Startup Lesson: Avoid Overhiring
The real risks to a startup of hiring salespeople too early.
October, 2009. The weather outside was beautiful at our headquarters in Palo Alto, CA, but things were about to get stormy in the Dasient board room.
We had been operating for about 1 year, and had launched our cloud-based security-as-a-service product to much fanfare in the press a few months ago.
But there were no sales rolling in. We were initially going direct to SMBs, and were finding that the sales cycle was long and painful to get an SMB to pay even as little as $50 or $100 a month. And the number of SMB prospects and customers we were getting was pitifully low. We were starting to see some traction coming in from reseller/OEMs (a whole other blog post on that), as well as from some enterprise customers (banks, publishers, and ad networks). But it was incredibly slow going to grow our sales.
That particular board meeting was the first time we sensed that our investors were losing their patience. They kept asking what the plan was to grow our pipeline and when we would start seeing sales ramp. At one point, one of our investors said something to the effect of, “You guys don’t really understand sales. You need to hire a good salesperson to help you guys sell more of the product.” They encouraged us to ramp up hiring, especially in sales and marketing.
In retrospect, this was a key moment in our company’s history. Our investors thought we had a sales execution problem. The reality was (although we didn’t want to admit it to ourselves, much less out investors): We didn’t have an execution problem, we had a market problem.
Our sales progress to this point was far below our own expectations. I think we were a little insecure about this — maybe our investors were right. Maybe we didn’t know how to sell. Perhaps if we hired a really good sales leader, things would turn around and sales would start to ramp. After all, here were some really experienced investors who themselves had been CEOs of companies in the past, and they were telling us with a lot of confidence that we had an execution problem that would be fixed if we hired more salespeople. “Salespeople are a different breed. The best ones will figure out how to sell refrigerators to Eskimos.”
So we took their advice. Whereas before, our team had been really lean (3 founders and a few engineers), we now started hiring sales and marketing people. And, of course, sales people are not inexpensive. So our burn rate went up as well.
Problem: We hadn’t found the repeatable, scalable business model.
Steve Blank recently wrote a great article where he proposed a definition of a startup company. He wrote that a startup is in search of a repeatable, scalable business model.
Steve defined “repeatable” in the following way:
“Startups may get orders that come from board members’ customer relationships or heroic, single-shot efforts of the CEO. These are great, but they are not repeatable by a sales organization. What you are searching for is not the one-off revenue hits but rather a repeatable pattern that can be replicated by a sales organization selling off a pricelist or by customers coming to your web site.”
Steve also defined “scalable” in the following way:
“The goal is not to get one customer but many – and to get those customers so each additional customer adds incremental revenue and profit. The test is: If you add one more sales person or spend more marketing dollars, does your sales revenue go up by more than your expenses?”
The problem was that we weren’t there yet — we had not found a repeatable, scalable business model. The founders were personally driving and closing every SMB, enterprise, and reseller deal. And it was taking a lot of heroics to close those deals. We were rapidly iterating even fundamental components of our product based on what we were learning from the market. When we added new salespeople, our revenue was not going up by more than our expenses. In other words, we were still discovering our product-market fit.
After that Oct 2009 board meeting, we made the mistake of going down the path of ramping up our sales and marketing teams and three things happened:
1. We continued to thrash
2. Our burn rate grew and cash became depleted
3. It became more difficult to pivot
Let’s discuss each of these consequences in more detail.
We continued to thrash
We brought on salespeople, but we still had not achieved product-market fit and we were thrashing around in search of it. Sales cycles continued to be long; it was difficult for us to find the right customer, and when we did, we needed to really evangelize the product. We were definitely doing “demand generation” rather than “demand fulfillment.” Most customers really did not believe that they needed our product right now. Or, the product needed to be extended to meet some “custom” requirements for each new large customer. As a result, the sales that did come through continued to require heavy involvement from the co-founders. Either we had to use our technical knowledge and/or relationships to convince customers of their need, or we had to be on sales calls to understand new customer requirements.
Moreover, our sales team grew frustrated because they felt the product was not quite “done,” and that we lacked the messaging and sales materials around the product that they could use to execute sales. We started to see some sometimes rapid churn within the sales org. One of our salespeople joined the company and left within 2 weeks.
Our burn rate grew and cash became depleted
Headcount grew, our burn rate increased, but the actual sales ramp still did not occur. We had raised a little over $2m in seed round funding in the fall of 2008. For an entire year, we had kept our team lean— our company consisted of just the co-founders and a couple of engineers, and the co-founders had taken massive salary cuts (on the order of 50% of what we were making in our previous jobs) in order to conserve cash. Before that Oct. 2009 board meeting, we had about 3/4 of the cash we had raised in the seed round still left.
However, with the new expenses from salespeople (and without much additional revenue coming in to offset the expenses), our burn rate grew dramatically. It was amazing how quickly we burned through cash. Less than six months after the decision to hire more salespeople, we had significantly depleted our cash reserves and were facing the prospect of raising a bridge round.
It became more difficult to pivot
In the book “Getting Real” by 37Signals, the authors write about the risks for a startup to gain too much mass.
“Less mass lets you change direction quickly. You can react and evolve. You can focus on the good ideas and drop the bad ones. You can listen and respond to your customers. You can integrate new technologies now instead of later. Instead of an aircraft carrier, you steer a cigarette boat. Revel in that fact.”
We had hired a sales team to execute on our vision of building a cloud-based web security company. With these added employees, it now became harder for us to change our vision and pivot into a new product-market opportunity. We also started to bring on more customers around this initial vision. We didn’t realize it at the time, but the decision to bring on salespeople at this time constrained us, and reduced our ability to pivot.
For example, about a year later, we realized that there could be an application of our technology to solve mobile security problems. We knew that mobile security was “hot”— the threats were growing, our prospects were asking us about it more and more. We began prototyping some offerings that provided mobile security solutions. But it was so difficult for us to fully pivot into this new opportunity. We had a legacy product that was completely unrelated, legacy customers that had our first product, and legacy salespeople that been spending their time with us selling web security products, not mobile security. Although many of the salespeople were willing to adapt, they had been building a pipeline of customers for web security, and it was difficult to get them to let go of those prospects to focus on a new, risky mobile security opportunity.
Why did we make this mistake?
I think there were three reasons we made the mistake of hiring salespeople too early: (1) we were not confronting reality ourselves; (2) we did not clearly communicating to the board our suspicion that we were facing a market problem, not an execution problem. (I will publish another post about lessons learned from board communication at a later time.); and (3) as first-time entrepreneurs, I think we were overly influenced by what our experienced investors were telling us.
A few months after deciding to ramp up our sales team, I had a meeting with Scott Petry, one of the co-founders of Postini (sold to Google in 2007). When I told him that we were in the process of ramping up our sales team, Scott told me that it was important for the co-founders to stay very involved in the sales process until we understood how to do scalable, repeatable sales. He said, “You can’t transition the sales process to a salesperson until you can make sales in your sleep.” He was speaking figuratively, but the message was clear. Don’t start hiring salespeople until your sales process is ready to scale. Unfortunately, we had already started ramping our sales team because we (and our board) thought that we might have an execution problem. Instead, we really should have kept our team lean and focused on solving the market problem.
If you’re a current or aspiring entrepreneur, make sure that you know what kind of problem you need to solve—a market or an execution problem—before you start ramping up your sales team. Don’t hire too many salespeople until you have the scalable, repeatable sales process figured out. Otherwise, you’ll find yourself thrashing, burning through cash, and unable to pivot later.
