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Mark Leslie on the development of entrepreneurial companies

Mark Leslie on the development of entrepreneurial companies

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  • 1. The Sales Learning Curve“It Always Takes Longer and Costs More…” mleslie@leslieventures.com Copyright 2008, Mark Leslie 1
  • 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. 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. Where the Risk Is“If We Build It They Will Come” “When We Build It Will Anyone Come?” Copyright 2008, Mark Leslie 4
  • 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. 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. The Case of Nano – Optical Customer Adaptive Software and Hardware CorporationN O C A S H Copyright 2008, Mark Leslie 7
  • 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. 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. 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. 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. 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. 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. 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. MLC based pricingCost Loss Price Profit Volume (Time) Copyright 2008, Mark Leslie 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. 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. 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. 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. 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. The Sales Learning Curve Standard QuotaYield Fully Loaded Cost/SR Customer Transactions Copyright 2008, Mark Leslie 22
  • 22. Staffing for Learning The “Renaissance” Sales Exec Standard QuotaYield Fully Loaded Cost/SR Customer Transactions Copyright 2008, Mark Leslie 23
  • 23. Staffing when Marginal Contribution is Visible Standard QuotaYield Fully Loaded Cost/SR Customer Transactions Copyright 2008, Mark Leslie 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. NOCASH Revisited – Pedal-to-the- Metal Staffing too Early Standard QuotaYield Fully Loaded Cost/SR Customer Transactions Copyright 2008, Mark Leslie 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. Different Types of Companies  Different Shaped Curve“Faster, Better Cheaper” “Innovator” “Brave New World” Copyright 2008, Mark Leslie 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. 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. 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. 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. 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. 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. Some Corollaries to the theory Copyright 2008, Mark Leslie 36
  • 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. 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. 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. “It Always Takes Longer and Costs More” Maybe Not… Copyright 2008, Mark Leslie 40
  • 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. The Sales Learning Curve“It Always Takes Longer and Costs More…” mleslie@leslieventures.com Copyright 2008, Mark Leslie 42