In the ever-evolving start-up landscape, the allocation of investment capital is a pivotal decision that can shape a company's future.

A 2022 report by CB Insights provides a keen insight into this, revealing that start-ups, on average, channel 19% of their investment capital into sales and marketing. However, this figure is not uniform and can vary based on several determinants, including the industry, the start-up's growth phase, and its overarching business model. For example, start-ups in the software-as-a-service (SaaS) industry tend to spend more on sales and marketing than start-ups in other industries, such as manufacturing or healthcare. Start-ups in the early stages of growth also tend to spend more on sales and marketing to acquire new customers.

Discussing some of the items in the report, Frank Overtoom (Fractional Chief Financial Officer) and Alan Giles (Founder, Fractional Execs) had a few interesting observations that you will find within this article.

“Investing in Sales and Marketing during a growth phase isn't an expense; it's an investment in your company's future. Without it, you risk stalling or falling behind.” - Frank Overtoom

“Many firms present an impressive growth plan to secure investment, then forget to invest in the resources to deliver those growth numbers” - Alan Giles

A Closer Look: Industry-Specific Expenditure

The industry a start-up operates in significantly influences its sales and marketing expenditure, both in terms of how much is allocated and what it is primarily used for. Some of the differences recorded are as follows:

Software-as-a-Service (SaaS): Start-ups in the SaaS arena allocate between 25-35% of their investment capital to sales and marketing. Given the fierce competition in this sector, it's evident why they prioritize customer acquisition and retention.

Consumer Products: These start-ups set aside 20-30% of their investment for sales and marketing, emphasizing branding and promotions to differentiate themselves in a saturated market.

E-commerce: E-commerce start-ups, much like consumer products, allocate 20-30% of their capital to sales and marketing, focusing on driving traffic and building customer loyalty.

Healthcare: With a more conservative approach, healthcare start-ups dedicate 10-20% of their capital to sales and marketing, often prioritizing research and regulatory compliance.

Manufacturing: Manufacturing start-ups, mirroring healthcare, earmark 10-20% of their funds for sales and marketing, emphasizing innovation and B2B sales.

“Alignment and consistency in Sales and Marketing efforts are the jet fuel that propels a company forward during a growth phase. Without them, you're just burning money and going nowhere fast.” (Frank Overtoom)

‘Investors love to see their investments being deployed in areas that move the needle quickly – smart and timely investment in innovative Sales & Marketing activities are critical to capitalise on the cash injection.” (Alan Giles)

A Closer Look: Business Model/Growth Stage

What becomes obvious is that those start-ups that are operating in dynamic high growth sectors yet are still in their nascent growth stages, should prioritise allocating more substantial portions of their capital to sales and marketing. The logic is straightforward: the initial phases demand aggressive customer acquisition, and a potent sales and marketing strategy can facilitate this.

The stage of growth has an impact on spend also, early-stage start-ups tend to spend more on sales and marketing to attract new customers to their service/solution. Alongside this, the business model also has an impact, with companies relying on subscription-based business models having the confidence to invest more in acquiring customers as they will drive a longer financial relationship with the customer. Lastly, competition is a consideration that plays heavily on investment decisions – it costs more to develop a differentiated story to sell than in a new market.

While industry benchmarks offer a guideline, each start-up must tailor its strategy based on its unique circumstances and market dynamics. As the start-up world continues to transform, it remains to be seen how these investment patterns will adapt.

“What is clear, is that companies that raise funding and deploy quickly in the right areas will prevail. Spending in cost centres ahead of profit centres is a sure-fire way to burn capital quickly” (Alan Giles)

To connect with Frank Overtoom or Alan Giles to discuss this article or other areas of business growth, please drop us a note at info@fractional-execs.co.uk or connect on LinkedIn here:

Frank - https://www.linkedin.com/in/frankovertoom/

Alan - https://www.linkedin.com/in/alangiles/

Fractional Execs – https://fractional-execs.co.uk