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Summary:

Different phases of a startup’s lifecycle require different approaches to spending. VC David Skok explains how startup CEOs need to manage their burn rate as they fine-tune their sales process and their sales team to prepare themselves for the next stage.

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Different phases of a startup’s lifecycle require different approaches to spending. In my previous post, I talked about the first phase: finding  product/market fit. I described how entrepreneurs should have a laser-like focus on finding it, and why they should conserve cash to get there. In this post, I’ll talk about the search for a scalable and repeatable sales model.

Identify a Repeatable, Scalable Sales Model

You’ve found a repeatable and scalable sales model when:

  • The process you go through to acquire a paying customer is clearly repeatable.
    • If your process involves salespeople, you can add new hires and they can achieve the same productivity level as the original sales team.
    • If it’s a touchless web sales model, your web traffic converts in a predictable way through your web site.
  • The process is scalable.
    • You can increase the sources of your leads and/or web traffic without reaching a near-term limit.
    • The resources (e.g. salespeople) in your conversion funnel can easily be scaled without reaching a near-term limit.
  • Your cost to acquire a customer (CAC) is significantly less than the amount you can monetize them over the customer’s lifetime.
    • In a SaaS business, I recommend that lifetime value (LTV) should be more than three times higher than CAC.
    • It should also be possible to recover CAC in less than 12 months for a capital-efficient startup.
    • LTV should be calculated using gross profit (not revenue) after cost of goods, cost to serve and cost of on-boarding.

Experiment with Sales Models; Maintain a Low Burn Rate

Like the search for product/market fit, this is a time when you should experiment. Don’t believe the predictions of your business plan, which are purely unproven hypotheses. Only a tiny number of startups are able to meet or beat the sales plans they put together until they have found a repeatable and scalable sales model.

You can’t predict how long it will take you to find a repeatable and scalable sales model. It’s common to find the product or market has changed during this time, so you need your funds to last you through as many experiments as possible to have the greatest chance of finding a workable model.

Avoid the temptation to throw money at the problem. This is a very common mistake, particularly by inexperienced-investor board members who are under pressure to see results happen fast. If you do this, you’ll usually find you are burning through cash and seeing very little in the way of results.

Start off by designing an initial sales funnel process you plan to prove out over time. (I have an entire section of my website dedicated to this topic called Building a Sales and Marketing Machine.) Design experiments that can be run quickly and with low investment. When you’re designing the experiment, think carefully about what data you’ll need to collect to determine if it was successful.

First-in Salespeople Are a Different Breed

If you need to use salespeople as part of your conversion funnel, you should understand that the type of person who can deal with an unproven sales process is very different from the usual salesperson. They need to be smart enough to help map out a repeatable process, though no map exists for them. Normally, when you hire salespeople, you want them to follow your proven path, rather than invent their own ways of selling and messaging.  The first-in salesperson will know how to try out different target sub-markets and vary the messaging to determine what works best.

Start with one or two salespeople and restrict them to a local geography. Make sure they’re selling effectively before hiring others. It’s far harder to change messaging and direction in a large distributed organization. With just one or two people, your sales team can get together face-to-face to discuss problems they’re seeing, as well as what’s working.

The Importance of Funnel Metrics

Great funnel metrics are a key element required to reach a repeatable and scalable sales model. You’ll need to know what your conversion rates are for every stage of your funnel, and how those change for different lead sources. Usually, there’s a limit to how many leads can come from each lead source, and the only way to scale the business is to add new lead sources. The economics for these new lead sources may be different from the original sources, and only these types of metrics will help you understand if they’re economically viable. (I’ve written previously about designing startup metrics to drive successful behavior.)

To have a truly scalable sales model, you’ll likely need to have a variety of different lead sources proven to scale when needed, at a price that works.

What comes next?

Once you’ve found product/market fit and have a repeatable and scalable sales model, it’s time to scale the business. I’ll talk about how to do that in my next blog post.

David Skok has been a General Partner at Matrix Partners since 2001. He founded his first company when he was 22, and since then, founded three companies, including SilverStream Software, and done one turnaround. Skok specializes in SaaS, enterprise software and cloud computing and blogs at forEntrepreneurs.com.

Image courtesy of Flickr user tonylanciabeta

  1. Jarrod Levitan Sunday, November 28, 2010

    Thank you David!
    Ive been looking for practical ratios around CAC and LTV for our SaaS company. Really fantastic blog specifically about salespeople and the 2 different roles.

    Also enjoyed the pevious blog and shared it with my team.

    thanks again for sharing your knowledge!

    Jarrod

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  3. Jarrod, Thanks very much for your comment. I am glad you found it helpful.

  4. David,
    As always, great post with loads of useful information. Hiring the right first-in Salespeople is big challenge since most sales people are looking for a clear path to commissions and there isn’t a clear path at this point. I like the first in salespeople to have a history of earning $300k+/year, they will only take the job if you can convince them they can get there again. Once they believe, these folks will figure it out from there.
    Tim

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