Is a lack of spending on marketing and sales delaying fund raising?

Our recent Impact Brief (A Failure to Scale, February 2017) revealed amongst other things that Canadian companies wait longer before they start raising funds. Anecdotal evidence suggests that many Canadian technology companies wait until their products are completed before raising and spending funds on crucial functions, including marketing and sales (M&S).

This is disconcerting because early expenditures on M&S may lead to faster market traction, more solid growth, and earlier VC funding. But practitioners in the Canadian technology scene have observed that many businesses underestimate the importance of M&S in their formative years.

The goal of this study was to determine whether Canadian technology startups do in fact delay funding M&S activities. To this end, we looked at job classifications of employees at over 900 private Canadian technology companies that had received external investments.

Job classifications were used as proxy to gain insight into how firms allocate money for various functions within the business. We discovered a striking pattern: while Canadian firms with the lowest recorded levels of external funding (our proxy for growth) have only 13% of their employees engaged in M&S activities, this percentage was significantly higher for businesses that had managed to raise funds. Firms with US$50,000–US$2 million of funding have 24% of their employees engaged in M&S. Thus in the early stages of development, Canadian tech firms are likely to have a larger fraction of their workforce dedicated to research and development (R&D) than to M&S.

Our analysis of more than 60 tech businesses in the US showed a different recipe for success: firms that scale quickly to US$10 million in revenue spend, on average, 73% more on M&S than on R&D. Leading American firms have 40% of their employees dedicated to M&S.

This is significantly different in Canada where even the highest funded firms only have 31% of their employees in an M&S role. This creates a vicious cycle: fewer M&S employees means less M&S activity, which slows down all the processes needed for customer traction and entry into the market.

A smaller contingent of M&S employees means that less time will be spent on vital startup activities such as market intelligence, product marketing, and business development. Companies that neglect M&S tend to approach the market only when a product is ready, therefore delaying their first revenue and growth.