The Ultimate Start-Up Guide: Marketing Lessons, War Stories, and Hard-Won Advice from Leading Venture Capitalists and Angel Investors

By Tom Hogan and Carol Broadbent

Most start-ups fail.

And they die remarkably young: The typical start-up lasts 20 months and burns through $1.3 million in financing before closing its doors.

So what's the formula for success for those start-ups that make it through the early trials, leveraging their early success into either getting acquired or issuing an IPO (initial public offering)? What are the lessons that first-time entrepreneurs and employees need to know to navigate their way to success?

The Ultimate Start-Up Guide offers practical advice, insights, lessons, and best practices from the world of start-ups, including:

• Strategies for hiring and building your team, culture, and values.
• How to pitch your company, secure funding, and distribute equity.
• Best practices in launching your business.
• How venture capitalist investors think, evaluate new companies, and advise entrepreneurs.
• War stories and red flags from top VC partners and entrepreneurs.

Start-ups are a business model and culture of their own, changing the economic landscape as well as the way we live and work. The Ultimate Start-Up Guide offers an insider's look at this world. It's a fascinating read for anyone contemplating how to build or participate in a successful start-up.

• Language: English
• Publisher: Career Press
• Release date: Jan 23, 2017
• ISBN: 9781632659286

Tom Hogan

Tom Hogan grew up in post-war Germany. While his father was US military, the family lived off-base in a German village. When Tom was 8, the family visited Dachau, the original Nazi concentration camp. which prompted Tom to wonder how many of his neighbors had known about—or even participated—in the campaign against the Jews and the resulting Holocaust. It’s a question that has stayed with him his entire life.After graduating from Harvard with a Masters in Biblical Archaeology, Tom was recruited by a human rights agency to bring Holocaust Studies into high school and college curricula. For four years he taught at Santa Clara University and traveled with Holocaust survivors to school districts and universities, bringing the lessons of the Holocaust home to new audiences.In the late 80s, Tom left teaching to join a growing company, Oracle, as its first creative director. Leveraging his success at Oracle, he joined the VC (Venture Capital) world, where his agency, Crowded Ocean, positioned and launched over 50 startups, many of them market leaders today. He is the co-author of The Ultimate Startup Guide, which is used in graduate and MBA programs.He recently left the tech world to return to teaching. For five years he taught Holocaust and Genocide Studies at UC Santa Cruz. He then retired to Austin, where he now writes full-time. His first novel, Left for Alive, was described by Kirkus as “gritty and observant, particularly his descriptions of the various outlaws who populate his pages... an impressive tale about criminals that will hold readers hostage.” The Devil’s Breath is his second novel. In addition to his fiction, Hogan is a screenwriter and has written for Newsweek as well as numerous political and travel pubs.

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Introduction

Who the Hell Do We Think We Are?

PEGGY HOGAN (TOM’S MOM)

WHY THE HELL WOULD ANYONE WANT TO READ A BOOK BY YOU TWO?

CROWDED OCEAN (AFTER SOME THOUGHT)

LET US GET BACK TO YOU ON THAT ONE.

NINE OUT OF 10 START-UPS FAIL within their first 24 months of operation. We should know: we were one of them.

Crowded Ocean, like many start-ups, failed in its first incarnation. We had an interesting idea (detailed in a later chapter), but opened our doors the same week that Lehman Bros. collapsed in 2008, bringing the market crashing down with it. We soldiered on for almost a year with our original idea, but never had a chance. In fact, we didn’t make a single dollar that first year. Let us repeat that: not one dollar.

Rather than fold our tents, we regrouped and took a hard look—first at the market, then at ourselves. We filled our whiteboard with different concepts targeted at different markets. Then, one evening over beers from our office mini-fridge, taking a break from the whiteboard exercise, we were reminiscing about our days as VPs of marketing (Carol at Aspect and Bay Networks, Tom at VitalSigns and Lucent) and how hard it was to find good agencies. Remembering conversations with our former peers who were now CMOs, it was clear that not much had changed during the intervening 10 years. And at that moment Crowded Ocean 2.0 was born. The concept was simple: we would build the kind of agency we and our peers had always wished we could have found when we were heads of marketing.

That idea by itself wasn’t either unique or that compelling—we needed to do something that ensured that we weren’t pigeon-holed as just another agency. We decided to distinguish ourselves in two ways: structure and target. For the first one, instead of being another large brick-and-mortar agency filled with headcount and overhead (for which we would have to bill our clients), we would be a virtual or just-in-time agency, with no employees. For our target audience, we would focus exclusively on the most underserved audience in the market: start-ups. Our business objective (we hate the term mission) was clear: to build the ultimate marketing agency for start-ups.

Six years and 42 start-ups later, we’ve been asked by some of our VC (venture capital) partners to put down the lessons we’ve learned into something that can be shared with first-time founders. You’re holding the results in your hands—or on your screen.

A word about the title: when you title anything beginning with The Ultimate, either you’re delusional or you better be able to back that claim up with hard evidence. We hope it’s the latter, but you be the judge.

We want The Ultimate Start-Up Guide to be a go-to resource for startup founders, would-be entrepreneurs, and anyone interested in the start-up world in general—a resource they can go to for insights, examples, and advice about starting and growing their own company.

So let’s consider those three terms—insights, examples, and advice—in order, along with some of that hard evidence we referenced earlier.

Insights

In our six years of operation, Crowded Ocean has worked with more than 50 companies, 42 of them start-ups (the rest of them were established companies looking to pivot into new markets).

But so what? Maybe all that number (42) means is that we found an average of seven CEOs a year dumb enough to hire us. So here are some other numbers:

• Ninety percent of all start-ups fail within their first two years. More than 90 percent of our clients are still in business after that same period.

• Ten percent of all VC-backed companies go public or are acquired at a profit; 30 percent of ours have had the same success. And more are in the pipeline for either acquisition or IPO (initial public offering).

We like those numbers—and so do our clients and VC supporters. We also think that the insights we’ve learned from working with these companies apply to multiple markets and can be valuable for anyone entering or participating in the start-up world, tech or not.

But this book is not just based on the insights we’ve gained during the past six years. Before Crowded Ocean, we were VPs of marketing at our own start-ups. And we both got our starts in the early days of some high-tech titans.

Another distinguishing element is that we also don’t think the sun rises and sets on Silicon Valley or technology. During breaks that we’ve taken from Silicon Valley, Carol has worked in the non-profit sector, while Tom has worked in human rights and returned to his earlier profession as a Professor of Holocaust Studies. So although we love Silicon Valley, we have a slightly different perspective on things than our more tech-oriented founders and VC pals.

Experience

As already noted, we’ve worked as principals and founders of start-ups, so we’ve got a few war stories on that front. More importantly, many of the founders we’ve worked with in the past have agreed to share their own experiences—both positive and negative—at each stage of the process. Some of them are now on their second or third start-up since we worked with them—which means they’re both experienced and jaundiced. Not too many books have so many experts willing to share their stories and show their scars. In addition, Sumo Logic, one of our clients, has graciously agreed to share their experiences from concept to exit, a unique and valuable addition to a book of this sort.

Advice

Venture capitalists (VCs) are the high priests of the start-up world. They’re the ones who, with a single nod of benediction, or the single stroke of a pen, can turn a dream into a reality for an entrepreneur. Many of them are PR-averse, preferring to let their business successes speak for them. This is why we are gratified that virtually every VC investor we’ve worked with in the past (a number of whom are on the annual Forbes Midas list) agreed to sit down with us and provide their advice for free (a word rarely associated with VCs) to would-be founders. This book is shot through with their insights.

So that’s it. As they say in Texas, we may be farting higher than our ass with a title like this. But the generosity of our founders and VC partners make this, we believe, a book that will be of value to anyone who is interested in the start-up world, either as a participant or an observer.

One More Intro

When we outlined this book and decided to take a sequential approach to how a start-up develops from the development of the idea through to endgame (IPO, acquisition, or success as a privately-held company), we thought it would be of benefit to our readers to take one company and follow it through this entire process. Sumo Logic was our first choice, and we were delighted when Christian Beedgen, one of the Sumo founders, agreed to participate in the project. He met with us, shared the Sumo story, reviewed the copy, and hopefully put flesh and bones on our different topics with his real-world examples.

Starting with Chapter 4 (The Idea), each relevant chapter along the startup path will conclude with a mini-case study on how Sumo Logic navigated each stage—sometimes successfully, sometimes less so. We hope these examples make each chapter a bit more valuable and a bit more relevant.

Thanks, Christian.

1

The Four-Legged Stool: The Crowded Ocean Formula

SILICON VALLEY MAXIM

A START-UP IS A STATE OF MIND.

CROWDED OCEAN

SO IS SCHIZOPHRENIA.

WE LAUNCH START-UPS.

Those are the first three words on our website and the essence of what we do. We may position ourselves as a marketing firm, but when you join a company as early as we often do (sometimes before they even have a name), you better bring a lot of general business sense to the table as well.

One of our clients once referred to us as his VPs of Common Sense. His logic was simple: you’ve got an experience base that I’ll never have, launching more than 40 start-ups and working with such industry luminaries as Larry Ellison (Oracle), Scott McNealy (Sun), Tom Siebel (Siebel Systems), and Marc Benioff (Salesforce). Our job, according to him, started with a negative: make sure he didn’t screw things up. Then the job turned positive: use our experience to position the company appropriately, develop the messaging and content to support that positioning, launch the company into the open market, and equip the sales team with the tools and programs to give them the best chance to succeed.

Crowded Ocean, in its own way, is just another start-up. We started with the basics that most founders do: a whiteboard and an open mind. We didn’t have an installed base that we needed to preserve or an antiquated technology that we needed to amortize. We just had the goal of building the ultimate marketing agency for start-ups.

Once we focused on our core strategy and market, we articulated our core operating principles, which we not only wanted to offer to our clients, but wanted them to integrate into their own business operations.

On-Demand Marketing

This concept can go by multiple names, including just in time, kanban (Japanese for just in time), virtual, and the trendier adjective, fluid. Regardless of what you call it, it comes down to paying for only what you need, when you need it. It applies to marketing (a major focus of this book), but increasingly to multiple areas of your own start-up operation.

When Tom started at Oracle, he was one of three members of its nascent corporate marketing department, writing all the company’s product literature, annual reports, and ads. During his six-year tenure there, as the company skyrocketed, he wound up as senior director of corporate marketing, with a staff of 70 (running ORACLE Magazine, Oracle OpenWorld, seminars, direct marketing, advertising, and so on). In today’s world, with a growing distinction between core, virtualized, and commodity functions, with so many great contractors out there, and so many collaboration technologies allowing contributions from many perspectives and geographies, that department of 70 would probably be between 15 and 25, most of them managers sourcing and collaborating with outside resources.

Why the move to on-demand (or virtual) resources? A number of factors, really:

• ECONOMIC. This one’s obvious. There is no hefty salary, no 30 percent overhead, and lower real estate costs. The slower burn rate alone makes this option very attractive to start-ups.

• AGILITY. Much of today’s work is task-oriented or project-oriented. It’s much faster to assemble a collection of professional talent for a short period and specific task than hope that your collection of in-house talent has the same best of breed skills and original ideas to perform the task at hand.

• FRESH THINKING. In-house talent often grows comfortable and intellectually complacent. Outside talent has to stay on top of its game, learning and integrating the most recent ideas and techniques into their skill set.

In the course of our engagements with start-ups, we generally outsource the development and delivery of the following programs:

• Corporate identity.

• Content writing (white papers, data sheets, case studies, video).

• Public relations.

• Website design and development.

• Event marketing (trade shows, webinars, partner programs).

• Demand generation, automation, and measurement.

• Sales and marketing systems.

• Video production.

• Social media.

What does that translate into, headcount-wise? For your marketing department (in an enterprise start-up), in addition to your CMO (or a virtual VP of marketing like Crowded Ocean) your start-up should have at most one full-time employee: a strong marketing manager who can hire and manage all of the previously listed contract services. As you move into Phase 2 (early sales), you should plan to add a second employee, someone strong in demand generation, web analytics, and sales/marketing automation systems. That’s it. The rest should be virtual or on-demand.

This logic applies not only to marketing, but to almost every other discipline within your start-up. There are some obvious areas. No start-up needs a full-time CFO or legal counsel, but in the eight years that Crowded Ocean has been operating, we’ve seen even the ultimate in-house, full-time positions—coding and sales—moving to on-demand.

Inbound and Outbound Marketing

The marketing brains and co-founders of HubSpot evangelized the concept of inbound marketing about a decade ago. Inbound marketing says that in the age of the Internet, you want to invest in targeted content to attract or pull customers to your website and social channels to build your audience with compelling content and offers. In other words, you want to get found online and earn your audience through authority, content, and offers.

Previously, a brand would reach out to try find customers through traditional outbound or push-based investments like paid media (advertising), PR, and direct mail. Start-ups today invest marketing dollars in targeted content offered on specific sites, social channels, and online forums to be discovered in search and earned media. The term inbound marketing is now so ubiquitous that it has its own Wikipedia entry and has spawned its own industry of books, presentations, and seminars. Inbound marketing is the marketing engine that lowers the cost of customer acquisition, but it is an engine that must be fueled with an investment in outbound marketing to prime the pump, so to speak, a process that can take months.

Success in inbound marketing also implies an emphasis on measurement that was heretofore unavailable in the pre-Internet, outbound-marketing era. By using marketing automation system software like HubSpot, Marketo, and Pardot, coupled with a disciplined inbound marketing approach, start-ups can measure where their customers are coming from, what content is most effective at attracting customers and, therefore, how to tune and maximize every marketing dollar spent to attract and convert them.

Sales-Based Marketing

Since our founding, Crowded Ocean has been associated with sales-based marketing. The concept is simple, but controversial. The role of marketing comes down to three words: make sales easier. If it doesn’t generate new sales, shorten the sales cycle, or make repeat sales easier, don’t do it.

We’ve written about it; we do workshops about it—for us, it’s just common sense. But for many marketing professionals, it’s controversial because it sounds as if we are making marketing and marketers subservient to sales. We’re not: marketing is a true equal of sales in any start-up in which we work.

But the term is off-putting to many, especially marketers. There are any number of CMOs or VPs of marketing who reject this concept. They believe that: a) they know—better than the sales team—what the market does or doesn’t need, and b) raising the role of sales, in their mind, diminishes the importance of marketing, which is a killer in this world of big egos and big budgets.

Let’s be clear. There are certain companies (Coke, Nike, and Quiksilver come immediately to mind) that are truly marketing-centric. The differences between my sugar water and yours, between my shoes and yours, between my surf shorts and yours, rarely come down to functionality and technology; they come down to marketing. In those cases, sales-based marketing doesn’t make sense. But for most companies today, sales-based marketing should be the norm.

This is especially true in the area of start-ups, which exist because of real-life problems that a company or consumer is having or because of a unique application that users will flock to. This means marketing can’t work in a self-imposed vacuum; it has to go down the hall to the product team and translate what they’ve created to a skeptical market. And it needs to go out in the field with the sales guys and see and hear how target users react to the product. Then it needs to incorporate all of this into their positioning and messaging.

The next step in sales-based marketing is testing the message. Let’s say that, in the course of establishing the initial positioning of the company and product, we establish three different options to explain how the product works: a bicycle, a car, and a boat. After much discussion, with the sales and product departments weighing in heavily, we decide on car and devise presentations and sales materials in support of this position.

Now it’s time to test our new positioning (before we do any of the heavy investments of time and money in critical marketing deliverables like PR, a website, and demand generation programs). We meet with a number of potential customers and get their feedback. And we listen hard.

It’s the same thing with early positioning of your product. You have to have confidence in your decision (car), but you have to be flexible and humble: the market knows better than you what it needs and wants. So the first time a customer says, You’re not a car—you’re more like a bicycle, consider the feedback, but stay the course. If sales, based on this one meeting, wants to rip up the PowerPoint presentation and start again, tell them they’re overreacting. If the sales team gets the same reaction the second time, listen harder; but it’s still too early to change course. However, if the sales team reports that they hear it for a third time, scrap the car and get to work on the bicycle strategy.

Now that you’ve been out selling the product for a bit, it’s time to define your sales cycle. Not some generic cycle—your sales cycle.

The key is to still hold sales accountable for revenue generation, but to also involve your entire start-up team by showing them where there are holes (or stalls) in the cycle, so that the appropriate department (marketing, product, or support) can take the appropriate action. If the issue is lack of market awareness, you might heavy up on PR, analyst relations, thought leadership, search engine marketing, and social media. If it’s a problem of early trials not turning into volume sales, we work out incentive programs for the pioneers within a company. If the product is a complex sale, we might pilot a try-before-you-buy program, where some customer success people work as coaches for key clients.

Your company-specific sales cycle graphic will change as you grow— and it’s sales’ job to keep it up to date and the company informed. Your marketing strategy and spending will adjust accordingly. You can put PR on a maintenance budget and heavy-up on lead generation. You can build out case studies and ROI tools—anything that validates your early claims and assures customers they’re not taking a major risk. Then (you’ll be sick of reading this phrase throughout the book) measure everything. Learn what’s working, where new business is coming from, and how to make your sales cycle as short and efficient as possible.

Whole-Brain Marketing

Business, as seen through the left-brain/right-brain lens, (left brain = logic and analysis; right brain = creativity and imagination) is a determinedly left-brain discipline. Sales is make your numbers and you’re golden; miss them and you’re gone. Product is make the product according to spec and on time, and you get a bonus. Miss it often enough and you’re working the drive-through lane at Carl’s Jr.

For most of its history, marketing has inhabited the sparsely populated right-brain sector of