| With billions of dollars of venture capital residing down | | | | operating reality of rapidly growing companies.The |
| the street on Sand Hill Road, two Stanford | | | | last thing most CEOs and venture investors want to |
| professors are attempting to answer a fundamental | | | | hear is "Go Slow" when they have a product that is |
| question "why does it always take longer and cost | | | | out of beta testing. Having become intimately |
| more to build a hi-tech company than anyone ever | | | | involved with the SLC and Leslie and Holloway's |
| expects?" For all the intellect, experience and | | | | thinking, we are firmly convinced that is precisely |
| graduate degrees in the venture capital industry, the | | | | what companies must do whether they are a start |
| sad truth is that 80% of venture capital investments | | | | up launching a brand new product or an established |
| do not pan out. While the reasons for this high | | | | company starting a new line of business.When |
| attrition rate are too numerous to list here, a simple | | | | companies are pushing a product out of beta, it is |
| fact defines every successful investment - the | | | | not unusual for a startup to have a relatively poor |
| company figures out how to bring in more money | | | | handle on questions such as the following: |
| than it spends. The secret to solving this fundamental | | | | - What is the true Customer ROI? |
| equation these two professors believe lies in the | | | | - Does the company have a clear segmentation and |
| Sales Learning Curve.Mark Leslie, an entrepreneur | | | | customer focus strategy? |
| turned Stanford lecturer who took a startup | | | | - Has the Sales Model been clearly defined?Most |
| company, Veritas, from nascent stages to over $1B | | | | management teams feel like they have a strong grip |
| in revenues and a recent $13.5B merger with | | | | on these topics based on a few "high touch" initial |
| Symantec, and Charles Holloway, the Kleiner Perkins | | | | sales, the feeling that it is time to put the "pedal to |
| Caufield & Byers Professor of Management at the | | | | the metal." Typically, when "v1" is shipped, it is a time |
| Stanford Graduate School of Business have | | | | of rising excitement, enthusiasm and confidence |
| developed a framework, that goes a long way | | | | within the organization. There is also an expectation |
| toward answering the question "why it always takes | | | | from investors that with rising expenses that |
| longer and costs more?" Leslie and Holloway call this | | | | management is going to push to get to breakeven in |
| framework the Sales Learning Curve (SLC) and | | | | the shortest time period possible. Since revenue is |
| believe that it will prove as powerful a construct in | | | | only generated from sales activity which is directly |
| the high tech sector as the Manufacturing Learning | | | | related to the number of sales people in the field, |
| Curve (MLC) was to the manufacturing sector in the | | | | there is a tremendous amount of pressure to hire |
| early (date?). Today, manufacturers wouldn't think of | | | | and deploy reps ASAP.Unfortunately, these sales |
| running their operation without tracking the MLC | | | | reps are frequently deployed before the product is |
| because of the dramatic improvements in | | | | grounded in market reality and an effective sales and |
| productivity that it offers. Similarly, Leslie and | | | | marketing process has been developed. |
| Holloway believe the SLC holds the potential to | | | | Consequently, these sales reps are unproductive, |
| fundamentally change how high tech companies are | | | | "sales activity" never turns into revenue, and precious |
| managed and will lead to more high tech companies | | | | cash is wasted at an alarming rate.What is the |
| reaching the promised land of "positive free | | | | alternative? Our experience, which is echoed by the |
| cashflow." Increasing the number of cashflow positive | | | | SLC, has shown that taking a much different |
| companies should lead to greater venture capital | | | | approach to sales when introducing a new product |
| returns, more capital being allocated to the sector by | | | | into the market can result in far more favorable out |
| LPS, more early stage company formation, more | | | | comes. At this stage, management should focus on |
| innovation, more jobs, and increased productivity.So | | | | capturing market and customer feedback rather than |
| what is the Sales Learning Curve?[Note to Editor -- | | | | strictly on generating near-term revenue. The rate at |
| there are 2 graphics that were stripped out when I | | | | which this customer feedback is acquired and |
| pasted in the article into this form]As illustrated | | | | assimilated into the product is critical to a company's |
| above, the Sales Learning Curve tracks the | | | | ability to move up the SLC. Defining sales success in |
| contribution margin per sales rep (Sales Yield) against | | | | terms of the "amount of feedback collected from |
| the number of customer transactions. The shape of | | | | customers" influences the type of sales people hired |
| the curve will be different for every company and | | | | at this stage as well as how they are |
| every sector but the central tenant of the SLC | | | | compensated.How does a company know the shape |
| remains constant - the "go-to-market" phase is when | | | | of its SLC and how to gauge its progress along it? A |
| companies should "Go Slow to Go Fast" (which is | | | | number of primary drivers of the SLC exist: readiness |
| some advice from a Nordic skiing expert that I | | | | of the product, sales and marketing, product type, |
| recently received when I asked for some tips on | | | | market structure and macro-economic conditions.In |
| improving my performance prior to an upcoming race | | | | tandem with the Venture Dynamics Group, we have |
| - Google the phrase and you will find that triathletes, | | | | developed a dynamic simulation model that estimates |
| grade school teachers, executive coaches, swimmers, | | | | the SLC under different scenarios. The model helps |
| and karate instructors are all well aware of the Go | | | | entrepreneurs and investors model the shape of the |
| Slow to Go Fast benefits).Leslie and Holloway believe | | | | SLC given a certain set of assumptions and then see |
| the "organizational learning" that occurs as sales reps | | | | the resulting impact on cash flow.There are several |
| interact with customers to close initial sales is crucial | | | | actions an early stage business should take to apply |
| to the ultimate success of the organization. The | | | | the SLC framework that my firm, as well as Leslie |
| classic "go-to-market" strategy involves hiring a VP of | | | | and Holloway, are espousing. The following are some |
| sales once the beta product is complete and then | | | | highlights: |
| hiring as many reps as the balance sheet will allow in | | | | - Identify and prioritize product, sales and marketing |
| order to "drive revenue and get to breakeven." | | | | factors impacting the SLC |
| According to Leslie and Holloway, this strategy is | | | | - Shore up gaps as well as exploit your strengths |
| doomed to failure because the company has failed to | | | | based on findings from broad customer contact and |
| take the time to understand the shape of the SLC | | | | market experience. |
| for its product in its market. Some reports generated | | | | - Engage in a regular process of analyzing how |
| over the last two years by Fenwick and West, a | | | | learning can be accelerated. |
| prominent Silicon Valley law firm, bear out their | | | | - Mobilize entire organization to engage with |
| assertion. There is a consistent pattern of inflated B | | | | customers (engineering, product marketing, sales and |
| round valuations; the percentage of down rounds for | | | | finance) |
| C and later rounds is always greater than B rounds. | | | | - Staff and operate at the appropriate levels based |
| As Leslie and Holloway state, "One inference from | | | | on where you are on SLC.The management team |
| this is that both entrepreneurs and VC's | | | | can then mobilize their entire organization towards |
| underestimate the cost and time required to move | | | | learning and accelerate their path up the SLC. While |
| up the SLC after completion of the Beta product. | | | | some of the management team may believe that |
| VCs and entrepreneurs often assume that the | | | | this process will slow the rate of revenue growth, it |
| company is ready to gain market traction at this | | | | is important to remind them that this process is |
| stage when in fact the company is only ready to | | | | intended to accelerate the process by which |
| begin the SLC learning process, which like product | | | | companies reach the ultimate corporate goal, cash |
| development stages has a somewhat indeterminate | | | | flow positive.Though it can seem counterintuitive to |
| duration."When moving from beta release to first | | | | slow down the go-go energy upon initial product |
| release, Leslie and Holloway argue that only a few | | | | delivery, a well-grounded approach that keeps the |
| technically versant sales reps should be hired. These | | | | SLC principles in mind will end up being the fastest |
| sales reps should serve as a conduit between the | | | | path to rapid market penetration and sales growth. |
| initial customers and the engineering team and | | | | This will ensure you avoid the old saying, "haste |
| compensated not on revenue targets but on the | | | | makes waste" while giving your team and investors |
| "organizational learnings" that are achieved. Only after | | | | the kind of financial return you desire.If you would |
| enough of these "learnings" have been incorporated | | | | like to see a complete SLC presentation given by |
| into subsequent releases of the product and the | | | | Mark Leslie at a recent event, go to Chase is a |
| organization knows how to sell the product (defined | | | | partner with Altus Alliance, which specializes in driving |
| as the point at which each sales rep's contribution | | | | revenue traction for emerging businesses. He |
| margin is twice their fully burdened cost) does it | | | | publishes a blog entitled Chase Market Velocity that |
| make sense to aggressively hire additional sales reps. | | | | focuses on how emerging businesses can gain |
| Leslie and Holloway posit that the SLC is immutable | | | | market traction via the Enterprise Sales Learning |
| and can point to numerous theoretical models and | | | | Curve principles espoused by Mark Leslie. Before |
| concrete examples that indicate that until you have | | | | joining Altus Alliance, Chase spent nearly 20 years in |
| reached this pivotal point on the SLC, the capital | | | | the industry with over a dozen years at Microsoft in |
| invested in hiring additional sales reps is simply | | | | various senior marketing and general management |
| wasted.My firm's principals have served as | | | | roles, including his role as MSN's managing director for |
| executives, investors, board members, and | | | | industry marketing and relations. In that capacity, he |
| consultants to nearly 50 early stage companies in the | | | | was responsible for MSN taking a leadership role |
| technology sector - some successful (Microsoft) - | | | | within the Interactive Marketing industry to grow |
| some not. We have found consistently the | | | | Online's share of the overall ad market in concert |
| go-to-market stage (more so than product | | | | with AOL, CNET, Yahoo!, Google and other market |
| development or market expansion) is where there is | | | | leaders. Chase played leadership roles in launching |
| the highest degree of uncertainty and the greatest | | | | several new businesses within Microsoft including |
| potential to burn through finite cash resources | | | | Microsoft's entry into the enterprise software and |
| typically through a misallocation of sales & marketing | | | | server business which is now an $8B business. He |
| resources. Needless to say, once we were exposed | | | | was integral in Microsoft's entry into Internet |
| to the SLC, we immediately began working to | | | | businesses that achieved both critical and financial |
| develop the tools and constructs needed to apply | | | | success. |
| the theory behind the SLC to the day-to-day | | | | |