Monday, July 31, 2017

Lesson #271: Want to Scale Revenues? It's All Math!

Posted By: George Deeb - 7/31/2017

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Over the last several weeks, I have been networking with key influencers in the tech startup community in the Raleigh-Durham area.  I had the joy of meeting Alex Osadzinski, a seven-time successful serial entrepreneur  and venture investor in town.  Alex's career took off as an early employee with Sun Microsystems between 1986-1994, helping lead their meteoric rise to over $1BN in revenues in only a few years. And, since then, he has helped enterprise software companies rapidly scale their businesses to new heights, most recently as the CMO at Relias Learning, whose sales have almost tripled to almost $200MM since he got involved in early 2016.

ALEX'S PLAYBOOK FOR SCALING REVENUES

I asked Alex the secret to successfully scaling businesses, over and over again; his answer was short and sweet, "it's all math".  Which I loved!  I have never personally scaled a business to over $100MM, but I had always said to entrepreneurs trying to accomplish this goal, "it's all math".  And, now I am hearing those exact words come out of the mouth of a proven veteran that has actually done it, several times over.

Alex continued to talk through the other key drivers of successfully scaling companies.  He highlighted the importance of not scaling until the product is ready to scale, with all the kinks worked out.  The importance of having good metrics with which to manage the business, "with rigor".  The importance of  scalable processes and learning programs to quickly onboard new employees and promote older employees each year.  The importance of knowing when new products, new market verticals, global expansion or new acquisitions will be needed to help propel the company to new heights, when the original product is fully saturated in the market.  The importance of hiring people that have a base understanding of your industry, to help shorten the learning curve.  Knowing that complexity multiplies with rapid scale, given 50% of your staff is brand new to the company each year and employees no longer know everyone else in the organization, nor being centrally-located in one office.  Etc.  My pencil couldn't write fast enough to document every nugget shared in this valuable crash course.

IT'S ALL MATH

I wanted to share Alex's wisdom with all of you, and to help give you more concrete examples of what is meant by, "it's all math".

Revenues & Recruiting:  Let's say you are trying to grow from $50MM to $100MM in one year.  If your typical salesperson can handle $1MM in sales each, that means you need to have 50 new salespersons up and running at the beginning of the year.  But, with 30% typical attrition in a sales organization--half from voluntary resignations and half from involuntary terminations, it really means you need to have 80 salesperson up and running to ensure you actually hit your goal.  But, to be "up and running", that means you most likely needed to recruit them 6 months before the year even started, and get them fully trained and ready for selling in the 3 months you actually want them to be selling.  So, it becomes crystal clear, that in order to double revenues in 2018, you actually need to start working on that plan early in 2017, to have have any reasonable chance of hitting your goal.

Market Share and Common Sense:  Let's say your product serves an industry that is only $300MM in size, and with four key competitors in the market it would be very unlikely to grow your product sales more than $75MM stand alone.  That means simply adding salespeople is not enough; you most likely are going to have to introduce a couple new products that will increase your market size potential, to have any chance of hitting your $100MM revenue goal.  And, product development takes time, it could take a year or two, to ideate, design, manufacture and prepare a product for sales.  Again, if we are trying to drive sales in 2018, we should have been thinking about adding new products back in 2016, otherwise it is too late to realistically start driving revenues in time.

Mergers & Acquisitions:  So, what if your board is really clamoring for doubling revenues this year, and there is no realistic way to drive that internally?  That leaves you with only one viable option: M&A, provided you think about it early enough in the year, as it typically takes 6-12 months to get through an M&A process, from identifying and reaching out to targets, to negotiating the deal, to constructing the closing documents, etc.  But, you should really only go down the M&A route, if you are willing to tackle all the added complexities and potential pitfalls involved with trying to merge two businesses.  That said, after you get to $100MM in revenues stand-alone, you most likely will need to be giving M&A options a serious look, in all cases.  But, a word to the wise, if you are merging two $50MM businesses, you most likely won't end up with $100MM, after attrition of employees and potential clashes in culture, so build a cushion in finding a company large enough to hit your goal, net of issues like these.

WHAT THIS MEANS FOR YOU

As you can see, driving credible growth, with a realistic plan, is largely about having your arms around the math, as it really is a numbers game.  Stop living in the present, managing your business day-to-day, and actually think through how big of a business you want to have three years from now, and then, back into the mechanics of how best to get there.  It most likely means you will have to start investing in market research, new salespeople, onboarding processes, bigger real estate, product development, corporate development, etc., sooner than later.  For enterprise sales, your current year is pretty much already "maxed out", based on the investments you made last year.  So, the efforts you are making in 2017, is most likely going to dictate your sales success in 2018 and 2019, depending on the tactics you plan to use.  So, get way ahead of your planning for future years, now.  Otherwise, you have no chance of hitting your target. Duh . . . it's all math!!


For future posts, please follow me on Twitter at: @georgedeeb.


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