The Sales Learning      Curve“It Always Takes Longer and Costs             More…”                       mleslie@leslievent...
Development of Entrepreneurial           Companies► Seed   Stage   Creating the Business Plan► Development    Stage   Cr...
Where the Risk Is► Seed   Stage   Creating the Business Plan► Development     Stage   Creating the product► Go-to-Market...
Where the Risk Is“If We Build It They Will Come”      “When We Build It Will Anyone Come?”                 Copyright 2008,...
Go-to-Market► Successful   Beta   Conversion of Beta’s to customers► “Go   for it”► It is an exciting and optimistic time...
Rapid Sales Deployment -- The          Seduction of the CEO►   Cash Considerations     Growing expense / Zero revenue -- ...
The Case of    Nano – Optical Customer     Adaptive Software and     Hardware CorporationN     O     C                    ...
NOCASH: Goes to Market► With  successful Beta in sight…► Hire the VP Sales   Often times a “regional” level sales manager...
NOCASH: Revenue Planning -- The        Capacity Model►   Revenue: For each sales rep assume:       Quota       Apply the...
NOCASH: Revenue Planning -- The            Capacity Model►   Revenue: For each sales rep assume:      Quota --  $1.5 M   ...
NOCASH: The Hope► Based  on a $1.0 M / mo burn rate starting point► Hire 30 sales reps, get to cash flow positive by  end-...
NOCASH: The Reality    0    -1    -2    -3    -4                                                      Cash Flow    -5    -...
Would You Invest in this Company?►I  just built this device for $10,000► Unfortunately the market will only pay $100  for ...
Manufacturing Learning Curve (MLC)► Well known principle in business► Cost decreases as volume increase► Shape of curve di...
MLC based pricingCost       Loss                                   Price                                            Profit...
Sales Learning Curve (SLC)►   Analogous to MLC, but focused on sales interface rather    than manufacturing►   Key variabl...
The Product Centric Corporation                            Production Facing                     Customer Facing          ...
SLC Learning -- Product► Completeness    Features    Installability► Correctness    Does it do what it is supposed to  ...
SLC Learning -- Market►   Positioning        Correct marketing messages        ROI proof        Market segmentation    ...
SLC Learning -- Sales► Sales model► Sales pitch► Training and development► Availability of executive selling► Correct sale...
The Sales Learning Curve                                                 Standard QuotaYield                              ...
Staffing for Learning        The “Renaissance” Sales Exec                                                            Stand...
Staffing when Marginal Contribution                is Visible                                                         Stan...
“Pedal-to-the-Metal” Staffing          The “Coin Operated” Sales Exec         Standard Quota         2 x Fully Loaded Cost...
NOCASH Revisited – Pedal-to-the-            Metal Staffing too Early                                                      ...
Tracking Sales Yield► Often times very few data points► Often time very random data points► However, any data is better th...
Different Types of Companies            Different Shaped Curve“Faster, Better Cheaper”   “Innovator”                     ...
The Nature of Learning        Discover                   Discover                            Test             RemediateDis...
Planning for Learning►   Identify the specific characteristics of your company,    product and market     Develop SLC exp...
Quantitative Methods►       Marginal Contribution analysis          Expected Gross Margin of FESR at Quota          Minu...
Channels of Distribution► SLC   principles are broadly applicable to channel  selling► All of the same issues relative to ...
Time to Cash Flow Breakeven             NOCASH Revisited                  Scenario                                        ...
Time to Cash Flow Breakeven► Time to breakeven correlates directly to the learning curve   Learning  Positive Marginal C...
Some Corollaries to the       theory        Copyright 2008, Mark Leslie   36
SLC impact in the Mature Company►   As companies mature they develop and release new    products     As differentiated fr...
SLC impact in the Mature Company► Companies     forget the learning curve they  experienced in their initial go-to-market►...
Impact of SLC on Venture Financing►   Pro-Forma VC financing     A round = product development     B round = go-to-marke...
“It Always Takes Longer     and Costs More”  Maybe Not…         Copyright 2008, Mark Leslie   40
A New Framework forEntrepreneurial Companies►   Plan the development of companies to include enterprise-    wide sales lea...
The Sales Learning      Curve“It Always Takes Longer and Costs             More…”                       mleslie@leslievent...
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1008 slc

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Mark Leslie on the development of entrepreneurial companies

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1008 slc

  1. 1. The Sales Learning Curve“It Always Takes Longer and Costs More…” mleslie@leslieventures.com Copyright 2008, Mark Leslie 1
  2. 2. Development of Entrepreneurial Companies► Seed Stage  Creating the Business Plan► Development Stage  Creating the product► Go-to-Market Stage  Getting Traction  AKA “The Chasm”► Market Expansion Stage► Harvest Copyright 2008, Mark Leslie 2
  3. 3. Where the Risk Is► Seed Stage  Creating the Business Plan► Development Stage  Creating the product► Go-to-Market Stage  Getting Traction  AKA “The Chasm”► Market Expansion Stage► Harvest Copyright 2008, Mark Leslie 3
  4. 4. Where the Risk Is“If We Build It They Will Come” “When We Build It Will Anyone Come?” Copyright 2008, Mark Leslie 4
  5. 5. Go-to-Market► Successful Beta  Conversion of Beta’s to customers► “Go for it”► It is an exciting and optimistic time… Copyright 2008, Mark Leslie 5
  6. 6. Rapid Sales Deployment -- The Seduction of the CEO► Cash Considerations  Growing expense / Zero revenue -- Cash is being consumed  Fastest / least painful route to cash is growing the revenue line as fast as possible  Pressure from the investors / board► Competitive start-ups  “We will not forfeit any game by not showing up” ► Each company must deploy to the superset!  A battle to emerge from the pack: “First Mover Advantage”► Overconfidence  “The beta went great…”  “The press loves us…”  “We’re hot!” -- (“…and a lot smarter than the other guys…”) Copyright 2008, Mark Leslie 6
  7. 7. The Case of Nano – Optical Customer Adaptive Software and Hardware CorporationN O C A S H Copyright 2008, Mark Leslie 7
  8. 8. NOCASH: Goes to Market► With successful Beta in sight…► Hire the VP Sales  Often times a “regional” level sales manager at a larger company in similar market► New VP sets the plan and hires the sales force based on a “Capacity Model” Copyright 2008, Mark Leslie 8
  9. 9. NOCASH: Revenue Planning -- The Capacity Model► Revenue: For each sales rep assume:  Quota  Apply the company’s gross margin  Start up productivity ramp (by quarter)  Attrition► Expense: For staffing and logistics determine  On-Target-Earnings (OTE) per sales rep  Number of sales reps per manager and cost per manager  Number of system engineers per Field Sales Exec (FSE) and cost per system engineer  Number of inside sales reps per FSE and cost per rep  Number and build-out of field locations Copyright 2008, Mark Leslie 9
  10. 10. NOCASH: Revenue Planning -- The Capacity Model► Revenue: For each sales rep assume:  Quota -- $1.5 M  Gross Margin – 90%  Start up productivity ramp (by quarter) – 0, 1/2, 1 (25%)  Attrition –  ~ $ 1,000 K / FSE per year net (after 6 months startup)► Expense: For staffing and logistics determine  Number of sales reps per manager  Number of system engineers per Field Sales Exec (FSE)  Number of inside sales reps per FSE  Salary and commission levels  Number and build-out of field locations  > $500K / person / year► Marginal contribution per FSE <= $500K / Yr Copyright 2008, Mark Leslie 10
  11. 11. NOCASH: The Hope► Based on a $1.0 M / mo burn rate starting point► Hire 30 sales reps, get to cash flow positive by end-of-year 1 0 -1 -2 -3 -4 Cash Flow -5 -6 -7 1st Qtr 2nd 3rd Qtr4th Qtr Qtr Copyright 2008, Mark Leslie 11
  12. 12. NOCASH: The Reality 0 -1 -2 -3 -4 Cash Flow -5 -6 -7 1st Qtr 2nd 3rd Qtr4th Qtr Qtr► Fire the VP sales and most of the sales force, do a big cutback► Maybe fire the CEO… Copyright 2008, Mark Leslie 12
  13. 13. Would You Invest in this Company?►I just built this device for $10,000► Unfortunately the market will only pay $100 for this device► The good news is my engineers tell me that if we can ramp up the volume to 1,000,000 units we can manufacture the device for $10►The name of this company is INTEL Copyright 2008, Mark Leslie 14
  14. 14. Manufacturing Learning Curve (MLC)► Well known principle in business► Cost decreases as volume increase► Shape of curve differs in different industries  Semiconductor and Steel industry “price on the curve”► Learning is non-predictive – everyone doing their job well► MLC is visible to us based on available math  cost accounting gives us the points to plot Copyright 2008, Mark Leslie 15
  15. 15. MLC based pricingCost Loss Price Profit Volume (Time) Copyright 2008, Mark Leslie 16
  16. 16. Sales Learning Curve (SLC)► Analogous to MLC, but focused on sales interface rather than manufacturing► Key variable to measure is the effect of learning on SALES YIELD  Equal to the average production per full time, fully trained sales rep per year  Not measured, not visible  Sales Yield is to SLC as Product Cost is to MLC► Like MLC, learning takes place in many ways – “everyone just doing their job”► SLC is an Enterprise effect – not just the sales department Copyright 2008, Mark Leslie 17
  17. 17. The Product Centric Corporation Production Facing Customer Facing Departments/Employees Departments/EmployeesProduction Line 1 Customer 1 dProduction Line 2 Customer 2 Engineering Product Marketing Product DevelopmentProduction Line 3 Customer 3Production Line 4 Customer 4 Manufacturing Learning Sales Learning Copyright 2008, Mark Leslie 18
  18. 18. SLC Learning -- Product► Completeness  Features  Installability► Correctness  Does it do what it is supposed to  Does it do what the customers need► Scalability► Maintainability and serviceability► Ecosystem  Does it work in the required environments Copyright 2008, Mark Leslie 19
  19. 19. SLC Learning -- Market► Positioning  Correct marketing messages  ROI proof  Market segmentation  Competitive Analysis► Promotion  Customer success stories  Correct and sufficient collateral material  Correct and sufficient shows, PR, advertising► Price  Across multiple channels  discounts► Place  Channels of distribution Copyright 2008, Mark Leslie 20
  20. 20. SLC Learning -- Sales► Sales model► Sales pitch► Training and development► Availability of executive selling► Correct sales profile  Learning phase  Development phase  Expansion phase Copyright 2008, Mark Leslie 21
  21. 21. The Sales Learning Curve Standard QuotaYield Fully Loaded Cost/SR Customer Transactions Copyright 2008, Mark Leslie 22
  22. 22. Staffing for Learning The “Renaissance” Sales Exec Standard QuotaYield Fully Loaded Cost/SR Customer Transactions Copyright 2008, Mark Leslie 23
  23. 23. Staffing when Marginal Contribution is Visible Standard QuotaYield Fully Loaded Cost/SR Customer Transactions Copyright 2008, Mark Leslie 24
  24. 24. “Pedal-to-the-Metal” Staffing The “Coin Operated” Sales Exec Standard Quota 2 x Fully Loaded Cost/SRYield Customer Transactions Copyright 2008, Mark Leslie 25
  25. 25. NOCASH Revisited – Pedal-to-the- Metal Staffing too Early Standard QuotaYield Fully Loaded Cost/SR Customer Transactions Copyright 2008, Mark Leslie 26
  26. 26. Tracking Sales Yield► Often times very few data points► Often time very random data points► However, any data is better than no data► An exercise in data smoothing  Six months trailing average  Curve fitting► But,probably a lack of clarity► However… …you will probably know it when you see it Copyright 2008, Mark Leslie 27
  27. 27. Different Types of Companies  Different Shaped Curve“Faster, Better Cheaper” “Innovator” “Brave New World” Copyright 2008, Mark Leslie 28
  28. 28. The Nature of Learning Discover Discover Test RemediateDiscover Test Remediate Test Remediate DiscoverLearning is oftentimes sequential ABC Test Remediate Copyright 2008, Mark Leslie 30
  29. 29. Planning for Learning► Identify the specific characteristics of your company, product and market  Develop SLC expected model  Identify, track and report on the learning opportunities  Identify, track and report on sales yield► Select initial sales personnel to enhance corporate learning  The “Renaissance” Sales Rep  Not the “Coin Operated” Sales Rep► Mobilize the company for learning► Do not ramp up expenses  Perhaps reduce R&D expenses at this time► Set investor and employee expectations to account for uncertainty and learning Copyright 2008, Mark Leslie 31
  30. 30. Quantitative Methods► Marginal Contribution analysis  Expected Gross Margin of FESR at Quota  Minus - Cost / year of a fully loaded FESR  Equal - Marginal Contribution► Breakeven Analysis  Number of required FESRs at Marginal Contribution to offset fixed costs  Less effect of SLC (reduces marginal contribution)  Factor in organizational build-out time – NOCASH example ► Needed 30 FESRs – example showed batch hiring of all of them ► Would need to hire Sales VP, 4 – 5 RMs, and 20 SEs, find offices, develop training, etc.► Sparse Data  Curve Fitting  Six months moving averages► Sales Yield Accounting – the sales version of Cost Accounting Copyright 2008, Mark Leslie 32
  31. 31. Channels of Distribution► SLC principles are broadly applicable to channel selling► All of the same issues relative to “merchantability” of the product by the company  Company has to make the first sales by the channel  And the communication with the end customer is more distant► In addition to all other learning, need to do the learning relative to channel acceptance as well Copyright 2008, Mark Leslie 33
  32. 32. Time to Cash Flow Breakeven NOCASH Revisited Scenario ResultNo SLC Effect ►Break Month 15 Even in►Hire 12 SR’s month1 ►Maximum cash burned = $5.0 M►Hire 2 per month thereafterLinear SLC over 24 months Month 18 Breakeven in►Hire 12 SR’s month 1 Maximum cash burned = $17.7 M►Hire 2 per month thereafterRecommended Plan ►Breakeven Month 16 in►Reduce fixed 40% ►Maximum cash burned = $8.5 M►Hire 2 SR’s / month for 2 months►Hire 26 SR’s in month 10 (margin contribution >0) to catch up►Hire 2 per month thereafter Copyright 2008, Mark Leslie 34
  33. 33. Time to Cash Flow Breakeven► Time to breakeven correlates directly to the learning curve  Learning  Positive Marginal Contribution  Cash Flow Breakeven► Timeto cash flow breakeven reasonably independent of sales staffing  More staffing may increase rate of initial discovery, but cannot make it less sequential► MORE STAFF DOES NOT SPEED UP LEARNING – JUST CONSUMES MORE CASH!► Basically, it is not ready until it is ready Copyright 2008, Mark Leslie 35
  34. 34. Some Corollaries to the theory Copyright 2008, Mark Leslie 36
  35. 35. SLC impact in the Mature Company► As companies mature they develop and release new products  As differentiated from new versions of old products  For example, in the software business, there are no “one-product” companies with revenue > $1 Billion► Often times new products given to existing sales force  Doesn’t quite work right  Hard to sell and install  Sales reps need to make quota and “move on”  The new product is… ►“Radioactive”► Result:  New product fails to meet plan by a wide margin  New product is killed Copyright 2008, Mark Leslie 37
  36. 36. SLC impact in the Mature Company► Companies forget the learning curve they experienced in their initial go-to-market► Critical to replicate that product / market learning process  Segregated sales force  Low productivity expectations  Focus on organizational learning► Onlydeliver to larger sales force when learning is complete and sales yield by product is competitive Copyright 2008, Mark Leslie 38
  37. 37. Impact of SLC on Venture Financing► Pro-Forma VC financing  A round = product development  B round = go-to-market  C round = market expansion► Fenwick and West Quarterly VC Survey  Eight quarters reported  Percentage of C and later which are DOWN rounds always greater than for B rounds► VCs and Entrepreneurs underestimate the cost and time required to move up the SLC after successful completion of Beta.► Reconciling the SLC to VC standard practices  View B round as financing the next (go-to-market) development stage  Pay less, consistent with the risk assessment  Hopefully more up rounds later… Copyright 2008, Mark Leslie 39
  38. 38. “It Always Takes Longer and Costs More” Maybe Not… Copyright 2008, Mark Leslie 40
  39. 39. A New Framework forEntrepreneurial Companies► Plan the development of companies to include enterprise- wide sales learning  A second developmental stage ► ProductDevelopment ► Go-To-Market (Sales Learning) Development► Value Go-To-Market Development rounds (“B” rounds) appropriately  Smooth the VC process, which is better for both VC and entrepreneur► Plan effectively for achieving cash flow breakeven  Eliminate wishful thinking  Consume much less cash  Reduce trauma to the organization Copyright 2008, Mark Leslie 41
  40. 40. The Sales Learning Curve“It Always Takes Longer and Costs More…” mleslie@leslieventures.com Copyright 2008, Mark Leslie 42
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