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Why Enterprise Software Sales is like Chess (with elements of Poker) November 4, 2013

Posted by Bernard Lunn in Enterprise Sales, SAAS.
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Many cerebral developers have an image of sales as a game for smooth talking silver tongued devils who are not over-endowed with grey matter.

Coding is very hard intellectual work. So is enterprise selling. Enterprise sales is like a game of chess with opening moves, middle game and end-game:

Opening moves in chess are fairly well-defined. You cannot win through brilliant opening moves, but you can lose quite quickly through some dumb moves. The same is true in enterprise sales. People over estimate the value of an introduction. It is not much more than Pawn to Queen four. You need to get through the door to sell, but its what you do when you are through the door that matters. Its not just the credibility of your introduction (first move) but also how you position your value proposition on first email, call and meeting that will determine how well you do when you get to the negotiation phase.

Middle game is when the sales support guys make all the difference. The process of proving product fit to the specific enterprise requirements is long and complex with a track running from demos to gap analysis to proof of concept. Then the process of aligning stakeholders towards a specific proposal can take place. You cannot plan more than two moves ahead, the best players mix analysis with intuition (“sight of the board”) as well as some time-proven maxims (such as “control the center of the board”).

End game is when the closers score. Some sales guys are no good in the opening moves (they expect the company to set them up with lots of qualified leads) and they are hands-off during the complex hard work of the middle game. This may annoy the hard-working folks in marketing and sales support, but they can get away with it because they are great closers. Watch out for these guys at your Gorilla competitors. A naive start up can align people around a perfect demo, gap analysis and proof of concept only to find the deal snatched away by salesman sammy at Bigco who trashed you with a well timed comment to the decision-maker over golf or cocktails.

The reason that winning at enterprise sales is so much fun is that it is cerebral but it is not only cerebral. You need good EQ as well as good IQ. Or, to put it another way it is a mix of chess and poker and as Bond says in Casino Royale “in poker you don’t just play the cards, you play the person sitting across from you”.

Four Gates That Multi-$billion Ventures Pass Through. September 28, 2012

Posted by Bernard Lunn in capital markets, Enterprise Sales, IPO, SAAS, start-ups, Strategy Workshop.
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I also think about these Four Gates in the form of a funnel, with lots at the top and very few at the bottom (just like a sales 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 site; 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 not 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 ventures is a crystal clear understanding of the problem, because they have heard the pain described by so many customers and prospects.

I look for conceptual clarity in 4 dimensions:

  1. Large enough 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.
  4. You really, really want to do this more than anything else in the world and deep down you believe that you are the best person to pull this off. You are saying “damn the torpedoes, full steam ahead”. If you want people to take that risk with you, you had better believe it yourself deep down in your heart and gut. You also must be ready to commit to at least 10 years with 60 hour weeks, forget about a balanced life for a while.

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 four 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. Enterprise software ventures tend to be bootstrapped from customer revenues, not from VC, so the founders learn to 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. 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.

Gate #2: Prove the Concept.

This is the “fit to today’s market” phase. This is also what VC call “traction”. 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 proving fit to market in a niche. So the service has to work and deliver what those consumers want. In the lean startup model, this is when all that pivoting takes place. However great entrepreneurs don’t pivot at a conceptual/strategic level, they got through Gate #1 with conceptual clarity, but it may take multiple tactical pivots to get traction in a specific niche.

Gate #3: Scale within niche.

This is the “make it work as a business” phase. This is when you throw out the lean startup guide book and start working like a real business with serious amount of capital and real management bench strength. Blowing it at this stage for lack of resources – human or financial – is dumb.

During the last decade, most enterprise software vendors that made it past Gate # 2 got acquired. VCs mostly shunned enterprise software during this time and it takes huge amount of self-sacrifice by the whole team to make it past Gate # 3 without VC.  At this stage – you have the 3 reference customers, you have proved the concept – the acquirer will not consider your revenues to be meaningful, so you will be acquired for your R&D value with a bit of credit for the quality of your customer relationships. If you are lucky, you hit a market just at the point where two behemoth vendors who compete like crazy absolutely must, must, must have this technology….. If you raised VC, the acquisition value at this stage will usually 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.

Entrepreneurs who want to build 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.

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. This is when we see the free users (“if the service is free, you are the product”) start to get annoyed as the company starts to monetize them more aggressively (think of Facebook or any other social media venture), but a great entrepreneur and management team can navigate their way through this challenge.

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. 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 all 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 remains to be seen if this decade will produce more big winners, but that is the subject of another post.

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 up to 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.

Enterprise Software: The tough transition from founder led sales to a scalable, professional sales team August 27, 2012

Posted by Bernard Lunn in Enterprise Sales, Enterprise Web 2.0.
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You need three reference accounts to be a credible vendor:

Once means nothing

Twice is coincidence

Three times is a trend

These first three deals are very, very tough. Customers don’t want to take the risk of being an early customer of a startup. The only person who can close these first three deals is a founder. That is why successful enterprise software ventures almost always have a balanced founding team of two. One is a brilliant techie who creates the product. The other is a smart, driven,  sales oriented person – the “sales co-founder”. Attempts to hire somebody to make these first three deals happen usually fail. You cannot outsource the job.

These first three deals need to evolve with the product. The two founders, the sales guy and the techie, need to work incredibly closely to make these deals happen. The product does not really exist until these three reference implementations are complete.

Each of these three deals is very tough to pull off. Most customers prefer to wait until the product is proven in the market – they want to wait until you have those three reference accounts. You can be justified in having a big high five celebration on each closing. However the next transition is often even tougher. Mostly it is tougher because founders don’t see this one coming. The first three deals are so tough and so all consuming. There are four temptations when you reach this point, each with their own peril:

1. Just keep working the same way. This is very tempting for the sales co-founder. Why mess with success? You and your techie co-founder are working as a great team. You have a pipeline. You are enjoying this. The propects want to keep working with the founders. There is only one problem. You can never build a big business this way. Maybe you are OK with that, but your window of opportunity can close very fast. Your market wants a winner to emerge. There is a gap that needs filling. That is why you succeeded in getting those first three deals. The market wants your company to become a big viable vendor. So, while they love talking to the co-founders, they love your experience, insight and energy, they also want you to build a scalable organisation. If you don’t, the market will annoint another winner and you will find doors being closed.

2. Hire a professional sales guy to replace the sales co-founder. The founder can make selling the product sound so easy. You have a great product, three happy reference accounts and a window of opportunity into a big new market. Surely you can find somebody to replace you? Sadly, many ventures fail totally at this stage. Those that make it past this phase do so thanks to the drive and will of the founders after burning through many of these professional sales folks in an expensive process that is full of fights and bitterness. Who do you hire for this key role? It is tempting to go for the professional from a big company. The candidates will tell you why they are quite comfortable making the transition to a startup, why that is what they have always wanted to do. Sadly many of them are refugees from big company sales teams simply because they were not good sales people. No matter how many times these professionals deny it, they will expect your company to have all the marketing bells and whistles of a big, mature vendor. They will also quickly get uncomfortable with the constant pivots and tactical flexibility. This is an essential feature of the early days of a startup. The sales co-founder can manage this easily as they are an owner and they have a close working relationship with the technical co-founder. However this is really difficult for the newly-arrived sales professional to pull off. The customers keep asking for the sales co-founder. The technical team won’t make changes based on what the newly-arrived sales professional asks for. The organizational anti-bodies rush to kill this intruder. The founders refuse to accept that their scrappy, agile, fun startup can have these organizational anti-bodies. So the newly-arrived sales professional is fired; it must be their fault. I have seen enterprise software ventures burn through three or more sales professionals in this way. This takes many years, costs a lot of money and often means the company misses the big window of opportunity.

3. Hire an entrepreneur-sales type. Knowing about the perils of bringing in the professional sales type, many founders aim to hire a clone of the sales co-founder. That can sometimes work OK, better than the sales professional from Bigco.  But this just postpones the time when the venture has to implement scalable sales processes. The more immediate problem is that most people don’t like being clones. This is particularly true of the entrepreneurial sales types. This route often leads to big clashes between two strong-willed personalities that each deeply prize their freedom to work things their way.

4. Raise a lot of Venture Capital so that you can hire a top notch sales manager (VP of Sales) who then brings the full sales team on board. This addresses one big issue with both  routes 2 and 3. It is hard to bring on just one sales person as this makes the role of the sales co-founder unclear. The sales co-founder cannot just manage one sales person. But all you are doing is replacing all the problems of hiring a sales person with the same problems but related to hiring a sales manager. It is very hard to accelerate growth in enterprise software using Venture Capital. Hiring a sales manager who brings on a whole team at this stage may simply accelerate the burn rate.

When you pass the gate labelled “3 reference accounts”, get the whole team together for a big celebration. Your venture is now viable, you are “in business”. Then head off for a couple of quiet days to work out how to pass through the next gate labelled “big valuable company”.