Crowdfunding, Marketing, Big Data and The Death of Direct Sales

I was sitting in Demo Day the other day at FlashStarts watching ten companies present. The event had been scheduled to coincide with the first day of Title II of the new JOBS Act, which allows companies to directly solicit investment over the Internet or through other methods of mass marketing. This overturns 80 years of regulation which prohibited mass solicitation of investors by companies raising early stage venture capital. The first presenting company, Crowdentials, helps companies comply with the new SEC rules, which still require that companies ensure that their investors are “accredited” or face the penalty of not being able to raise additional funding for one year (a death knell for start-ups).

It suddenly occurred to me that I was seeing another manifestation of a question that has been troubling me: what does the massive movement of commerce on-line mean for expensive direct sales by enterprise software companies? Multiple companies in which I have invested early stage venture capital have been wrestling with this question.

What fund-raising and enterprise software sales have in common, I realized, is that they have traditionally been direct selling activities—in one case because of rules, and in the other because of the complexity of selling software to enterprises. If a company wanted to raise money, it had to interact with people it knew or to whom it was directly referred and who also passed the test of being accredited investors.

Similarly, enterprise software selling was traditionally dependent on personal relationships between a salesperson and customer personnel. The best salespeople moved from company to company, and sold different products to the same customers over the years.

Direct fund-raising and direct sales are now both being eroded by the massive movement of people online. Our on-line lives enable us to affiliate with people and companies that share our interests, irrespective of where we live or who we know in our daily lives. We can see them, trace their social networks, and readily find ratings about them. We are entering the era when marketing will replace direct sales in most situations.

Why is this happening?

Direct selling (or direct fund-raising) is expensive, labor intensive, and doesn’t scale. It is time consuming, results are hard to predict, and customer decision processes are opaque. Growing a direct sales force requires a significant investment; half of the salespeople a company hires don’t work out, but it’s hard to predict which ones until the company has made a significant investment. Many fund-raising processes, similarly, end in frustration. Having financed multiple companies that rely on direct selling, I can tell you that it is frustrating for boards to receive sales forecasts and the explanations associated with them.

What is enabling the shift from direct selling to marketing?

The simple answer is the Internet, but there are several components to consider.

  • Privacy is dead, but transparency is increasing.

Far from enabling companies raising money or selling software to be anonymous, the Internet actually increases transparency, enabling investors or customers to evaluate them and the reputations of the people behind them, before ever engaging with them.

One company in which I invested has depended on direct selling and has had frustratingly long sales cycles and convoluted sales processes. Last year, a well-known technology company called, said that they had completed an analysis of available products, and had chosen this company. They were ready to buy, and the sale was completed very quickly. They had never engaged with anybody at the company!

Last month a company I know received an unsolicited term sheet from a New York investment group at a breathtakingly high valuation. Nobody at the company had ever engaged with the investment group! We have speculated that they had an investment thesis around the company’s products, monitored social media, and picked the company with the highest profile as an investment target.

A third company finds that its yield in direct selling has reached historic lows. People aren’t responding to e-mails or answering the phone. The first time the company often hears about the prospect is when an RFP is issued.

What happened?

  • Buying is replacing selling.

In all three cases, enough information was available about each company on the Internet to enable analysts, who knew nobody at either company, to conduct a thorough assessment without ever engaging with the company. Social media rankings and quality ratings were certainly a part of the analysis. This is a recent phenomenon, probably just emerging over the last year, and still in its infancy. The ability to do this type of analysis is one benefit of big data and the tools that turn it into useful information. (As I was writing this post, an article in the Wall Street Journal confirmed my suspicions about what is happening: If You Look Good On Twitter, VCs May Take Notice.)

Investments used to be made, and software used to be bought, based on the trust developed in personal relationships between individuals. There is now so much information available on the Internet about us all (yes, privacy is dead) that investors can learn about companies, and companies can learn about software, without direct sales presentations.

  • Geography is becoming less important.

Formerly, companies raised investment in their communities, where they were known, and enterprise software was sold by salespeople who spent their careers developing relationships with particular companies in the territory in which they lived. Where you live and where a company is based are becoming unimportant in investment and sales decisions.

  • The Internet is becoming a video medium

One reason that geography is unimportant is that the Internet is creating platforms on which people can interact based on interests and preferences and video enables face-to-face interaction.

  • Investors and customers are overwhelmed by information.

VCs and angels have an excess of deal flow, and company personnel who have a role in buying software receive hundreds of emails and dozens of phone calls each week. (I receive multiple phone calls and dozens of e-mails per week trying to sell me cloud-based software, IT outsourcing services, or something similar and I don’t buy any of these items, causing me to question whether these companies direct selling efforts are effective.) It’s impossible to even read all the material, much less make sense of it. Deal flow has always been filtered through trusted referral sources, but now it’s also being filtered by accelerators.  Similarly, the software sales dynamic is shifting from responding to sales solicitations to reaching out to solve a problem.

  • Corporate security is enhanced due to 9/11.

Everywhere I go now, you need a badge to get into buildings, or to be escorted by somebody with privileges. One software company CEO who came up through the sales ranks, says, “I used to be able to get into every building on the Ford campus, except the R&D center, and wander around seeing people. I can’t even get on the campus now.” The way in today is through cyberspace.

I think what we’re witnessing is the death of direct sales (in most circumstances) and its replacement by sophisticated marketing tools.

What should companies that are raising funds or selling products do? Clearly, marketing is becoming more important. The ability to project a brand onto the Internet and to be distinguished from the clutter will be important to both fund-raising and selling. Here are some recommendations for any company raising money or selling a product or service:

  1. Make sure your product or service (if you’re raising money, it’s the entire company) is solid and will withstand Internet and on premises due diligence. This means going beyond the traditional methodologies and incorporating social media monitoring software, such as Radian6, to evaluate your on-line presence.
  2. Be very careful before investing in or expanding a direct selling operation. Make sure you have a repeatable, cost-effective model before embarking on a hiring spree.
  3. Be expansive in hiring leading edge marketing talent. Invest in the people and tools to create marketing or fund-raising campaigns that break through the clutter.

Will direct sales survive the Internet? Probably, in some places and at some level. Complex enterprise sales will likely always require hand-holding on the customer side. Parts of the international market are slower to catch on to trends discussed here than U.S. companies and, for cultural reasons, will be slower to abandon personal direct selling. Eventually, though, the cost of direct selling will be too high compared with the cost of effective marketing and direct selling will become a niche approach to reaching customers.

Wealth Creation is A Precondition of Job Creation

I was pleased the other day, while attending Demo Day at FlashStarts, to hear founder Charles Stack state that the goal of the accelerator and each of its companies was “wealth creation.” That was the only goal he discussed, and he pointedly mentioned it several times.

For the last decade I have participated in and supported many initiatives to remake the economies of Ohio and Michigan into entrepreneurial ecosystems, including engaging in early stage venture capital investing. Many people from the private, public, and non-profit sectors were involved in creating many programs and activities, including:

  • Technology investments from Ohio’s Third Frontier program
  • Funds-of-funds such as the Venture Michigan Fund, the Ohio Capital Fund, Renaissance, Cintrifuse, and the 21st Century Jobs Fund
  • Incubators, accelerators, and entrepreneurial assistance organizations like BioEnterprise, Ann Arbor Spark, JumpStart, and NextEnergy
  • Enhanced technology transfer at the region’s universities
  • Formation and support for pre-seed and seed funds
  • Loan and equity investment programs directly from Jobs Ohio the Michigan Economic Development Corporation, and Cuyahoga County…
  • …and many more.

Most of these activities have been supported by non-profit foundations and by taxpayer funded programs administered by government. Never once have I heard a public official or a representative of a non-profit organization state that “wealth creation” was one of their goals (although I was pleased to see Cleveland’s foundation community well represented in the Demo Day audience). And therein lies a fundamental difference between the objectives of the private sector and the public and non-profit sectors.

For politicians and people in the non-profit sector, the overriding interest is “jobs.” “Jobs” is the goal discussed in every speech and news release and the central variable measured in progress reports. It is the obsession of the media and of critics of the above programs.

What I have never understood is how jobs are supposed to be created without wealth also being created. I understand that government spending can temporarily create some types of jobs and that many people want to believe that having government create jobs and give them to people is the way to alleviate unemployment and create economic growth. All of the research, however, shows that this approach doesn’t work: these jobs cost more than they repay, and they require ongoing subsidies.

We have just gone through a cycle in which government spent huge sums of money to move the unemployment needle, without much success. It is true that some individuals and companies can do well by feeding off of government spending, but it is an illusion to believe that jobs created by crony capitalism are self-sustaining. Money must be taken from productive sources to continue subsidizing them.

Unfortunately, there is a divide in American society: in the public sector, media and non-profit worlds, the words “profit” and “wealth” often carry negative moral connotations. The pursuit of these objectives is deemed to be “greedy” or exploitative. That’s one reason that the public sector tries to create jobs without creating wealth.

In the private sector, businesses and business people understand that profit and wealth creation are the measures by which they can determine that they are serving customers and creating sustainable companies and employment. Yet, the business community has been  put on the defensive by a public and media assault on profit and wealth.

Over the last decade, I have spoken often about the need to publicly support wealth creation. I haven’t had much support on this subject; maybe I have been traveling in the wrong circles. It’s good to have Charles speak up, and he is doing so with his own money and investor money.

Wealth creation must be the goal in entrepreneurial ecosystems. When wealth is created, so are jobs. Wealth is what will feed government coffers and the endowments of foundations. It is a virtuous cycle when it is working properly. Except in pockets of our economy, as Richard Florida points out in The Atlantic Monthly, we are not creating enough wealth.

It’s time to fight back and speak the truth: If America wants to create economic growth and new jobs we must embrace profit and wealth. There is no other way to get out of the economic doldrums.