Abstract

Start-up firms play a major role in the economy, with B2B start-ups often developing new technologies and offerings to business customers that incumbent firms do not provide. However, little is known about the cost-effectiveness of start-up firms’ investments in marketing. We integrate insights from managerial interviews with signaling theory to posit how conducting systematic marketing affects start-up firm valuation, and how the combination of the firm’s primary customer-type (B2B versus B2C) and development stage (early versus late) moderates that effect. Our empirical analysis reveals that marketing investments affect firm valuation positively for some start-ups and negatively for others depending on the noted moderators. In particular, we find that investments in systematic marketing by early-stage B2B start-ups increase firm valuation, yet more than half of early-stage B2B start-up firms choose not to invest in systematic marketing, apparently believing such investments will not pay off.

Introduction

Business-to-business (B2B) start-up firms are major drivers of economic growth as they produce new technologies and offerings that incumbent firms cannot or are reluctant to provide (Dörner, Flötotto, Henz, & Strålin, 2021). In aggregate, start-up firms are responsible for 10% of all worldwide job growth between 2017 and 2021(Wijngaarde, 2021), while B2B focused start-ups make up 71% of reported start-up sales in the US Census Bureau’s 2015 Annual Survey of Entrepreneurs (U.S. Census Bureau, 2017). However, despite the importance of start-up firms, it is difficult for either B2B or business-to-consumer (B2C) start-up firms to succeed: only about 50% of start-up firms survive for five or more years (U.S. Bureau of Labor Statistics, 2016).

Allocating resources to marketing could potentially help a start-up increase its likelihood to succeed since focusing on marketing reduces ambiguity about the firm, its value proposition, and its offerings (e.g., Acar, Dahl, Fuchs, & Schreier, 2021). Further, a start-up that allocates significant resources to marketing is signaling to investors that the firm is focusing on its customers and is creating and delivering value to them (Halberstadt et al., 2021). Yet, start-up firms are 60 times more likely to report being resource constrained than to report possessing sufficient resources for their development (Evans & Jovanovic, 1989; Wasserman, 2012). That resource constraint limits what functions start-ups can allocate scarce resources (O’Toole & McGrath, 2018), which, in turn, impacts start-up firms’ actions (Fernhaber & Patel, 2012) and ultimately their survival and performance (Dencker & Gruber, 2015).

Consequently, for start-up firms, to conduct systematic marketing — that is, following Moorman and Day’s (2016) definition of a systematic marketing organization based on four “C’s”, e.g., capabilities, configuration, (human) capital, and culture, operating on an on-going basis — often requires directing scarce resources from other aspects of their business. As a result, as confirmed through our multi-method approach that involved interviews, secondary data, and a follow-up survey, many start-ups do not report conducting systematic marketing, but instead report either not conducting any marketing or only conducting marketing on an ad hoc and opportunistic basis.1 One (typical) interview response about marketing’s role was “Marketing?? We don’t do any real marketing…we have much more important issues than marketing to focus on.” A 2015 Capital One survey of small business owners supports this observation, reporting that 76% of owners face marketing challenges, 64% feel they are unable to effectively market their businesses, and 39% report that their firms have not executed any marketing initiatives in the past six months (Capital One, 2015).

Discussion

This research investigates whether and when conducting systematic marketing benefits start-up firms, an important topic that has been rarely addressed in the marketing literature. We develop a conceptual model of the antecedents and consequences of conducting systematic marketing that includes the interactions of two firm characteristics – type of customer and stage of development– to determine when conducting systematic marketing should be more or less beneficial to startup firms. We test our conceptual model using a rich dataset on start-up firms provided by Equidam, an online start-up firm valuator, through a wide range of robustness tests, and with an analysis of an independent survey of start-up firms. In each of these analyses, we find strong support for our conceptual model and associated hypotheses. One key finding challenges current practice: while we find that conducting systematic is more beneficial to early-stage B2B start-up firms than to any other category of firm, such firms are the least likely to conduct systematic marketing.