Fractional Futures

Diagnosing the Marketing Health of a Portfolio Company

• Paul Mills • Season 3 • Episode 2

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Fractional Futures is the essential podcast for CEOs, investors, and senior marketing executives looking to unlock the power of fractional marketing leadership.
 
Hosted by Paul Mills, Founder at VCMO, and with special guests, we'll share expert insights, provide actionable strategies and explore real-world success stories to help you leverage fractional marketing leadership for maximum impact.

In this episode                                                              

In this episode of Fractional Futures, Paul Mills and Rob Nicholls discuss the critical role of fractional CMOs in helping portfolio companies scale and maximize enterprise value. They delve into the often-overlooked area of marketing due diligence during acquisitions, emphasizing the need for investors to assess marketing capabilities thoroughly. The conversation highlights the importance of key metrics in evaluating marketing success and the necessity for CMOs to communicate effectively with CFOs. They also explore the significance of building strong relationships between marketing and finance leaders to navigate budget requests and identify potential red flags in marketing strategies.

Special Guest

Rob Nicholls, Founder Rob Nicholls Consulting, CFO, Board Advisor and Angel Investor.

Key Takeaways

  • Investors often overlook marketing capabilities during due diligence.
  • Marketing due diligence should be a key part of acquisition processes.
  • The future potential of a business is more important than past performance.
  • Storytelling by founders can influence investor decisions.
  • CMOs need to align their metrics with revenue generation.
  • Building relationships with CFOs is crucial for CMOs.
  • Credibility with the board can facilitate budget approvals.
  • Understanding market trends is essential for identifying opportunities.
  • Too many metrics can dilute focus; keep it simple.
  • CFOs act as chief risk officers in assessing investment opportunities.

Sound Bites 

"It's all about the future."

"Too much is just too much."

"Credibility goes a long way."

Contact VCMO

Thanks for listening & keep podcasting!

Fractional Marketing Leadership | Marketing Transformed.

Paul Mills (00:01.816)

Hello and welcome to season three of Fractional Futures. In this season, we're diving into how fractional CMOs can help SMEs and portfolio companies scale and maximize enterprise value. Joining me in every episode is Rob Nicholls, a seasoned CFO, non-exec director and board advisor with over 35 years of global finance expertise. Rob specializes in profit maximization and value creation, and I'm delighted to welcome him to the show today. Hi, Rob, how are doing?

 

Rob Nicholls (00:32.539)

Good to see you again Paul, thanks for the invitation. playing a lot of golf actually, I Friday on my own actually but it was all good. The weather's a little bit dodgy at the moment but we'll try and get out this afternoon.

 

Paul Mills (00:34.178)

What have been up to? Where have you been golfing this week?

 

Paul Mills (00:45.219)

Did you knock any hole-in- ones playing on your own?

 

Rob Nicholls (00:48.529)

I did a lot of mulligans actually. Do hovers.

 

Paul Mills (00:51.918)

Fantastic. So Rob, let's get into the meat of it today. This episode really is looking at what investors, maybe what CFOs would do when assessing the marketing health of a portfolio company to see if it's got the right credentials to take it to the next level of growth.

 

When I've spoken to investors, either VCs or private equity, I always ask them, I always push them quite hard on how deep they go when they look at the marketing capability. And I've always been surprised they don't go as perhaps deep as I would expect. When investors assess a company, they're very meticulous with examining the financials.

 

But marketing is often overlooked. They might look at a very high level marketing KPI, but they perhaps don't look at the strategic capability of the organization. The organization might not have a marketing leader in place. The marketing might be left to the founder or the co-founder, but are the investors looking at their capability? question mark. So let's have a quick chat around.

 

marketing due diligence. I think certainly when investors go into a company, it should be a very essential part of any acquisition process or transformation process. How do you go about assessing the marketing function? during an acquisition phase or maybe going into a recently found, you know, a recently invested business? How do you, from your perspective, how do you look at that?

 

Rob Nicholls (02:37.201)

So I think any acquirer is gonna look and do their due diligence. I'm a believer in the most due diligence is nowhere near sufficient to uncover the skeletons in the closet, if you will. And you're right to say a lot of the due diligence is gonna be around the financials, the management accounts, the recent period management accounts, and then the statutory accounts that have been filed. But that really doesn't tell you very much because

 

It's all about the future. It's all about where the business is going. So focusing too much on the financials probably is a mistake and not focusing enough on the marketing capability where the industry is going, where the opportunity is going is not focused on sufficiently. Now marketing, to be honest, in a due diligence in a venture capital or private equity, they will look at it, but they won't look at it with the microscope that they probably

 

should apply to it. There simply isn't a timeline. So they are really looking very, very quickly to get a sense of where the business is going. But more especially, a lot of private equity or venture firms, they're investing in the founder, they're investing in the CEO and their vision for that business. So to be honest, where it's been is kind of irrelevant. It's where it's going to go. And if the founder can spin a good story about what the opportunity is,

 

That will often suffice as the due diligence for the market opportunity. There won't be a lot of discussion around the TAM and the SAM and the pricing and recurring revenue on a monthly or an annual basis. There just isn't the timeline around that. But they do believe in the story that the founder or the CEO can tell. And that largely will be a case of that is the extent of the due diligence about the market opportunity.

 

other than looking at the financials, okay, you turned over a couple of hundred last year, you may be going to do two, three, four million this year. you may be plan or at least the pitch deck talks doing five to 12 million in the three to five years out kind of thing. It really is a finger in the air kind of job. Nobody knows nobody's going to be right. And it really is down to the CEO and the CFO to spin the story to

 

Rob Nicholls (05:03.013)

the investor company, that this is the market opportunity and that we've got traction and we've got a product market fit and here's the market opportunity and here's the team to take it forward. Really, there isn't very much market research. There'll be an understanding of what the product or service is beyond that, it's limited. It really is limited. So unless you're talking about a

 

50 to 100 million pound a year recurring revenue business, there really isn't the greatest amount of due diligence. they don't expect a full-time marketing person in the business. And even if there was one, they're likely to be a relatively inexperienced junior member of staff that's perhaps doing some social media and some blogs. There isn't likely to be an experienced, knowledgeable...

 

insightful CMO or marketing director that's done this one, two, three times. just unlikely to be the case. And again, the acquirer will be leaning quite heavily on board advisors and non-execs to add the perspective of what the opportunity is and add the marketing or sales marketing insight to the acquisition.

 

Paul Mills (06:21.634)

Yeah, it's good observations there. I think certainly what I've observed in portfolio companies and speaking to investors and the founders, particularly founders, several founders will say, I'm going on this on gut instincts. I've got a good feel for the market. I've got a good feel for what my product or service provides.

 

That for me is a red flag. think if you're running a business purely on gut instincts and intuition, especially in the marketing domain, you're sailing into choppy waters. think Businesses that rely on that gut instinct for their marketing, if they can't provide any data-driven insights around total addressable market,

 

customer segmentation, demand forecasting, it creates a whole world of uncertainty. you know, especially for a potential acquirer or an investor going into that business, it creates a lot of unknowns. And I think if you're facing that, I think that for me would be a warning. And that's kind of a level due diligence that investors really need to be looking at. You know, what data are you using to drive your assumptions?

 

or your founder story. How in your experience, Rob, have you seen that where there's been businesses where you've got a particularly personable founder or CEO, they might have great gravitas, they might be great in front of a camera, great at spinning a story, but they might also be, I don't want to say pulling the wool over your eyes, but they might be over egging their own gut assumptions on where the market really is at.

 

Rob Nicholls (08:13.925)

I mean, lot of due diligence for any acquirer is about risk reduction. And anytime you can reduce the risk in an acquisition or acquiring any business, you're to be onto a positive thing as well. But it does come down to an awful lot of acquisitions, whether you're turning over less than a million, 10 or 25 million, an awful lot of the acquisition is going to be predicated on the storytelling that the CFO and the CEO

 

can put into the marketplace, can put into the mind of the acquirer. so due diligence on behalf of the acquiring company, you've got to get under the surface. You've got to understand is there product market fit? Is there traction in the marketplace? How many times has the business pivoted? I'm working with a startup company that's pivoted four times in two years and they still don't have traction. They're getting a little bit of revenue, but

 

At some point, most acquirers, most pre or venture companies will recognize that you'll get it right. It may take you half a dozen pivots. It may only take you one or two pivots, but you're looking for evidence that there's traction, whether that's engaged customers, testimonials, clients that really love your product or service. That's the sort of, that's what the due diligence, a lot of acquirers are looking at is evidence, know, tangible evidence.

 

testimonials, case studies, customers that just love your brand or your product, that goes a long way. Equally, the storytelling on behalf of the business and also the brand perception. What do people talk, what do people say about the business or the opportunity and where it's going? At the moment, there's an awful lot of interest on gaming companies, on online betting companies, if you will.

 

people can see the opportunities, venture firms can see the opportunities that it's a multi-billion dollar opportunity. So any business that is in that world, there's an awful lot of due diligence going on around acquiring small online betting companies, whether they're specialist companies, acquiring them and rolling them up. There's value accretion in that. And an awful lot of people out there selling stories around, know this market, whether it's a certain

 

Rob Nicholls (10:38.213)

got a certain sport or whatever it may be and the market opportunity is X, that's something you can get your hands around and quantify. But equally, you've got to have metrics around this and a lot of metrics are kind of superfluous. They don't really mean a lot and it is what it is. know, customer acquisition costs. There's an awful lot of that you can package under that and there's an awful lot of costs that you can exclude from that as well. So

 

Metrics don't mean as much as some people might think. A lot of it comes down to gut feel about the market opportunity. Do we believe that this opportunity is going to scale 20, 30, 50, 100X? Because you have to remember that any venture-backed company is going to be looking for an exit, a quick exit, two to five years, quite possibly five to seven years, most definitely.

 

and they have to be looking at the opportunity being a significant multiple of the entry cost. If you're acquiring a business for a million pounds, you're gonna be looking for 15 to 25 million exit in three to five years, five to seven years maximum. And the market potential that the CMO should be able to illustrate, or in this case, it's likely the CFO or the CEO that's gonna illustrate.

 

they've got to paint a picture of what the opportunity is. And just coming back to the point about due diligence, that's about reducing the risk, the inherent risk to the acquirer. So understanding what the opportunity is, and really putting some metrics around that.

 

Paul Mills (12:19.662)

And that's probably a nice segue to talk about metrics, Rob. I think a lot of businesses will probably relate to this next statement where they don't know if their marketing is working or not, because they don't know if they're tracking the right numbers. and they don't always track, you know, the right numbers that they should be. With your CFO hat on, what

 

marketing numbers are you particularly interested in to see the value of marketing and how it's creating growth for the organization?

 

Rob Nicholls (12:56.411)

So this is where we get into a little bit of a gray area in terms of this is where other functional areas, the chief revenue officer are starting to impinge on the world that might've been owned by the CMO. So an awful lot of the metrics that I as a CFO or the board is gonna be looking at are around the market opportunity and the revenue generation, the traction in the marketplace. So it's.

 

monthly recurring revenue, it's annualized recurring revenue, it's the customer acquisition cost. And for me, unfortunately, I'm a revenue generating person, I want to see revenue per employee. So if I can see if I've got two companies, one's doing 100,000 pounds of annual recurring revenue per employee, and another business is doing a million pounds on an annual recurring

 

and your recurring revenue basis per employee. I know which businesses that I want to be involved in. it is, know, whatever metric you use, you've got to choose one, two, three, no more than half a dozen, certainly. But this is where marketing can lose control of the narrative, if you will. And this is where there is an opportunity for the CRO to step in here or for the CMO

 

to lose the opportunity to a CRO. And that I'm seeing more and more. It's not happening perhaps as much outside of the city or in London potentially, but the CRO is certainly playing into this space because revenue is such a critical element. The other costs, branding, pricing is...

 

less important at that point. really is all about revenue and revenue per employee and monthly recurring revenue and annualized recurring revenue because that's what investors want. That's what the portfolio company is going to be really looking over your shoulder and the board observer that's sitting in on the quarterly or even monthly board meetings, they're going to be very, very closely attuned to revenue.

 

Rob Nicholls (15:14.755)

And anyone who can talk to the revenue opportunity or the incremental revenue or the growth in revenue per user, per employee is going to have the ear of the investor and likely the CEO and the CFO as well. So I'm a big believer in revenue based metrics, often on an employee basis. So traditional marketing metrics

 

to my mind, are a little bit less important. Certainly in the first couple of years, in later years, yes, they'll become much more valuable. But it is a world where the CRO is certainly moving into position here in an increasing way.

 

Paul Mills (16:04.226)

Yeah, you're right. And I think if you look at LinkedIn every day, there's noise from marketers getting frustrated with CROs elbowing into their space and vice versa. And I think marketers are certainly since digital marketing has become a big thing and digital marketing in itself is a very wide discipline. Having a whole load of digital metrics,

 

available at your fingertips to track campaigns, advertising, spend, whatever it might be. It's great, but I think by virtue of those digital channels, it's given us too much data to track. And I think a lot of marketers have got guilty of just presenting back vanity metrics. Our website has generated this number of impressions or I've got this number of followers this month for or whatever. And it really doesn't go back to, know, what pound sign does that contribute to?

 

And I think you're right. CMOs, marketing leaders, they need to talk the same language as the CFO. If you're not able, As a marketer, you're not able to provide insight into pricing power, competitive positioning, revenue expansion, then...

 

you're not talking in terms of margins, profitability and enterprise value. You kind of have two different conversations. I think that's probably where a lot of CMOs and CFOs fall out of love with each other. That's where they talk in different languages. Is that something you see quite often? And if you do see it, how do you help coach or mentor a CMO who's perhaps talking in the wrong way?

 

Rob Nicholls (17:36.529)

show.

 

Rob Nicholls (17:46.747)

So in the companies I advise currently, I have one CMO in that world. And to be honest, I do try very hard to not mentoring, but build a relationship with that person. I probably talk to that person as much, if not more than the CEO, the managing director there as well. So I think you're absolutely right is the CMO or the marketing lead, whether it's an internal person or an external person has to talk in the language of the board.

 

the CEO and the CFO. And that generally is revenue, margin and profit base. whether it's gross, I'm a big believer in gross margins is the dollars left after I've subjected, subtracted the cost of actually acquiring that revenue. So for me, gross margin is a key metric. And in all the companies, the portfolio companies that I work with, gross margin is tracked on a monthly basis.

 

And that's a key metric for me, to be honest, followers, blog numbers, downloads. It's nice. It's nice to know that there's traction in the marketplace and that there's followers, but it doesn't generate revenue or profitability or margin. And so I think there is an opportunity for marketing leaders, whether they're CROs, CMOs, business development people to really understand what

 

metrics are really making it happen at the boardroom level. And that is sales, sales growth, revenue per employee, gross margins and net margins and EBITDA, bottom line net profit. Those are the sort of numbers we need to be talking of. The value of individual incremental users, additional users of the service.

 

The market opportunity, huge number. If my business is only turning over two million, but you're telling me that the market opportunity is 50X that, why aren't we going after that? And what metrics do we need to understand? We need to implement to see that we're making incremental process on a monthly or quarterly basis. Because if you're not showing incremental improvement on a monthly or quarterly basis, you're not gonna be in place very long. You're not gonna be the CMO or the marketing director very long.

 

Rob Nicholls (20:08.611)

if there's no growth in revenue, revenue per employee or annualized recurring revenue, you're just not going to be in place very long. You what is the average tenure of a marketing manager these days? About 18 months now. It should be a lot longer, but the timeline isn't there. The opportunity isn't there to build this brand unless you're working with a family company that perhaps is thinking in terms of decades. Most businesses certainly aren't these days.

 

and the timeline, the funding timeline, the cost of capital today, they have to understand you got to generate revenue and margin, gross margin quickly on a recurring basis in order to invest in other things. People, new innovations, in new iterations of the product or service, new people to do other things. That's what it's all about. And I think there is an opportunity for marketing to understand better

 

what the key financial metrics that the board, CEO, CFO really want to hear about. And it's about revenue, unfortunately.

 

Paul Mills (21:17.056)

And there's been several clients that I've gone to. one of the very first things I look at is their technical, their tech stack to see how easy it is to measure, monitor and extract those metrics. Quite a lot of companies, they do struggle with metrics and tracking. So for those marketers that are going into a business and

 

it is difficult to get those KPIs measured or out of a system. How can the CFO and CMO work together to quickly build the reporting metrics, just maybe for day one, just to get things spinning up?

 

Rob Nicholls (22:01.737)

So again, there are numbers available and marketing needs to be party to those numbers. They need to be shared, have shared with them the strategic plan, the monthly numbers that come out of Xero or QuickBooks or Sage or whatever financial system they should be made. And a lot of times the finance department, the finance leader will often hold on to those numbers. They might not be quite so willing to share them with

 

the marketing person or the business development person. And that's something you've got to get over. And you're going to get over that by building a relationship, not an adversarial, not a confrontational relationship, but a really working together for the benefit of the business and helping to support the CEO and understanding the narrative. So a lot of it comes down to the relationship you build with the finance leader. So

 

It is incumbent on the marketing person, whether it's CMO, internal, external, fractional, or otherwise, to build a relationship. You've got to understand what makes the finance leader, the CFO and the CEO tick because believe me, the CFO knows what the CEO is thinking and it knows what the board is wanting as well. So they are a real opportunity for you to understand where you fit in the business.

 

And I come back to again, the numbers are all there. The data is there, how you choose to share it. And if it's shared with you, that's up to the relationship that you form. I'm a big believer in not having too many metrics. think I've been at companies where they've had 15, 20 KPIs and more, and they'll have KPIs, different KPIs per business stream. If you've got two, three, four businesses within an overall business, they'll have different KPIs.

 

per business stream, they'll have different metrics they look at. And generally too many metrics. I'm a big believer in having a dashboard of perhaps half a dozen metrics at most. And most of them, three, probably out of six, have to be dollar or pound revenue based metrics. And probably the other three metrics are things like gross margin, numbers of customers, and maybe one other metric as well.

 

Rob Nicholls (24:23.601)

Too much is just too much. The board doesn't want to have three, four, five metrics, more than three or four, five or metrics. They just don't want to see that. They want a very high level summary. key metrics. What is the growth in the last month or quarter? What is the gross margin? What is the trending gross margin? What is the customer acquisition cost? Is it going down? What are the total numbers of customers we've got? What is the churn?

 

How many of our existing customers, we've got a hundred customers, are we losing 10 customers a month? In which case are we turning over the whole portfolio of clients annually? They want to get an idea of the trend in those numbers. So the trend, I'm a big believer is the trend is your friend unless it isn't. So understand where these things are going. Is the market opportunity increasing? Is it stable? Is it declining? If it's declining.

 

What are we needing to do about it? Where are we looking where the market's going? What is the opportunity? And the marketing business development, CRO, CMO needs to be informing the CFO and the CEO and the board where things are going. Where do they think the business opportunity is going? And advise accordingly.

 

Paul Mills (25:43.15)

Actually, that probably is a great segue into this last segment. It's around spotting red flags and opportunities. think certainly Any strategic marketer, any marketing leader really needs to be part of the eyes and ears of the business to look at the market, where are the trends, where are the opportunities coming from, what are the threats in the marketplace and how do we mitigate that.

 

Several marketers, they will find opportunities and they will come to the CFO with their cap in hand, begging for more money, more budget to do the next big campaign or the next big activity, whether it's a brand repositioning activity, a brand identity change, something like that. How do you respond to those marketers that come to you

 

wanting more budget to do something and you can't really quite see where the value is coming from. How do you navigate that sort of difficult conversation?

 

Rob Nicholls (26:48.177)

So I think again, credit goes on What goes a long way is credibility, credibility in the company credibility with the CFO, the CEO and the board. If you've got credibility, you're going to get listened to. Second point of is, is this is is the relationship is, do I believe in you as a marketing leader? Do I believe in where you think the company is going and the opportunity is going? If I can plot

 

the revenue number on our strategic plan and I can plot it on a curve and see where the industry is going in the next two, three, four years and I agree with you, you're gonna be on a positive uptrend. Coming to me for 25, 50,000 pounds extra is not gonna happen unless I can see there's an opportunity to engage in growing the business.

 

There's an awful lot of red flags. know, a lot of businesses, they'll keep going down one road and they won't change. They won't pivot. They won't recognize that a market opportunity that they thought was there just hasn't come about. I've got a business that I work with currently that has been plowing a field for the last two and a half years, hoping that there'll be a pot of money that their customers can dip into. And that hasn't come to pass, but we've invested.

 

an awful lot of money, hundreds of thousands of pounds in people, systems and the opportunities, but the revenue has just not come about. And so that's one of four revenue streams that I, as a CFO, have been saying for over a year, we need to cut off and stop investing in that. So if I can't see a tangible pot of money or revenue opportunity there, you're not going to have my support.

 

to go there. And that's, it's a big risk, but it's also a red flag. I can't see tangible engagement in that business, or with the clients that we need or recognition in the marketplace, that that's an opportunity. You're not going to get additional funding to go in that direction. You're just not going to. you know, Most businesses don't have a chief risk officer. When you get to a large couple of hundred million dollar business, you may have a CRO, a chief risk officer.

 

Rob Nicholls (29:09.297)

other than the Chief Revenue Officer. So effectively the Chief Risk Officer is the CFO. They have to be looking out for what is the tail risk, if you will. Where is the opportunity not gonna be and where do we need to clip our wings and where do we need to expand? As a board member, the CFO is a custodian of capital and they're only gonna give capital, they're allocating capital where...

 

revenue generating opportunities are and where there's margin and profitability. They're not going to put resources into an area where there's no revenue or margin opportunities. they are the chief risk officer. They're looking out for what is the sinkhole? Where can we drop a couple of hundred thousand pounds for which there's no tangible revenue opportunity one, two, three years down the road? So that is the chief financial officer's role,

 

to be the chief risk officer. So again, I've come back to the relationship. You've got to have a relationship. You've got to understand what makes the chief financial officer tick because they understand where the CEO is going and where the board wants the company to go. So it comes down to relationship, but understanding the risk is a big part of it. I had another opportunity, different client.

 

who had sunk about quarter of million pounds into an IT system that just was not going to generate any revenue opportunities. It was supposed to support the business, but we killed it after 18 months because it just wasn't doing what it needed to do for the business to support the growth. And the business is growing 20 plus percent a year, but it just wasn't the right system. So we had to kill that. And so that's mitigating the risk that would have been a single

 

and a cost to the business.

 

Paul Mills (31:06.936)

Great stuff. I totally empathize with that story you just mentioned about the IT system. I've been to a few clients and there's an in-house marketer where I've joined a company and it's been a pet project of the CEO to get a new expensive system, a big new shiny CRM, know, Gartner top quartile CRM system for a tiny small 10 person business. It's not needed. And I think, you know, some businesses can actually

 

bit controversial this, you can actually run a good CRM off Excel. If you don't have many clients, if you've got a handful of clients, Excel is just a good CRM as Salesforce.

 

Rob Nicholls (31:41.502)

I'm with you on that as well.

 

Rob Nicholls (31:48.593)

I have client up in London that's got, think, 50 customers, 50 clients, and they invested in HubSpot. I love HubSpot. I'm an investor in HubSpot. But they were paying £1,200 a month to run a 50-person client database and new opportunities as well. So you're absolutely right. Whether it's Salesforce, HubSpot, Pipe Drive, you probably can run it on an Excel spreadsheet.

 

Now for my sins, I do run HubSpot, but I use the freemium model. So that's fine. But you're actually right. And the CMO, unfortunately, some CMOs can be dreamers. know, there's an investment in a CRM system and that's great. And some CEOs are shiny new, you know, toy. They like that sort of stuff. The board is not going to engage with, you know, I.

 

Again, another one is the agency model. I'm not a believer in the agency model. I had to fire an agency, I think four months into a contract, we were paying 12,000 pounds a month for an agency that basically was generating a couple of blogs and a couple of social media posts every month and a bit of strategy. That wasn't gonna go on very long, know, sinking up 12,000 pound a month into an agency model. That's just not gonna work as well.

 

Paul Mills (33:07.779)

Wow.

 

Rob Nicholls (33:11.997)

I'm not a believer in the agency model. think there's a lot of concern there at the agency model. We've seen peak agency perhaps, but that's for another day.

 

Paul Mills (33:20.43)

Absolutely, an episode all on itself. That's probably a good place to stop the show there, Rob. So If you've been listening or watching this episode, I hope you found value from our discussion. In the next episode, Rob and I will be discussing how to build a marketing strategy that's aligned with investment goals. So stay tuned for that one. Rob, it's been a pleasure listening to you today. You've shared some absolutely brilliant insights there and hope the listeners and viewers have got some

 

real good value out of that. So thank you again and look forward to the next episode.

 

Rob Nicholls (33:54.257)

Thanks, Paul.

 

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Paul Mills

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