Barrel Kfir of Dell Technologies Capital on how much to spend on marketing

Barrel Kfir 00:30

Hi Etgar, thank you for having me.

Barrel Kfir 00:45

Of course, would love to. I started my journey on the good side, starting from technology. I have a first degree in computer science, which I did during high school, starting when I was 15 years old and finishing it before joining the army. Then I spent a few years in the technological unit of the intelligence corps, mostly around cyber security, starting from research and development roles and moving with time to product management, leading teams. I spent a few years in the Ministry of Defense as well, and finished my service as a captain.

01:20 Then I had some friends trying to convince me to start a company, but I thought I don't have enough experience on sales, on marketing, on anything that is not technology. So I thought I'll do a product role in an early-stage cyber company, which is probably the closest to my last role at the Ministry of Defense. I came across one of the managing partners at JVP back then. A conversation that started with "what are the interesting cyber companies looking for a product role" ended up with an associate position open. That was almost 10 years ago by now, and since then I got stuck on the dark side of investing.

02:01 I spent a few years early-stage investing with JVP, and then I joined Intel to build their next-gen accelerator. It was called Ignite, together with [name unclear]. After that I joined Vintage, a platform combining fund-of-funds, secondary, and growth investing, and I did that for a few years. Three months ago I joined Dell Technologies Capital.

02:34 Two sentences about my role. Dell is a fund leading rounds at seed to B stages, focusing on the US, Israel, and Europe. Most of the partners are based in the US. [unclear @ 02:41] and myself are based here in Israel, focusing on sectors like cyber security, enterprise infrastructure, dev tools, deep tech, quantum, stuff like that. And Dell has been doing this for the past 12 years by now. So this is me and this is us.

Barrel Kfir 03:20

I'm saying what they're saying publicly. It's a different conversation behind the scenes.

Barrel Kfir 03:50

Definitely. It depends on the stage, and it also sometimes depends on the sector. The marketing objective could be different for a company in the quantum space, where the first five years are spent on development, maybe even more, versus companies that are more focused on developing the product at first, versus companies that are ready to shift the product to the market after two weeks. It will look different. It's a combination of stages and sectors.

04:07 But at a very high level, the marketing role is split between lead generation for sales on one side, and anything related to branding, messaging, and positioning on the other. Both parts start basically since the inception of the company, but as the company matures you have more and more KPIs to examine on each of those. It's like any other topic with a startup: the overlap between marketing and other divisions like product and sales obviously exists, and they are all connected to each other. But with time, as the company matures, you can isolate the KPIs for marketing, especially when it relates to lead generation, which is much more quantifiable. Things like branding and messaging affect other elements of the company, but they are also critical.

Barrel Kfir 05:50

It's a good question, and it depends from investor to investor. I'll speak for myself, and it's true for marketing but also for many other elements of the company. Our role as investor is to be a trusted advisor and provide help to the companies. We're not there to set the KPIs for them. Ideally, the founder and the management team are the ones who should set the KPIs.

06:25 The best thing we can do as investors is, first, give them a benchmark, because we usually have good visibility into the market. We see many companies in similar stages and similar sectors, and sometimes that benchmark is super valuable. It helps them, where they get aggregated data from someone who's seen many companies at that stage, either set the KPIs, or benchmark them, or keep tracking them according to performance compared to what other companies in that space are doing. So the benchmarking value is crucial for founders. The second one is general advice and help: helping them with hiring, or introductions to relevant people, or anything regarding positioning and messaging. So it's the benchmarking and the ongoing support. It's the same with marketing. The best thing a VC can do is align the company's expectations to a benchmark, and then help them try to achieve that, but it will obviously be driven by the founders.

Barrel Kfir 07:58

It's a good question. It definitely depends on stage, but it also depends on sector. As I said, we invest usually in tech-oriented companies selling to the enterprise. So the expectation is that especially in the early stages, most of the expense will go to R&D and building the product. Most of the companies we look at, the differentiation is either coming from the product itself, or sometimes from the go-to-market, but mostly from the product. That means the spend on marketing will not be high in the seed nor the A.

08:44 In the B stages it will start to look meaningful, but anything above even 20% at the seed should raise a flag, and above 30% at the A should raise a flag, and so forth. Even at the B those numbers are quite massive. So if we see a company that between seed and A has like 50% of its expenses going to sales and marketing, and half of it goes to marketing, that's usually, I wouldn't say a red flag, but it definitely doesn't correlate with the benchmark of technological companies.

Barrel Kfir 09:45

Very good question. One of the biggest mistakes technical teams are making is to ignore branding and corporate messaging and positioning. Everyone understands the value of marketing for lead generation, so some of them believe that until they start selling at scale there is no need to spend anything on marketing. I don't think that's the case.

10:16 For most early-stage companies, the best approach is to work with a proven branding agency even from day one, from scratch, to work around the brand, the narrative, the product positioning early on, just to set the North Star and align where the company is. It's harder for tech companies to understand that they don't need to bring someone full-time on board as a chief of marketing early on, but they need to start working with an agency or a third party, and ideally a very good one, to identify and crack those branding and messaging challenges that are crucial for the startup's future success.

Barrel Kfir 11:16

It really depends, honestly. I've seen companies doing very good jobs with agencies, and the ones that have a fractional CMO position, usually the ones that have a fractional CMO will also use third parties like agencies and PR firms. He'll just orchestrate a lot of the work for the founders and especially bring in his experience as well. So it's not necessarily one instead of the other, and it depends. But like I said, I think it's crucial to start doing it almost from day one, because it will affect a lot of the company's progress.

Barrel Kfir 12:19

I think it's more or less around the B round of stages. And just to add some traction, the company should be selling a few millions of dollars already, and it should come from multiple customers, not a handful of them. They will probably go and fundraise towards it. It could happen a little before that fundraise or a little after. But the idea is that the B round, that early growth stage, is a stage where the machine is more or less working, and now you need to put more gas into the machine, make it scalable, and face the challenges of scale.

12:50 You already have some revenues, not very small, at least a few millions of dollars, maybe tens of customers, and you understand the journey that brought those customers: the source, the conversion, the reason they bought, as well as the ones that didn't. So you are able to fuel that CMO with the KPIs you want to achieve based on historical data. Because if you bring someone like that with no historical data to set KPIs, it's very challenging. It should still be a lot about the founders, super close touch, until they reach the point where they feel the historical data gives them the KPIs to set, and someone experienced can do a better job than they ever did and take ownership of that entire department.

Barrel Kfir 14:54

It's true. As the company is more mature, you should have the data to set the KPIs even solely for marketing: the MQLs, the number of leads, then conversions to SQL, then first meeting, then an opportunity. Those are the first four steps, and maybe at the opportunity level, or sometimes even at the first-meeting level, they do a handoff to sales. Those should be the main KPIs they benchmark against. It should also be a portion of the total sales; for example, you want marketing to generate 20% of the total sales of the company. You extract the conversions from that goal, and then you have the total number of leads.

15:54 Those KPIs should be directly related to the compensation of everyone in the marketing team, as well as the company's general success: a portion tied to company success, a portion to the marketing team's success, and obviously some base salary. As the company matures, the portion of base salary reduces and the portion of variable compensation increases. The biggest challenge with marketing is that their job is much more than lead generation and creating opportunities for sales. When you try to benchmark things like brand and awareness, it becomes harder, but there are ways to benchmark those and have specific KPIs for them.

16:25 It depends from company to company, but things like thought leadership, the KPIs of branding, are usually divided into multiple stages. There's the awareness stage, then the consideration and decision stage, and third, the delight stage. On the awareness stage you can benchmark things like sentiment, social mentions, top-of-mind brands, share of voice compared to competitors. Those are KPIs you can actually put numbers on. On the consideration stage you'll have purchase intent and conversion rate. On the decision stage, cost per acquisition. On the delight stage, an NPS-like score, customer lifetime value, and so on. A lot of those KPIs also relate to other departments, like sales and product, but they should definitely be part of the marketing KPIs and benchmarks.

Barrel Kfir 17:59

My advice might be part of the reason it's so short. In positions like sales and marketing, the key thing is to understand quickly if you did a good job in hiring or not, and if not, move on. In those roles, by definition, you'll have a quarter, two quarters, sometimes more, of onboarding before they need to generate their full quota. So it takes time. If after that you spend a few more quarters trying to fix the situation, or you're not aware whether you did a good job or not, that could really kill a startup, especially early on when they run on a much tighter budget.

19:00 So my very simple advice is: try to identify very quickly if you did a good job or not. Try to create KPIs even before those personas need to meet the company-level KPIs. But that's always hard. Most of the companies I've worked with tried two or three times before they nailed the head of sales or head of marketing that they were satisfied with.

Barrel Kfir 19:55

I think it's because it's easier to measure them. If you look at the compensation of someone in R&D, the portion related to numerical goals is probably not a big portion; it's either related to something else or very softly defined. Sales and marketing have a very large chunk of their compensation based on results that are easily quantified, and that creates the short retention, because it's easier to see if it's working or not.

Barrel Kfir 20:55

I'd rather not go into names, so I'm not sure I have a good answer. But I would say that sometimes I thought a company was doing a very good job on marketing, and then when I double-clicked and looked at it, it looked different. And sometimes the other way around. It's not easy from the outside to measure marketing.

21:06 Sometimes you think a company has a good brand because you hear it a lot, because it's one of the three or five names for that specific solution that pops up. So you think they're doing a good job in marketing, but that's only one goal within the marketing department. Then you go inside and realize some other elements are missing, and the reason they have good market awareness is not necessarily the reason that will sustain the company at scale. You're also not aware of the ratio between the marketing achievement and the spend before you go in.

21:36 Sometimes I'm very surprised to come in and see that a company that was able to do good work on marketing is almost not spending at all on marketing, then you're even more impressed, and you realize this is only the beginning; the potential is massive. Compared to the other way around, where you come in and see a crazy spend on marketing. Spending a lot of money is an easy way to get your name out there on the awareness side, but this is usually not scalable and doesn't necessarily end up with good conversions.

Barrel Kfir 22:38

In those stages the marketing team is sometimes the founders themselves; it's not a massive team. If they're at the point that they have any conversion rate, take a look at it, that's good. If not, in those stages I like to see a lot of thought leadership. When people speak about the problem you are solving, are you one of the names that pops into their mind? Are you one of the names that replies, that writes articles, that engages in the conversation? You need to achieve that usually with a small resource at those stages, but you need to lead the discussion about the problem and about potential solutions.

23:40 From my perspective, that shouldn't be a pure sell. Promoting your company is one thing; creating thought leadership around the problem is a different thing. When that thought leadership is driven by people from your company, it does good to your brand. When I look at companies at that stage, I want to see that they are one of the names considered top within that problem. If there are tens or 20 competitors, you want to be in the top five.

24:10 One of the sectors we invest a lot in is cyber security. Within cyber security, especially these days, and especially in Israel, you see many companies starting at more or less the same stages with very similar pitches. The product is not really a differentiation yet, because they are still building it, and a lot of the differentiation will come from the brand. The brand is associated with who they got money from, when they started, the background of the founders, and the work they're doing on thought leadership. So it's super critical in spaces where there's a lot of competition and no ability yet to distinguish between competitors, because they are early. Then brand becomes very crucial in those stages, also for hiring talent.

Barrel Kfir 25:25

I touched on it before. It's easier for technical founders to understand the value of lead generation, and they are purely focused on that. It's harder to see the value of brand and awareness and how it affects every other element of the company, and how to measure that. So they are almost avoiding it, or they don't set the right infrastructure to tackle it from day one and measure it and be obsessed with it. That's probably the most common mistake I would mention.

Barrel Kfir 26:10

I'm not a founder, but I see a lot of founders. It's almost irrelevant how many times people tell you it's hard and it will take a big price on your personal life; only after you suffer it the first time do you understand it. Sometimes for first-time founders there's almost a necessity to be naive and ultra-optimistic, so maybe it's good we're not breaking them with reality from day one. But every founder I speak with says that at some point they realize it's much harder than they thought. So just be prepared for a very long and challenging journey that's hopefully also satisfying.

Barrel Kfir 27:00

You're touching a nerve. I told you I started investing 10 years ago. Back then I thought it's a very nice position to be an investor, spend two years before you go and start something yourself as a founder. By now I see that 10 years passed and I'm still not a founder. The only advice would be to tell myself: it's never too early to be a founder. You can always understand more, always have more experience before you start, and that's always true, but it's never too early. When I started I thought it would be much easier doing it in two to three years, and that's never true.

Barrel Kfir 28:30

I think you covered most of the good questions. For someone who said repeatedly along this discussion that startups need to work on branding and messaging from day one, that they need to be out there, and that sometimes they underestimate how important that is, comparing it to today's trend of being under stealth mode for the first two years of the company, even after they raised an A round or more, I think that's a challenge and a trade-off.

28:46 Even after I'm leading rounds in companies, sometimes they are still thinking about the best time to go out of stealth mode. That comes into contradiction with wanting to put their brand out there, and that's always a challenge. It very much depends on the sector and the status of the competitive landscape. Most companies will say the best date to get out of stealth mode is when my machine is ready to absorb all the enormous amount of leads that will come after people hear about me. In general it's true, but again they are underestimating the fact that you need to start grabbing market share of awareness as fast as possible.

29:48 So the current challenge is balancing between wanting to work in stealth mode, without your competitors hearing about you or understanding what you do, and wanting the market to hear about you and understand what you do as fast as possible.

Barrel Kfir 30:19

Thank you very much, Etgar. I had a great time as well, and I'm sure we'll speak again. Thank you.