It’s just after the end of a quarter, and for VC’s that means many board meetings to review how portfolio companies have performed. Over the years of doing this, I’ve been shocked and surprised how many times I’ve seen good companies with great product/market fit miss their sales targets for an incredibly avoidable reason: they missed their sales hiring targets. As a result, they didn’t have enough quota carrying sales reps to make their number.
In many cases this wasn’t disastrous, and could be corrected in subsequent quarters. But in several cases, it caused significant problems with an upcoming financing, and damaged the company’s cash flow.
It was also frustrating seeing the founders realize that they could have easily avoided the problem, had they just been warned about it in advance. That’s the reason that I am writing this post.
The problem occurs because recruiting A-players is hard (see my last blog post “Recruiting – the 3rd critical startup skill”), and is frequently given a lower priority than is needed.
There’s another likely explanation why this happens and it has to do with the mental shift that is required of founders when it’s time to scale. As you’ll see in the diagram below, I believe there are three phases in a startup’s lifecycle.
In the first two phases, founders should be minimizing spend to buy themselves as much time as possible to figure out product/market fit, and a repeatable/scalable sales process. However once they have these figured out, they enter an entirely different phase, where they need to scale the company aggressively. This requires a huge mental shift, away from saving money and staying lean and mean, to hitting the accelerator pedal, and investing and hiring aggressively to scale the proven sales process. I think many founders don’t recognize the moment when that mental shift is required, and how their thinking and behavior has to change. Founders are used the feeling that it’s OK to be a little late with hiring as you’ll save some cash. But in the third phase, hiring misses turn out to be an execution failure that have direct and significant consequences.
The science behind sales
Sales is both an art form and also a science. The science part of sales can best be captured in a few formulae that drive sales results. While these are instinctively known to most executives, they are still worth re-examining, as they provide some valuable lessons for B2B founders who have found product/market fit, and are now starting to scale their business.
The primary formula that drives sales results
This formula tells us that there are two variables that we have to pay attention to carefully to increase bookings:
- How many productive reps we have
- How much a typical rep will be able to sell in a month/quarter/year
Blindingly obvious, right? But surprising how frequently companies don’t pay enough attention to making sure they hit their hiring and productivity targets for sales reps, and miss plan as a result.
Anyone who has ever developed a financial forecast for a B2B company will know this formula well, as this is typically the key formula used to figure out what the bookings number will be as the company grows. (One of my earlier blog posts: SaaS Economics, provides many graphs and a sample spreadsheet model that clearly illustrates how sales rep hiring drives bookings.)
Hiring sales reps isn’t enough on its own
Although the primary driver of sales is making sure you have enough productive sales reps, simply hiring those reps is not enough. This will only work if you take care of a few other critical needs:
- Ensure there are enough leads to feed those sales people
- Do proper on-boarding to ramp those new sales hires
- Allow for a certain number of failed sales hires
- Ensure that there are enough resources to on-board and support the new customers
I’ll look at each of these in more detail below.
Ensure there are enough leads to feed the salesforce
In the old days, it was common to expect sales reps to do their own lead generation by cold calling. But in today’s Sales 2.0 world, we’re smart enough to know that this isn’t the best strategy. Today’s SaaS companies will typically employ a combination of Inbound Marketing, paid marketing, and outbound calling using Sales Development Reps, or SDR’s (sometimes also referred to as Business Development Reps, or BDR’s. For more information on SDR’s, read this earlier blog post: Using outbound prospecting to drive targeted leads.)
So if we’re going to add sales people, we’re also going to need to add marketing resources and/or SDR’s to produce the leads required to feed our expensive sales reps.
On-boarding to ramp those new sales hires
In the early days of a startup, on-boarding is typically done in an informal way, often by sitting new hires next to a founder, and spending time as it’s needed passing on knowledge. However, as soon as a startup reaches the point where it has product/market fit, and a repeatable, scalable sale process, it will enter an expansion phase where many recruits will join the company. At this stage, consistent on-boarding becomes incredibly important.
Many founders will find it hard to invest enough time in this, as they are so used to being the ones doing all the key work. But as the company scales, they have to stop being the do-ers, and become great managers. And for them to be able to trust others to do the work, and create a consistent, scalable sales process, they are going to have to invest significant time and energy in teaching those new recruits what they know. Nowhere is this more important than with sales hires, as the impact of a great on-boarding program will be immediately felt in hard measurable bookings numbers.
This topic is so important and there is such great opportunity for most startups to improve what they are doing, that I have dedicated a whole blog post to it. You can read my interview with Andrew Quinn, Head of On-boarding at HubSpot here: “A Strong Team Starts at On-boarding”. The post looks in detail at how Quinn has built up HubSpot’s on-boarding program. It’s one of their secret weapons and well worth understanding.
Allow for a certain number of failed sales hires
Another common reason that causes sales to miss their targets is that the plan assumes that every sales hire will be productive and hit quota. We all know from past experiences that this is unrealistic. So a good plan will incorporate room for a certain number of failed sales hires. The number I have heard is somewhere between 25-33% of new sales hires will not work out.
The trick with poor sales hires is to identify them as fast as possible. A good on-boarding program will have testing built-in, and this can be a good way to detect salespeople that don’t possess the skills needed for success.
Ensure enough resources to on-board and support the new customers
If you hit your sales hiring targets, you are likely to ramp bookings, and that will immediately place pressure on the Customer Success teams that are responsible for on-boarding and supporting the new customers. So good hiring execution in sales will also drive a need for good hiring execution in Customer Success.
Best practice: hire ahead of your sales hiring budget
The best sales executives have seen this movie before, and they know that the one way to really ensure they are going to hit their numbers is to hire ahead of the sales hiring budget. They are always looking for great talent, and like to fill their open requisitions slightly ahead of the planned date.
If you’re wondering if there is some risk in this, there is a small amount. But the worst downside you’ll see is that your business doesn’t develop quite as fast as you’d hoped, and you slow hiring, and are out of pocket one or two months of a sales rep’s salary. That is a far smaller risk than the risk of missing your bookings plan due to not hitting your hiring plan.
Track sales capacity to avoid the problem
Another good way to avoid hitting this problem is to track your sales capacity versus plan. Sales Capacity is simply the number of productive reps multiplied by your average productivity per rep.
It’s a good idea to look at both Sales Capacity, and the two components that contribute to it:
- Rep hiring versus plan.
- I typically see this done by measuring fully ramped equivalents versus the planned number. So if you have hired a new rep who is only ramped to be at 50% capacity, they would only count for 0.5 fully ramped equivalents.
- PPR – Productivity per Rep.
- Hopefully as you get better at hiring, training, selling, and as your product improves, you should see this improve over time.
Tracking these metrics on at least a monthly basis, hiring ahead of plan and equipping your sales reps with the training and resources they need to be successful will help you hit your sales targets at the point you’re ready to scale.
Important note: this blog post does not apply to startups who don’t have product/market fit, or a repeatable/scalable sales process.