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

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.

Lesson #270: Benchmarking SaaS Sales Team Metrics

I recently read this terrific blog post by David Skok, an expert on SaaS businesses and a General Partner at Matrix Partners, an early-stage venture capital firm based in Boston.  This post included a lot of terrific sales-related benchmarking metrics for SaaS businesses collected by David and The Bridge Group.  David was kind enough to allow me to share his learnings with all of you.  So, here it goes.

Sample Studied:  The study interviewed 384 SaaS executives.  89% in North America, $20MM median revenues, $25K median contract value, 60 day median sales cycle.

Territories:  Companies keep it simple as long as they can; 61% of companies under $5MM have no territories--which falls to 10% for companies over $250MM in sales.  Companies under $50MM that do create territories, do so: 63% by geography, 23% by named accounts and 9% by industry vertical.

Outside Sales Reps:  Outside salespeople are expensive, especially for lower ticket products where you can't make the lifetime value of revenues exceed the cost of acquisition.  So, no surprise that only 9% of the sales pipeline of a company under $5MM was generated by outside salespeople (leaning on marketing or inside salespeople instead), which jumps to 38% of the pipeline for companies between $50-$100MM in revenues, where they can better afford the costs.

Specialized Roles:  Every client can have up to three people covering them--a sales development rep that close the first sale, an account executive that manages the long term relationship and future sales and a customer success person that manages operational fulfillment.  Only 22% of companies under $5MM have all three roles, which increases to 44% for companies between $20-$50MM.  And, the higher the average order value, the higher odds you get multiple roles filled (8% fill all three roles with under $5K ticket, which jumps to 56% with $100K+ ticket given the higher complexity of the sale).

Location:  24% of companies under $5MM have sales reps in multiple locations, which jumps to 95% for companies over $500MM.  Surprisingly, the cost of that person is largely the same as the home office team, regardless of which market they are operating from.

Tenure:  The average tenure of a salesperson is 2.4 years with the company.  But, that increases with the average order value of the product:  only 8% of salespeople stay with the company over four years in companies under $5K ticket, but jump to 31% with over $100K ticket.  That speaks to more complex sales and the need to retain those selling experts--and, the higher compensation those salespeople are making with no need to look elsewhere for a new job.

Turnover:  The average employee turnover in the sales team was a whopping 30%, half of which from involuntary terminations and half of which from voluntary resignations.  The old adage bears true:  never stop recruiting.  And, what a painful process for your sales managers, having to retrain a third of their sales team every year, and the negative impact that has on sales productivity.

Compensation:  The average compensation was $126K, comprised of a $62K base salary and a $64K commission for on-target sales.  Understanding there is a wide range here, based on average ticket of the product.  But, compensation is steadily rising; the amount of salespeople making more than $120K has increased from 18% to 51% in the last five years.

Quotas:  The average quota was $770K, or 5.3x their total compensation for on-target sales. But, quotas increase with average ticket, from $578K for $5K ticket to $1.3MM for $100K+ ticket.  That assumes selling low ticket products is easy and you should close 115 transactions a year (10 a month) and selling high ticket products is hard, selling only 13 transactions a year (one a month).  Quotas have been increasing about 8% over the last two years, faster than inflation, as companies are asking their salespeople to do more production.

Commission Plan:  On average, 37% of companies offer a flat compensation plan (regardless of sales production), 24% offer a gradually increasing commission plan, 28% offer a sharply increasing commission plan (that accelerates with achievement over plan) and 11% offer a steeply increasing commission plan (often with a sales cliff before material commissions kick in).  I am surprised a third of companies don't tie compensation to performance--please fix that!!

Demos:  The number of demos is dependent on average ticket.  Companies with an averge ticket under $5K do 11.3 demos a week (closing around 25% of them) and companies with a ticket over $100K do 3.6 demos a week (closing about 7% of them, on average).  I am surprised the close rate was not higher than 10% in all cases, which I typically shoot for.  That is the difference of 43% more sales!!

Tech Spend:  Excluding the base CRM costs, the average salesperson spends around $477 on additional software to help them with their jobs.  That typically gets you email automation, contact data appending, contract e-signatures and LinkedIn's Sales Navigator tools.  The more sophisticated companies spend an additional $500 to get call recordings and conversion analytics tools.  The below chart shows even more advanced technologies which are early in their adoption curve.

Titles:  Titles materially vary by size of company--a VP in a small company may be the equivalent experience of a Director in a medium company or a Manager in a big company.  The most senior person in a company under $20MM is typically a VP or CXO, 45% of the time.  Where the most senior person in a company over $100MM, may have the Manager title, 71% of the time.  So, be careful how your craft your job postings and ask smart questions during interviews to make sure you are not comparing apples with oranges.  As a rule of thumb:  Directors are great strategists/leaders, Managers are great coaches and Team Leaders are great role models in a hybrid contributor/manager role.  Team leaders typically manage a team of 7.2 account executives, excluding themselves.

Struggles:  I am guessing you are all in good company here.  49% of companies struggle with team productivity/performance; 30% with recruiting/hiring; 26% with onboarding/training and 19% with forecast accuracy.  Numbers which have not materially improved over the years, despite all the advancements in technology.  Driving sales is never easy.


Hopefully, you agree that are some great sales benchmarking metrics herein, which can help you in managing your own SaaS sales organizations.  Thanks again, David, for allowing me to share some of your insights with our Red Rocket readers.  Be sure to read the full blog post for more details and you can follow David on Twitter at: @bostonvc.  Happy hunting!

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

A Good Entrepreneur Evolves Over Time

I've been an entrepreneur for most of my life. I started an odd-jobs business in high school, founded a collectible comic-book business in college and launched my first venture capital-backed startup -- an adventure-travel company -- in my 20s.  My entrepreneurial endeavors continue today. I'm in my late 40s, running Red Rocket, looking for companies to buy and advising hundreds of early-stage businesses. My approach to managing businesses today is very different than when I was younger. The experience I now bring to the table has materially mellowed me as a leader. But, I didn't have that background or that perspective when I was younger.

Read the rest of this post in Entrepreneur, which I guest authored this week.

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

5 Considerations When Setting Your M&A Goals

Over time, merger or acquisition opportunities may present themselves as a growth opportunity for your business.  As I have discussed in the past, M&A can be very distracting to an early-stage business still trying to optimize their stand-alone business.  Especially when things can often go awry in merging businesses, management teams and employee cultures.  But, assuming you have done your homework on those fronts, and you are comfortable in taking the leap into world of M&A, here are five considerations when setting M&A goals for your business.

Read the rest of this post in Forbes, which I guest authored this week.

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