Category Archives: Management

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 form.”

[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.

Join me at SaaStock EMEA for “How to Make a Marketing Machine”

Please join me on October 13th at SaaStock EMEA, a free European SaaS event, for my presentation entitled “How to Make a Marketing Machine” on October 13th at 9:05 am PT (6:05 pm CET).

While west coasters will have to wake-up early to attend some of this event, the overall agenda looks great with a strong speaker line-up including:

  • Founders of companies including Aircall, Amplifyi, Capchase, Chargebee, Clumio, Gainsight, Pitch, Panintelligence, Personio, Productboard, Profitwell, Slack, and Talkdesk.
  • Executives from companies including Algolia, AWS, Celigo, Contentful, Freshworks, Intercom, Yellowfin, Zephr, and Zoominfo.
  • VCs from partnerships including Accel, Index, Point Nine, Seedcamp, Sequoia, and of course, Balderton.

The event runs for 3 days (Oct 12 – 14), about 4 hours every day starting at 5:30 am PT (2:30 pm CET).  Check out the full schedule here.

With a 20-minute slot, I had one of two angles to take on my topic, How To Build a Marketing Machine.

  • I could emphasize “marketing,” and attempt a warp-speed, how-to session that in reality should take 60-90 minutes at any normal pace.
  • I could emphasize “machine,” and focus on what people mean why they say “marketing machine” and how to build one.  This is the angle I decided to take.

As such, we’ll discuss the following topics in the sure-to-be still, fast-paced session.

  • What is a marketing machine?
  • How do we model it?
  • How do we measure it?
  • What are its key attributes?
  • How should it function?
  • Why it should be built in layers

It should be a fun and informative session.  Look forward to seeing you there!

The Triangle of Director Protections: D&O Insurance, Indemnification Agreements, and Charter Provisions

A corporate lawyer friend once told me to think about director protections as a triangle with three legs [1]:

  • D&O insurance, which stands for directors and officers insurance (and with which most people are familiar)
  • Indemnification agreements (with which some people are familiar)
  • Charter provisions (with which it seems almost nobody is familiar)

Why does this matter?  If you want to attract strong, experienced individuals to your board of directors, they are going to ask your company to provide reasonable and standard protections from potential liability associated with that work [2] [3].  The same holds true for corporate executive officers, though they are often less aware of the exposure.

And, by the way, as a founder/CEO you should want to protect yourself.

My goals for this post are to:

  • Put this topic on your radar, framed not just as “D&O insurance” but the “whole package” of director protections (i.e., the “triangle”)
  • Share what I’ve learned as a brief introduction and provide links to more authoritative posts (e.g., from law firms)
  • Remind you to seek legal counsel in addressing director and officer protections because the topic gets complicated fast, as the embedded links below demonstrate.

D&O Insurance
Most startups purchase some sort of D&O insurance fairly early in their evolution; VCs often require it.  Per this The Hartford post, “D&O insurance protects the personal assets of corporate directors and officers, and their spouses, in the event they are personally sued by employees, vendors, competitors, investors, customers, or other parties, for actual or alleged wrongful acts in managing a company.”

Woodruff Sawyer outlines Eight Reasons Private Companies Should Buy D&O Insurance:

  • Attracting new directors
  • VC requirements
  • Emerging risks
  • Regulatory exposures
  • Bankruptcy
  • M&A
  • Shareholder lawsuits
  • IPO considerations

Per this site, startups typically purchase between $1M and $3M in coverage and the median annual cost of a policy is $3,800 for companies having raised <$5M, $9,600 for those having raised between $5M and $20M, and $17,000 for those having raised >$20M.

Despite the acronym proximity, D&O should not be confused with E&O (errors and omissions) insurance, which protects your company from lawsuits claiming mistakes in professional services, and which many startups also often purchase.  Beyond the scope of this post, Silicon Valley Bank has a nice overall startup insurance primer, Everything Founders Should Know about Protecting Their Property, that also discusses business property and general liability insurance, employment practices liability insurance (EPLI), and with links to other types of commonly purchased insurance.

Indemnification Agreements
In my experience, indemnification agreements are important, but generally less well understood than D&O insurance.

Let’s start with defining indemnification.  Per this Cornell Law site:

To indemnify another party is to compensate that party for losses that that party has incurred or will incur as related to a specified incident.

So, in our context, indemnification means that if a director is sued as a result of their work with the company that the company will compensate them for any losses they sustain as a result.

An indemnification agreement is a contract that specifies that, provided the director meets a minimum standard of conduct (e.g., acted in good faith, acted in a manner reasonably believed to be in the company’s best interests, had no reasonable cause to believe they were acting illegally), the company will defend the director against the cost of certain claims, including legal fees, litigation awards, and settlement costs [4].  For an example, see this model indemnification agreement from The National Venture Capital Association (NVCA) [5], which provides a detailed introduction in its preface as well as detailed in-line comments.

As with all things legal, the devil’s in the detail on indemnification agreements.  Some of the bigger issues include:

  • Advancing expenses.  There’s paying your costs at the end of the process and then there’s paying them along the way.  To understand the need, imagine a case that costs $250K to defend over four years.
  • Specific circumstances.  In the indemnification mandatory or permitted?  Does it apply to all claims or only certain types?  What are the procedures and default presumptions to determine if the director is entitled to indemnification on any given case?
  • Duration.  Is the indemnification only for active directors? What if a director no longer serves on the board, but is sued in a claim related to work done in the past when they were active?
  • Choice of counsel.  If the company’s paying, does it get to pick the law firm?  What if the director wants to hire the most expensive firm in town?
  • Pathological cases.  I’m not 100% sure about this one, but I love corner cases so — what if the company is suing the director?  Does it have to indemnify them in that case as well?

When it comes startups, it’s important to remember the Achilles’ heel of indemnification: an indemnification agreement is only as good as the company’s ability to pay.  In situations where a startup goes “cash out” (as in, out of cash), that ability is zero.  Hence the need for the full triangle of director protections, including D&O insurance.

Charter Provisions
The last leg of our triangle is Charter provisions.  A corporate Charter, also known as a company’s Articles of Incorporation, is a document that establishes the existence of a corporation, is filed with the government, and that lays out the major components of a company including its objectives, structure, and planned operations.

When it comes to director protection, I believe the best practice is for the Charter to contain both (a) exculpatory charter provisions that limit or eliminate directors’ personal monetary liability and, (b) indemnification language that says the company will provide directors with the fullest indemnification allowed by law (e.g., “indemnification to the fullest extent permitted by [Delaware] law.”)

Apparently, a certain amount of indemnification is automatically provided by statute (in some states) and the “fullest indemnification allowed by law” language supplements that where necessary, allowing any specific indemnification agreements to kick in [6].  I know this point is technical, but I also know that the corporate lawyers with whom I’ve worked emphasize that D&O alone is not enough, you need to look at the whole triangle of director protections — and that Charter provisions are one leg of that triangle.

I hope you enjoyed this rather in-depth primer and that I successfully put this issue on your radar.  If you’re unsure about where your company stands on director (and officer) protection, you should give your lawyers a call.  I’m sure they’d love to hear from you.

List of Best Links I Found
I did a lot of web surfing to support this post.  Many of the pieces I found were not focused on a given subtopic, but the whole thing.  That’s good to the extent my primary argument is “look at the whole package,” but it was bad for my hyperlinking because it was, e.g., hard to find articles that discussed indemnification agreements without also discussing charter provisions.  Ergo, I recommend using control-F to scan through these articles if you are looking for one specific topic of interest.  In rough order of accessibility:

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Notes

[1]  I am not a lawyer; just a business person doing his best to try and figure things out and share what I’ve learned along the way.  See my FAQ and the blog’s license agreement for additional disclaimers as well.

[2] I am writing about for-profit enterprises, though those interested in non-profit boards also face potential liability issues.

[3] I have skin the game here; I serve on the board of directors of several companies.

[4] There is an argument that startup executive officers who are not directors should also have an indemnification clause in their employment agreement.  See your lawyer for more.

[5] The NCVA provides a great collection of model legal documents, including a voting agreement, a term sheet, a stock purchase agreement, and many others.

[6] I am at/beyond my legal depth here.  All I know is you should ask your lawyer what needs to in the Charter to provide for maximum director protection.  See the Skadden Arps two-part series linked above for more detail on this specific topic.

Appearance on the “Yes, And Marketing” Podcast

A few days ago, Steve Pockross released a new episode of his Yes, And Marketing podcast on which he interviews a series of “eclectic and enlivening” marketers where “your weird shower thoughts and disparate liberal arts references take a road trip.” I was last week’s featured guest, and I don’t think the episode fails to deliver on its rather unusual promise.

Steve posted a nice summary of the session which lays out the topics we discussed including:

  • A rambling introduction where we talked about the Grateful Dead as related to marketing and business models, the philosophy of math and Russell’s paradox, the linkage between mysticism and quantum mechanics, the art of the proper French dinner, an unlikely similarity between geophysics and marketing (inverse problems), the quote from A Christmas Carol that most applies to upwardly mobile CMOs (“mankind was my business”), Gad Elmaleh, The Three-Body Problem trilogy, and stuff like that.
  • Imposing simplicity, a critical duty for all marketers
  • The two archetypal marketing messages, Bags Fly Free and Soup is Good Food.
  • Long vs. short copy and how to correctly apply David Ogilvy’s “long copy sells” adage.
  • Content marketing, and when to write C+ deliverables vs. A+ deliverables, and how to be explicit about that in planning.  (Lest you end with straight Bs.)
  • What to look for in a CMO for a startup, particularly if they’re potentially joining from a large company and you’re worried they may struggle in a startup environment.
  • Aligning sales and marketing, a perennial favorite topic, but this time both from the CMO and the individual marketer perspective.
  • The importance of rigorous definitions in messaging, and how you can use them to turn gray messages into black-and-white messages.
  • Walking the benefits stack by repeatedly asking “so what?” and not being afraid to do so.
  • Never forgetting the kiss, i.e., the ultimate benefit from the point of view of the customer, in your marketing.

Thanks to Steve for having me, to Crispin Read for referring me (his episode is well worth a listen), and to all of you who find the time to listen.  While I’ve been doing a  lot of podcast interviews of late, like the Grateful Dead, I promise that each show is different.  And this one’s a barn burner.

“The Board Brought Me In” Telltale

There’s only one executive who should ever say, “the board brought me in,” and that is the chief executive officer (CEO).  Yet, you’d be surprised how often you hear other executives — chief revenue officers (CROs), chief marketing officers (CMOs), chief product officers (CPOs), and most often chief financial officers (CFOs) — say, “the board brought me in.”

It usually comes up in an interview, with a candidate running through their background.

“Well, I was at XYZ-Co, and things were going great, but at PDQ-Co they needed some help, so the board brought me in to help get things back on track.”

A+ on storytelling, but (usually a) C- on reality attachment.  “And where,” methinks, “was the CEO during all this board bringing in and such?”

(And if things really were going so well at XYZ-Co, tell me why’d you jump ship to do a fixer-upper at PDQ-Co again?)

I always view “the board brought me in” language as a telltale.  Of what, I’m not entirely sure, but it’s usually one of these things:

  • Self-aggrandizement.  Sometimes, it’s just the candidate trying to sound larger-than-life and they think it sounds good to say, “the board brought me in.”  In this case, the candidate’s judgement and credibility come into question.
  • Innocent miscommunication.  Perhaps the candidate knew an existing board member and was referred into the position by them.  OK, I suppose technically they could think, “the board brought me in,” but didn’t the CEO interview them and make the final call?  Did the board really bring them in — as in, against the CEO’s wishes?  Maybe it’s just old-fashioned communications confusion.  Maybe.
  • Genuine confusion.  Or, perhaps the candidate is under the illusion that they somehow work for the board and not the CEO.  This can happen with CFOs in particular because, unlike all other CXOs, there is something of a special relationship between the board and the CFO.  But in tech startups, in my humble opinion, the CFO works for the CEO, period — not for the board.  They may have a special relationship with the board, they may meet with the board without the CEO being present (e.g., audit committees).  But they work for the CEO.  If you feel differently, great.  If you feel like I do — best to use this as a telltale of a potentially huge problem downstream.
  • A placeholder CEO.  There is always some chance the CEO is somehow a placeholder (e.g., a founder who’s lost all but positional power in the organization and acting in some lame duck capacity).  In this case, the CXO in question might just be saying the truth — perhaps the board really did bring them in.  But then the candidate’s going to need to explain why they jumped into such a mess [1].

I’m sure there are other possibilities as well.  But the main point of this post is to say that your ears should perk up every time you hear a CXO [2] candidate say, “the board brought me in.”  Mine do.

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Notes

[1] And I suspect the most common answer will be, “and they were planning to make me CEO in X months once they worked on the transition.”  In which case, I’d want to understand why the candidate is so trusting (or naïve), what written assurances were given, and why they would take a CXO job with a dubious call option on CEO as opposed to taking a straight-up CEO job.  (To which the best, but still somewhat unfortunate, answer is — it was the only available path I had at the time.)

[2] For all values of X != E.