Feature: Marketing Quandary – VCs See a Growing Need for Differentiation –

Computer industry behemoths IBM and Intel roll out products virtually every quarter, putting on big extravaganzas at trade shows. They often have in-house marketing specialists, or consumer product staples like Reebok and Proctor & Gamble to drive the events.

Start-ups don’t have that luxury. Their budgets can afford a hotel room at a trade show and not much more. More important, they don’t get a second chance if their launch fails to gain traction for their product. All the engineering talent and innovative technology are not always enough to save a product that misses its chance to impress potential customers and strategic partners.

About a year ago, Charles River Ventures added Dave Power as a partner and chief marketing officer to develop the firm’s image and mentor portfolio companies on a range of marketing issues, including product launches. Charles River is not alone in this endeavor. But while several venture capital firms have added marketing partners, the industry has not reached a consensus on exactly what a marketing partner’s role entails.

Marketing partners focus on either mentoring portfolio companies or promoting the firm, or a combination of both. Firms also vary over whom they target with their messages and how they promote themselves.

For example, Power spends half his time building business development functions at portfolio companies, which in turn is a service he markets to potential entrepreneurs. On the other hand, Gail Guerin, senior partner of marketing at Baring Private Equity Partners, courts investors as her primary responsibility.

Even though they have different tasks, both Power and Guerin strive to differentiate their firms from the other players entering the market. VCs used to work quietly in closed circles and let their reputations speak for themselves. The addition of marketing partners shows that firms are starting to worry about their images. In some instances, VC firms are even examining the implications of their names. [See What’s In a Name?]

By adding a marketing partner, venture firms are taking another step on the path toward institutionalization. Some VCs say the trend results from the natural growth of the business out of a cottage industry. As new firms flooded the market, some VCs established a concerted effort to differentiate their firm from the cluttered marketplace, but others say VCs have no need to advertise themselves.

VCs should stand on their track record, they say, which will resonate adequately without any help from a full-time marketing person. These VCs also say they receive adequate deal flow through their relationships without the need to generate cold calls from entrepreneurs, and they prefer to keep a low profile. After all, the important players, such as limited partners and their peers, know who they are. They are content to rest on the laurels of their previous investment performance.

Power disagrees with that attitude. “We want to make sure the entrepreneur with the next Sonus Networks calls Charles River first,” he says. “I don’t want to leave it to chance for someone to thumb through a directory and find Charles River Ventures.” Just one Sonus Networks would definitely pay for Charles River’s marketing effort.

Shepherding Portfolio Companies

“We’ve got a group of entrepreneurs with a strong predisposition to technology, science and engineering with no marketing background,” says Rosemary Remacle, venture partner focusing on marketing at Sevin Rosen Funds.

VCs rarely assume roles in the individual portfolio companies, but they might go on-site for a day to help the company with long-range marketing strategies and stay very active with the company until it hires its own marketing team. With a more mature company, the VC may just bounce some questions off the vice president of sales and marketing over lunch to help them sort out a particular quandary.

In completing their responsibilities for both the firm and its portfolio companies, marketing partners often take a diagnostic role, outsourcing most of their projects to consultants. A few marketing partners have built marketing teams including a few project people. For example, Remacle has a large part-time market research team at her disposal.

Several marketing partners build communication among portfolio companies. Jennifer Jones, marketing partner at Mayfield, produces workshops for portfolio executives. These events help companies develop specific operational functions and potentially raise the firm’s value in the eyes of the entrepreneurs.

Charles River’s Power uses his connections to help his portfolio companies identify and solicit their first customer. Marketing partners also help portfolio companies increase their visibility at the right industry conferences and produce their own events where the entrepreneurs can network with strategic partners.

Touting the Firm

All the marketing functions VCs support at the portfolio company level are services the firm markets to at least one constituency – potential entrepreneurs. VCs want the entrepreneurs with the good deals to perceive their firm to be more valuable than another. They want the firm’s cachet to bring better deals with better terms.

VC firms with and without official marketing professionals agree that a good track record is the most important factor in a VC firm’s reputation. A firm cannot buy a reputation.

However, firms like Charles River and Baring went one step further, saying that firms have to make sure their track record is associated with their name. Firms have to make sure their identity and their mission are clearly communicated to the appropriate constituents.

Power tries to get his partners quoted in the publications read by the industry in which they invest. Marketing partners publicize a clear message of the firm’s mission, and they place their investing partners on specific speaking panels.

Looking through a list of conference attendees at a large New York conference in July, a veteran VC said, “Look at all these firms. I’ve never heard of these people.”

With so many competitors, VCs want their constituents to know who they are, what they do and which successful portfolio companies they have backed. Enter the chief marketing officer.

A Sign of Maturity

The professionalization of the marketing function symbolizes maturity in the VC industry and represents a further symptom of the bifurcation in the types of organizations engaging in venture investing.

Historically a cottage industry, VCs formed partnerships because they knew or liked each other without any thoughts to the ingredients of a successful firm, says Thomas Hellmann, assistant professor at the Stanford Graduate School of Business. As some partnerships assume an institutional nature and examine the weaknesses in the firm, the marketing function is a natural gap they fill.

Many firms still operate like a group of general partners making investments. While some GP groups have become more established over the past two decades, these boutique firms cling firmly to the concept of VC as a relationship business, and they continue to maintain the classic low profile. Their investing success gives them no reason to consider any alternative.

As other firms have scaled up, their capital has allowed and required them to explore new organizational structures. Certain functions may need to be professionalized in order to deploy large amounts of capital in a reasonable time frame.

For example, Charles River and Mayfield both recently raised billion-dollar funds. Sevin Rosen’s latest fund is in that ballpark, and Baring operates a family of six regionally focused funds. It’s no coincidence that these funds have addressed the marketing function.

The fate of the marketing role may well rest in the balance between the traditional partnership and the franchise. Will the industry favor the four-person GP group or the billion-dollar behemoth?

Or, will it allow both?

Only time will tell.

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