The Marketing Section
Joseph W. Bartlett, Special Counsel, McCarter & English LLP, Co-Founder of VCExperts
McCarter & English LLP
2002-08-02
The Single-Most Important Section For Early-Stage Investments
The marketing section is the most troublesome for many founders to write convincingly and should, in view of the significance venture investors pay to the issue, be the most carefully drafted. It is relatively easy to obtain industry statistics and divide by some number. For example:
The overall market for Product X is $1.5 billion per year and we plan to capture, "conservatively," 10 percent, which means we project $150 million in annual sales. Our strategy is to pursue the following niches …
All the words are appealing and familiar; venture capitalists are expected to applaud a niche strategy, meaning that the approach to the market is focused on an area where competition will be minimal and a substantial market share is ripe for the plucking. The term "conservative" is also routinely joined to an entrepreneur's forecast. However, a well-done plan does not stop there—a number of questions remain to be answered. For example, what determines the niche? Price? Few successful venture strategies are driven by the idea of being the lowest-cost producer. Quality? Performance? Geography? Service? Proprietary information? Is the market growing? How will competitors (presumably larger and better financed) be kept at bay? How will the market be penetrated? Will the issuer train its own sales force, use manufacturers' representatives, or joint venture with another supplier or vendor? Will it advertise? What are the promotional plans? Direct mail? Trade shows? What service and warranty policies will be followed?
One critical feature for many sophisticated investors is evidence that the marketing section has been drafted and then subjected to multiple revisions, that the plan has been gone over a number of times by persons bringing varying backgrounds and experience to the issue. Many a venture capitalist will be delighted to find a candid confession that the overall business strategy actually changed after an in-the-field investigation of market potential.
Indeed, the more specificity the better. Thus, a sophisticated marketing plan will designate the magazines and other media outlets in which the firm plans to advertise, and identify the trade shows, the territories a sales office can be expected to cover, perhaps even provide proposed ratios, such as the expected ratio of successful sales per sales calls.
The coda to the marketing section, either made a part of it or placed in the immediate vicinity, is the section on competition. One experienced investor representative starts each discussion with a founder by asking for a discourse on competition; if the founder has not thought the issue through, the interview is rapidly brought to a close. Investors are generally unwilling to believe that, even with the most impregnable protection for proprietary information, competition can be kept at bay for very long. It is essential, therefore, to zero in on the existing (and likely future) competition and indicate as specifically as possible why and how the new entrant will be able to steal a march on the other firms, what legal and economic obstacles can be strewn in their path, how long the monopoly will last, and so forth.