VCs are an integral part of startup eco-system. Without them, the tech industry would never look like what they appear to be today. We often hear things like Amazon launching Amazon Go or Housing.com revolutionizing the real estate industry. The truth is out there; without a Venture Capitalist both of them would never exist.
Even the smartphone or laptop that you are using to read this article, may be somehow backed by a Venture Capitalist. The importance of VCs have stepped into the mind of budding entrepreneurs and most of the startups are being designed to impress VCs.
Have you been ever to a VC pitch session, you might know the questions that they ask. Probably, the metrics that they look for are of higher expectations. To maintain your startup’s funding needs, you must be very crisp with your customer acquisition strategies.
However, there is a total conjecture with this question as I can’t speak for every VC. But when an investor looks at a potential seed investment, distribution or customer acquisition strategy questions are important for a few reasons.
One of those reasons is not because the answer the entrepreneur gives is actually going to turn out to be one of the most successful customer acquisition strategies for their business.
VCs look for a thoughtful answer that shows that the entrepreneur is actually thinking about these issues as it relates to overall business strategy, financial/capital strategy, product strategy, etc.
So here are the top 3 things I’d guess VC’s are looking for when they ask customer acquisition strategies questions:
1. Displays an Understanding of Their Business’s Economics
I’m a big believer that the financials or economics of a business dictate that business’s strategy. For example, let’s say that I was building out a new ad-based business model.
If that were the case then the revenue per user would be fairly low and therefore would prevent me from leveraging paid advertising/marketing channels.
So if a VC asked me how I was going to acquire users I’d definitely articulate this fact and then go into some of the free channels we were planning on developing campaigns for.
If the entrepreneur can demonstrate that they understand their Customer Lifetime Value and its relationship to their Allowable Customer Acquisition Cost, I’m usually feeling comfortable in their thought process.
2. Displays an Understanding of Focus and Execution
One of the things that I’ve come to realize about early customer acquisition for start-ups is it’s never a combination of channels that drives massive growth — it’s usually a single channel and strategy.
So when I see plans that look like the entrepreneur is just throwing shit at the wall to see what sticks, I kind of cringe.
There’s something to be said for testing multiple channels – as you’re not quite sure which channel is going to be “the one” — but there’s also something to be said for rapidly testing one channel at a time.
There’s no way you’re ever going to develop the type of insight and expertise in a specific channel without investing the time and energy to design, launch and optimize your campaign multiple times.
A shotgun blast approach will ensure that you never become an expert at a single channel. On the other hand, when I see a methodical testing plan for a couple of select channels (or campaign ideas) that’s grounded in the business’s financials, I feel much more comfortable.
3. Displays an Understanding of Their Customer
For me, this is one of the most important things this question (and its answer) conveys. If someone truly understands their customer then they understand:
- Where the customer “hangs out” (e.g. sites they visit, magazines they read, etc.)
- How to best reach that person where they hang out
- How to differentiate their product from other’s in the market place
- How to handle the customer’s objections
I only want to be in business with someone who knows more about their customer, their customer’s needs, motivations, and behaviors, than anyone else out there.
It’s this level of deep understanding that creates consistent breakthroughs for a business on the product and marketing fronts.
I’d argue that only companies that truly understand and cater to their customer’s deepest unmet needs are the ones who survive and thrive.
If the question of user acquisition is answered properly, it displays this type of understanding and could give an investor a lot of confidence in your business.
Your acquisition method can scale from 100 subscribers to 100K subscribers and eventually become a sustainable business. Example: If you develop a retail product and you plan to sale that store by store – That’s not scalable. If you already have partnerships with Walmart or CVS – That’s scalable.
Focusing on one sector is a good indication, in my view, vs. ‘our target audience is 18-60 and we plan to grow viral’. Startups are usually limited by resources and budget. Focusing on one sector, usually the sector that will see the biggest value in your service, tends to yield better results given those resources.
Some sectors (e.g college students, engaged couples) have sector targeted distribution channels and/or content platforms. Most sectors have sector-specific events.