Danger ahead! Lately we’ve observed some obvious, and also not-so-obvious challenges in pitching a product that sells into the SMB segment to VCs. While the total addressable market for SMB B2B SaaS products may be huge in terms of numbers of customers, this is almost always juxtaposed against challenges of pricing being too low, the cost of acquisition being too high, or the competitive landscape being too crowded. It’s frustrating for founders because the conversation quickly shifts from asking “Do we have an awesome product that solves our customers problems?” to “Is it even economically feasible to sell and market this successfully to those buyers?” You will always have to answer hard questions against these themes. Below are some of our best sales and marketing tips for pitching your SMB product to a VC:
1. Show Command Over Your Cost of Acquisition (CAC) and “Sales Velocity”. Understanding the potential cost of acquiring your customers, and the sales velocity equation behind that is always critical, but especially so at the SMB level. The reason for this is that building up a marketing and sales engine for SMB clients is far more mechanical and repetitive than the process for the enterprise segment. These measurements are the underpinnings of keeping your process tight. To illustrate this, the average company raising a Series A does so with $1.5MM-2MM of recurring revenue, and at 18 months after they raise their seed funding. This does not really change if you’re selling a $3k/yr product or $300k/yr product. What does change is your sales velocity equation though. In the former case, holding all other levers equal, you need to sign 100x more deals in the same time frame to reach that milestone versus the enterprise product. This is critical to admit and understand!
Furthermore, at certain lower price points, you can fall into what Peter Thiel calls the “Dead Zone” in Zero to One, and this is a cost of acquisition challenge. Here, you find yourself in a place where buyers of your product won’t purchase purely through marketing and a self-service effort, but at the same time, they are spending too little on your product to warrant a salesperson and the extra services they may require in order to buy. We could get into more details, but basically, in this situation your CAC is too high, sales velocity is too low, and you find yourself in an economically challenging position for your business. What to do? Gain a strong understanding of this concept, and see our next tips.
2. Be Able To Speak Eloquently About First Channels You’ll Market Through, Why Those, and the Key Metrics You Are Tracking Around These Channels. One answer to CAC challenges we outlined above is to have a sophisticated understanding of your buyer and ideal customer, how they buy, the language they want to hear, and how to market efficiently against that. At the early stage, marketing and sales efforts are often a zero sum game due to budgetary and time constraints, and money spent on demand gen acquisition via email campaigns is likely money that can’t be spent on social media acquisition campaigns, as one example. That said, if you’ve done your homework on your buyer, you can positively affect this.
Example: you know that the average industry response rate to cold emails is 9% and the average click through rate on display ads is <1% , but you believe (for logical reasons you state in your pitch) you can achieve 15% on email responses and only .25% on Ads, and therefore you have a better idea of where you’re headed for your buyer and why. You’ve shown you’re a thoughtful operator who knows how to optimize your channels, bring CAC down, measure effectively, and iterate. Whether right or wrong, we’ll be far more confident that you know what questions to ask of your marketing process to get to the correct answer quicker.
3. “We’ll Hire ABC to Solve This Sales or Marketing Problem” Shouldn’t Be Your Standalone Answer. Unfortunately, this answer is not good enough. “ABC” is usually a marketing generalist, inside sales manager, demand gen manager or someone else who has shown promise at their current big-name-company in ramping up sales of a lower ACV, SMB product rapidly. This is usually an answer that glosses over the underlying sales and marketing challenges that the VC is actually asking about. By simply stating you’ll hire someone and leaving it at that, you’re undermining ABC’s role, the foundation that they need to be successful, and a critical understanding of what they need to do. Additionally, if you want the best sales and marketing hires to come work for you, they’ll interview you more than you’ll interview them. The same answer your VC-to-be is looking for here is the same answer that this hire will be looking for. Answer “who, what, when, where, and why” to the extent you can for this hire, what your vision is for them, and a few tactical things they may execute on. Thoughtfulness sells and that’s why this is one of the best tips for pitching your SMB product to a VC.
4. Outline the Market Comps for Your Business, and Highlight Your Story Against That Context. What you’re doing here is, well, a little bit of the VC’s homework for them. If you’re facing the scrutiny we outlined above, this provides a chance for you to suggest what the market comps are for your business. It’s one of the best tips for pitching your SMB product to a VC because it’s an opportunity for you to contextualize your company against those who have succeeded before you, and “social proof” your entire operation.
You may be asking, “What’s a market comp for my company?” I think it’s fair to look at companies who sell in a similar way, to a similar buyer, in the same vertical you’re targeting. I would maybe suggest highlighting companies that are complementary to what you’re doing (ie not competitive) who are years ahead (ie a future version of you). Obviously pick successful ones! You could also look at a very similar verticalized product that targets another vertical, and compare yours to that, against the backdrop of an open and large total addressable market for your vertical. G2 Crowd is a good resource for researching market comps and their positioning too. When it comes time to do due diligence, ultimately someone at the VC is researching this and asking themselves, “What does this company look like at their exit? What’s the path to that success look like across the board, from product development, to market penetration, to revenue?”. You can help command that vision.
Hopefully these tips help current and future founders of products geared towards the SMB market to prepare for the VC rebuttals they’ll face. Now go use our tips for pitching your SMB product to a VC and prove us wrong when we bring them up! If you liked “Sales and Marketing Tips for Pitching Your SMB Product to a VC” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog.