When you start a company, the initial challenges tend to be around hiring your first few employees, raising capital, and most importantly figuring out that elusive thing called “product-market fit”. In the case of a typical B2B start-up, once you have ~ 10 customers and around $1 M in ARR, you have early product -market fit. By the time you have $3–5 M in ARR, you have likely figured out a repeatable Go-To-Market model. Furthermore, you have built probably out the go-to-market team with a sales VP, a marketing director/VP, and a dozen of or so employees across these functions, and are ready to step on the gas and scale.
The challenge is how fast should you plan to scale? There is typically a 6–9 month lag between making sales and marketing investments and seeing results. For example, lets say that Acme Inc, did 200K in Q1, 400K in Q2, $1.1M in Q3, will likely to do $ 1.8M in ACV bookings in Q4 2018, and end the year at ~ $ 4M in run rate ARR. Clearly, things are working but should Beth, the CEO, plan for a $3M quarter in Q4 2019? Or $4M? Or perhaps $6 M?
Beth wants to steps on the gas and given that she has grown from nothing 4 quarters ago to $2M, growing 3X to doing $6M in four quarters doesn’t seem crazy. However, that will require 30–35 sales reps (250K quarterly quota @70–75 % productivity), up from less than 10. After factoring in marketing expenses, some office space, and a handful of customer success folks, that likely means adding another $ 1–1.5 M in monthly burn.
If things go as per plan, the company will be at $ 15 M+ ARR run rate by end 2019 and will be worth 4–5X more than it was a year ago (valuation grows at a multiple of revenue growth). But if new ARR doesn’t ramp up as per plan, Beth could be doing a round of lay-offs in 6 months, and Acme could be cash out by end 2019.
So what should Beth (or you) do? The answer obviously depends on a lot of variables but here are the questions I would likely ask Beth (or you), if I were her board member/advisor:
- Do you have complete confidence in your VP of Sales? Are you confident that s/he can hire and manage 30–35 AEs. I have made the mistake of scaling the sales teams around a weak VP of Sales at least twice and both cases, it was a disaster. Its often not obvious if your VP of Sales is “weak” and this is a question where your board members can really help. Share all the data with them and possibly even have them re-interview the VP of Sales.
- Have you truly found a repeatable pattern? Is there a consistent customer profile that AEs/marketing can go out and find more off (e.g. top 500 E-tailer vs. companies with large complex data pipelines)? Do you have clarity on the buyer persona (e.g. VP Product vs. equally split between VP Product, VP Engg, and VP Analytics), use cases, and pricing model/ACV? Is there a pattern to the sales process and the types of AEs that succeed? I am all for being iterative and learning as you go, but don’t start to hire an additional 20+ AEs and triple your sales team without clarity on these questions
- Can you train and support the additional AEs? When you have a handful of AEs, product marketing, field enablement and sales ops are all part time jobs for some-one. If you plan to hire more than 10 AEs in a year, you need at least 2 people (1 each for product marketing and sales operations). Initially, they can split field enablement between them, but as soon as you are hiring more than 5 people/quarter, you need a dedicated field enablement person. These functions are critical to both setting up AEs for success and quickly weeding out the ones who are not likely to succeed. In particular, I am a huge fan of being super anal about sales training; the CEO should be very hands on, to the point of listening to every new AE pitch and not assigning leads to AEs until they pass the pitch test.
- Can you scale demand generation in line with the AE ramp ? Once you have clarity around your target customer profile, scaling demand generation is mostly a matter of experimenting with various channels and iterating quickly. That said, it takes time, and is a somewhat linear process. And nothing is more frustrating than having hired a bunch of what feels like very expensive AEs and not enough leads to feed to them.
- Is customer success set up for success? How long does it take for customers to realize value and is that acceptable? What is your NPS? Are you tracking the right engagement metrics? All too often, a great VP of Sales has sold “ice to the eskimo”, or the product never gets used/doesn’t deliver value to justify the purchase price or the sponsor leaves or… Before you start to aggressively scale sales, it’s critical to both have confidence that product usage/retention is under is strong and to have a customer success leader who can scale the CS function in line with sales.
If you feel strongly that you can answer these questions with a YES, then you should go ahead and start to hire another 20+ AEs. If you want a 2nd opinion, drop me an email with the relevant data and I am happy to chat about it. And if the answer for multiple questions is “I am not sure”, take another quarter to figure things out before you step on the gas.
Scaling a startup never gets easier, and going from being extremely frugal to “burning money like it “grows on trees” is nerve wracking. However, if you aspire to build something of consequence, the risk/cost of going too slow is even higher.