Category Archives: CEO

Did Your Board Order a Proposal or a Discussion?

[Restructured.  See notes.]

I think board meetings should have more discussions and fewer proposals.  Why?

  • The hardest questions often don’t lend themselves well to proposals. Think:  global warming, cultural divisiveness.  Or, in business:  investor alignment, exit strategy, or a flawed corporate strategy.  You’re not going to solve those issues in 45 minutes by quickly reviewing three options.
  • Proposals can result in a myopic focus on approval.  Approving an operating plan can be a strategic exercise where a strategy is proposed and translated into an organizational structure and expense budget.  But it’s too often an 11th-hour exercise driven by financial constraints where everybody just wants approval.
  • Proposals usually feature limited discussion.  Both because of the format and the approval focus, discussions during proposal sessions tend to be hasty and shallow.  If everyone knows they need to leave at 5pm and that three other items are slated before the end of the meeting, you’re strongly disincenting discussion.
  • Boards know less about your business than you think. Management spends 60 hours a week at the company, while board members might spend 60 hours a year.  If you want to leverage your board’s knowledge, first spend 20 minutes simply baselining them.  It’s a great introduction to a discussion and only rarely happens in proposals.  The more they know, the more they can help.
  • Sometimes, people just need to talk.  Think of recent hard times, like the start of Covid.  Just talking about the problem with the board leveraged the knowledge of those in the room (e.g., if only to know what other companies were doing), made everyone feel better, and helped the board determine if management were taking the situation seriously and asking the right questions — even if nobody had all the answers.  The board getting together to “just talk” isn’t just a touchy-feely concept; it’s a legal one, too [1].

For clarity’s sake, I think board meeting sessions fall into one of three types:

  • A review (or, “deep dive”) where, e.g., the CRO reviews the previous quarter’s results, metrics, win/loss, lessons learned, and plans to address to key issues.  Or maybe it’s a review of the partner program.  Or the product roadmap.  The goal is deep inspection and learning.
  • A proposal, where, e.g., the CEO and CFO present next year’s operating plan, seeking board approval at the end of the session.  Or a stock option refresh.  Or executive compensation.  Management presents either one or three options and seeks an approval of their choice. Usually there is some discussion, but the goal is ultimately procedural:  getting formal approval on a proposed decision.
  • A discussion, where, e.g., the CEO leads a discussion on strategy, the CRO a discussion on sales models, or the CFO a discussion on an upcoming new financial standard.  The purpose of a discussion is educational:  to leverage the knowledge of everyone in the room so they all leave smarter on the issue than when they came in.  Discussions are also useful for consensus building.

So my advice is to look at your last few board agendas, classify the session topics by type, and analyze your mix.  Odds are, you’re having lots of reviews and proposals, but few or no discussions.  I’d say everyone would be better off if you changed that going forward.

For example, here’s a hard problem that many startups face today:

How are we going to make our cash last, while growing fast enough, so that — despite multiple compression — our next round will be an up-round?

Sure, you can run a proposal session on this topic.  You can build a spreadsheet to model a few macro scenarios (e.g., mild vs. modest recession), financing options (e.g., extension round, venture debt), and cost-cutting options (e.g., a 10% RIF).  You can make a decision on what, if anything, to do right now.  But, invariably, there will remain a ton of, “we’ll have to wait and see how things develop going forward.”

In this case, especially if no immediate actions are indicated, a discussion might be much more effective than a proposal.  I think what most boards care about right now are the answers to questions like these:

  • Is the CEO in touch or in denial when it comes to the changing business reality?
  • Does the CEO understand the new fundraising environment (e.g., multiples, constraints)?
  • Is the CEO too optimistic or pessimistic about the expected fundraising environment in 18-24 months?  What future environment assumptions are driving their point of view?
  • Is the CFO on top of cash planning and forecasting?
  • Is the CEO ready and willing to make cuts if indicated by the needs of the business?
  • Does the company have good leading indicators and are they tracking them so they can act early, if indicated?
  • What do my fellow board members think and what are they seeing in the market and with their other companies?

I think most boards would instinctively order a proposal, added to the next board meeting’s agenda.  I think smart CEOs might well convince them to order a discussion, instead.

# # #

Notes
I had planned to restructure this post in response to feedback on the draft, but failed to do so before it auto-posted earlier today.  Hence, I’ve restructured it largely in accordance with a rule from my grandmother, a high school english teacher:  most essays are improved by simply deleting the first paragraph.  I did a bit more than that, but the world’s most Irish grandmother (Margaret Mary Magadalene O’Keefe Downing Gardiner) was proven right yet again.

[1] If you ever wondered why unanimous written consent resolutions needed to be unanimous:  the idea is that if there is any dissent (i.e., if even one director opposes a motion), that the board must convene to discuss it.

The Board Boss Delusion

I talked to a founder a while back who felt like they’d lost a year or two thanks to some strategic distractions foisted upon them by a well-meaning board of directors.  While most startup boards try to follow the Hippocratic Oath, some — like well-meaning but overbearing parents — smother their founders and their companies with love.  This was, in my opinion, such a case.

It wasn’t the first time I’d heard this tale, so I thought I’d write a quick post on the topic, which serves as a follow up to my previous post, Whose Company Is It Anyway?

Most of the writing I’ve done on board relations focuses on the hired CEO for two reasons:

  • That’s the path I personally took, having been a hired CEO at two startups.  I could write about it first hand.
  • I thought it was the harder path.  Alas, the grass is always greener, so I always assumed life was easier for founders because they possessed the irrevocable moral authority of being founder and accompanying invisibility cloak [1] that shield them from the same level of termination risk as a hired CEO [2].

But some founder/CEOs — particularly younger, nicer, and/or first-time ones — suffer from a dangerous delusion that we need to challenge.  When I asked the aforementioned founder how they ended up in this situation, they said this:

“I was younger then.  I was still under the impression that the board were my bosses.”

That’s it.  The board boss delusion:  the belief that a founder/CEO should try to please the board in the same way that an employee wants to please their manager.  Why is this a delusion?

  • The board is not a person.  It’s a committee.  It’s not of one mind.  It may literally be impossible to please everyone, and often is.
  • The board does not want to be the boss.  Despite appearances otherwise, the board always wants the CEO to be boss.  Admittedly that may be more apparent with some boards than others, but even the most idea-generating, directive [3] boards do not want the CEO treating them like the boss.  They’re just adding value by providing ideas.
  • As CEO you are accountable for results, not for pleasing people.  You’re not a director executing someone else’s plan who is rated on execution and congeniality.
  • There is no get out of jail free card.  If a founder/CEO fully executes exactly what a powerful board member said and it fails, they do not get to say, “but, but we agreed that was plan.”  The invariable response if you do:  “you’re the one running the company and you decided to do it.”  It’s on you.  It’s always on you.
  • The board is usually not qualified to be boss.  How many of your board members would make the short list in a search for your replacement?  Some, maybe, even ideal in cases.  But most?  No.
  • The board doesn’t work there.  You spend 50-70 hours/week at the company.  They go to six four-hour board meetings per year and sit on 8-10 other boards.  Informed outsiders?  Yes.  But outsiders.
  • It’s your company.  As a hired CEO it’s metaphorical, as a founder/CEO, it’s literal.  Either way, you need to run it.  The board’s there to challenge you, give you ideas, pattern match, and leverage their networks.  You’re there to run the show.

If you don’t believe me, try one of these ideas:

  • Ask your board members, over a coffee (not in a board meeting), if they want to be treated like the boss.  They will say no.
  • Throw them the keys.  A few of the gutsier founders I know do this when the board gets too directive.  They literally take their car keys out of their pocket and throw them across the table:  “if it looks so easy, you can do it.”  They will throw them back.
  • Ask them to tell you a story about CEOs who got replaced.  Drill into those stories.  Find out whose plan the CEO was executing.  Ask if the board approved the plan.  Ask if the CEO failed executing an agreed-to plan, particularly if they were executing it well but it just wasn’t working, why they got replaced?  They’ll say, in the end the CEO decided to execute it, so it was their plan.

Whose company is it?  Yours.  Run it that way.

Is the board your boss?  No.  And the faster you learn that, the better.

# # #

Notes
[1]  Potentially including actual control provisions.

[2]  I am not saying this is bad, by the way.  Having “it’s my company” moral authority makes founder/CEOs less vulnerable to termination in ways that I believe are more good than bad.  Yes, in the end, if someone is continually failing they need to be replaced. But, on the flip side, if it now takes 13 years (i.e., 52 quarters) to go public, there is a virtually 100% chance of bad periods along the way and, particularly on a VC board where there are N stakeholders with potentially divergent opinions, it can be difficult to survive such downturns without either a protector (i.e., alpha) on the board or the moral authority of being a founder.

[3]  You should do this!  You should do that!

How Should CEOs Answer the Question, “What Keeps You Up at Night?”

I’ve always felt that “what keeps you up at night?” was a trick question for CEOs.

There’s one part of it I’m quite sure about.  There cannot be anything that you control that keeps you up at night.  Why?  Because you’re the CEO.  If something is keeping you up at night, well, do something about it.

Stress, as I like to say, is for VPs and CXOs.  They’re the ones that need to convince the boss about something.  They’re the ones worried about how something might look.  The CEO?  Well, you’re accountable for results.  You get to make or approve the decisions.

If you’re a founder/CEO then you shouldn’t be particularly worried about how things look to the board.  It’s your company.  You’ve got an invisibility cloak that your hired CEO counterparts lack, and which you should use when needed.  Think of founder privilege the way the kitschy Love Story described love:  it means never having to say you’re sorry.

For what it’s worth, and I won’t claim to have been God’s gift to CEOs, I lived by the control rule — that is, if I controlled it and it woke me up in the middle of the night, then I was going to do something about it.  That’s why one of the worst things I could say to one of my VPs was, “I woke up last night thinking about you.”  If that happened, and it sometimes did, then either our working relationship or their employment status was changing soon.

I put this in the same “listen to your gut” class as the I don’t want to talk to you anymore rule.  If you’re one of my VPs, then you’re running a key part of my company, then I should look forward to speaking with you each and every time.  If I don’t look forward to speaking with you, it’s a massive problem, and one I shouldn’t ignore.  After all, why wouldn’t I look forward to speaking with you?  Who don’t I like speaking to?  People who:

  • Don’t listen
  • Don’t follow through
  • Can’t keep up
  • Grinf-ck me
  • Can’t or won’t change
  • Are negative
  • Are mean

There are probably other classes, but the point is if I don’t want to talk to someone, it’s a huge signal and one I should dig into, not ignore.

Waking up in the middle of the night is an even bigger signal.  If you agree that CEOs should not wake up in the middle of the night over things they can control, then we can move onto the second category:  things they can’t control.  Should CEOs wake up in the middle of the night over them?

Again I say no.  Why?

Making bets is a big part of a CEO’s job.  Based on available information and working with the team, the CEO places a set of strategic bets on behalf of the company.  The company then needs to execute those strategies.  While the quality of that execution is under the CEO’s control (and should be high to remove execution as a source of noise in the strategy process), the outcome is not.

Why be stressed while the roulette wheel is spinning?  It’s a natural reaction, but does it change the outcome?  You’ve placed your chips already.  Does stressing out increase the odds of the ball landing on your square?  Does not stressing out decrease it?  No.  It changes nothing at the roulette table.

I’d argue that in business, unlike roulette, stressing out can effect the outcome.  A CEO who’s constantly under stress while the wheel is spinning — e.g., waking up in the middle of the night — is likely to perform worse, not better, as a result.

  • A tired CEO does not make great decisions
  • A haggard CEO does not inspire confidence
  • A grumpy CEO does not handle delicate situations well

I’m not trying to minimize the very real stress that comes with the CEO job.  I am, however, trying to provide a rational, contrarian, and hopefully fresh point of view that helps you better frame it.

In the end, there are two types of things that CEOs can potentially stress about:

  • Things they can control.  They shouldn’t stress over these because they should do something about them, instead.
  • Things they can’t control.  They shouldn’t stress over these because doing so will not change the outcome.  Worse yet, it may well change the outcome — for the worse — over the things they can control.

Ergo, CEOs should never stress about things.  QED.

As Warren Buffet said, “games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard.”  Focus on what you can control and, as Bill Walsh says, the score will take care of itself.

Congratulations.  You’re the CEO.  You’ve got the best job in the world.  Enjoy every day.  And sleep well every night.

# # #

Notes

  • To reiterate, none of this is to trivialize the stress that comes with the CEO job nor to suggest that CEOs shouldn’t work hard.  It is to say that I believe they will be happier and more effective if they find a way to sleep well — as most senior executives do.
  • To look at this from an outcomes perspective, while I was pleased with the operational results at both companies I ran, I was not particularly pleased with the outcomes.  Did I work hard and obsess about things?  Yes, in general.  If I worried more and slept less do I think it would have improved my outcomes?  No.  Were some of the worst decisions I made in part due to being worried and stressed about things?  Yes.  Did I in general sleep well?  Yes.  I have always naturally focused on running plays well and believed that the score would then take of itself.  In my experience, sometimes it does, but sometimes it doesn’t.
  • In writing this post, I found a few anecdotal, fun, and one somewhat ironic article on success and sleep.
  • This Bill Walsh quote seems to undermine my argument.  “If you’re up at 3 A.M. every night talking into a tape recorder and writing notes on scraps of paper, have a knot in your stomach and a rash on your skin, are losing sleep and losing touch with your wife and kids, have no appetite or sense of humor, and feel that everything might turn out wrong, then you’re probably doing the job.”  That said, he’d use this as an opener to speeches which were largely about focusing on what you can control.
  • Walsh’s other quote on sleep was more proactive:  “If you want to sleep at night before the game, have your first 25 plays established in your own mind the night before that. You can walk into the stadium and you can start the game without that stress factor. You will start the game and you will remind yourself that you are looking at certain things because a pattern has been set up.”

How to Lead a Strategic Board Discussion

Have you ever been to a board meeting where 60 minutes were allocated on the agenda for discussion of a strategic topic?  What happened in that session?

  • You probably started late because board meetings are hard to keep on time.
  • Some exec, maybe the CEO, probably presented a “few slides” to “tee up” the discussion.
  • “A few” turned out to be 23.
  • Two or three questions were asked by the one board member closest to the topic.  The others said nothing.
  • Time ran out because you needed to get to the administrative section, approving prior-meeting minutes and such.
  • Everyone politely said, “great job,” but left the meeting frustrated.

This happens a lot.  Execs who dysfunctionally view survival as the goal of a board meeting might be happy with this outcome.  Think:  “we survived another one; now, let’s get back to work.”

For those execs, however, who actually want to both tap into the board’s expertise and build board-level consensus on a strategic topic, this is a terrible outcome.  No expertise was tapped.  No consensus was built (except perhaps that the company doesn’t run good board meetings).  So what went wrong and what should we do about it?

What Goes Wrong in Strategic Board Discussions
Startup boards are a tough audience.  They are homogenous in some ways:  everyone is typically smart, outspoken, successful, and aggressive [1].  That means leading any discussion is cat-herding.

But, when it comes to strategic discussions, the board is heterogenous in three critical dimensions [2]:

  • Operating experience
  • Technology understanding
  • Financial knowledge

Startup boards are typically VC-dominated because, as a startup goes through the A, B, C, D series of funding rounds, it typically adds one VC board member per round [3].  Thus the typical, sub-$100M [4] startup board has 1-2 founders, one VC for each funding round [5], and one or possibly two independents.

Patagonia vests [6] aside, not all VCs are alike.  When it comes to operating experience, VCs generally fall into one of three different categories [7]:

  • Deep.  Former founders, who founded, grew, and eventually sold their companies, or highly successful 10+ year executives from brand-name companies.  In high school, members of the former group were in the programming club [8].  You’ll find these people working at early-stage VC firms.
  • Moderate.  People who worked for roughly 4 to 10 years, often in product but sometimes in sales or corpdev, at a larger tech company, often with an MBA sandwiched in the middle.  Often they studied CS or engineering undergrad.  In high school, they were in the entrepreneurship club.  You’ll find these people at a wide range of VC firms.
  • Light.  People who typically majored in economics or finance (sometimes CS), worked for 2 to 4 years in management consulting or at a tech firm, attended a top business school, joined a VC firm as an associate, and then worked (usually hard and against the odds) their way up to partner.  In high school, they were in the investing club.  You’ll find these people at later-stage VC firms.

Independent board members come in different flavors as well:

  • General managers.  Active or former CEOs of startups and/or business unit GMs at big companies.  These people typically have a good overview of the business and know the functional area they grew up in, these days typically sales or product.
  • Go-to-market executives.  Active or former sales or marketing leaders, i.e., CROs or CMOs.  These people understand go-to-market, but may be light on both technical understanding and financial knowledge.
  • Finance executives.  Active or former CFOs who lead the audit committee and who work the company’s CFO to ensure the company’s financial affairs are in order.  These people are typically light on technical understanding and go-to-market (GTM) knowledge (but they know that GTM is too expensive and they don’t like it).

Now, imagine having a deep conversation about {multi-cloud, serverless, re-architecture, UI/UX, positioning, pricing, branding, ABM, PLG, company strategy, category consolidation, international expansion, channels} with a group consisting of two product-oriented company founders, three VCs (one deep, one moderate, and one light in operating experience), and two independent directors (one former CEO with a sales background and the other a former CFO).

As the saying goes, “you can’t fix what you can’t see.”  Hopefully in this part of the post we’ve shined a bright light on the problem.  You want to discuss an inherently difficult issue (otherwise it wouldn’t have made the agenda).  You’re working with one heck of heterogeneous group. And, for the cherry on top, most of the group members are type-A personalities.  No wonder these sessions are hard to lead [9].

How To Lead a Strategic Board Discussion
Since this exercise is almost a Kobayashi Maru, sometimes the smartest strategy is change the rules.  Rather than teeing up an impossible discussion, instead propose to create a working group of those members who are most interested (and presumably expert) in the chosen topic.  Team those board members with the relevant executive staff, run a series of meetings that dive deep into the topic, and then report back into the larger group. Sometimes, as the WOPR computer concluded in War Games, the only wining move is not to play.

The benefits of these working groups are many:

  • You engage the board members and really tap into their expertise.
  • The smaller group size and more informal setting lead to more interesting and interactive discussions.
  • You create an opportunity for the executive staff to increase their visibility and build relationships with board members [10].

Personally, I’ve participated in numerous such working groups on various topics (e.g., pricing, metrics, GTM planning and modeling, sales process, positioning/branding, product strategy, and reluctantly, compensation) and find them invariably superior to jumping into a hard topic with a big heterogeneous group.

That said, once in a while you do need to lead such a discussion, so in that situation what should you do?  Do these five things:

  • Make a deck.  If you start the discussion from scratch without a tee-up, it will likely be a mess.  Use a deck to frame the topic and maintain control.  However, that deck is not a presentation.  It should be built specifically to lead a discussion.  Don’t just cut and paste slides from your internal meetings.
  • Baseline the audience.  Writing for the person in the room with the least expertise and familiarity with the topic, write 3-5 slides that describe the challenge you are facing and the decision you need to make.  Try to decompose the overall question to three sub-questions about which you will lead a discussion.  This will likely clarify your own thinking on the question greatly.  If it’s a one-hour session, this part, including explanatory Q&A, should take 10 minutes.
  • Ask three questions. The final three slides should each have one question in the title and blank body.  Stay on each one for 15 minutes.
  • Balance participation.  Remember your goal is to enable a discussion, not necessarily to make the final decision.  So lead a discussion.  It’s not a discussion if you and the alpha board member are the only people talking.  (That’s called watching two people talk.)  Keep track of who’s talking and do so naturally, i.e., without “going around the room” (which also isn’t a discussion, it’s a serial Q&A).
  • Summarize what you heard and either promise to get back to them with your final decision, propose splitting off a working group, or some other concrete action so that they know the next steps going forward.

Remember if you’re clear on the goal — to have a good discussion — and you build the deck and lead the group to stay focused on that goal, you might not arrive at an easy decision in 60 minutes, but you will indeed have delivered on what you promised — a good, board-level discussion about a complex issue.

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Notes

[1]  As is well known, they are also often homogenous in other, undesirable ways (e.g., race, gender) that I will acknowledge but not address as it’s not the purpose of this post.  For more on this topic, you can start here.

[2]  This is why pattern-matching across portfolio companies, executive staffing, and compensation are popular topics with boards.  They are safe topics, in the sense that everyone gets to participate in the discussion.  On the other extreme, it’s why product and major engineering decisions get so little time relative to their importance.  Go-to-market lies somewhere in the middle.

[3]  This is somewhat less true in today’s markets because (a) many VCs are more willing to invest without taking a board seat and (b) some, more indexing-oriented, later-stage VCs do not as a matter of practice want board seats because their business model is about deploying large amounts of capital across a broad range of companies.

[4]  Around $100M they may typically start reconfiguring in preparation for an upcoming IPO.

[5]  Where that number, using an Excel formula, is = code(uppercase(last-round-letter)) – 64.  You’re welcome.

[6]  A little satire from Fortune and/or my favorite scene from The Internship, which is about academic elitism in Silicon Valley in general and not VC in specific.

[7]  These buckets are definitionally stereotypes with all attached strengths and weaknesses.  While I was tempted to write “typically” and “often” before every sentence, I elected not to for word parsimony.  Place accept in the spirit given.

[8]  I add this colorful detail, which will invariably be wrong a lot, both for fun and to help paint the picture.  In each instance, I know at least one person, and usually more than one person, who fits this profile.  But no, I don’t always ask people what clubs they were in during high school.  To ensure contemporary naming (e.g., back when I was a member, it was called “computer club”), the club names come from the list at the high school that most of my children attended.

[9]  This why boards frequently talk about “safer” topics (in the sense that everyone can more easily participate) such as pattern matching across companies, executive staffing, and compensation — and a key reason why major engineering and product decisions get low airtime relative to their importance on many boards.

[10]  One of the smartest things e-staffers can do is to build relationships with their VC board members.  This isn’t always easy — everyone is pressed for time, sometimes it can make the CEO uncomfortable, and it’s not strictly necessary — but five years later when the VC is looking for a CXO for a hot portfolio company, whether you get the call or not may well be a function of that relationship or lack thereof.

The Top Two, High-Level Questions About Sales (and Associated Metrics)

“The nice thing about metrics is that there are so many to choose from.” — Adapted from Grace Hopper [1]

“Data, data everywhere.  Nor any drop to drink.” — adapted from Samuel Taylor Coleridge [2]

In a world where many executives are overwhelmed with sales and marketing metrics — from MQL generation to pipeline analysis to close-rates and everything in between — I am writing this post in the spirit of kicking it back up to the CXO-level and answering the question:  when it comes to sales, what do you really need to worry about?

I think can burn it all down to two questions:

  • Are we giving ourselves the chance to hit the number?
  • Are we hitting the number?

That’s it.  In slightly longer form:

  • Are we generating enough pipeline so that we start every quarter with a realistic chance to make the number?
  • Are we converting enough of that pipeline so that we do, in fact, hit the number?

Translating it to metrics:

  • Do we start every quarter with sufficient pipeline coverage?
  • Do we have sufficient pipeline conversion to hit the number?

Who Owns Pipeline Coverage and How to Measure It?
Pipeline coverage is a pretty simple concept:  it’s the dollar value of the pipeline with a close date in a given period divided by the new ARR target for that period.  I have written a lot of pretty in-depth material on managing the pipeline in this blog and I won’t rehash all that here.

The key points are:

  • There are typically four major pipeline generation (pipegen) sources [3] and I like setting quarterly pipegen goals for each, and doing so in terms of opportunity (oppty) count, not pipeline dollars.  Why?  Because it’s more tangible [4] and for early-stage oppties one is simply a proxy for the other — and a gameable one at that [5].
  • I loathe looking at rolling-four-quarter pipeline both because we don’t have rolling-four-quarter sales targets and because doing so often results in a pipeline that resembles a Tantalean punishment where all the deals are two quarters out.
  • Unless delegated, ownership for overall pipeline coverage boomerangs back on the CEO [6].  I think the CMO should be designated the quarterback of the pipeline and be responsible for both (a) hitting the quarterly goal for marketing-generated oppties and (b) forecasting day-one, next-quarter pipeline and taking appropriate remedial action — working across all four sources — to ensure it is adequate.
  • A reasonable pipeline coverage ratio is 3.0x, though you should likely use your historical conversion rates once you have them. [7]
  • Having sufficient aggregate pipeline can mask a feast-or-famine situation with individual sellers, so always keep an eye on the opportunity histogram as well.  Having enough total oppties won’t help you hit the sales target if all the oppties are sitting with three sellers who can’t call everyone all back.
  • Finally, don’t forget the not-so-subtle difference between day-one and week-three pipeline [8].  I like coverage goals focused on day-one pipeline coverage [9], but I prefer doing analytics (e.g., pipeline conversion rates) off week-three snapshots [10].

Who Owns Pipeline Conversion and How to Measure and Improve It?
Unlike pipeline coverage, which usually a joint production of four different teams, pipeline conversion is typically the exclusive the domain of sales [11].  In other words, who owns pipeline conversion?  Sales.

My favorite way to measure pipeline conversion is take a snapshot of the current-quarter pipeline in week 3 of each quarter and then divide the actual quarterly sales by the week 3 pipeline.  For example, if we had $10M in current-quarter new ARR pipeline at the start of week 3, and closed the quarter out with $2.7M in new ARR, then we’d have a 27% week 3 pipeline conversion rate [12].

What’s a good rate?  Generally, it’s the inverse of your desired pipeline coverage ratio.  That is, if you like a 3.0x week 3 pipeline coverage ratio, you’re saying you expect a 33% week 3 pipeline conversation rate.  If you like 4.0x, you’re saying you expect 25% [13].

Should this number be the same as your stage-2-to-close (S2TC) rate?  That is, the close rate of sales-accepted (i.e., “stage 2” in my parlance) oppties.  The answer, somewhat counter-intuitively, is no.  Why?

  • The S2TC rate is count-based, not ARR-dollar-based, and can therefore differ.
  • The S2TC rate is typically cohort-based, not milestone-based — i.e., it takes a cohort of S2 oppties generated in some past quarter and tracks them until they eventually close [14].

While I think the S2TC rate is a better, more accurate measure of what percent of your S2 oppties (eventually) close, it is simply not the same thing as a week-3 pipeline conversion rate [15].  The two are not unrelated, but nor are they the same.

There are a zillion different ways to improve pipeline conversion rates, but they generally fall into these buckets:

  • Generate higher-quality pipeline.  This is almost tautological because my definition of higher-quality pipeline is pipeline that converts at a higher rate.  That said, higher-quality generally means “more, realer” oppties as it’s well known that sellers drop the quality bar on oppties when pipeline is thin, and thus the oppties become less real.  Increasing the percent of pipeline within the ideal customer profile (ICP) is also a good way of improving pipeline quality [16] as is using intent data to find people who are actively out shopping.  High slip and derail percentages are often indicators of low-quality pipeline.
  • Make the product easier to sell.  Make a series of product changes, messaging/positioning changes, and/or create new sales tools that make it easier to sell the product, as measured by close rates or win rates.
  • Make seller hiring profile improvements so that you are hiring sellers who are more likely to be successful in selling your product.  It’s stunning to me how often this simple act is overlooked.  Who you’re hiring has a huge impact on how much they sell.
  • Makes sales process improvements, such as adopting a sales methodology, improving your onboarding and periodic sales training, and/or separating out pipeline scrubs from forecast calls from deal reviews [17].

Interestingly, I didn’t add “change your sales model” to the list as I mentally separate model selection from model execution, but that’s admittedly an arbitrary delineation.  My gut is:  if your pipeline conversion is weak, do the above things to improve execution efficiency of your model.  If your CAC is high, re-evaluate your sales model.  I’ll think some more about that and maybe do a subsequent post [18].

In conclusion, let’s zoom it back up and say:  if you’ve got a problem with your sales performance, there are really only two questions you need to focus on.  While we (perhaps inadvertently) demonstrated that you can drill deeply into them — those two simple questions remain:

  • Are we giving ourselves the chance to hit the number?
  • Are we hitting it?

The first is about pipeline generation and coverage.  The second is about pipeline conversion.

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Notes

[1]  The original quip was about standards:  “the nice thing about standards is that you have so many to chose from.”

[2]  The original line from The Rime of the Ancient Mariner was about water, of course.

[3]  I remember there are four because back in the day at Salesforce they were known, oddly, as the “four horsemen” of the pipeline:  marketing, SDR/outbound, alliances, and sales.

[4]  Think:  “get 10 oppties” instead of “get $500K in pipeline.”

[5]  Think:  ” I know our ASP is $50K and our goal was $500K in pipeline, so we needed 10 deals, but we only got 9, so can you make one of them worth $100K in the pipeline so I can hit my coverage goal?”  Moreover, if you believe that oppties should be created with $0 value until a price is socialized with the customer, the only thing you can reasonably measure is oppty count, not oppty dollars.  (Unless you create an implied pipeline by valuing zero-dollar oppties at your ASP.)

[6]  Typically the four pipeline sources converge in the org chart only at the CEO.

[7]  And yes it will vary across new vs. expansion business, so 3.0x is really more of a blended rate.  Example:  a 75%/25% split between new logo and expansion ARR with coverage ratios of 3.5x and 1.5x respectively yields a perfect, blended 3.0 coverage ratio.

[8]  Because of two, typically offsetting, factors:  sales clean-up during the first few weeks of the quarter which tends to reduce pipeline and (typically marketing-led) pipeline generation during those same few weeks.

[9]  For the simple reason that we know if we hit it immediately at the end of the quarter — and for the more subtle reason that we don’t provide perverse disincentives for cleaning up the pipeline at the start of the quarter.  (Think:  “why did your people push all that stuff out the pipeline right before they snapshotted it to see if I made my coverage goal?”)

[10]  To the extent you have a massive drop-off between day 1 and week 3, it’s a problem and one likely caused by only scrubbing this-quarter pipeline during pipeline scrubs and thus turning next-quarter into an opportunity garbage dump.  Solve this problem by doing pipeline scrubs that scrub the all-quarter pipeline (i.e., oppties in the pipeline with a close date in any future quarter).  However, even when you’re doing that it seems that sales management still needs a week or two at the start of every quarter to really clean things up.  Hence my desire to do analytics based on week 3 snapshots.

[11] Even if you rely on channel partners to make some sales and have two different sales organizations as a result, channel sales is still sales — just sales using a different sales model one where, in effect, channel sales reps function more like direct sales managers.

[12]  Technically, it may not be “conversion” as some closed oppties may not be present in the week 3 pipeline (e.g., if created in week 4 or if pulled forward in week 6 from next quarter).  The shorter your sales cycle, the less well this technique works, but if you are dealing with an average sales cycle of 6-12 months, then this technique works fine.  In that case, in general, if it’s not in the pipeline in week 3 it can’t close.  Moreover, if you have a long sales cycle and nevertheless lose lots of individual oppties from your week 3 pipeline that get replaced by “newly discovered” (yet somehow reasonably mature oppties) and/or oppties that inflate greatly in size, then I think your sales management has a pipeline discipline problem, either allowing or complicit in hiding information that should be clearly shown in the pipeline.

[13]  This assumes you haven’t sold anything by week 3 which, while not atypical, does not happen in more “linear” businesses and/or where sales backlogs orders.  In these cases, you should look at to-go coverage and conversion rates.

[14]  See my writings on time-based close rates and cohort- vs. milestone-based analysis.

[15] The other big problem with the S2TC rate is that it can only be calculated on a lagging basis.  With an average sales cycle of 3 quarters, you won’t be able to accurately measure the S2TC rate of oppties generated in 1Q21 until 4Q21 or 1Q22 (or even later, if your distribution has a long tail — in which case, I’d recommend capping it at some point and talking about a “six-quarter S2TC rate” or such).

[16]  Provided of course you have a data-supported ICP where oppties at companies within the ICP actually do close at a higher rate than those outside.  In my experience, this is usually not the case, as most ICPs are more aspirational than data-driven.

[17]  Many sales managers try to run a single “weekly call” that does all three of these things and thus does each poorly.  I prefer running a forecast call that’s 100% focused on producing a forecast, a pipeline scrub that reviews every oppty in a seller’s pipeline on the key fields (e.g., close date, value, stage, forecast category), and deal reviews that are 100% focused on pulling a team together to get “many eyes” and many ideas on how to help a seller win a deal.

[18] The obvious counter-argument is that improving pipeline conversion, ceteris paribus, increases new ARR which reduces CAC.  But I’m sticking by my guns for now, somewhat arbitrarily saying there’s (a) improving efficiency on an existing sales model (which does improve the CAC), and then there’s (b) fixing a CAC that is fundamentally off because the company has the wrong sales model (e.g., a high-cost field sales team doing small deals).  One is about improving the execution of a sales model; the other is about picking the appropriate sales model.