Sales thresholds and sales philosophy
By Max Gurvits — @MxGur
Most conversations with fellow entrepreneurs drill down, fairly quickly, to sales and revenue. How much is it, how fast is it growing. And most importantly, where are the clients coming from.
It’s no secret that tech (or any other business field) is well beyond the point of being interesting, or investment-worthy, without revenue. Entrepreneurship channels and opportunities are widespread, and the biggest risk has moved from technology to market; the question is no longer can you make it, but will they buy it.
Selling is a beautiful thing, because it is the biggest validator of a company’s success. From the moment the founder sells the idea to an advisor or first investor, all the way to strong revenue and retention metrics, the continuous meeting of sales benchmarks and milestones is the only reliable way to tell whether a company has potential.
It wasn’t always like this. Only five or six years ago, fuelled by mobile successes like Foursquare, Instagram, and Angry Birds, investors and the tech press had a crush on companies with asymmetrical models, where the point was to ramp up the user base as quickly as possible with VC money. In 2010, a million users of an application was a good measure of success. By 2012, the saying went “10 million is the new 1 million”, meaning the free user threshold for validation went up 10x. But it was still desirable to have a ton of users that weren’t paying.
This is now retired thinking. Internet platforms and distribution channels have reached maturity, and getting to mass usership has become a commodity. And so the trick moves to monetization; companies succeeding in monetizing quickly and scaling the monetization are the ones investors are looking for. Most investors want to see revenue and well as sustainable month-on-month revenue growth, and at CBA we’re no exception.
From the point of view of a company founder, sales can be broken down to a series of milestones, which also correspond with specific fundraising opportunities:
This is the idea stage, or the prototype stage. Too early for revenue, but there is actually sales to be done. It is now that the founder “sells” the idea. To the first investor, usually friends&family, early angel, or accelerator, but also to industry advisors. The ability to convince a small investor and an industry expert to join as an advisor is what the sales test is at this point.
Public beta, first revenue
Here is the point where the founders have to close customers, and show that they’re not just friends or relationships, but that revenue is stable and growing from month to month. In my first company, this was a big coming-of-age moment, where coming from a total non-sales background, I needed to go out and close customers daily. This required a re-shuffle from networking, working on product, and appeasing our first (angel) investors, to spending a maximum amount of time in the field, getting meetings, and getting people to buy our offering.
I’ve met many founders who, like me when I first started, are hesitant to do this. It’s often a frustrating process, and you constantly live in the fear of missing out on investor meetings, team quality time, and general networking. But the simple truth is that sales, like any process, has to be validated. The channels, the qualification of leads, the buying arguments, and the pricing. There is no way to do this without figuring it out, and there is nothing to scale with money or other resources if this hasn’t first been established. And so it’s up the founder(s) to pull in the first dollars.
This is the stage where seed funds with distribution expertise, and the majority of angel investors come in. The ability to prove sales and double-digit MoM growth unlocks the next investment opportunity. I often get asked what the absolute indicators are for first-sales validation. As a rule of thumb, revenue of USD/EUR 10,000 per month and growing 10% for at least 3 months is a great indicator.
Public launch, geographical expansion
After the product gets a public launch, founders need to work on aggressive growth and expansion, especially if their market of origin is in an emerging geography (read: all of the world outside major US population centers). Here is where sales drastically changes: instead of closing customers on their own, successful founders pull in the best experts they can find, and raise a Series A round to finance the new, top-talent headcount. Often companies open an office in Silicon Valley, or New York or London at this point, employing top biz dev guns in major market centers to go after clients. The burnrate goes up by a lot, but so does revenue. It is usually after around a year into this stage that companies either get acquired, or start turning into enterprises if acquisition offers are rejected, or run out of money and sink.
So the good news for guys like myself, who don’t consider themselves to be sales superheroes, is that the period in which the founder has to show their sales super skills is actually a rather short one. And paradoxically, the better you are at it, the quicker you can move up the Maslow pyramid of entrepreneurship and leadership, hiring better experts at selling to do the job.
In my dealings with entrepreneurs, I’ve noticed an element of popular culture that has crept its way into startups, often being bothersome and distracting: the over-focusing on closing as the main part of the sale. In reality, most good client relationships only start with an initial buying commitment (or closing, as the closers would call it). Everybody knows that the most valuable clients are those that come through referrals. They’re not only free to acquire, they’re usually also the most enthusiastic and loyal ones. Referrals are by definition impossible without a referee who has had a tremendous time with the product or service post-closing. And referral business is also the best way to insure your company against temporary sales spikes, that can be achieved by over-focusing on closing, but that will usually lead to disappointments afterwards.
And so, despite popular culture hyping of gung-ho salespersons, it is often founders that aren’t predisposed to sales that end up being great sales people: by building relationships instead of going for the close, and by working their way through the initial, pre-product sales process, aiming to get the math right and to move on with the company by hiring a sales force after validation.
At Cross Border Angels, we are committed to helping the best entrepreneurs around the world connect with the most useful angel investors. Learn more at http://crossborderangels.com/entrepreneurs.