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On Recruiting: The Must-Have / Nice-to-Have List

I’m amazed by the number of times I see companies performing searches, even for key positions, without a clear idea of what they’re looking for.  Rephrasing Lewis Carroll, “if you don’t know what you’re recruiting for, any candidate looks great.”

lewis

I liken executive recruiters to Realtors.  If you don’t give a Realtor specific guidance on what you want to see, they’ll show you whatever’s on the market.  Moreover, even if you do tell a Realtor that you want a 4-bedroom on a cul de sac with great schools, you are likely to end up visiting a 3-bedroom “charmer” on a main thoroughfare that they just had to show you because it has a certain “je ne sais quoi.”  That know-not-what, by the way, is that it’s for sale.

This is a moment of truth for your relationship with your Realtor because if you do not say “if you show me another house that doesn’t meet my must-have criteria I’ll be working with another Realtor,” then three years hence you’ll be wondering, to the sound of passing traffic, why you live in a 3-bedroom and the kids are in private school.

Let’s stick with the house metaphor.  It’s actually fairly easy to make a list of criteria.  Make a two-column list, with one column titled “Must Have” and the other “Nice to Have.”  (One way things go wrong is when you mix up the two.)

Must Have Nice to Have
4 bedrooms Hot tub
3 baths Ranch (one level)
Quarter-acre lot Half-acre lot
Great schools (K-12) Less than 20 years old
No swimming pool Walk to downtown
$1.0 to $1.5M price

This process has a number of advantages:

  • It forces you and your spouse to discuss what you really want.  What’s truly a must-have vs. a nice-to-have criteria?  You might be surprised.
  • It provides a crystal-clear basis of communication with your Realtor.
  • If you provide the list before engaging with Realtor, they have the chance to refuse the business if they think your criteria are unrealistic, e.g., given your price point.
  • Once engaged, it gives you the basis for holding the Realtor accountable for showing you only what you want to see.

Let’s switch to executive recruiting.  What do we typically find in an executive job specification?  This is excerpted from a real CEO spec:

The ideal candidate will be or have:

  • A track record in building and leading high-performance teams
  • Confidence to interact with and inspire belief from present and future investors
  • The ability to articulate and define relevant methodology
  • An excellent communicator, effective in front of Customers, Employees, Analysts
  • Sound judgment and maturity
  • A leader who recognizes and respects talent outside of his/her own and recruits that talent to work close to and complement him/her within the company
  • Unquestionable integrity
  • Organizational tolerance:  ability to work with fluidity and ambiguity

That ambiguity tolerance starts right with this spec.  Think for a minute:

  • Are these as clear as our house spec?  A track record for how long, two quarters or ten years?
  • Are they measurable in any way?   How do I know if they respect talent outside their own or have sound judgement?
  • Are they well thought out?  (“There, I just questioned your integrity. We’re done.”)
  • Are they specific?  Which relevant methodology should they be able to define?

Compared to our house criteria, this is a mess.  And there are 17 more bullets.

How does this happen?  It’s just a tradition in executive recruiting; these sorts of specs get created. These bullets were probably selectively copied and pasted from other specs by an associate at the search firm.  While the selection was likely based a conversation with the company about what they want, it’s clear that nobody did any hard thinking about what they really needed.

A big clue that they have no must-have criteria is this “ideal candidate” nonsense.  Our house spec didn’t say “the ideal house will have” and then describe some fantasy house we can never afford.  We decided what the house must have, and then added some things that would be nice to have as well.

Let’s make an example of what an must-have / nice-to-have list could look like for an EVP of Sales at $50M startup.  This list makes a lot of assumptions about company needs and is far from perfect.  But it’s a heck of a lot better than the bullets above.

Must Have Nice to Have
Previously led all sales at an enterprise SaaS startup as it grew from $50M to $100M in ARR Knowledge of the CRM space
Has previously established detailed operational metrics and processes to run a velocity sales model Ability to quickly recruit a strong VP of salesops
A network including top reps and regional managers that can be  immediately recruited Prior experience creating and growing a sales enablement  function with onboarding and certification
At least 3 years’ experience managing international sales Prior experience selling or managing outside of North America
At least 5 years’ experience managing a three-level sales organization with at least 50 sellers Early-career experience in a technical or pre-sales role
Demonstrated compatibility with the organization’s culture and values Technical undergraduate degree plus MBA

What’s most important is that the process of making this list — writing it down, talking to peers about it, sharing it with the board, discussing it with prospective search firms — will clarify your own thinking and help you build consensus around precisely who is needed to do the job.

Otherwise, you’ll just get an “athlete” that the recruiter had in inventory.

Why I’m Advising Cyral

When I sign up to advise a company, I’ll often do a post to let readers know and discuss the reasons why I like the company.  This post is about Cyral, a cloud data security company I’m advising that I’ve been talking with for over a year.

Earlier this year, Cyral announced an $11M series A led by Redpoint, Costanoa, and others.  That was on top of a $4.1M in angel seed financing, bringing the total invested capital to $15.1M.

Cyral_logo_for_web.e28367f0

Cyral does cloud data security.  I indirectly referred to the company in my 2020 Predictions post, where I talked about a new, data-layer approach to security.  Cyral acts as a database proxy on top of every data endpoint in your data layer, watching all the traffic, figuring out (via machine-learning) what is normal, detecting what is not, and either alerting or stopping threats in real-time as they occur.

I remember when I first met co-founder Manav Mital at Peet’s Coffee to discuss the company.  He was surprised that I actually understood a thing or two about databases [1], which was fun. During the meeting a light-bulb went off in my head:  why were data breaches always measured megarows or terarows (hundreds of millions to billions of rows) as opposed say rows or kilorows?  Can’t we stop these things while they’re going down?

I initially viewed Cyral as a next-generation data loss prevention (DLP) company because I thought DLP was about stopping security problems in real-time.  But DLP was more about content than data, more about classification than anomaly detection, and more about business rules than machine learning.  DLP could do things like detect email attachments that contained source code and intercept an outbound email with such an attachment.  It had nothing to do with monitoring traffic to the data endpoints in a company’s both on-premise and (increasingly) cloud data layer, providing visibility into activity, fine-grained data access control, and real-time protection against data exfiltration.  That’s Cyral.

Here are some of the reasons I decided to work with the company.

  • Manav is not only a great guy and (a fellow) member of the illustrious Aster Data mafia [2], he is a second-time entrepreneur, having co-founded Instart Logic, which raised $140M from a top set of investors and built a strong business before eventually hitting hard times in the highly competitive CDN space, ultimately being acquired by Akamai.  It’s great to work with Manav because he has the wisdom from both his successes and his failures on his nearly decade-long journey at Instart.

 

  • I think security is a race without a finish line and thus a great and growing market space.  In addition to data-layer anomaly detection, Cyral provides fine-grained access control in a world where too many applications defeat security using shared data-layer logins.  Cyral can distinguish different users even if they’re coming into the database through the same username/password.  What’s more, Cyral provides more than just security, it provides insight by giving you visibility into who’s doing what.

 

  • New cloud data endpoints from Snowflake to Redshift to Kafka introduce complexity that breaks traditional approaches to security.  The old approach to security was largely about building a strong perimeter.  In a hybrid cloud world, that mixes traditional and cloud data sources, there is no perimeter to defend.  The perimeter is dead, long live data-layer security!

 

When talent meets opportunity, great things can happen.

# # #

Notes

[1] Having worked in technical support at Ingres (RDBMS), as VP of Marketing at Versant (ODBMS), as CMO at BusinessObjects (a BI tool, but with an embedded micro-multidimensional DBMS), as CEO at MarkLogic (XML DBMS), as board member at Aster Data (SQL/MapReduce DBMS), advisor to MongoDB (document-oriented DBMS),  and as CEO of Host Analytics (which included a multidimensional modeling engine) well, heck, you think I might have picked something up.

[2] Aster Data was an amazing well of entrepreneurship and the success of its mafia is an untold story in Silicon Valley.  A large number of companies, some of them amazingly successful, were founded by Aster Data alumni including:  ActionIQ, Arcadia Data, ClearStory, Cohesity, DataHero, Imanis Data, Instart Logic, Level-Up Analytics, Moveworks, Nutanix, The Data Team, ThoughtSpot, and WorkSpan.

 

Should Customer Success Report into the CRO or the CEO?

The CEO.  Thanks for reading.

# # #

I was tempted to stop there because I’ve been writing a lot of long posts lately and because I do believe the answer is that simple.  First let me explain the controversy and then I’ll explain my view on it.

In days of yore, chief revenue officer (CRO) was just a gussied-up title for VP of Sales.  If someone was particularly good, particularly senior, or particularly hard to recruit you might call them CRO.  But the job was always the same:  go sell software.

Back in the pre-subscription era, basically all the revenue — save for a little bit of services and some maintenance that practically renewed itself — came from sales anyway.  Chief revenue officer meant chief sales officer meant VP of Sales.  All basically the same thing.  By the way, as the person responsible for effectively all of the company’s revenue, one heck of a powerful person in the organization.

Then the subscription era came along.  I remember the day at Salesforce when it really hit me.  Frank, the head of Sales, had a $1B number.  But Maria, the head of Customer Success [1], had a $2B number.  There’s a new sheriff in SaaS town, I realized, the person who owns renewals always has a bigger number than the person who runs sales [2], and the bigger you get the larger that difference.

Details of how things worked at Salesforce aside, I realized that the creation of Customer Success — particularly if it owned renewals — represented an opportunity to change the power structure within a software company. It meant Sales could be focused on customer acquisition and that Customer Success could be, definitionally, focused on customer success because it owned renewals.  It presented the opportunity to have an important check and balance in an industry where companies were typically sales-dominated to a fault.  Best of all, the check would be coming not just from a well-meaning person whose mission was to care about customer success, but from someone running a significantly larger amount of revenue than the head of Sales.

Then two complications came along.

The first complication was expansion ARR (annual recurring revenue).  Subscriptions are great, but they’re even better when they get bigger every year — and heck you need a certain amount of that just to offset the natural shrinkage (i.e., churn) that occurs when customers unsubscribe.  Expansion take two forms

  • Incidental:  price increases, extra seats, edition upsells, the kind of “fries with your burger” sales that are a step up from order-taking, but don’t require a lot of salespersonship.
  • Non-incidental:  cross-selling a complementary product, potentially to a different buyer within the account (e.g., selling Service Cloud to a VP of Service where the VP of Sales is using Sales Cloud) or an effectively new sale into different division of an existing account (e.g., selling GE Lighting when GE Aviation is already a customer).

While it was usually quite clear that Sales owned new customer acquisition and Customer Success owned renewals, expansion threw a monkey wrench in the machinery.  New sales models, and new metaphors to go with them, emerged. For example:

  • Hunter-only.  Sales does everything, new customer acquisition, both types of expansion, and even works on renewals.  Customer success is more focused on adoption and technical support.
  • Hunter/farmer.  Sales does new customer acquisition and non-incidental expansion and Customer Success does renewals and incidental expansion.
  • Hunter/hunter.  Where Sales itself is effectively split in two, with one team owning new customer acquisition after which accounts are quickly passed to a very sales-y customer success team whose primary job is to expand the account.
  • Farmers with shotguns.  A variation of hunter/hunter where an initial penetration Sales team focuses on “land” (e.g, with a $25K deal) and then passes the account to a high-end enterprise “expand” team chartered with major expansions (e.g., to $1M).

While different circumstances call for different models, expansion significantly complicated the picture.

The second complication was the rise of the chief revenue officer (CRO).  Generally speaking, sales leaders:

  • Didn’t like their diminished status, owning only a portion of company revenue
  • Were attracted to the buffer value in managing the ARR pool [3]
  • Witnessed too many incidents where Customer Success (who they often viewed as overgrown support people) bungled expansion opportunities and/or failed to maximize deals
  • Could exploit the fact that the check-and-balance between Sales and Customer Success resulted in the CEO getting sucked into a lot of messy operational issues

On this basis, Sales leaders increasingly (if not selflessly) argued that it was better for the CEO and the company if all revenue rolled up under a single person (i.e., me).  A lot of CEOs bought it.  While I’ve run it both ways, I was never one of them.

I think Customer Success should report into the CEO in early- and mid-stage startups.  Why?

  • I want the sales team focused on sales.  Not account management.  Not adoption.  Not renewals.  Not incidental expansion.  I want them focused on winning new deals either at new customers or different divisions of existing customers (non-incidental expansion).  Sales is hard.  They need to be focused on selling.  New ARR is their metric.
  • I want the check and balance.  Sales can be tempted in SaaS companies to book business that they know probably won’t renew.  A smart SaaS company does not want that business.  Since the VP of Customer Success is going to be measured, inter alia, on gross churn, they have a strong incentive call sales out and, if needed, put processes in place to prevent inception churnThe only thing worse than dealing with the problems caused by this check and balance is not hearing about those problems.  When one exec owns pouring water into the bucket and a different one owns stopping it from leaking out, you create a healthy tension within the organization.
  • They can work together without reporting to a single person.  Or, better put, they are always going to report to a single person (you or the CRO) so the question is who?  If you build compensation plans and operational models correctly, Customer Success will flip major expansions to Sales and Sales will flip incidental expansions back to Customer Success.  Remember the two rules in building a Customer Success model — never pair our farmer against the competitor’s hunter, and never use a hunter when a farmer will do.
  • I want the training ground for sales.  A lot of companies take fresh sales development reps (SDRs) and promote them directly to salesreps.  While it sometimes works, it’s risky.  Why not have two paths?  One where they can move directly into sales and one where they can move into Customer Success, close 12 deals per quarter instead of 3, hone their skills on incidental expansion, and, if you have the right model, close any non-incidental expansion the salesrep thinks they can handle?
  • I want the Customer Success team to be more sales-y than support-y.  Ironically, when Customer Success is in Sales you often end up with a more support-oriented Customer Success team.  Why?  The salesreps have all the power; they want to keep everything sales-y to themselves, and Customer Success gets relegated to a more support-like role.  It doesn’t have to be this way; it just often is.  In my generally preferred model, Customer Success is renewals- and expansion-focused, not support-focused, and that enables them to add more value to the business.  For example, when a customer is facing a non-support technical challenge (e.g., making a new set of reports), their first instinct will be to sell them professional services, not simply build it for the customer themselves.  To latter is to turn Customer Success into free consulting and support, starting a cycle that only spirals.  The former is keep Customer Success focused on leveraging the resources of the company and its partners to drive adoption, successful achievement of business objectives, renewals, and expansion.

Does this mean a SaaS company can’t have a CRO role if Customer Success does not report into them?  No.  You can call the person chartered with hitting new ARR goals whatever you want to — EVP of Sales, CRO, Santa Claus, Chief Sales Officer, or even President/CRO if you must.  You just shouldn’t have Customer Success report into them.

Personally, I’ve always preferred Sales leaders who like the word “sales” in their title.  That way, as one of my favorites always said, “they’re not surprised when I ask for money.”

# # #

[1] At Salesforce then called Customers for Life.

[2] Corner cases aside and assuming either annual contracts or that ownership is ownership, even if every customer technically isn’t renewing every year.

[3] Ending ARR is usually a far less volatile metric than new ARR.

The Zero-Sum Fallacy: ARR vs. Services

Some SaaS startups develop a form of zero-sum delusion early in their evolution, characterized by following set of beliefs.  Believing that:

  • A customer has a fixed budget that is 100% fungible between ARR (annual revenue revenue) and services
  • It is in the company’s best interest to turn as much of the customer’s budget as possible into ARR
  • Customers never think to budget implementation services separately from annual software licensing
  • A $25K StartFast offering that walks through a standard checklist is everything a customer needs for a successful implementation
  • If the StartFast doesn’t work, it’s not a big deal because the Customer Success team’s mission is to offer free clean-up after failed implementations
  • Since the only thing consultants do is implementations, their job title should be “Implementation Consultant”
  • Any solutions practices or offerings should be built by our partners
  • The services team should be introduced as late as possible in the sales cycle; ideally after contract signing, in order to eliminate the chance a post-sales consultant will show up, tell the customer “the truth,” and ruin a deal
  • It is impossible and/or not meaningful to create and run a separate services P&L
  • The need for services is a reflection of failure on the part of the product (even in an enterprise setting)

Zero-sum delusion typically presents with the following metrics:

  • Services being less than 10% of total company revenues
  • Services margins running in the negative 20% to negative 60% range
  • High churn on one-year deals (often 25% or higher) due to failed implementations
  • Competitors winning bigger deals both on the ARR and services side (and associated internal confusion about that)
  • Loss reports indicating that prospects believed the competition “understood our problem better” and acted “more like a partner than a vendor”

Zero-sum delusion is a serious issue for an early-stage SaaS business.  It is often acquired through excess contact with purely financial venture capitalists.  Happily, with critical thinking and by challenging assumptions, it can be overcome.

zerosum

OK, let’s switch to my normal narrative mode and discuss what’s going on here.  First, some SaaS companies deliberately run with a low set-up product, little to no services, and a customer success team that takes care of implementation issues.  Usually these companies sell inexpensive software (e.g., ARR < $25K), use a low-touch sales model, and focus on the small and medium business market [1].  If delivering such an offering is your company’s strategy then you should disregard this post.

However, if your strategy is not to be a low-touch business model disruptor, if you do deals closer to $250K than $25K, if your services attach rate [2] is closer to 10% than 40%, if you consider yourself a somewhat classic enterprise SaaS vendor — basically, if you solve big, hard problems for enterprises and expect to get paid for it — then you should read this post.

Let’s start with a story.  Back in the day at Business Objects, we did a great business grinding out a large number of relatively small (but nevertheless enterprise) deals in the $100K to $200K range.  I remember we were working a deal at a major retailer — call them SeasEdge — against MicroStrategy, a self-funded competitor bootstrapped from a consulting business.

SeasEdge was doing a business intelligence (BI) evaluation and were looking to use BI to improve operational efficiency across a wide range of retail use cases, from supply chain to catalog design.  We had a pretty formulaic sales cycle, from discovery to demo to proposal.  We had financials that Wall Street loved (e.g., high gross margins, a small services business, good sales efficiency) so that meant we ran with a high salesrep-to-SE (sales engineer) ratio and a relatively small, largely tactical professional services team. I remember hearing our sales team’s worries that we were under-servicing the account — the salesrep had a lot of other active opportunities and the SE, who was supporting more than two salesreps, was badly overloaded.  Worse yet, MicroStrategy was swarming on the account, bringing not only a salesrep and an SE but about 5 senior consultants to every meeting.  Although they were a fraction of our size, they looked bigger than we did in this account.

SeasEdge taught me the important lesson that the deal you lose is not necessarily the deal your competitor wins.  We lost a $200K query-and-reporting (Q&R) deal.  MicroStrategy won a $4M retail transformation deal.  We were in the business of banging out $200K Q&R deals so that’s what we saw when we looked at SeasEdge.  MicroStrategy, born from a consultancy, looked at SeasEdge and saw a massive software and services, retail transformation opportunity instead.

I understand this is an extreme example and I’m not suggesting your company get in the business of multi-million dollar services deals [3].  But don’t miss the key lessons either:

  • Make sure you’re selling what the customer is buying.  We were selling Q&R tools.  They were buying retail transformation.
  • People may have more money than you think.  Particularly, when there’s a major business challenge.  We saw only 5% of the eventual budget.
  • A strong professional services organization can help you win deals by allowing you to better understand, more heavily staff, appear more as a partner in, and better solve customer problems in sales opportunities.  Internalize:  a rainmaker professional services leader is pure gold in sales cycles.
  • While partners are awesome, they are not you.  Once in a while, the customer wants “one throat to choke” and if you can’t be that throat then they will likely buy from someone who can.

I call this problem zero-sum delusion because I think the root cause is a fallacy that a zero-sum trade-off exists between ARR and professional services.  The fallacy is that if a customer has only $250K to spend, we should get as much of that $250K as possible in ARR, because ARR recurs and professional services doesn’t [4].  The reality is that most customers, particularly when you’re selling to the information technology (IT) organization, are professional buyers — this isn’t their first rodeo, they know that enterprise software requires professional services, and they budget separately for it.  Moreover, they know that a three-year $250K ARR deal represents a lot of money for their company and they darn well want the project associated with that investment to be successful — and they are willing to pay to ensure that success.

If you combine the zero-sum fallacy with purely financial investors applying pressure to maximize blended gross margins [5] and the fantasy that you can somehow run a low-touch services model when that isn’t actually your company and product strategy, you end up with a full-blown case of zero-sum delusion.

Curing the Zero-Sum Delusion

If your organization has this problem, here are some steps you can take to fix it.

  • Convince yourself it’s not zero sum.  Interview customers.  Look at competitors.  Look at you budget in your own company.  Talk to consultants who help customers buy and implement software.  When you do, you will realize that customers know that enterprise software requires services and they budget accordingly.  You’ll also understand that customers will happily pay to increase the odds of project success; buying quality services is, in effect, an insurance policy on the customer’s job [6].
  • Change your negotiation approach.  If you think it’s zero sum, you’ll create a self-fulfilling prophecy in negotiation.  Don’t frame the problem as zero sum.  Negotiate ARR first, then treat that as fixed.  Add the required services on top, negotiating services not as a zero-sum budget trade-off against ARR, but as a function of the amount of work they want done.  I’ve won deals precisely because we proposed twice the services as our competition because the customer saw we actually wanted to solve their problem, and not just low-ball them on services to sell subscription.
  • Change sales’ mental math.  If you pay salesreps 12% on ARR and 2% on services, if your reps have zero-sum delusion they will see a $250K ARR, $100K services deal as $5K to $10K in lost commission [7].  Per the prior point we want them to see this as a $30K ARR commission opportunity with some services commissions on top — and the higher the services commissions the higher the chance for downstream upsell.  Moreover, once they really get it, they see a 50% chance of winning a 250/25 deal, but a 80% chance of winning a 250/100 deal.  An increase in expected value by over $10K.
  • Put a partner-level, rainmaker leader in charge of your services organization and each region of it.  The lawyer who makes partner isn’t the one with the best legal knowledge; it’s the one with the biggest book of business.  Adopt that mentality and run your services business like, well, a services business.
  • Create a services P&L and let your VP of Services fully manage it.  They will know to get more bookings when the forecast is light. They will increase hiring into a heavy forecast and cut weak performers into a light forecast.  They know how to do this.  Let them.
  • Set your professional services gross margin target at 5-10%.  As an independent business it can easily run in the 30-40% range. As a SaaS adjunct you want services to have time to help sales, time to help broken customers (helping renewals), time to enable partners, and the ability to be agile.  All that costs you some margin.  The mission should be to maximize ARR while not losing money.
  • Constrain services to no more than 20% of revenue.  This limits the blended gross margin impact, is usually fine with the board, keeps you well away from the line where people say “it’s really a services firm,” usually leaves plenty of room for a services partner ecosystem, and most importantly, creates artificial scarcity that will force you to be mindful about where to put your services team versus where to put a partner’s.
  • Force sales to engage with services earlier in the sales cycle.  This is hard and requires trust.  It also requires that the services folks are ready for it.  So wait until the rainmakers in charge have trained, retrained, or cleared people and then begin.  It doesn’t take but a few screw-ups to break the whole process so make sure services understand that they are not on the sales prevention team, but on the solving customer problems team.  When this is working, the customer buys because both the VP of Sales, and more importantly, the VP of Services looked them in the eye and said, “we will make you successful” [8].
  • Outplace any consultant who thinks their mission is “tell the truth” and not help sales.  Nobody’s saying that people should lie, but there is a breed of curmudgeon who loves to “half empty” everything and does so in the name of “telling the truth.”  In reality, they’re telling the truth in the most negative way possible and, if they want to do that, and if they think that helps their credibility, they should go work at independent services firm [9].  You can help them do that.
  • Under no circumstances create a separate services sales team — i.e., hire separate salespeople just to sell services [10]. The margins don’t support it and it’s unnecessary.  If you have strong overall and regional leadership, if those leaders are rainmakers as they should be, then there is absolutely zero reason to hire separate staff to sell services.

# # #

Notes

[1] Yes, they can eventually be enterprise disruptors by bringing this low-touch, cheap-and-cheerful approach to the enterprise (e.g., Zendesk), but that’s not the purpose of this post.

[2] Services attach rate is the ratio of professional services to ARR in a new booking.  For example, if you sell $50K of services as part of a $500K ARR deal, then your attach rate is 10%.

[3] We had neither that staffing levels nor the right kind of consultants to even propose, let alone take on, such an engagement.  The better strategy for us would have been to run behind a Big 4 systems integrator bidding who included our software in their proposal.

[4] Sales compensation plans typically reinforce this as well.  Remediating that is hard and beyond the scope of this post, but at least be aware of the problem.

[5] At the potential expense of maximizing ARR — which should be the point.

[6] If you think from the customer’s perspective.  Their job is to make sure projects succeed.  Bad things sometimes happen when they don’t.

[7] On the theory that the perfect deal, compensation wide, is 100% ARR.  Math wise, 0.12*250+0.02*100 = $32K whereas 0.12*350+0.02*0 = $42K.  More realistically, if they could have held services to $50K, you’d get 0.12*300+0.02*50 = $37K.  Note that this way of thinking is zero-sum and ignores the chance you can expand services while holding ARR constant.

[8] And, no offense, they believed the latter more than the former.  And they know the latter is the person on the hook to make it happen.

[9] Oh, but they want the stock-options upside of working at a vendor!  If that’s true, then they need to get on board and help maximize ARR while, yes, still telling the truth but in a positive way.

[10] Wanting to do so is actually a symptom of advanced zero-sum delusion.

How Startup CEOs Should Think About the Coronavirus, Part III — Useful Links

This post in part III in a series.  Part I covers the basics of employee communications.  Part II provides information on how several leading companies are handling the situation and offers specific thoughts on financial planning.  This part, a set of curated links that I have found useful, was formerly at the end of part II, but I figured it really should be a standalone post.

While I will try to prevent the list from getting too long, I will update this post from time to time as I find high-quality information resources.

Coronavirus Resources: Silicon Valley / Business Orientation

Coronavirus Resources: Authorities on Twitter

Coronavirus Resources: Public Health Agencies

 

The Most Important Chart for Managing the Pipeline: The Opportunity Histogram

In my last post, I made the case that the simplest, most intuitive metric for understanding whether you have too much, too little, or just the right amount of pipeline is opportunities/salesrep, calculated for both the current-quarter and the all-quarters pipeline.

This post builds upon the prior one by examining potential (and usually inevitable) problems with pipeline distribution.  If the problem uncovered by the first post was that “ARR hides weak opportunity count,” the problem uncovered by this post is that “averages hide uneven distributions.”

In reality, the pipeline is almost never evenly distributed:

  • Despite the salesops team’s best effort to create equal territories at the start of the year, opportunities invariably end up unevenly distributed across them.
  • If you view marketing as dropping leads from airplanes, the odds that those leads fall evenly over your territories is zero.  In some cases, marketing can control where leads land (e.g., a local CFO event in Chicago), but in most cases they cannot.
  • Tenured salesreps (who have had more time to develop their territories) usually have more opportunities than junior ones.
  • Warm territories tend to have more opportunities than cold ones [1].
  • High-activity salesreps [2] tend to have more opportunities than their more average-activity counterparts.

The result is that even my favorite pipeline metric, opportunities/salesrep, can be misleading because it’s a mathematical average and a single average can be produced by very different distributions.  So, much as I generally prefer tables of numbers to charts, here’s a case where we’re going to need a chart to get a look at the distribution.

Here’s an example:

oppty histo

Let’s say this company thinks its salesreps need 7 this-quarter and 16 all-quarters opportunities in order to be successful.  The averages here, shown by the blue and orange dotted lines respectively, say they’re in great shape — the average this-quarter opportunities/salesrep is 7.1 and the average all-quarters is 16.6.

But behind that lies a terrible distribution:  only 4 salesreps (reps 2, 7, 10, and 13) have more than 7 opportunities in the current quarter.  The other 11 are all starving to various degrees with 5 reps having 4 or fewer opportunities.

The all-quarters pipeline is somewhat healthier.  There are 8 reps above the target of 16, but nevertheless, certain reps are starving on both a this-quarter and all-quarters basis (reps 4, 11, 12, and 14) and have little chance at either short- or mid-term success.

Now that we can use this chart to highlight this problem, let’s examine the three ways to solve it.

  • Generate more opportunities, ideally in a super-targeted way to help the starving reps without further burying the loaded reps.  Sales loves to ask for this solution.  In practice, it’s hard to execute and inherently phase-lagged.
  • Reduce the number of reps.  If reps 4, 11, and 12 have been at the company for a long time and continuously struggled to hit their numbers, we can “Lord of the Flies” them, and reassign their opportunities to some of the surviving reps.  The problem here is that you’re reducing sales quota capacity — it’s a potentially good short-term fix that hurts long-term growth [3].
  • Reallocate opportunities from loaded reps to starving reps.  Sales management usually loathes this “Robin Hood” approach because there are few things more difficult than taking an opportunity from a sales rep.  (Think:  you can pry it from my cold dead fingers.)  This is a real problem because it is the best solution to the problem [4] — there is no way that reps 7 and 13 can actively service all their opportunities and the company is likely to be losing deals it could have won because of it [5].

You can download the spreadsheet for this post, here.

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Notes

[1] The distinction here is whether the territory has been continuously and actively covered (warm) vs. either totally uncovered or partially covered by another rep who did not actively manage it (cold).

[2] Yes, David C., if you’re reading this while doing a demo from the back seat of your car that someone else is driving on the NJ Turnpike, you are the archtype!

[3] It’s also a bad solution if they are proven salesreps simply caught in a pipeline crunch, perhaps after having had a blow-out result in the prior quarter.

[4] Other solutions include negotiating with the reps — e.g., “if you hand off these four opportunities I’ll uplift the commissions twenty percent and you’ll split it with salesrep I assign them to — 60% of something is a lot more than 100% of zero, which is what you’ll get if you can’t put enough time into the deal.”

[5] Better yet, in anticipation of the inevitable opportunity distribution problem, sales management can and should leave fallow (i.e., unmapped) territories, so they can do dynamic rebalancing as opportunities are created without enduring the painful “taking” of an opportunity from a salesrep who thinks they own it.

Do We Have Enough Pipeline? The One Simple Metric Many Folks Forget.

Pipeline is a frequently scrutinized SaaS company metric because it’s one of relatively few leading indicators in a SaaS business — i.e., indicators that don’t just tell us about the past but that help inform us about the future, providing important clues to our anticipated performance this quarter, next quarter, and the one after that.

Thus, pipeline gets examined a lot.  Boards and investors love to look at:

  • Aggregate pipeline for the year, and how it’s changing [1]
  • Pipeline coverage for the quarter and whether a company has the magical 3x coverage ratio that most require [2]
  • Pipeline with and without the high funnel (i.e., pipeline excluding stage 1 and stage 2 opportunities) [3]
  • Pipeline scrubbing and the process a company uses to keep its pipeline from getting inflated full of junk including, among other things, rolling hairballs.
  • Expected values of the pipeline that create triangulation forecasts, such as stage-weighted expected value or forecast-category-weighted expected value.

But how much pipeline is enough?

“I’ve got too much pipeline, I wish the company would stop sending so many opportunities my way”  — Things I Have Never Heard a Salesperson Say.

Some try to focus on building an annual pipeline.  I think that’s misguided.  Don’t focus on the long-term and hope the short-term takes care of itself; focus consistently on the short-term and long-term will automatically take care of itself.  I made this somewhat “surprised that it’s seen as contrarian” argument in I’ve Got a Crazy Idea:  How About We Focus on Next-Quarter’s Pipeline?

But somehow, amidst all the frenzy a very simple concept gets lost.  How many opportunities can a salesperson realistically handle at one time? 

Clearly, we want to avoid under-utilizing salespeople — the case when they are carrying too few opportunities.  But we also want to avoid them carrying too many — opportunities will fall through the cracks, prospect voice mails will go unreturned, and presentations and demos will either be hastily assembled or the team will request extensions to deadlines [4].

So what’s the magic metric to inform you if you have too little, too much, or just the right amount of pipeline?  Opportunities/salesrep — measured both this-quarter and for all-quarters.

What numbers define an acceptable range?

My first answer is to ask salesreps and sales managers before they know what you’re up to.  “Hey Sarah, out of curiosity, how many current-quarter opportunities do you think a salesrep can actually handle?”  Poll a bunch of your team and see what you get.

Next, here are some rough ranges that I’ve seen [5]:

  • Enterprise reps:  6 to 8 this-quarter and 12 to 15 all-quarters opportunities
  • Corporate reps:  10 to 12 this-quarter and 15 to 20 all-quarters opportunities

I’ve been in meetings where the CRO says “we have enough pipeline” only to discover that they are carrying only 2.5 current-quarter opportunities per salesrep [6].  I then ask two questions:  (1) what’s your close rate and (2) what’s your average sales price (ASP)?  If the CRO says 40% and $125K, I then conclude the average salesrep will win one (0.4 * 2.5 = 1), $125K deal in the quarter, about half a typical quota.  I then ask:  what do the salesreps carrying 2.5 current-quarter opportunities actually do all day?  You told me they could carry 8 opportunities and they’re carrying about a quarter of that?  Silence usually follows.

Conversely, I’ve been in meetings where the average enterprise salesrep is carrying close to 30 large, complex opportunities.  I think:  there’s no way the salesreps are adequately servicing all those deals.  In such situations, I have had SDRs crying in my office saying a prospect they handed off to sales weeks ago called them back, furious about the poor service they were getting [7].  I’ve had customers call me saying their salesrep canceled a live demo on five minutes’ notice via a chickenshit voicemail to their desk line after they’d assembled a room full of VIPs to see it [8].  Bad things happen when your salesreps are carrying too many opportunities.

If you’re in this situation, hire more reps.  Give deals to partners.  Move deals from enterprise to corporate sales.  But don’t let opportunities that cost the company between $2,000 and $8,000 to create just rot on the table.  As I reminded salesreps when I was a CEO:  they’re not your opportunities, they’re my opportunities — I paid for them.

Hopefully, I’ve made the case that going forward, while you should keep tracking pipeline on an ARR basis and looking at ARR conversion rates, you should add opportunity count and opportunity count / salesrep to your reports on the current-quarter and the all-quarters pipeline.  It’s the easiest and most intuitive way to understand the amount of your pipeline relative to your ability to process it.

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Notes

[1] With an eye to two rules of thumb:  [a] that annual starting pipeline often approximate’s this year’s annual sales and [b] that the YoY growth rate in the size of the pipeline predicts YoY growth rate in sales.

[2] Pipeline coverage = pipeline / plan.  So if you have 300 units of pipeline and a new ARR plan of 100 units, then you have 3.0x pipeline coverage.

[3] Though there’s a better way to solve this problem — rather than excluding early-stage opportunities that have been created with a placeholder value, simply create new opportunities with value of $0.  That way, there’s nothing to exclude and it creates a best-practice (at most companies) that sales can’t change that $0 to a value without socializing the value with the customer first.

[4] The High Crime of a company slowing down its own sales cycles!  Never forget the sales adage:  “time kills all deals.”

[5] You can do a rough check on these numbers using close rates and ASPs.  If your enterprise quota is $300K/quarter, your ASP $100K, and your close rate 33%, a salesrep will need 9 current-quarter opportunities to make their number.

[6] The anemic pipeline hidden, on an ARR basis, by (unrealistically) large deal sizes.

[7] And they actually first went to HR seeking advice about what to do, because they didn’t want “rat out” the offending salesrep.

[8] Invoking my foundational training in customer support, I listened actively, empathized, and offered to assign a new salesrep — the top rep in the company — to the account, if they’d give us one more chance.  That salesrep turned a deal that the soon-to-be-former salesrep was too busy to work on, into the deal of the quarter.