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.”

What comes first: the pipeline or the egg?  Or, to unmix metaphors, 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.