Musings on Entrepreneurship and Innovation
Sunday, October 10, 2004
The Sales Learning Curve
Mark Leslie is a technology partner at El Dorado Ventures. From 1990 to 2000, he was the CEO of Veritas Software. In a venture capital market that is characterized by the need for capital efficiency, Leslie's thoughtful insights in his recent AlwaysOn Network article regarding the relationships among iterative experiential learning, sales productivity, and net cash flow are spot on:
By learning from the past, startups can build cost-effective, successful sales teams that burn through a minimal amount of cash on the road to breakeven...The time it takes to achieve cash flow breakeven is reasonably independent of sales force staffing. It is, instead, entirely dependent on how well and how quickly the entire organization learns what it takes to sell the product or service while incorporating customer feedback into the product itself. Because the entire organization has to come up to speed, hiring large initial sales staff does not speed up the time to breakeven, it simply consumes cash more quickly...Rather than starting with a large sales force, a company using the [sales learning curve] is better served by hiring a small team of sales execs with the analytical skills and patience to lead the company through an iterative learning process that includes the continuous discovery and solution of small but crucial problems.
In other words, initial sales capacity in the context of a new venture is inevitably low because the company has yet to really learn how to sell its innovative service or product. Throwing expensive, yet unproductive, staff at the problem burns cash and, probably, slows the rate of organizational learning. Leslie's advice is to first use a small, highly skilled team to climb into the steep part of the classic S-shaped sales learning curve. At that point, sales techniques can be institutionalized. It then makes sense to hit the gas by hiring more sales staff. Greg Gianforte, the founder and CEO of RightNow Technologies, put it a slightly different way. He advises to find a sales tactic that works, then build a sale strategy around that tactic.
With a little help from Laura Black of Greer Black Company, I've created a simulating model that links cash with sales staffing, iterative learning, the diffusion of learning, and sales capacity (click for larger image):
A model like this allows one to test assumptions regarding the sensitivity of cash flow to initial sales staffing, sales staff growth, initial productivity, learning rates, and the cost of sales staff relative to revenue potential. As a reflection of Leslie's observations, I've found this little model quite useful. If you'd like to learn more, please contact me.