BESSEMER CLOUD COMPUTING LAW #3:
Study the sales learning curve and only invest behind success.
Years ago, Bessemer was fortunate to invest behind Mark Leslie at Veritas, and as a result our firm became big believers in the Sales Learning Curve (SLC), a concept Mark helped to pioneer . The core concept is that software organizations often fail because they staff up their sales efforts too quickly, before the sales model has been refined. This concept is even more critical for Cloud businesses, given the large upfront investment required to acquire customers. Ramping up too quickly will burn precious cash reserve and could sink the business. This typically means you should hire sales reps slowly upfront, only focus on your core geography until your business starts to scale considerably, and separate your “hunters” and “farmers” as you start to ramp.
It takes at least $300,000 CMRR to climb the Sales Learning Curve. You should tune your model before you scale, which typically means stopping at three sales reps until you hit at least $300,000 CMRR and at least two of your reps are making their $100,000 CMRR quotas. You know you can profitably scale sales when a couple of sales reps are at an annualized run rate to sign annual contract values (CMRR x 12 months) equal to twice their fully-burdened cost of sales. In this case, fully-burdened is not just the salary, bonus, and benefits of the sales rep, but also allocations for sales engineering support, executive support, marketing expense, and professional service expenses associated with securing the customer.
For a direct, enterprise sales business model, these thresholds are likely to be around $80,000-100,000 CMRR (approx. $1-1.2M annualized), and for tele-sales models, this may scale down to $60,000-75,000 MRR ($720,000-900,000 annualized). It is usually time to accelerate sales hiring when at least two out of three sales reps are hitting quotas at these numbers, and the business has achieved some scale to suggest that the processes are repeatable- at least $300,000 of CMRR. The “repeatable” aspect is critical: too often companies scale their sales force aggressively after their first senior rep is getting traction in the market and then quickly realize that the new hires struggle to sign their first deal because they don’t have three VP’s and the CEO alongside them.
You should also separate your “hunters” and “farmers” and pay them all on CMRR growth. As soon as you have climbed the Sales Learning Curve and have a sizeable customer base, you should supplement your sales force with renewal-oriented account managers. When a Cloud company starts to hit the sales inflection point, it is important to keep the new business reps (the “hunters”) busy with finding new deals, while a team of account managers (the “farmers”) tends to the established customers.
Both teams are critically important for the health and growth of the business because CMRR is a function of new sales net of churn from your existing accounts. Therefore, you should have dedicated experts for each of these two revenue groups as soon as is practically possible. Once a company has a few sales reps achieving quota and a significant customer base, it is time to hire dedicated account management experts who are compensated to focus exclusively on customer service, renewals, and up-sells. The compensation plans will drive behavior, so it is vital that you structure the sales and account management plans to align with the key metrics of your business: CMRR, Churn, and Cash flow. The new account team should be paid on new CMRR with a standard deal structure (such as a one year deal, with quarterly pre-payments), and incentives for more favorable cash flow terms (such as multi-year pre-payments). You should think of account management as a sales function, and that group should be compensated in a similar fashion – but modeled on your CMRR and churn assumptions instead of a new CMRR sales quota.
To create a repeatable sales process, focus is also critical, which typically means that you should restrict yourself to your core market. If you’re based in North America, prove your business in North America first. Only after reaching $1M in CMRR should you consider hiring European sales and services execs behind customer demand. Save Asia for post-IPO. You can think of this as a “bowling pin” strategy on a geographic basis, or good military strategy by avoiding concurrent wars on multiple fronts, but it’s also good business strategy for Cloud Computing.
Almost all businesses will look to go global at some point if they continue to grow. But Cloud vendors face more barriers to globalization than traditional software companies because you can’t just localize the UI and ship a new CD to some remote country. Given the different architecture and high service level expectations in the Cloud industry, companies are faced with questions about latency, data access and security through replicated local datacenters, in-country customer support personnel, packaged integration with other regional software and Cloud products, and similar issues.
Simply put, North America is a massive market with a rising tide around Cloud. There is no need to go global early and force this cost and complexity upon your organization. In most Cloud sub-markets, we find that Europe is roughly three years behind the US in adoption, and Asia is slightly behind Europe – although we have recently seen some interesting pockets of activity in Japan and India that may be accelerating. A rough rule of thumb is that you should look to pass $1M CMRR ($12M Annual Contract Value) before even considering Europe, and even then you should let customer deals pull you into the region as you incrementally hire sales and services professionals. Unless you have some extremely unfair advantage in Asia, wait until Europe is a clear home run before even considering opening up a sales war on another front. Your default position should be to consider Europe as your pre-IPO growth story, and Asia only after you’re a high-flying public company.
Finally, do not confuse any of this with a message to build your business slowly or to under- invest in sales or marketing. Quite the opposite! The 6 C’s of Cloud finance and the Sales Learning Curve are tools to help you know when and how to invest aggressively to maximize the business’s long term value creation with the least dilution for you as the executive team. If the metrics are strong, you will be able to finance the business at very attractive terms. You will actually be destroying value if you don’t invest behind success when the ROI is strong!