The Pipeline Chicken or Egg Problem

The other day I heard a startup executive say, “we will start to accelerate sales hiring — hiring reps beyond the current staffing levels and the current plan — once we start to see the pipeline to support it.”

To mix metaphors, what comes first: the pipeline or the egg?  To un-mix them, what comes first:  the pipeline or the reps to prosecute it?  Unlike the chicken or the egg problem, I think this one has a clear answer: the reps.

My answer comes part from experience and part from math.

First, the experience part:  long ago I noticed that the number of opportunities in the pipeline of a software company tends to be a linear function of the number of reps, with a slope in the 12-18 range as a function of business model [1].  That is, in my 12 years of being a startup CEO, my all-quarters, scrubbed [2] pipeline usually had somewhere between 12 and 18 opportunities per rep and the primary way it went up was not by doing more marketing, but by hiring more reps.

Put differently, I see pipeline as a lagging indicator driven by your capacity and not a leading indicator driven by opportunity creation in your marketing funnel.

Why?  Because of the human factor:  whether they realize it or not, reps and their managers tend to apply a floating bar on opportunity acceptance that keeps them operating around their opportunity-handling capacity.  Why’s that?  It’s partially due to the self-fulfilling 3x pipeline prophecy:  if you’re not carrying enough pipeline, someone’s going to yell at you until you do, which will tend to drop your bar on opportunity acceptance.  On the flip side, if you’re carrying more opportunities than your capacity — and anyone is paying attention — your manager might take opportunities away from you, or worse yet hire another rep and split your territory.  These factors tends to raise the bar, so reps cherry pick the best opportunities and reject lesser ones that they’d might otherwise accept in a tougher environment.

So unless you’re running a real machine with air-tight definitions and little/no discretion (which I wouldn’t advise), the number of opportunities in your pipeline is going to be some constant times the number of reps.

Second, the math part.  If you’re running a reasonably tight ship, you have a financial model and an inverted funnel model that goes along with it.  You’re using historical costs and conversion rates along with future ARR targets to say, roughly, “if we need $4.0M in New ARR in 3 quarters, and we insert a bunch of math, then we’re going to need to generate 400 SALs this quarter and $X of marketing budget to do it.”  So unless there’s some discontinuity in your business, your pipeline generation doesn’t reflect market demand; it reflects your financial and demandgen funnel models.

To paraphrase Chester Karrass, you don’t get the pipeline you deserve, you get the one you plan for.  Sure, if your execution is bad you might fall significantly short on achieving your pipeline generation goal.  But it’s quite rare to come in way over it.

So what should be your trigger for hiring more reps?  That’s probably the subject of another post, but I’d look first externally at market share (are you gaining or losing, and how fast) and then internally at the CAC ratio.

CAC is the ultimate measure of your sales & marketing efficiency and looking at it should eliminate the need to look more deeply at quota attainment percentages, close rates, opportunity cost generation, etc.  If one or more of those things are badly out of whack, it will show up in your CAC.

So I’d say my quick rule is if your CAC is normal (1.5 or less in enterprise), your churn is normal (<10% gross), and your net dollar expansion rate is good enough (105%+), then you should probably hire more reps.  But we’ll dive more into that in another post.

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Notes

[1]  It’s a broad range, but it gets tighter when you break it down by business model.  In my experience, roughly speaking in:

  • Classic enterprise on-premises ($350K ASP with elephants over $1M), it runs closer to 8-10
  • Medium ARR SaaS ($75K ASP), it runs from 12-15
  • Corporate ARR SaaS ($25K ASP) where it ran 16-20

[2] The scrubbed part is super important.  I’ve seen companies with 100x pipeline coverage and 1% conversation rates. That just means a total lack of pipeline discipline and ergo meaningless metrics.  You should have written definitions of how to manage pipeline and enforce them through periodic scrubs.  Otherwise you’re building analytic castles in the sand.

8 responses to “The Pipeline Chicken or Egg Problem

  1. Hi Dave,
    I think there may be a flaw in your argument.
    You begin by suggesting this is a startup without sales reps and then proceed to apply rules for an operating Enterprise SaaS solution provider that has a sales team (otherwise, how would they know their CAC?).
    I think the founders in an enterprise SaaS startup have to be the ones that acquire the first (five or so) customers. By then, they will understand the customer pain points and the beginnings of a sales process. They should begin doing ABM before demand generation. With ABM, an initial pipeline is created and should then hire a sales leader who is willing to be the only sales rep until he/she refines the sales process.
    Thanks for the article
    Chuck DeVita

    • Hey Chuck,

      Thanks for reading. Sorry I did not mean to suggest there were no saleseps. The idea to me it was a startup with maybe 10, maybe 30, maybe even 50 reps and it’s wondering when to step on the hiring gas. I agree that early-early stage first handful of customers needs to be done by founder(s). Though the interesting question there is should they hire a sales head early and literally sell, side-by-side, those customers together so the sales head will be ready to take over at some point on their own. I know at least one founder who did that and was very happy he did.

  2. Hey Chuck,

    I think I see the problem that lead to the confusion — I said “we’ll start to staff up sales” — i.e., not staff sales, but staff it up — i.e., add more reps than planned. I’ll see if I can make that clearer in the copy.

  3. Dave – your articles are as interesting as they are helpful for me- so, very!! We are building out a sales team (on a path to 10 M ARR) and so this article is very relevant for us as we seek to figure out what the market will bare and what our burn rate can handle in regards to CAC.

  4. Dave – You wrote “the number of opportunities in your pipeline is going to be some constant times the number of reps.”

    What about the conversion from opportunities in the pipeline to sales as the number of reps increase? What trend have you seen that to follow? And please do write a piece on what triggers hiring the next sales rep.

    • On the hiring trigger post idea, noted and thanks. On conversion rates with staff, frankly I’ve not really noticed any trends. Other than the obvious, if you hire a bunch of unqualified people, quickly, and give them inadequate training, and then beat them up to N oppties in their pipeline and/or Y coverage ratio, you will create a pipeline full of air and conversation rates will drop. Other than that, which I’ve seen far too often, prudent hiring with good onboarding in my opinion doesn’t have to hurt conversion rates. Patching-warming also definitely helps.

    • Thanks Dave. Follow up question, what qualities do you look for in each level of sales and how do you test for those qualities?

      For example – What qualities do you optimize for in a sales leader (VP of Sales or CRO) vs manager vs rep? Should managers be quota carrying too? And how do you test for those qualities in an interview?

      Sorry for the lengthy questions! I appreciate your active response in this comments section.

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