Your startup has now a few paying enterprise customers and you struggle to decide if it is the good time to grow your sales team (typically from a founder or an early employee dedicated to sales to 3–5 sales reps) or if you need to invest more time to learn about your market and to refine your product. This is a crucial question as growing your sales team will have a huge impact on your cash and can potentially kill your company if you do it too early and with the wrong profiles.
The Sales Learning Curve article by Mark Leslie is full of great insights about startup sales ramp-up. Mark Leslie focus on the sales yield indicator ( the average annual sales revenue per full-time, fully trained and effective sales representative) to define where you are on the sales learning curve when you need to ramp-up your sales team and which sales profile your need to onboard.
But this indicator is quite difficult to evaluate in the early days as a majority of the sales are done by the founders who are not really representatives of a “fully trained and effective sales representative”. By the way, in the first phase of the learning curve, called “the initiation phase”, he considers that you already have a team of three to four salespeople. I position myself before the hiring of this first sales team, which is already a significant investment for a young company.
I think there are a few common sense checks that you can perform to define your sales maturity and to verify that you are ready to hire a sales team or if it is better for you to continue to meet potential customers, learn about their needs and improve your product.
My checklist looks quite obvious, but in many cases, I have noticed that the founders struggle to evaluate this tipping point and try to hire a sales team too early. Because a lot of startup founders are technical people, they think that it is mandatory to find someone who has a strong sales experience with a proven track record. And after six months, no sales and a lot of cash burnt, they decide to stop the experience. Be careful, in sales, the context is key and a successful sales manager at Microsoft (if he eventually accepts to join your team, which is already a bit strange) may not be able to sell a single contract at your startup! Learning is key. In the early days, it is better to rely on a founder and/or an early team member that is able to learn (maybe with some coaching) than to hire an expensive sales executive.This story happens so often that it should be a rite of passage into entrepreneur adulthood.
Here is my personal checklist (more adapted when you sell a B2B product)
1) You have found a sales pattern
If you want to enter into a highly repeatable sales process, your sales need to share a clear pattern. And something more accurate than “we sell HR applications to Fortune 500 companies”. Good for SAP or Oracle, but not for a startup with a few customers and a promising but incomplete product. You need to track metrics others than industry or size of the company.
Can you define 3 criteria that are commons to your customers?
- a similar pain?
- the buyer? (VP of Sales, CIO,..)
- a product that you complement?
- a similar noticeable event: M&A, strategic IT project, …
If you can’t list 3 or more common criteria, you don’t have a pattern. Do not be afraid to define a very narrow pattern. Your goal is to find the first set of customers who react positively to your product.
The answer to this question will also help you to define a clear lead generation process and to provide qualified leads to your sales team.
2) Your level of specific development is low
You need to check that your customers are really buying your product and not a highly customized version of your product. If you take too much time to adapt your product to satisfy your customers you are a service company!
A simple method to evaluate this criterion is to estimate the cost of the specific development using the average cost of your technical team. If the ratio between the cost of the specific development is exceeding the annual value of the contract, you have a problem or you are still discovering your market.
If the custom development is billed to the customer as Professional Service and Professional Service is part of your business model, it could be fine, but if it is done for free by your product team, it means you are not ready to scale your sales team.
The idea is to define what your customers are buying. If they are buying a custom version of your product each time, you will be able to make a few sales as a founder because you will be able to commit on the product change requests, but a fresh new sales rep will be totally lost.
3) Your product is sticky and contagious
Stickiness and contagion are easier to understand and evaluate when you sell B2C products. If your average user downloads your mobile app, use it a few hours and then abandon it, your app is not sticky. If your users do not recommend your app to their friends and family, your app is not contagious. And it is obvious: if your product is sticky and contagious, it will be easier to spread your product across your market.
This is something that we usually forget to evaluate in a B2B environment. But this is crucial. Your first customers will probably start with a PoC or with a limited deployment of your product and your success is directly linked to your capacity to increase the number of users.
To achieve that, you absolutely need to create an incredible user experience and to convert your first users into advocates. They will also help you to articulate why these early customers are buying your product. Track your product usage, check if your customers are keen to testify about your solution or if they recommend your solutions to their coworker, and track all the little signs that can prove customer adoption.
Salesforce.com is incredible at converting their users into ambassadors inside and outside their companies. They have found a high level of stickiness even before becoming the leader they are now.
4) You know approximately your targeted customer lifetime value
If you read articles about startup metrics (and especially SaaS metrics) you will see a lot of reference to Customer LTV (Life Time Value) and CAC (Cost of Acquisition) and the accepted rule is that to LTV should be at least 3 times your CAC.
This is a very interesting rule, but quite difficult to analyze when you have a dozen of customers. But at this stage, you need to know your target LTV because it will really shape your sales organization.
If you want to build a successful business, The lifetime value of a customer should be consistent with your sales effort to acquire him.
Maybe it won’t be the case for the first deals because you will offer a discount to someone who will take the risk to use an early version of your product and who will provide a precious feedback, but you absolutely need to validate that this rule will be valid after a few deals.
For example, if you target a huge market and if your customers are able to sign online or without a huge sales organization, your price might be low. But if you sell to Fortune 500, with 6 months sales cycle, you’d better check that your customer lifetime value covers your sales costs.
It means obviously that knowing your average customer lifetime value is key. On this subject, I recommend you to read to blog post of Zuora CEO: Go-to-market strategy: the hundred million dollar question.
Ready to scale?
If you can check these 4 boxes, happy days! you are ready to ramp-up your sales team because you have a desirable product and a profitable model and you will be able to explain to your fresh new salespeople who is buying your product and why they are buying it!
Otherwise, Go out and check again these criteria for new sales.
Learn fast, measure fast, adapt fast!