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Four Gates That Multi-$billion Software Ventures Pass Through. May 11, 2014

Posted by bernardlunn in Corporate Strategy.
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Think of these Four Gates like a funnel, with lots at the top and very few at the bottom (just like a sale funnel):

  • Gate #1: Conceptual Clarity.

  • Gate #2: Prove the Concept.

  • Gate #3: Scale within Niche.

  • Gate #4: Expand and Dominate.

It takes totally different skills to go through each of these four gates. Few founders have all the four different skills needed, which is why so many ventures fail as they attempt to pass through these gates. Even harder is the fact that the skills, techniques and attitudes that make you successful going through one gate are exactly the opposite of the skills, techniques and attitudes that make you successful going through the next gate. Each gate requires a wrenching pivot.

Gate #1: Conceptual Clarity.

This is the “fit to the future” phase. This is where you have a vision of “a world where….”. From this you have a mission for the venture along the lines of “in this future world, we will…”. Finally, you have a strategy, as in “we will do this by….”

There has been a lot of fruitless debate about whether concept or execution is more important. This debate is silly, because you must have both. A bad concept that is brilliantly executed will be nothing more than a tough uphill slog with relatively little reward at the top if you get there. On the other hand, a brilliant concept with weak execution is nothing more than “woulda, coulda, shoulda”.

In consumer web ventures, the investment in this phase is coding an early version of the service; these ventures are usually founded by developers who can invest their moonlit coding time, knowing that the best way to articulate the concept is to show something. In enterprise software, the investment in this phase is talking to lots and lots of potential customers to really understand their pain points both now and the likely pain points in the future world that you envisage. The founder is often a sales executive in an established company who keeps hearing the same request from customers that his/her current employer has no interest in fulfilling. They start with a crystal clear understanding of the pain, but only when they team up with a great developer do they create a solution to that pain. The established vendors are nor being totally blind, nor are they only inhibited by the innovator’s dilemma from cannibalising their core business. Usually a technological breakthrough is needed as well. Thanks to Moore’s Law the world is awash in technological breakthroughs but most of them are solutions looking for a problem. What differentiates the great enterprise software ventures is a crystal clear understanding of the problem, because they have heard the pain described by so many customers and prospects.

Conceptual clarity must address these 3 dimensions:

  1. Huge market. A niche might make for a great venture that can be bootstrapped or flipped, but  these are criteria for ventures that can “go the distance” through the four gates into multi-$ billion in value.

  2. Massive disruption hitting that market. This is the kind of disruption that creates an existential threat to the major players in the market – think of Skype vs telephone companies or Google vs traditional advertising. If it is not disruption of that scale, the existing vendors will add the features they need to stay competitive (“adding that feature” may mean acquiring your venture, so this is fine for ventures that will be acquired before they go through all these gates).

  3. You have a 10x proposition. You have to be 10x better or faster or cheaper than the incumbents. That seems like a high bar, but it needs to be this big to overcome the start-up risk that you are asking customers to take. Tactically you may start by offering say 3X knowing that as the technology rolls onwards you have much more in reserve, but you must see where that 10x is coming from.

Here are the two things you do NOT need to have at this stage:

  • A strategy that seems viable to most people. Most great ventures look totally ridiculous to most sensible people in their founding days. You do need a couple of smart people to believe in the strategy, whether they be co-founders or investors. But get comfortable with the fact that most people think you are crazy (unless you actually are crazy, there will be times when you doubt yourself and when you think most people are right).
  • Any proof that any of the three things on that checklist are true. Anybody who asks for proof at this stage does not know how this works and does not deserve to be your partner.

Many great entrepreneurs have conceptual clarity but are weak at articulating it, or too busy executing on the next phase. At this stage nobody cares about your concept. Only after you have passed the next gate does anybody care.

Gate #2: Prove the Concept.

This is the “fit to today’s market” phase. This is also what VC call “traction”.

Enterprise software ventures focus their pitch on the immediate needs of customers who are ready to make a commitment now, leaving out all the futuristic, big picture stuff which would only scare potential customers. Consumer ventures seed the market and prove the value proposition in a tiny little niche; at launch all the market will see and all the entrepreneur is thinking about is that tiny niche.

However, somewhere in the back of their mind, the great entrepreneurs carry a conceptual vision that is a lot bigger than the immediate solution that they offer to get through Gate # 2.

Many entrepreneurs stumble at this point because they are not consciously making the transition from thinking about the future to executing on the present. The future that you envisage may or may not come to pass. If it does, you may strike gold. However that won’t help you get traction with customers today. All they are concerned about is problems they have today. Your customers maybe happy to “shoot the breeze” about the future, but they will only spend their money on problems that they have right now.

That almost certainly means you get traction in a niche that is tiny compared to the big vision in your concept. This process of digging deep into a niche and focussing 100% on the present day needs is a vital step in turning dreams into reality. It is also 100% opposite to what you do to get through Gate #1.

In enterprise software, getting through Gate #2 means getting the first three paying reference customers. This is a tough job because most customers prefer to wait until you have these three references before committing; one way to drive enterprise software founders crazy is to ask them about this chicken and egg problem. These need to be real enterprise-wide deployments with customers paying 6 figures. A few logos of customers deploying the software in one small area and paying a few thousand dollars won’t make the grade. Lots of enterprise software ventures reach this stage and become cash flow positive without raising any VC, but then stumble at the next Gate.

In consumer ventures, getting through Gate #2 means month to month growth rates in attention. I am using the word attention because the specific metrics such as page views, uniques, downloads, active users tend to change a lot as people “game” the old metrics.

Gate #3: Scale within niche.

This is the “make it work as a business” phase.

For consumer web ventures, the big obstacle at this Gate is proving a scalable and profitable revenue model. There are now trade offs and conflicts to be managed between the needs of free users and the different needs of paying customers (i.e advertisers) and that is often hard for the entrepreneur who won in the last Gate through their self-proclaimed single focus on user experience.

Some enterprise software vendors that made it past Gate # 2 get acquired for their R&D value with a bit of credit for the quality of your customer relationships. If you raised VC, the acquisition value will be a disappointment to investors. As VCs usually get liquidation preference, this will be an even bigger disappointment to founders and management. If you bootstrapped past Gate # 2, the value you will get from the trade sale will still be life-changing as you don’t have to share the spoils with VC. However the big money, the fame and fortune, is reserved for those who make it to Gate # 3. One way to look at this is, don’t raise VC unless you are determined to make it past Gate # 3.

Consumer ventures can exit for great multiples at Gate # 2 as deals like Instagram and WhatsApp show. However these deals are few and far between, it only ends that way if you get massive growth in attention at a time when a big acquirer is facing disruption (think Facebook facing disruption from mobile and thus paying a big premium for both Instagram and WhatsApp).

Enterprise software ventures that make it through this gate need to make the tough transition from founder-led sales to a scalable, professional sales team. This is harder than it sounds for reasons that I describe in this post.

Businesses that make it through this phase are “in the catbird seat”. You have a profitable, scalable model that you can grow with internal resources as long as you like. You will be fending off acquisition offers all the time, both from financial buyers (private equity funds) as well as strategic buyers (the enterprise software Bigcos). You get to choose when and who you sell to. Or you may choose to go all the way to Gate # 4.

Gate #4: Expand and Dominate.

This is the post IPO sustainable public company phase. This is where ventures grow into their original conceptual potential, moving beyond the niche orientation that you need in order to get through Gates 2 and 3.

For consumer technology ventures, consider the difference between Apple and Google and many of the batch of 2011 IPOs. Apple and Google look good on all financial metrics, they built a superb monetization engine, not just superb products.

In the enterprise software space, only one company has broken through into the big league during the last decade and that is SalesForce.com. There have been plenty of SaaS IPOs, but only a few of them have escaped the “small cap hell” by getting a valuation over $2 billion. It is possible that Splunk and Workday will grow into their premium valuations and join the big league.

The “expand and dominate” Gate #4 is about getting back to that original founding conceptual clarity, of realising the big picture potential. All the long years of the earlier Gates are simply laying the groundwork to make this possible. This is another wrenching pivot. The skills, techniques and attitudes that got you through Gate # 4 are all about focussing on a niche, constraining ambitions for the future while concentrating on the immediate opportunities. If you have done a good job in the transition through Gate # 3, you will be able to leave the quarter by quarter growth to a highly competent team. That frees the founder CEO to focus on expanding into adjacent markets and dominating their market. Dominate may sound harsh to some ears but it is what public market investors expect, that is what the high valuations given to fast growth tech companies are based on.

Entrepreneurs that make it through Gate # 2 get the opportunity to exit and that can be a good result if they have bootstrapped to that point. Entrepreneurs that make it through Gate # 3 get the opportunity to exit and that is a good result for founders, management (this is when those stock options become life-changing) as well as any investors who are fortunate enough to be along for the ride.

The Silicon Valley VC orthodoxy for a long time was that no founder has the right profile to make it through all the 4 Gates. Therefore VCs have usually tried to either sell the business at each of these Gates or find professional management to replace the founder CEO. (I refer to the Founder CEO as the key, even though there are often co-founders it is one of them who emerges as the leader). That conventional wisdom is being seriously questioned today as we witness the failure of “professional managers” from big companies to drive the growth of start-ups. When you look at the really great success stories, you tend to see one highly charged entrepreneur who takes it all the way through these 4 Gates – think of Gates, Ellison, Page, Zuckerberg, Bezos, Jobs, Benioff. Their ability to pivot and personally change at each of these Gates is the story of their success. It would be crazy to see these entrepreneurs in their founding days and envisage them as the CEO of a multi-billion $ publicly traded company, yet some of them actually do that. The current VC fund structure, with its need for exits to return money to the Limited Partners, is not conducive to backing entrepreneurs all the way through these four Gates. So we are likely to see some innovation in this area as the rewards for backing entrepreneurs through all four gates is very big.

Piketty is wrong because he misses the capital destruction caused by capital efficient digital disruption May 9, 2014

Posted by bernardlunn in Globalization.
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Before Piketty’s famous book, Capital in the 21st Century, came out, his ideas and research had already influenced Occupy Wall Street. In 2011, I found myself sympathetic to the 99% and their story, but around that time I went to a meeting where I learnt why Piketty is wrong; his book is brilliant research and insight – looking in the rear view mirror.

The meeting that changed my perspective was at a Wealth Management firm whose mission was to preserve wealth for future generations. Looked at from the perspective of the barricades in Zucotti Park, these were the folks ensuring that the 1% won and that we drifted into Oligarchy.

The Wealth Management firm had put up a list of their highest conviction stocks. Right at the top of the charts was a mega big Global 100 type company that had just that day had some horrible story that had decimated their share price. Oops. When questioned they responded:

“Stuff like that happens, it’s impossible to predict that kind of thing where rogue employees run amok”.

Yes that is true and the rationale for putting that stock top of the charts based on financial metrics was impeccable. Yes, the problem that crashed the stock that day was a Black Swan event and they are by definition impossible to predict. The rogues were fired. Story over? No. Nobody could predict who would go rogue and when and in what form, but it was reasonably predictable that somebody would go rogue fairly soon in some way. It was an inevitable event even if it was not an imminent event where you could predict the timing. The reason that the employees went rogue was that their business was slap bang in the path of digital disruption. It was a great big firm, run by an awesome entrepreneur and yet it was roadkill in front of the digitization truck. The boss refused to accept this, they were the #1 winner dammit! So he piled on the pressure to hit the numbers any way they could. That leads to employees cutting corners and if they get caught it’s labelled as rogue behavior. Anybody who has toiled in the management ranks of big corporations will recognise this.

If you distrust anecdotal evidence, consider the trends about how fast companies are entering and exiting indices of bigness such as the S&P500 or the Fortune 500. Or look at the time taken to get to $100m in revenues for digitized consumer ventures. Look at how many now get t0 over $100m, in some cases nudging $1 billion, within 5 years. That is disruption at work. The pace of change is accelerating now that 50% of the 7 billion people on the planet have mobile phones. It’s no longer just book shops that worry about being Amazoned, it is now also WalMart heirs who have to worry about that as well. I am writing this on the day the Alibaba IPO prospectus loaded, so now Amazon has to worry about being Alibabaed.

What’s a poor trust fund kid supposed to do?

What does this have to do with Piketty? The simple concept is about what happens when R exceeds G. R is Return on Capital. G is GDP growth. His thesis is that when R exceeds G we drift to Oligarchy. That makes sense. If Capital gets 6% Return when GDP is 3%, then Capital gets a bigger share of a smaller pie, which leads to increasing inequality.

But what if R is only 3%? What if R cannot even keep up with inflation? What if the trust fund gets wiped out over time by inflation, fees from all those fund managers and tax? Plus the fact that the wealth managers will do the prudent thing that they are paid to which is to invest in those safe solid companies with wonderful financial metrics – some of which will be slap bang in the middle of the road waiting to be run over by the digitization truck. Those $ billions in revenue created by digital start ups do come from somewhere, it is coming from the big companies that are maladapted to digitization that the trust fund kid is invested in. This leads to “shirtsleeves to shirtsleeves in three generations”. That is as it should be. People should work for a living. It gives them self respect and a purpose in life. “Shirtsleeves to shirtsleeves in three generations” means we have something close to an equal opportunity society and we avoid the drift to oligarchy. I would not wish for my children to live isolated lives in compounds protected from poor people because they are rich enough not to have to work. I would wish for them to do work that is fulfilling to them, with peers that they like and respect, in a society where most people are doing the same.

The obvious answer for the trust fund kid is to put money into the start-ups that drive the digitization truck, to get the massive returns that go to backing the winners. There are three problems with that:

  1. Venture Capital is a totally Darwinian game, the lion’s share of the returns go to a tiny number of Funds. These top tier VC Funds don’t need money from the trust fund kid, the partners invest their own money and tap a few investors who put money into their first fund and so have the right to put money into other funds.
  2. If you invest in a first time fund, you take a massive risk. If you invest in second tier funds you may, if you are lucky, make the same returns as an S&P Index Fund and quite likely you will lose money. If you invest directly in startups as an Angel you may get very lucky (the same is true in Vegas) and you may get non-financial benefits, but your chances of accelerating the destruction of your wealth is statistically far more likely.
  3. Digital startups are naturally capital efficient. That is why they are so disruptive. So they don’t need a lot of cash from the trust fund kid. That makes it really, really hard to make high R on large amounts of capital; it is far easier to get high R on small amounts of capital. If you are investing large sums you tend towards investing in big old companies that are roadkill in front of the digitization truck. Those big funds, whose managers make money on the amount of funds under management are the funds that our trust fund kid gets invited to invest in. Building a digital business is not like starting a factory or a diamond mine or some other 20th Century type enterprise. With smarts and hustle you can now reach billions of consumers directly. The cost of building the technology to do this is pathetically small. Its all about the smarts and the hustle (plus a sprinkling of luck). Founders of tech start-ups increasingly view capital as the least interesting ingredient in the cake they are baking. If asked could they have $50m or a co-founder like Steve Jobs, most would choose the latter because you cannot buy that kind of talent. That world – where talent is more important than capital – is not the world that Piketty is describing

It is not a coincidence that Piketty is French and his biggest fans are in America. When an economy is in slow growth mode, the people with the money use political power to grab an increasing share of pie. It is a diminishing pie that is based on the old 20th century businesses, but the pie is still very big.  The License Raj in India up to 1990 was the archetypal example of this.

The reason that this power grab cannot last long in the 21st century is that digital bits don’t stop at borders. The digitization tsunami amplifies the globalization tsunami and vice versa. India could hide behind the License Raj import substitution walls for decades and by doing this the people who were close to the political power became vastly wealthy while the rest of the people were relegated to poverty. This was a classic example that illustrates Piketty’s thesis – R was a lot more than G if you knew who to bribe in the License Raj.

However as governments learnt in the Arab Spring, you cannot turn off the Internet for long. If you turn it off or regulate to death the disruptive startups that use it, you kill the chance of the kind of wealth creation that you see in Silicon Valley and that other regions of the world want to emulate.

Piketty’s France is known for being run by a political elite. It is a slow growth economy where enough money is redistributed to keep voters happy. France today is similar to India in the License Raj days; it is only nominally a free enterprise society.

How can you see America in that context? America has nothing in common with socialist France and License Raj India, surely? Well in GDP terms, America is now a slow growth economy. And one can see a power grab by people with control of 20th century businesses like the Koch Brothers. That is why Piketty’s book is selling and being talked about so much and why Zucotti Park was crowded.

Yet America is also the home of innovation, the place where most of the digitization trucks get built. This is the real battle for the future of America. Forget about Democrats vs Republicans, that’s just a battle for who controls the spigots of the 20th century economy. The real battle is between 20th century America and 21st century America.

Ground zero in this battle for 21st century America is Stanford University. In 1999, two Stanford kids started Google. Ever since then, VC Funds (some of which are trying to make sure that the trust fund kid’s R is more than G) have camped outside Stamford dorm rooms waving check books. That has led to some embarrassing wealth destruction in ventures such as Color and Clinkle. Investing early in the great digitization winners is not a simple “wash and repeat” formula.

Who can blame parents for wanting to get their kids into Stamford? This is a return on education which is increasingly a return on capital since tax-payer funded education is in decline in America and many other countries. So once you get into Stamford you are made for life? Well no, not if you think you are made for life. That won’t make you work hard and will make you think like an insider when the disruption always comes from a well educated outsiders.

For this insight I am in debt to another book that covers similar territory to Piketty but in a very different way. This is Christina Freeland’s Plutocrats. She looks at where the first generation Plutocrats come from and that is very consistent all over the world. They come from smart, driven people who got a great education outside the elite centers of power. Yes there is an increasing return to education, but the results are better if that education is in a place where kids feel like outsiders who can only make it if they disrupt the existing order.

The poster boy for this is Marc Andreessen. Educated at Champaign-Illinois, in the midwest of America, he went on to found Netscape (and thus help start the digitization wave) and then started one of those top tier VC Funds (Andreessen Horowitz, where he coined the phrase that “software is eating the world”). He is now an insider in Silicon Valley, helping to build those digitization trucks that wipe out the inherited wealth invested in the 20th century economy. So it is significant that he shared his worry about the sense of entitlement at Stamford in a series of tweets (I am paraphrasing, check him out on Twitter, he is usually thought-provoking).

His tweets, inspired me to write this on a 12 hour flight from “old Europe” to “new California” without the distraction of Internet access.

Disclosure: I have NOT read Capital in the 21st Century. I am quite willing to admit that, I am no longer at College so I don’t need to prove to my Professor that I read the book. I got the “fundas”  by watching this Moyers interview with Krugman. I recommended it to all who have an interest in the subject but are too busy to read a 700 page book. I did read Plutocrats and highly recommend it (an entertaining read while also being very insightful).

Thought leadership selling for enterprise software creates a qualitative feedback loop that can get marketing & product management on the same page. May 5, 2014

Posted by bernardlunn in Blogging, Enterprise Sales, Enterprise Web 2.0, SAAS, start-ups.
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There are two core jobs in enterprise software; you either code it or you sell it.  All the other jobs, vital as they are, facilitate those two core tasks. In the great companies there is a culture that synthesizes the best of the coding world and the best of the sales world. In those companies both techies and hustlers respect each other and know that they depend on each other like mountain climbers roped together.

Sadly that kind of mutual respect culture is all too rare. For the first generation of enterprise software, the sales guys ruled and they often abused that privilege. It is therefore no surprise that in the next generation, characterized by SaaS and consumerization, many technical founders sought to write the sales guys out of the script.

In the consumer world, there is no selling (door to door salesmen are only in history books), there is marketing and that is tightly integrated with the product (lots of AB testing to find out what gets consumers to hit the buy button).

Marketing has become a science. The creative folks and their hustlers that we watch with such amusement on MadMen have been banished to the history books along with door to door salesmen. We now have a perfect quantitative feedback loop of Analytics feeding into Marketing Automation feeding back into product feeding back into Analytics….

That would be OK if selling to the enterprise one user at a time – the consumerization story – was all that was needed. It is a venture lifestage issue. You get early traction, the foot in the door, one user at a time using Freemium. To grow your share of budget you need at some stage to engage with the people who manage these enterprises (or sell to an acquirer who can do this but that is a very limited pool of acquirers).

So what you need is a qualitative feedback loop integrated with this quantitative feedback loop. You need to hear what people are thinking and feeling about your product, what would entice them to buy more. When you find this out you need to quickly integrate this into your product and your marketing; this has to be an agile feedback loop. For this you need humans who can understand the nuances of the enterprise you are selling to, the geography and the trend line dynamics in the niche you are focused on. They also need to be credible inside your company so that the voice of the customer is heard.

Thought leadership selling is a forgotten art. I think of it simply as industry expert bloggers who sell or salesmen who blog credibly about the industry. This Forbes article outlines it well, the key quote is here:

“Take Salesforce.com as an example. This was an organization that took cloud-based software-as-a-service for customer relationships into the mainstream marketplace. There are several elements to its success, namely a strong product, but it also has an army of thought leaders who specialize in app development, sales lead development, sales management, etc. that helps customers do their jobs better. Salesforce’s model, driven by product success and thought leaders, has led to a familiarity with “the cloud” and a willingness to accept it in a corporate environment. These achievements not only helped the cloud computing industry with adoption rates, but helped make Salesforce a leader in the cloud-based CRM space.”

I think of this simply as industry expert bloggers who sell or salesmen who blog credibly about the industry. It is no longer OK for customers to read interesting blogs on your site and then meet sales people who cannot continue the conversation because they follow the old fashioned scripted model of selling. This is particularly true when crossing the chasm through the bowling alley of niche markets. Of course in the early days, the founders do this and in very late days you can hire teams of sales people who follow a more scripted approach, but you need thought leadership selling to make the tough transition from the early days of founder led selling to mature enterprise sales processes.

Next post in series 

Enterprise Sales FAQ May 5, 2014

Posted by bernardlunn in Enterprise Sales.
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This is the final # 12 in a serialized book called Enterprise Sales for the Digital Age, delivered here as 12 blog posts. You can get value from each in isolation, but if you really need to understand enterprise sales, reading the whole series is worthwhile.  You can buy an improved version, neatly printed and bound, for $6 from Amazon.  

Enterprise Sales FAQ

Q: When should I go to my contact’s boss without his/her permission?
Background. You have spent a long time building a relationship with somebody at a prospect who always says the right thing, but the months roll by and nothing substantive happens. You know the boss’s name but you want your contact to make the introduction, to “take you up the chain”. Again, your contact makes lots of placatory noises, but it is not happening.


A#1: don’t get in this mess in the first place, call high from the start. The worst that can happen is that you learn quickly that there is no budget or that an incumbent has a lock-in. This is far better than taking a long time to learn the same thing.

A#2: if you are in that mess, the old proverb “if you are in a hole, stop digging” applies. Do it and do it now. Don’t warn your contact, he/she will only make it harder. Maybe use somebody in your management team or Board to make the call to the senior guy, but before you use your precious relationship capital, think about whether it is worth it for this account. There are only two outcomes a) you were wasting your time, the deal is not qualified b) they are seriously interested and you have a bridge to repair with your contact (if your contact is political player, he/she will be careful and respectful now that you have a relationship with the boss).

Q: When should I hire a VP Sales vs hiring an individual sales contributer?

 

A. This is a tough one. A VP Sales should have at least 5 sales people to manage, otherwise it is a wasted cost. In a well-run sales operation, the span of control should be 10 or more. It works for 5 in a startup where the VP Sales takes a hands-on lead from the front role.

 

This is where raising Venture Capital can help get over this hump. You then have the cash to hire a VP Sales and 5 sales people. You – and the VC obviously – have to be very confident that you have product fit to market and that the only thing needed to scale is a sales team.

 

Without that luxury, hire experienced individual sales contributers who do not need a lot of supervision. Sometimes one of them is willing to mentor/coach a more junior sales person and may want to become the VP Sales when that position opens up. However one mistake to avoid is being unclear on roles. Don’t hire somebody who really wants to be VP Sales and give them VP Sales type tasks when what you really need is direct sales. That person will tend to focus on the management tasks of the job they aspire to and not do enough to directly win customers.

Q. When do you force something to a Yes or No binary decision?

 

A. Earlier than you intuitively feel comfortable with. The motto is; “yes is ideal, no is manageable, maybe is the one thing that is impossible to manage”. Whether it is investors or customers, a “maybe” closes off other options. This is where the old-fashioned sales motto “always be closing” comes from. Whether it is a time for a meeting or a signature on a contract, you are always looking for certainty. If it is no, move on. That is what a funnel is all about. If you have lots of “maybes” you might not fill the top of the funnel properly because you hope that your maybes are for real. This is also where a conditional close works. If the maybe is based on a real issue you ask “if we could fix issue x, would you be willing to go ahead?” 

Q. What is the right CAC target?

 

A. You define this as a % of the License Fee. In a SaaS venture you do it as a % of Life Time Value (LTV). This is usually shown as the CAC/LTV %.

 

A. It depends on the stage of the venture/product in the market. In a mature business, the CAC % should be around 25% ie all your sales and marketing costs should not exceed 25%. In a simple model, you allocate 25% to Sales & Marketing, 25% to R&D and 10% to G&A, leaving a 40% operating margin. That is at maturity. Very early on, CAC is over 100%, that is why you raise capital. How soon you move from over 100% to 25% is a future growth vs current profitability debate that you must have with investors; in a massive market it may pay to keep investing and delay profitability (but you obvously have to be properly capitalized to do that).

 

Bootstrapped ventures have to keep CAC below 100%. Assuming an even split between R&D and S&M, around 40% each and 10% for G&A leaves you with 10% operating margin. That its hard to achieve and that is why in big, high growth markets, VC (or early exit) becomes essential.


Q. Should we put up a “give us your contact details” gate before delivering valuable content such as White Papers?

A. For startups, the answer is almost always no. Users will click away because you are not yet a trusted brand. You have to earn their attention and trust. Your sales people will have to use the proactive lead gen methodology outlined in an earlier post in this series. 

Q. When should I fire a non-performing sales person?

A. In general, earlier than most entrepreneurs do. Get a round table of entrepreneurs together and ask them to relate mistakes they wished they had avoided and “delaying firing when I knew in my gut it was the right thing to do” comes up a lot. It is painful. Most people want to “give them another chance”. This is a natural human instinct, but delaying is bad for everybody in the rest of the company and it might be bad for the individual as well. Everybody can be successful somewhere. Maybe they are not “cut out for sales” or maybe they can be successful in sales in another more mature company (where, for example, there is more structure, support and training).

 

Have a Performance Improvement Plan. See what can be done to get the person back on track. But track this rigorously and keep it short.

 

You cannot build an A Team if many slots are filled with B and C team players.

 

If most or all of the sales team are underperforming – look in the mirror. Maybe it is the product, maybe it is you, maybe your targets are wrong? But if most sales guys are hitting target, the decision is simple.

 

Q. Should I use domain or technical experts as sales people?

 

A. This is another tough one. The ideal candidate sits at the venn intersection of a) great sales skills b) great domain and tech knowledge. Good luck, those candidates are rarer than hen’s teeth. Occasionally you get somebody who moves out of a tech or domain role into sales and succeeds, but this is surprisingly rare. In the very early days of a venture, tech and domain skills matter more than sales skills; this is during the 3 projects to a product phase and the person is usually a co-founder. However, when it comes time to scale, it is much better to have a pair of individuals who work closely together – sales and sales support. The tech and domain skills reside in the sales support guy who manages the middle game of proving fit to enterprise need through proposal, demo, POC etc. Great enterprise software ventures are often defined by a superb working relationship of mutual respect between sales and sales support.

 

Q. Should I use Freemium or Free Trial?

 

A. The classic enterprise method was a Free Trial that you have to get via a sales person. The positive is that it puts the sales person in control. The negative is that it loses all those innovators in your customer’s (which may include the “innovator with clout” who holds the key to the enterprise-wide 8 figure annual relationship) who just wants some quiet time to experiment (to self educate in your product) before speaking to anybody. Which you choose fundamentally depends on how confident you are about the product. If you think it is the best, Freemium is the way to let it shine. If you think that there are “better, cheaper, faster” alternatives out there but you have the big enterprise brand and the market clout today, use Free Trials to control the process until your R&D/Product team can catch up with the innovators.

 

Q. Should I use a Proof Of Concept (POC) or go straight to Paid Trial ?

 

A. The POC has now become too widely accepted; “the POC is the new demo”. This means that too many vendors either a) spend far to much on POCs, killing their CAC metrics or b) skimp on the POCs so that they are not effective. Both are start-up killers. Weak sales people offer POCs far too early. It is free to the customer and looks good in the CRM metrics (“three prospects at POC stage”). Start-ups cannot win with skimpy POCs, you need the time to build something that proves to stakeholders that you have the secret sauce that their recipe demands. A Paid Pilot can also be called the first sale. It is a real sale with real benefits to the customer to real revenue to the vendor. By calling it a Paid Pilot, you signal a) your mission to be an enterprise-wide approved vendor (the Paid Pilot is a step in that direction) and b) you create a real dialogue/relationship with the stakeholder who is paying for the Paid Pilot by focusing on their ROI.

 

If you have any questions not covered here, please let me know in comments and I will do my best to answer them

Enterprise start-ups need thought-leadership selling, a mix of sales, marketing, technology and strategy May 4, 2014

Posted by bernardlunn in Corporate Strategy, Enterprise Sales.
Tags: , , ,
1 comment so far

 

This is post # 11 in a serialized book called Enterprise Sales for the Digital Age. You can get value from each post in isolation, but if you really need to understand enterprise sales, it is worth reading the whole series.  You can buy an improved version, neatly printed and bound, for $6 from Amazon.  

There are two core jobs in enterprise software; you either code it or you sell it. All the other jobs, vital as they are, facilitate those two core tasks. In the great companies there is a culture that synthesizes the best of the coding world and the best of the sales world. In those great companies, both techies and hustlers respect each other and know that they depend on each other like mountain climbers roped together.

Sadly that kind of mutual respect culture is all too rare. For the first generation of enterprise software, the sales guys ruled and they often abused that privilege. It is therefore no surprise that in the next generation, characterized by SaaS and consumerization, many technical founders sought to write the sales guys out of the script. This is the world of Dropbox, Evernote and Yammer, using one click at a time to break into red ocean markets.

Marketing has become a science that is tightly integrated with the product (e.g lots of AB testing to find out what gets consumers to hit the buy button). Consumer marketing techniques have been translated to B2B. We now have a perfect quantitative feedback loop of Analytics feeding into Marketing Automation feeding back into product feeding back into Analytics….

This consumerized approach to the enterprise works well in red ocean markets, but even in those it is a venture life-stage issue. You get early traction, the foot in the door, one user at a time using Freemium. To grow your share of budget you need at some stage to engage with the people who manage these enterprises (or sell to an acquirer who can do this, but that is a very limited pool of acquirers). When you reach this stage, you can take an arrogant approach as in “your users already want this, your job is just to enable more of them to get it” or a more solution oriented approach as in “what big problems could we solve for you if we made this an enterprise-wide solution?”. The latter is more likely to work and it requires some real solution selling.

Even before you reach the stage of CIO conversations, the bots alone are not enough. Humans are needed to create a qualitative feedback loop integrated with this quantitative feedback loop. You need to hear what people are thinking and feeling about your product, to understand what would entice them to buy more. When you find this out, you need to quickly integrate this into your product and into your marketing; this has to be an agile feedback loop. For this you need humans who can understand the nuances of the enterprise you are selling to, the geography and the trend line dynamics in the market that you are focused on. They also need to be credible inside your company so that the voice of the customer is heard. In other words you need thought-leadership selling. Or you could have a marketing person do this, or product management person or a developer or the CEO or whoever can do this job well. This is a task that crosses what are today’s job description boundaries; to do this well, you need a mix of sales, marketing, technical knowledge  and  a head for strategy. The end game is to close a deal, deliver great software, get a happy reference customer, get cash; that is a classic sales job description. If your Product Manager can do this, great. It does not matter what the job description is, the reality is that it will involve both selling and thought-leadership. 

So, what is the difference between thought-leadership selling and solution selling? One answer is “none”. The aim of thought-leadership selling is to solve a big problem for a big client and get paid big bucks, which is a definition of solution selling. The other answer is “everything”  because “the Internet changes everything”. The twin tsunamis of change – digitization and globalization – create radical, disruptive threats and opportunities for enterprises. Solutions require radical, strategic thinking. It is no longer enough to shave a small % off G&A costs, you have to show how you can enter  new markets, fix existential threats  and transform the business. One way to look at the difference is simply that “thought-leadership selling is solution selling on steroids”.

Thought leadership selling is also key to creating a market-dominating company by helping to create a message that really resonatesThis Forbes article describes how Salesforce.com did it:

“Take Salesforce.com as an example. This was an organization that took cloud-based software-as-a-service for customer relationships into the mainstream marketplace. There are several elements to its success, namely a strong product, but it also has an army of thought leaders who specialize in app development, sales lead development, sales management, etc. that helps customers do their jobs better. Salesforce’s model, driven by product success and thought leaders, has led to a familiarity with “the cloud” and a willingness to accept it in a corporate environment. These achievements not only helped the cloud computing industry with adoption rates, but helped make Salesforce a leader in the cloud-based CRM space.”

Marc Benioff is a salesman. He is also a technologist, thinker, marketer and strategist, but at heart he is a thought-leadership salesman. You can think of thought-leadership selling simply as industry expert bloggers who sell or salesmen who blog credibly about the industry. It is no longer OK for customers to read interesting blogs on your site and then meet sales people who cannot continue the conversation because they follow the old fashioned scripted model of selling. This is particularly true when crossing the chasm through the bowling alley of niche markets. Of course in the early days, the founders do this and in very late days you can hire teams of sales people who follow a more scripted approach, but you need thought leadership selling to make the tough transition from the early days of founder led selling to mature enterprise sales processes.

Enterprise software market leadership starts with mindshare. Winning the mindshare battle requires intense clarity about your message. If you can distill your message into a single word or phrase that defines your market, you have a big competitive advantage. That is what Marc Benioff did with Salesforce.com.

Of course it is not easy to do that. Thousands of marketing professionals get paid millions of dollars to come up with cringe-inducing phrases and tag lines that last as long as snowballs in hell. What makes it so hard is that messaging clarity has to be based on a very deep understanding of the dynamics of your industry and the position of your company within that industry and the customer’s pain point and your technology secret sauce. If your message does not seem real, it does not stand a chance. In fact it has to seem so real and obvious that when people hear it they assume they have heard it before.

History Lesson – Information Bus

That final touch of clarity that is enshrined in a single phrase or word, can make all the difference. I learnt this the hard way in the early days of the market for real-time application integration middleware, when technology such as Publish & Subscribe, real time messaging bus and Enterprise Application Integration was being adopted on a large scale in the first vertical niche market – financial trading rooms on Wall Street.

My company, Aregon, was an early innovator with solutions dating back to 1984 that were the first implementations in the industry. We were the technical pioneers. However when customers started to ask us whether we had an “Information Bus”, a term invented by a rival company, things started to go wrong.

How To Respond When A Rival Has Mindshare?

None of our responses was very effective.

For example, “no, that is not what we call our technology, let me explain” left people cold. Customers saw the Information Bus concept and automatically “got it”. They did not want to waste time understanding some new concept. Coming up with an alternative message is doomed unless you catch things very early and you are very, very good at coming up with an alternative that will crush the concept invented by your competitor. I mean crush, mindshare is not a game of percentages.

Replying that “yes, we have an Information Bus and ours is better for the following reasons” will get you sales, but will automatically relegate you to the position of follower. You can build a good business as the number two or three vendor in the market and, if you time it right, you can sell out at the right time for a reasonable valuation. That is what happened to Aregon. However that is a far cry from being the market leader in a large market that you define, which was what happened to Teknekron, which was later renamed TIBCO (as in the The Information Bus Company). They invented the market-defining messaging concept andthen became the leader in the booming enterprise integration market.

Why Was Information Bus Messaging So Powerful?

The payoff from getting it right is huge. However there are very, very few examples of great successes. Why was Information Bus so powerful as a message?

  • It was simple and easy to understand for the target audience. This does not mean “dumbing down” for everybody. This was a technically sophisticated audience, so TIBCO could count on a base level of knowledge.

  • It was based on a genuine “aha moment”. As related by Vivek Ranadive, TIBCO’s founder, the moment came when he asked a software expert to describe why so many software projects failed. As a hardware engineer by training, Vivek, could not understand why well-tested components could not simply plug into the system Bus. Why not do the same with software?

  • TIBCO created a clear and simple visual diagram of the Information Bus that anybody could draw on a napkin and understand in a heartbeat.

  • The company executed by ensuring that everybody stayed on message. Execution consistency is critical to success. The phrase enabled a dialogue that went into increasing levels of details as the company engaged in customer dialogues. Yet at every level they could come back to the simple Information Bus concept and diagram.

Think SAVE – Simple, Aha, Visual, Execution.

Thought-leadership sales guys are critical to Messaging Execution at the early stage

The best messages come from a synthesis of what you are hearing from the customers and an understanding of your technology secret sauce. You cannot rush that process.

If you force it and hire a lot of standard sales guys to deliver the message, it is unlikely to resonate in the market, you will just blow a lot of capital on sales and marketing. Hiring external consultants to create your messaging is usually a mistake. At best external consultants can act as facilitators, drawing out what is already known but hidden. Great messages cannot be forced out; they have to emerge. You cannot set a firm deadline and it is better to have no message (just great technology and a solution-selling mindset) than a bad one.

This is why you need a breed of thought-leadership sales guys at the early stage who are totally different from the standard sales guys who help you to scale once you have got a message that resonates. Standard sales guys deliver a message, thought-leadership sales guys help to create the message.

Many entrepreneurs fail by not hiring sales people that fit the life-stage of the venture.

Don’t rush to replace the passion and creativity of the founders – the thought-leaders who got those critical and tough early deals – with too much process too soon. This is a chasm that many entrepreneurs fall into. You have to replace the passion and creativity of the founder-led sales in order to build a valuable business, but if you rush that transition you end up destroying what made your company viable .

Everybody wants process – for the other guy!

Developers want to see sales guys follow a process, so that they sell what can be delivered. Sales guys also want developers to follow a process so that the customers they sell to get quality deliveries on time. Both tend to underestimate the amount of art vs science in the other person’s job. That lack of respect can lead to toxic behavior that damages the business.

When you see how the really great developers are not just a bit more productive than the average, not just 2x more productive but 10x, you would be crazy to load process onto their creativity.

Working with armies of average developers requires boatloads of process, but that is typically the maintenance type of work that is sent offshore. It is all about where you are in the life-cycle. Early in the life-cycle, you want to give individual creativity full rein. A bit later you have some light processes for small teams – that is what Agile is all about. In the latter stages it is all about metrics and scalable, repeatable processes. You move from artisan to factory worker.

The same is true in sales. By the time the product is a market leader in a big mature market, the sales teams need lots of process. You can visit the sales teams of companies like Oracle and IBM to find out how to do this well. However, if you are bringing a new product to market, you need to unleash the creative drive of a few great thought-leadership sales people.

Enterprise software is complex. A simple concept/name/diagram like Information Bus is just the enabler for productive conversations that go into greater detail on the value proposition and technology. It takes years for a concept like Information Bus to become fully realized in the market and in those years you need thought-leadership sales guys who don’t expect all marketing material to be delivered in a neat package, they are comfortable with the uncertainty of refining materials on the fly (those final adjustments in the taxi on route to a meeting and the post meeting debrief where you change a message that clearly did not resonate).

Startups need thought-leadership selling because “you have to capture mindshare before you capture market share”. That may sound like marketing, but the thought-leader sales people are also marketers. They don’t expect brochures and canned messages to deliver. They create the messages based on a thoughtful synthesis of their company’s value proposition and the pain that they hear from the market. Startups need to see evidence of that kind of thought-leadership selling before hiring.

Sales Forecasting; keep all stakeholders on the same page by rewarding accuracy May 3, 2014

Posted by bernardlunn in Enterprise Sales.
Tags: , ,
1 comment so far

This is # 10 in a serialized book called Enterprise Sales for the Digital Age, delivered here as 12 blog posts. You can get value from each in isolation, but if you really need to understand enterprise sales, reading the whole series is worthwhile.  You can buy an improved version, neatly printed and bound, for $6 from Amazon.  


Forecasting new business sales revenue is hard. As any sales manager will tell you, that is the ultimate “no, duh” statement. Yes forecasting is very hard.

The reason is obvious – the future is uncertain.

Sales revenue forecasting is also enormously important. Ask any CEO who got hammered by their Board for missing their numbers. Forecasting drives so many critical decisions. Without good forecasts you cannot have a good relationship with investors and you cannot plan your business.

If the company is big and old, you have lots of data to guide your forecasts and errors become rounding errors. However if you run a company that gets revenue from say 5 sales executives, you cannot rely on the usual statistical models. In startups the forecasting is also a lot tougher because there is a step ladder of forecasting difficulty:

– Very Easy: add-on sales to existing accounts. As a start-up you don’t have much of this.

– Fairly Easy: new accounts within a geography and a niche where you have been selling for years. It is unlikely you will have many of these.

– Hard: sales of a well established product into a new geography or a new horizontal or vertical market.

– Really Hard: sales of a new product into a market that is not even well-defined yet. These are the blue ocean markets that allow startups to get traction and scale, but this is a very tough forecasting challenge.

Forecasting recurring revenue contracts such as maintenance can be automated quite easily. You can apply standard assumptions about decay (how many will cancel) and the growth will be based on new contracts.

The problems all come from forecasting new contracts. These are outside your direct control. You are extremely dependent on the judgment of your sales team. SaaS subscription models make new contracts less critical, but investors are still mostly looking for the new contracts (and churn) as the signals of success or failure. Whichever way you cut it, your VP Sales (Sales Director, Chief Revenue Officer, Chief Hustling Officer, whatever you want to call her) has a tough job where everything is on the line every day.

You obviously want more sales. Perhaps even more, you want to know what is likely to happen. You want accuracy.

Attempts to automate new contract revenue forecasting usually do more harm than good. The standard approach is to apply closure rates to the sales funnel. The idea is to make assumptions about how many calls it takes to get meetings and how many meetings it takes to prepare a proposal and how many proposals it takes to get a contract. Then you can say we have 10 deals at 40% probability, 5 deals at 60%, 3 deals at 80% and one deal at 90%, based on where your deals are in the funnel. Put all that in a spreadsheet and hey presto you have a revenue forecast.

This approach appeals to engineers and accountants. It appears to be scientific. The problem is that it generates a false sense of confidence and is very susceptible to gaming as in “lets bump up the number of meetings until we get the desired result”. It is a classic “garbage in, garbage out” problem.

It is better to build a system around what good sales managers do in the real world. What they want to know from a sales guy is “will this deal close this quarter?” In the real world it is always binary – it either closes or does not close. 90% closure does not hit the revenue numbers and 2x 90% is still not worth any money.

Of course this leads to “sandbagging”. The sales guy may have 2 deals that can close in the quarter. He will tell his manager that one will definitely close and keep the other one in reserve. If his “committed close” blows out he hustles to close his back-up deal. If his main deal closes, he can either get his back-up deal in this quarter and be the star of the quarter and pick up some nice accelerator commissions, or push it into the next quarter and get ahead of the game.

Everybody sandbags right up the CEO providing “earnings guidance” to public market investors. Is this a problem? As one Board Director put it, “I love getting sandbagged, it means surprises are much more likely to be positive rather than negative”.

Whatever system you put in place, it will be gamed. The trick is not to try and avoid gaming as that runs against human nature. The trick is to get game theory working on your side by explicitly focussing on accuracy in two ways:

1. Measure input accuracy. The old saw, you cannot manage what you don’t measure, applies here. How accurate was salesman x in the past? Note that this is not the same as “did salesman X make target? The question is “at end Q2, salesman X forecast $1m for Q3. Now at end Q3 what was the actual result?”

2Reward accuracy. Revenue is always rewarded, but with accuracy being so critical to the company why don’t we explicitly reward accuracy? This can be in “attaboy” gifts; rewarding accuracy with cash when a sales guy is way below target could be counterproductive. Yet they must be good gifts – such as the holiday in the sun all expenses paid for top accuracy.


One reason that we do not measure and reward accuracy is that we are too focused on budgets and targets. These are only plans. What we really want to know is what will happen this quarter? Accountants and spreadsheets can measure the difference between actual, forecast, budget and target and the gaps can be used to kick ass. But don’t confuse that with the main objective of getting accuracy.

Many stakeholders are involved in the sales process and can add value in the forecasting process. During the regular sales review meetings all stakeholders should have a say. For example, the head of Customer Support may chime in with data about a nasty problem that Customer X is reporting that will not be easily fixed. That is likely to delay closing. It may also elevate that problem in the fix priority. Or, a salesman may say “POC for Prospect X starts next week”, but the Head Of Professional Services who provides resources for POCs may so “no, we cannot start next week”. The key output from these meetings is a company view on where each prospect is in the sales Funnel (eg in POC, in contract negotiation, Proposal presented, first meeting).

However that must not replace a simple financial forecast from each sales executive by month. You record accuracy over time. Then you can apply simple metrics. For example:

Sales Exec # 1: 90% accuracy, forecasts $1m in February, you record $900,000

Sales Exec # 2: 50% accuracy, forecasts $1m in February, you record $500,000

 Next post in series.

How to manage an enterprise sales team in the era of bring your own everything May 2, 2014

Posted by bernardlunn in Deal-making, Enterprise Sales, Enterprise Web 2.0, social networks.
Tags: , , ,
1 comment so far

This is # 9 in a serialized book called Enterprise Sales for the Digital Age, delivered here as 11 blog posts. You can get value from each in isolation, but if you really need to understand enterprise sales, reading the whole series is worthwhile.   You can buy an improved version, neatly printed and bound, for $6 from Amazon.  

Note: a version of this post has already been published on ReadWrite.

This applies to outside sales, particularly the rain-makers who get the early customers for startups.

Bring Your Own Device (BYOD) is now a well understood management issue. What mobile device a salesman uses is not that tough an issue to manage now that HTML5 has matured to a level where it is perfectly acceptable for most business apps. Its the app that matters, not the device.

However management is only just starting to wrestle with a world of “bring your own everything” including:

1. Bring your own social networks.You want to hire sales guys who “bring their own rolodex.” and technically speaking, the social networks such as Facebook, LinkedIn, and Twitter, are their rolodexes. This is not the same as just having a lot of Friends or Followers or Connections. What matters is the depth and quality of those relationships. Sales is all about “what have you done for me, or somebody like me that I can relate to, recently?” It is much better to have 10 who say “you have done something for me recently” than 100 who say “I vaguely recall interacting with that guy”. The key point here is that these are personal relationships, where the relationship data is stored in the cloud service and belongs to the individual, not corporate data in a CRM system that is used by the hired salesman while they are on the corporate pay roll. There is a change in the individual relationship to their employer that is going on here. Data is power and that data power is shifting to the individual. We can cheer the empowerement of the individual while also recognizing that this creates a management challenge which is quite legitimate.

2. Bring your own contact manager. LinkedIn has a special role in business social networking because it is the self-updating rolodex of business, managing content on people independent of their company affiliation. The individual owns and controls the data, not the employer.

3. Bring your own sales methodology. In ye olden days, the company told sales people what sales methodology to use. It was part of “the way we do things around here”. Onboarding included training in the company standard sales methodology. There are lots of these sales methodology and most of them are good. Famous ones are Miller Heiman, SPIN and Target Account Selling (TAS). However, will your startup be defined by your sales methodology? Or will you reject a sales star who made the key sales for a competitor because she prefers SPIN to your company standard? No, I did not think so.

4. Bring your own sales productivity tools and apps. This brings us back to mobile. It does not matter too much to the company whether a sales guy uses iPhone, Android, Windows or even Blackberry. However, what apps they use on that device has a bigger impact on management, because it relates to control over data and integration. The good sales guys will come in with their apps on phones and tablets hooked up to the networks and services they use in the cloud. They are onboard and productive on day one.

 

5. Bring your own content. The thought-leadership sales guys who are rain-makers for startups could be described as “bloggers who sell” or, if you prefer, “sales guys who blog”. They will of course use the content created by the company, but when prospects can self-educate online before meeting anybody from the company, there has to be a reason why the prospect wants to meet that sales person (as opposed to meeting the CEO or CTO or CMO who is doing the company blogging). This is another management headache or tremendous opportunity depending on how you deal with it. 

The mission you are giving these sales guys is tough – break into a new market for a relatively unknown startup and do it fast and do it big. You cannot also say “oh, and by the way, you also have to use all the systems, processes and tools we give you whether you like them or not”. Imagine telling a sales guy who has used one methodology and tool set successfully for years that she must switch to your company standard. Do you want her to do that – or generate sales quickly, put you on the map in a new market and make $ millions for your company?

This does change the balance of power between sales guys and their employer and creates a management headache. Luckily there are new solutions appearing to crack this problem.

New ventures focussed on this challenge include Nimble, RelateIQ, ClearSlide, Yesware, Tylr Mobile, Social Pandas and Selligy. These “sales productivity” ventures focus on making sales people more productive as opposed to traditional CRM which made their managers more productive. They focus on two types of solution:

 

  1. Integration at the mobile device level. Outside sales people should be – outside. Any system that is not mobile first, that does not allow sales people to do most of their work when they are out of the office, is a productivity drain. A sales person who is in the office too much is not a good sign. Mobile is the obvious answer. Mobile is also key to the integration of all those single feature cloud apps. Thanks to APIs, it is relatively easy to integrate these at the mobile app level. This is where the types of services that sales people use every day to get their job done – LinkedIn, email, presentations, CRM, maps, online meeting systems etc – can be integrated and presented in a single user experience.2. Digital exhaust to replace sales data entry. If the sales guys are in the office filling in reports for management, that is a management and systems failure. You want them meeting customers and prospects, that is when they are adding value. The great sales guys can write really short reports such as “beat quota by x% this month/quarter”. The long reports are all about reasons why the sales guy did not hit the numbers. Yet management does need data. The mobile apps do enable quick simple reporting while in between meetings (in the elevator, on a train, getting coffee). More strategically interesting is the trend towards auto aggregation of what may become known as “sales big data”. Like all big data, this is aggregated automatically from “digital exhaust”, in this case from what the sales guys are doing all day on their mobile devices. This answers questions like:1. Who did you meet?
    2. Where (in the cloud or F2F?)
    3. For how long?
    4. How engaged was the customer?The first three questions answer the most basic management concern whch is “are the sales guys doing their job, are they working hard?”. Much better to get this reported automatically rather than asking the sales guys to spend time doing this, knowing that they are incentivized to not tell you the truth. The current system of CRM reporting is doubly broken – it wastes valuable time and delivers suspect data. 

    However the really valuable data comes if you can answer the last question. This could help companies to do consistently what really great sales people do, which is to qualify prospects with great care and discipline. We all know that is what we should do, but very, very few sales people do it at all well. We think that sales is all about hard work, persistence, determination and all those other good Protestant work ethics. So we drive relentlessly on, calling that prospect for the umpteenth time.

The best sales guys wait until they can see that the customer’s need is real and urgent. They “wait until you hear the screams.”

One way of checking for pain and urgency is how much effort the prospect puts into the relationship. You need to see some equality of effort. If you call five times before the prospect returns your call that is not equality. If you send reams of information and give multiple presentations but the prospect won’t fill in a requirements questionnaire, then that is not equality of effort. With every call you want the prospect to DO something. If this does not happen then the screams are not loud enough and you should move onto your next opportunity.

Sales big data could start to answer questions like this at the customer level, by aggregating data such as:

  • How many hours has this customer spent talking to us?

  • Do they open mails from us and how quickly?

  • Are they clicking through our slides during webinars or is their attention engaged elsewhere?

  • How many emails did they send us?

It is still really early days in the market for sales productivity tools, but the need is there, so it is likely to happen quickly. In the era of “bring your own everything” our sales management systems and tools need to evolve. We need tools that primarily focus on making the front-line sales folks more productive while incidentally also allowing better management oversight.

Next post in series

How to hire the A Team enterprise sales guys May 2, 2014

Posted by bernardlunn in Deal-making, Enterprise Sales.
Tags: ,
1 comment so far

This is # 8 in a serialized book called Enterprise Sales for the Digital Age, delivered here as 11 blog posts. You can get value from each in isolation, but if you really need to understand enterprise sales, reading the whole series is worthwhile.   You can buy an improved version, neatly printed and bound, for $6 from Amazon.  

Note: a version of this post has already been published on ReadWrite.


This is a guide for tech founders of enterprise software startups looking for outside sales guys who will generate $millions annually. This is not for big old vendors or inside sales.

Here are 9 things to look for to find the A Team sales guys:

1. Track record. This is easy with sales guys, you can see how much they sold in past years, but don’t make the mistake of being too metrics driven. Selling a hot product for a big brand in a booming market is relatively easy compared to breaking into a new market for an unknown startup. More importantly, being too metrics driven can blind you to the other attributes. Would you hire a developer simply on how many lines of code they deliver?

2. Passion. Call it conviction if you prefer, but I like the word passion in this context because entrepreneurs talk about the need for passion (for good reason, passion is what sustains you through the tough times). Yet too many entrepreneurs think, when it comes to sales, that they should hire cynical mercenaries who can “sell ice-cream to eskimos”. That may work for big old vendors, but it fails in startups where smart, innovative customers smell the BS and where the team building between developers and sales, based on mutual trust and shared interests, is key to success.

3. Integrity. Here is a bit of timeless wisdom from Warren Buffet. He advises that, when hiring, look for brains, energy, and integrity; but if the people you find don’t have integrity, the other two qualities will kill you. Sorry, there is no magic trick for spotting intgrity. Sure, do background checks, but also be human, trust your instincts.

4. Intelligence. Enterprise sales using disruptive technology is complex, it needs intelligence to understand the nuances of the enterprise needs and how they relate to a rapidly evolving technology. 

5. Empathy. The ability to relate to other people at a human level is essential to sales. This is not a technique, it is a human quality that is probably a mix of genetics and early childhood learning.

6. Great questions. The great sales guys are not looking for a job, they are looking for great products to sell. Do their questions to you reveal an understanding of the dynamics of your market? Are they prepared, have they done their research? Are the questions boilerplate or specific to what you do? What they ask in an interview will indicate what they will ask on a sales call; which segues to point # 7.

7. Listening. Great sales people have two ears and one mouth. If you listen well (really attentively with great questions) the prospect will reveal the key driver for the sale; the rest is easy.

8. Energy. The road is long and hard, you need physical energy. Hire sportsmen who know how to endure pain to win and know that discipline (eg in diet) matters.

9. Ambition. Call it drive if you like. Mix with passion. What is it that makes you bounce out the next day after a crushing defeat?

That’s your checklist. How do you make sure you get these A Team players?

1. Invest your time. Hiring is your most important job. Take the time to interview a lot of candidates; cast a wide net. As a side benefit, interviewing a lot of smart people is a great way to learn more about your market. Spend a lot of face-to-face time with the candidates on your short list. Meet with references (note, meet, not email or phone). Meet with family and friends. 

2. Don’t compromise to “fill a slot”. It may allow you to check that box, but it will create 10 more boxes to check if you get it wrong. Don’t be afraid to delay until you get the best possible person.

3. Use the three months onboarding wisely. All that talk about taking your time can lead to analysis paralysis and speed is of the essence in a startup. Most headunters will give you a three month money back guaranty and a three month probation period in an offer is quite normal. You don’t want to make a hiring mistake, but you have three months to spot if you have made a mistake and then course correct without too high a cost.

4. Focus hard on building a win/win compensation plan. That is, a win for the company and a win for the employee. This is hard to do right. Even good compensation plans get gamed, which is why Buffet’s advice about integrity is so critical. Be generous… but also demanding.

Next post in series.

Negotiation Ninja Says: in the end game closing, forget your chess skills and play poker May 2, 2014

Posted by bernardlunn in Deal-making, Enterprise Sales.
Tags: , , ,
1 comment so far

 

This is post # 7 in a serialized book called Enterprise Sales for the Digital Age. You can get value from each post in isolation, but if you really need to understand enterprise sales, it is worth reading the whole series. You can buy an improved version, neatly printed and bound, for $6 from Amazon.  

I have used the analogy that enterprise sales is like chess with a beginning (get leads), middle (prove fit to requirements) and end (close the contract). In the closing phase, the game becomes more like poker where, as James Bond says in Casino Royale, “you don’t play your cards, you play the person sitting opposite you”.

“Closers” are rightly prized. Weak closers “snatch defeat from the jaws of victory”. They give up a great technical/functional advantage to let a strong closer from a competitor snatch the deal.

There are so many books, courses, seminars and theories about negotiation. Much of it “does not stick”, because in the heat of the moment you need to make instant decisions. This is where experience and an aptitude for negotiating count. However one way for negotiation tips to stick in the mind is to relate them as stories, particularly stories where somebody screwed up really badly or did something clever to gain advantage in a difficult situation. These are the Negotiation Ninja Says tales.

#1: Negotiation Ninja Says “don’t throw away the cards that have no value to you”.
As a sales rookie I was reviewing the key issues before a major contract negotiation. With my boss, I made a list of a) showstopper issues and b) “not a big issue for us” clauses.

During the meeting one of the “not a big issue for us” items came up. My boss said;

Hmm, that is difficult. Do you mind if my colleague and I step out of the meeting to discuss this?”.

I walked out thinking WTF; why make so much fuss about a clause that did not matter to us? When we were alone my boss said:

So what do you think will happen in the cricket today?”

We spent 10 minutes talking about cricket. The idea was simply to make them sweat about a point we were willing to concede so that we could trade it for something we wanted.

# 2: Negotiation Ninja Says “test how nervous they are with something silly”.
A few days before signing a deal, we were deep in the legal weeds. We were a tiny startup being acquired by a behemoth. We had a lot at stake, so we were nervous.

There was a ridiculous amount of legal Due Diligence stuff. One question was “have you told your spouses about this deal and are they in agreement?” This must have come from some earlier deal where a spouse had created a post-acquisition legal problem. In our case, our spouses just wanted us to close the deal so that we could pay bills and take a holiday.

My partner said:

Actually we might have a problem there. I have not told my wife about this deal”.

He was not trying to be clever, he was just tired and cranky and wanted some fun.

Even though this was on a conference call, the tension on their side was obvious. The message was clear – the buyer was just as tense as we were, they wanted this deal to close as badly as we did. 

In hindsight, we should have done this testing of their nerves a bit earlier. Not too much earlier when everybody is calm (because less is at stake at that stage) but early enough that it could be used to gain some negotiating leverage. The frayed nerves, the raised voices, the table-thumping, these are all signs that a deal is closing. You know that you are stressed. Find low risk ways to test how much they are stressed, to see how much leverage you have.


# 3. Negotiation Ninja Says after high or lowballing, use the blind pig stare and offer a mint
I had given the prospective buyer our price. I was highballing, had set a high price. He just looked at me. Did not say anything. Gave me no reaction at all. Just kept on looking at me. I call this the “blind pig stare”. This made me nervous. The inner “monkey mind” was saying “OMG, I blew it, set the price too high”. The temptation to fill the silence was intense. The temptation was to say something like “it’s all negotiable of course”. I was not a rookie at that stage. I took a deep breath. I took out a mint and offered him one. Normal politeness made him say “thanks”. The tension was broken, we started talking, found common ground and closed a deal. 

# 4. Negotiation Ninja Says “on the signing day, don’t blow it by talking about anything more substantive than the weather.

It was signing day, scheduled for 9am. There was nothing more to do, just go there and sign. The two bound documents were in front of us. I said something that prompted the buyer to ask me a question. I did not have an immediate response, needed to check with somebody. He said “let’s reschedule signing to 9am tomorrow”. Later that day something happened that was totally “out of left field”, beyond any of our control. The deal was not signed the next day. In fact, it never got signed. The moral – on signing day never talk about anything more substantive than the weather. 

# 5. Find somebody to be the bad guy or volunteer for the job.

Deals can fall apart on price. Despite all the kumbaya win/win negotation talk, price is still one thing where the buyer wants low and the seller wants high. Sometimes you just have to dig in your heels and say no, to walk away from the negotiation. That bruises the relationship. Somebody on the team has to be the bad guy. That usually falls down to a VP Sales type person. You want the sales executive to maintain a warm relationship and you want the CEO/Founder to do the same. You are all agreed on the strategy and the risks of losing the deal, the only question is who will be the bad guy? This is tougher for young startups with a flat management structure. Make sure that any VP Sales you hire understands that occasionally being that bad guy is part of the job description.

# 6. Once you start a bluff, any sign of weakness blows the whole deal

The company was one week away from not making payroll. There was one mega deal in negotiation. We had set a high price. In negotiations, the Founder/CEO refused to budge one inch. I knew what was at stake and knew that giving say a 20% discount (on license fees which were 100% gross margin) would have enabled the company to survive. When he was asked why he refused to budge he responded “If I had shown the slightest sign of weakness the deal would not have closed. They had to see us as the best, most powerful vendor in the market or they would have got nervous about our ability to survive”. The deal closed and the company went on to great fame and fortune.

This is poker in its purest form.

Once after that, with similarly high stakes, I have had to take the same stance. It worked. It does not always work; but what definitely does not work, the sign of a weak poker player, is starting off betting high, acting super confident, then later in the same hand pulling back and “going all wobbly”.

Next post in series.

Always Be Qualifying – listen for the screams May 1, 2014

Posted by bernardlunn in Deal-making, Enterprise Sales.
1 comment so far

This is # 6 in a serialized book called Enterprise Sales for the Digital Age. You can get value from each in isolation, but if you really need to understand enterprise sales, it is worth reading the whole series.  You can buy an improved version, neatly printed and bound, for $6 from Amazon.  

The old sales adage is “always be closing”. It confuses rookie sales people because they think of closing as something you only do at the end. Another way to think about this is “always be qualifying”. The things you close before the final close are really ways to qualify.

Traditional sales methodologies treat qualification as a one time event. Budget, tick. Need, tick. Decision-maker, tick. That implies a linear process like an assembly line in a factory. Of course the real world is not like that, so you have to re-qualify all the time. This is even more true in the Digital Age, when buyers self-educate online and appear fully qualified at the bottom of what we used to call a funnel and when the “innovator with clout” is that dude with a ponytail and sandals in the coffee shop.

As a sales leader, I love learning from the winners on my team. What is that consistent target-crusher doing right and can I teach this to other guys? For a while I was confused by one of my best performers.  He was by most visible metrics, the worst salesman. His presentations were rambling and verging on incoherent. His writing style would have given my English teacher apoplexy. He was consistently abrupt almost rude to all concerned. He came in late, left early and had long, expensive lunches.

I was really interested to find out what he did well. I do not believe in luck being a contributor on any consistent basis. So he must have been doing something really, really well because he was doing everything that was visible very badly.

I discovered that what he was doing very well was qualifying his prospects with great care and discipline. We all know that is what we should do, but very, very few sales people do it at all well. We think that sales is all about hard work, persistence, determination and all those other good Protestant work ethics. So we drive relentlessly on, calling that prospect for the umpteenth time.

This guy waited until he could see that the customer’s need was very real and urgent. He waited ‘till he could hear the screams. He then looked for something to indicate that we had an edge in the deal, some unfair advantage.

His laziness was a bit of an act. In reality he was a tireless networker. That is what all those long, expensive lunches were about. However he worked to create a sense of equality and respect with his customers. Sales people are usually too used to getting on their knees to that all-powerful buyer with the big budget. So the buyer does not respect the salesman and will ignore five of his calls in the certain knowledge that he will get another one.

Yes, it is a bit of a power game. This power game is easy if you work for the dominant player in the game. The power game is hardest to play when you are an unknown start-up, when times are tough and you are behind in your revenue targets.

We were in that position when a small Hedge Fund came on the horizon as a prospect for our real time trading support system. This was 1991 and Hedge Funds were not on our target list at that time, few people even knew what they were. The customer certainly seemed smaller than we were used to selling to. So the salesman told the prospect that we were not interested in their business. This put the prospect in a position of selling to us. “Sure we are small now, but we are growing fast and we need this system urgently and we have plenty of money for IT”. The screams were loud and clear and we closed the deal in record time and they became a good customer (and the Hedge Fund became one of the stars in this industry).

One way of checking for urgency is how much effort the prospect puts into the relationship. You need to see some equality of effort. If you call five times before the prospect returns your call that is not equality. If you send reams of information and give multiple presentations but the prospect won’t fill in a detailed requirements questionnaire, then that is not equality of effort. With every call you want the prospect to DO something. If this does not happen then the screams are not loud enough and you should move onto your next opportunity.

You have to cast a very wide net in order to qualify your prospects properly. Otherwise you will catch a couple of tiny fish in your net and mistake them for tuna! If you cast your net wide enough you will find deals where the customer’s need is urgent and your company has some specific edge in the deal.

The way to make sure you have a live one is to wait for the screams. Get your prospect doing some work before you get too excited.

 What really kills weak sales people is when a deal is going great but circumstances change and it is now dead in the water. They did everything right but the deal is dead.

Weak sales people don’t want to see this, it is too painful. That is when management has to make a painful decision to pull the plug on that sale.

Great sales people expect other members of the team (sales support and/or product management) to do most of the work during the proving phase. They are in oversight role, keeping an eye on what is happening to the customer, preparing for the close and filling the funnel with new prospects.

Great sales people will also not be reluctant to say something like “we set this whole POC up the wrong way, we have to start all over again”. If they see that the POC is not addressing the one thing that the CXO will mention in the Press Conference, they will be right. This makes them hugely unpopular internally, but it is better than losing the sale. The great sales people have the credibility from their sales track record to pull this off.

Great sales people are always visualizing that press conference and thinking about the “key ones” (one decision-maker, one business-driver and one selection-driver) and if it is not crystal clear today they will pull the plug even if it was crystal clear yesterday.

Next post in series.