The PMF sales equation

I experienced an Aha! moment the other day with CEO Sean Chou of our portfolio company Catalytic. Sean is an experienced enterprise startup founder and exec through his time as CTO of Fieldglass (sold to SAP). Sean and his VP Product, Jeff Grisenthwaite, had prepped an investor brief with a simple expression summarizing their pursuit of product-market-fit. It looked something like this:

If[(effort + price + risk) << (pain of customer problem), win sale, lose sale]

Bingo! In words, if the effort plus price plus risk of your solution is much much lower than your customer’s status quo pain, you can sell and find product-market-fit. We could complicate this by adding an expression for competitive position, but let’s assume the field of 2.0 solutions is sparse… something that is often true for the earliest stage startups, with competition heating up above 1-3M in ARR. This expression also assumes that the benefits of your solution actually solve the subject problem!

I love this expression because it succinctly captures the key issues effecting early PMF sales:

Pain of status quo: Is there real pain and is it big?

Effort: Is your solution relatively quick and easy to implement and maintain?

Price: Is the price of your solution very reasonable relative to the pain (and competitor prices)?

Risk: How do customers perceive the risk of purchasing from an early-stage startup? How do you help your customer champion mitigate the political capital risk of pushing a new process or solution?

“<<“: Are effort + price + risk much much lower than customer pain? If not, customers won’t bother. A simple “<” doesn’t cut it. It must be “<<”. Put another way, ROI must be very high.

An example of this is HPVP’s recent consideration of buying software to manage our portfolio job postings site. We currently do this with a string-and-chewing-gum combination of Startuphire and Angellist widgets. Even with both, they don’t cover our companies exhaustively, and we would love to have resume gathering and funnel tracking capability. However, what we have is pretty good for free! We were approached by an early startup with a slick solution, but we didn’t end up buying:

Pain of status quo: You may hear in my narrative above, this isn’t a top 1 or 2 pain point for us. If there is software out there that can find me the next Uber to invest in, you have my undivided attention and wallet.

Effort: We probed a lot on what the effort would be to implement and maintain their posting solution. Great answers here.

Price: They wanted 4x the price what we were happy to pay and 2x what we might have been willing to pay. They didn’t come down at all. Wuh?

Risk: We were being asked to take a risk on a seed stage startup with limited funding and only very early revenues. We love startups, but it would have been a bummer to invest in implementation and see them disappear six months later. We are thrilled to take that risk, but not at premium pricing…

“<<“: …which all comes back to the much-much-less-than issue. The risk and price together were just not that much lower than the current pain, so we passed.

 

S how big does the “<<” need to be for good “ROI”? ROI may be characterized qualitatively as (Value-of-solving-pain / (effort + price + risk)) or precisely quantified as ((savings or increased revenue) / price of software). Either way, we generally find that business customers want to see 5 to 10x ROI on software investments. In the example above, we figured we would see a 2 to 3x ROI at list price. If they had halved the price, we probably would have accepted 4 to 6x. Remember, we like startups.

You might say, “Wow! 5 to 10x is an inordinate return expectation for a customer” when lots of corporate investments are made at much lower ROI levels (think advertising as low as the 1.5 to 4x range and capex in the 3 to 7x range). Fair, but remember that even with SaaS where the hard cash cost is paid over time, costs of organizational effort and change management for new software adoption are front-loaded and heavily resisted. That lump cost of effort upfront means the solution has to be really really good – and quickly – for the customer champion to look like a hero to their organization. If a champion doesn’t think this is likely, they won’t risk their political capital.

Now how about competition? Without consideration of competition, the PMF sales expression above helps define whether the customer will play ball or not. Competition defines who is on the field of play. If there are several competitors who offer solutions that bridge the “much much less than” gap, then it’s a question of positioning product, features and price to stand out in the noise to a specific customer segment.

When to make senior hires from $0 to 10M in revenue

One of the most frequent questions we discuss with portfolio companies is when to make which senior hires. The answer is driven by experience/skills of the founding team, trajectory, cash position, type and stage of the startup. Since the first four are very contextual, stage serves as a common denominator to define rules of thumbs. For simplicity, we can think of stage by revenue run rate in $ARR. For B2B SaaS, this is gross revenue; for a marketplace, net revenue.  I think of $0 – 1 M as early product-market-fit, $2-5M as late product-market-fit and go-to-market repeatability, $5-9M as scale and $10M+ as mass scale and focus on achieving market leadership.

Below is a quick cheat sheet by function, role and startup stage for when certain hires are typically made, assuming they are not already on the founding team. The dark green indicates that most companies have the role at that stage. The hashed green indicates some companies have the role depending on other factors. The table implies layering of Chiefs on VPs on Directors. This is more illustrative than practical. You wouldn’t have a CFO, VP finance and controller at a $7M company. You might have a CFO and controller. You get the point.

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You will notice some coincidence above between when a director or VP hire might join a function. Often they are interchangeable but with different compensation, experience and “runway” expectations. A director hire in a startup might have 5-7 years of relevant experience and a VP hire 7 to 10. You wouldn’t expect a director level hire to own the function for much more than a doubling or tripling of revenue at this stage. A VP level should be able to 3-5x. “Chief” titles are in a different category. Don’t give out a chief title unless you think that person has uncapped ability and experience to scale. In the end, there can be only one king or queen of the mountain, whereas a penultimate title leaves the possibility of bringing in a more senior “chief” above a strong leader who has reached their cap on scale.  Looking briefly at each function:

Technology: If you are a tech startup, you need a CTO… duh. We generally invest in teams with a founding CTO, and in the rare exception a CTO is recruited at or before launch. Many founding CTOs have less experience at scaling large tech organizations (hiring, agile operations, tech scaling) but excel at system architecture, vision and solving really hard problems. That is why many of our companies also bring in a VP Engineering above $5M in revenue

Product: Often founding CEOs are the de facto product leaders. With the right founding CEO, this can scale as high as 5M in revenue, but in most cases establishing a product leader somewhere in the 2-5M range is important in focusing direction amidst customer feedback and an increasingly complex product. This is especially true in enterprise software. Many companies wait too long in formalizing product leadership, which can contribute negatively to finding product market fit.

Marketing: At less than $1M in revenue, marketing is mostly a demand gen game – testing paid acquisition, building SEO, optimizing landing pages and building the top of funnel. This can be done by a marketing manager with 3 to 5 years of relevant experience… or even less. As the company finds product-market-fit and begins scaling, higher level marketing leadership is needed to drive brand, position in a complex market and scale demand gen. This can be done by a director or VP level hire. CMOs aren’t usually needed until $10M+ when a run at category leadership calls for even deeper experience and industry gravitas.

Sales: I’ve written about “when not to hire your first VP of Sales” from our own battle scars. Put simply, we’ve almost never seen anyone but a founder be successful at leading sales at a startup below $2M in ARR. Below that the process, product and target customer are too undefined. For very large enterprise SaaS, that cutoff is even higher in the $4-5M ARR range, meaning enterprise software startups are wise to wait even later to hire a first non-founder VP Sales. Higher contract values mean fewer experienced sales cycles for a given ARR level, so repeatability through practice takes longer!

I’ve been surprised at the increasing use of CRO titles at small startups. “Chief Revenue Officer” implies the leader runs sales, customer success and maybe marketing AND that they have uncapped scaling potential. There are few people who really have that combined set of skills and potential, and they don’t usually work for small startups.

Customer Success: This function should start from day 1 with an individual contributor hired to manage first customers. Once 3 or 4 success reps are in place… somewhere in the $2-5M range, a functional leader is needed. This is a player coach, likely a director. VP level leadership can often wait until upper single digit run rate as long as a director level hire is given a voice at the table to fight for the customer in product and pricing decisions.

Talent: Talent (and HR) are critical functions, but in defining the culture and values of a company, there is no substitute for the founding CEO serving as head of talent for the first 25 hires. Once in the $2-5M ARR range with a staff above 25 people, institutionalizing HR and talent with a recruiter and/or HR operations person makes sense. Somewhere later in the $5-9M ARR, an executive level hire to run Talent (VP Talent) is prudent. The next stage of human scaling requires a devoted high-level player.

Finance: We see a lot of “CFOs” at too small startups. No dedicated financial resource is needed below $1M ARR. There are plenty of outsourced bookkeeping services to use for $1-5K a month. A controller becomes important in the $2-5M ARR range as a startup raises more capital (increasing information demands and frequency of investor communications), expenses increase and customer contracts become more complex. A controller can also be helpful in prepping board decks and managing a financial review or audit. So when do you level-up to director or VP finance? Here’s how I think about it: A controller should be able to answer the question “what are the numbers?”. A director or VP Finance should be able to answer the question “what do the numbers mean?” A VP Finance is particularly important in enterprise SaaS in the $5 to 9M range (or even earlier), where modeling and negotiating of customer contracts is important skill to have in-house. A controller or director level resource will scale further in SMB SaaS where everything is billed through Stripe. The final CFO step brings a true strategic financial leader who can manage a fundraise and diligence process, help the CEO test and analyze business cases/strategy and oversee key business risks (financial, physical, platform dependencies, etc).

*Operations: Many startups don’t need an operations function. Exceptions include tech enabled services, marketplaces (think sourcing and on-boarding supply) and enterprise SaaS where implementation and services are part of the model. Such companies may start with a founding COO. If not, a relatively senior hire is important early. You can’t screw this one up, and often the role requires real experience to avoid the risks of putting customers or suppliers through your own learning curve. Don’t reinvent the wheel when it comes to opps. With respect to “operations” functions like facilities/real estate, legal, or HR compliance, the VP Finance or CFO can handle those.

*Business Development and Partnerships: BD and Partnership hires can wait until later for many startups, except those where ecosystems are complex and busy and/or there is a lot of product value in integration. This tends to be true of horizontal SaaS – think martech, accounting/fin tech and sales enablement – where there is an existing stack of technologies into which you are trying to fit. In these cases, early BD is both risk mitigation (don’t get left in the cold) and a distribution opportunity (sell through the rest of the stack). Of course, the founding CEO is likely the best BD person for a long time.

Some considerations:

Key hires are as much about leverage as upleveling experience. A founding team of 2 or 3 people can’t run every function as a company grows. Each member should pick the one or two functions they excel in the most and run with it, filling leadership for the others as the company scales.

Faster growing startups should hire senior levels earlier than slower growing startups. By the time you “need” the hire, it is too late! Make decisions 6 to 9 months ahead to accommodate a 3-6 month search and hire process for Director levels and above. Faster growing companies also have better access to capital and so can afford a higher personnel burn to accommodate this ramp, while they have less time to experientially train and promote from within.

There should be a good reason for having a lot more senior people than the table suggests for your stage. If you are a < $1M ARR startup with lots of chiefs, be explicit about the tradeoffs. What are you getting for the higher burn and likely pain of having to trade people out later? We see two modes of good answers: (1) Extremely experienced teams that have had startup success together before and likely have better access to capital. Their bet is that they can go faster without the on-the-job-training costs; (2) Startups operating in credential driven industries where early team members need “C” titles, long resumes and fancy degrees to convince customer. Healthcare startups are the major culprit here. Those are the only sort of good answer we’ve seen.

People, Part 2: the characteristics that matter in startup teams

In “People, Part 1”, I outlined the combinations of three key “inspection” characteristics of founding teams (professional, startup and industry experience) that favor startup success. These characteristics are “inspected” because they can largely be assessed from LinkedIn, resumes and surface discussions. They describe what people have done and achieved (outcomes), less so how they achieved those outcomes. The how, or “experienced” characteristics, matter tremendously for two reasons: first regardless of past outcomes, certain actions are more likely to lead to more good outcomes in the future. Second, regardless of future outcomes, certain styles are much easier to work with than others. Any investor will tell you they learned quickly to avoid difficult people and teams – the only thing worse than an unsuccessful investment is a dramatic one. Founders can rightly say that about investors too.

Experienced characteristics are observed and assessed over time working with a team, both pre and post investment. If you’re wondering why an investor is going slow or “hanging around the hoop”, it may be because they want to see “more traction.” Just as often, however, the investor wants to get to know you better. It isn’t unheard of for HPVP to go from first deep-dive meeting with a company to term sheet in 4 weeks, but that’s almost exclusively with teams we’ve known for many month or years.

In a series of interviews I did with top VCs to understand how they assess teams, I found the typical time a VC spends getting to know a team before investment ranges from 6 to 20 hours. Of note, this is only for a first investment. By the time a second investment comes around, time-with-team grows to 50 to 75 hours via accrual of board meetings, dinners, phone calls and email communications. The collaboration, strategizing and observation afforded in this time provides an investor priceless insight into the team they’ve backed and highlights why VCs make smaller investments upfront but reserve heavily for follow-ons. They know a lot more later.

If experienced characteristics are about how people achieve outcomes, then these habituated activities can be broken down into a set of five key actions:

 

The five actions that matter in startup teams:

Execute, Hire, Learn, Build Relationships, Communicate

Stories are more fun, so let me describe these actions in short vignettes from my experiences with great teams, both within and without our portfolio.

Execute: I met with a founder nine months ago. She had a great idea, no product and no customers. Her target customer is in the healthcare industry – a 9 to 12 month sales cycle I believed. After nine months, she had 4 signed customers, 3 operational already, with a strong pipeline to boot. She had assembled a team, launched a product, sold 4 enterprise customers and raised a seed round all in this time. Is the sales model repeatable beyond founder sales, will customers churn, will everything work perfectly? Don’t know yet. I do know she gets shit done.

Hire: One of our CEOs was looking for a VP of Finance and interviewed a large slate. Any of the candidates could do the job, but the CEO struggled to see the uniqueness and new perspective any would bring to the startup’s relatively young executive team. Along came an overqualified candidate who was considering CFO (not VP Fin) roles at larger and more prestigious startups. The CEO both recognized he had found a diamond when he’d been looking for gold and was able to attract this CFO to a smaller company. I have written several times on talent in “Walking the talk on talent” and “T is for talent”. Nothing speaks to a team’s potential like their talent disposition. Does talent follow them from past roles? Do they know the gaps they have on their senior team? Have they brought in senior people to take the company to the next level as it grows? Are they planning to? If so, whom?

Learn: The best founders are constantly learning – from experiences, customers, advisors and each other. After raising a post-seed round, one of our portfolio companies endeavored to design and ramp an inside sales team. The COO/founder had sold the product himself, but never hired or built a sales team. Three weeks, 15 phone calls, one optioned advisor/consultant (an expert in the field) and countless blogs read later, the COO was interviewing BDRs, designing training materials and writing scripts. This isn’t to say startup teams should learn how to do everything from scratch; I would much prefer that someone on the team already had sales ramping experience. Given they didn’t, though, this COO did an amazing and efficient job using outside resources to avoid mistakes others had already made, and it was much cheaper than hiring a VP sales too early. Further reading: Dweck’s oft discussed “Growth Mindset” may seem cliché, but it is critical that founders are adept at applying effort with process and the input of others to develop abilities and achieve  outcomes (my paraphrase of the growth mindset) as this team did. A fixed set of abilities doesn’t cut it in startups.

Build Relationships: In order to execute, learn, hire or sell, we need to get people on our side, something that comes through facility with relationships.  A founder I know has this “it” factor with people. We initially didn’t invest in this founder’s startup, but he’d drop me emails or voicemails each quarter with updates or requests for input. Yes, I was on the investor “drip” campaign, but it felt genuine, and our relationship grew. As we later moved into diligence, we made five potential customer intros. Three of them emailed me unsolicited later and commented on how much they liked the founder. This is a person who will be able to achieve anything through other people.

Communicate: And to build relationships, we must communicate well. Whether you like in-person, phone, email or text, consistency and transparency should be the common thread. An experienced CEO we backed likes to prep each board member (and observer) separately with a 15 minute call a few days before a board meeting. This CEO also provides a 2-3 page written discussion of how the company is performing, what is going well and what isn’t. This isn’t a 15 page deck with one number a slide that means nothing without narrative. Nor is it 50 pages of squint-inducing excel schedules whose existence is proof of wasted time and money. It is a way for the CEO to organize his thoughts and communicate to his board unambiguously about how the company is doing and what he is thinking and feeling – there is no better pulse of a startup than this. By prepping each board member with a call and this document, this CEO completely aligns the Board to the problems and opportunities that need to be discussed in meeting and avoids potential for derailment. Amazing.

 

The five styles that matter in startup teams:

Fast, Tenacious, Confident, Motivated and Practical

Then there is the how of the how, the modifiers to these actions – the five style characteristics that reflect a team’s culture and approach.

It’s clear from the story vignettes above that being fast and tenacious are paramount (think about the sales team ramp and healthcare startup stories). Time is the lurking enemy of startups – the merciless denominator that must be defeated to hit milestones before your money is out. Tenacity is achieving and moving fast even when things get tough.

Being confident is a more complicated because it is often conflated with arrogance and overconfidence. Arrogance and overconfidence result from a belief that you have a set of skills and experiences that are superior to most others’. Confidence, rather, comes from a belief that you can apply effort with process and the input of others to develop abilities and achieve outcomes – the “growth mindset”. In this sense, confidence relies on others to help you while arrogance assumes others are inferior. True confidence is key to achieving the five actions above.

Motivated. In my discussions with other VCs, I found a common trend. Successful founders are motivated both by a passion for the problem (what one top VC described as “I can’t believe this doesn’t exist, and the world needs it”) and money. Consistently, VCs cited stories of one being necessary but not sufficient. Each VC had seen cases of (1) founding teams giving up when the payday seemed further and less likely on the horizon or (2) founders passionate about the problem but unable or even un-interested in sniffing out how to monetize it.

Last but not least, practicality is crucial in achieving success AND avoiding brain damage along the way. Yes, values and principles matter, but when it comes to business (not moral) decisions, being practical builds credibility and respect with employees, customers and investors. My favorite investments are ones where terms are negotiated in a quick call and a few emails. When we see contention in negotiating terms, we assume that’s how a founder manages every business deal, and we run for the hills.

What’s missing here? We hear a lot about achieving a perfect balance of EQ (emotional quotient) and IQ to drive success. And of course honesty. What about those? Well, many of the traits above are integral components of EQ. With respect to IQ, this isn’t middle school anymore; there aren’t smart kids and dumb kids. Most people you’ll meet in the startup world are pretty smart, whether credentialed or not. Most are honest too. There are certainly exceptions to both, and of course we look for smarts and honesty in our diligence, but they are table stakes. Smarts and honesty alone don’t get you far in a startup.

 

People, Part 1: Successful startup team modes

I’ve been spending a lot of time thinking about the people that I invest in. With 5 years and 50+ (firm wide) data points, what works and what doesn’t? This is the first of a few posts to come on this topic.

The characteristics of any person – including those we invest in – can be grouped as inspection characteristics and experienced characteristics. Inspection characteristics are those you can measure or observe from the outside, by looking at linkedin or having a cursory conversation. Experienced characteristics are the ones that can only be observed through extensive interaction. This post focuses on inspection characteristics and how they combine to form successful startup team modes, in our experience:

Startup experience, professional experience, and industry/product experience seem to be the three inspection characteristics that matter the most. These three dimensions chart a clear framework and set of combinations, or modes, where we’ve seen success.

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Two primary modes of success

Mode 1 – “The YC Model”:

First startup + limited professional experience + industry/product expert

I call this mode the YC Model because many Y-Combinator teams fit this bill: pre-career or early career founders in their first startup but with coding and/or product experience that is often tied to the industry they are disrupting. In our portfolio, two of our companies stand out strongly in this mode:

Farmlogs – software for farmers. They are actually a YC team, and the two co-founders started the company a few years out of school. Both were hackers and one grew up on a farm. Boom.

Shipbob – simple, fast and affordable fulfillment for e-commerce. Another YC team! Both co-founder are early-career developers – one from another portfolio company of ours and another at Deloitte. They started an e-commerce business before Shipbob and experienced the problem they are now solving first-hand.

Terminus and FourKites are also similar – relatively early career teams with direct product experience in their markets.

Why does this mode tend to work? Early-career, first-startup teams have little to lose. They are often unmarried, no children, mobile. While by definition these teams have a lot of learning to do on the job, they are typically cash efficient in the early days – they don’t need or want high salaries to accommodate the burdens they don’t have. They are also accustomed to getting their hands dirty. In cases where these teams have started their careers already (not directly out of high school or college), they were likely individual contributors and are not desirous of building big teams to which to delegate. Finally – and as important – these young teams have just enough experience to see and want to solve the problems in an industry, without being jaded are hardened by norms in need of change. Kudos to YC for productizing this combo.

 “YC Model” teams consequently do a great job finding product-market fit cash efficiently. They are nimble and fast. The flips side is that they tend to struggle scaling a business after finding PMF because they are inexperienced in hiring, managing and building organizations, navigating complex market dynamics and working with investors. They may also struggle with enterprise sales – a skill that develops over years of experience – and so default to lighter touch sales models even when they aren’t a fit. I am happy to say our teams above have worked handily through these challenges.

 

Model 2 – “Do it again, Sam”:

Successful startup exit + extensive professional experience + industry/product expert

This one seems like a no-brainer. Been there, done that; do it again, Sam; pick your proverb.

The best example in our Portfolio is G2Crowd – Yelp for B2B software – whose founding team built and sold Big Machines. We have a number of newer investments in our portfolio in this mode that we are also excited about including Truss, Hubdoc, Lookbook, Catalytic, and Upfront Healthcare.

While these teams may burn a bit more cash upfront, their on-the-job-learning is very low, so they are efficient on balance. They’ve also made money for investors before so have strong access to capital. As veterans of life and the startup journey, they know how to attract talent, build organization, sell to big customers, navigate a market and work with investors. Finally, if they are a big enough deal themselves, their prior industry role may help bring celebrity attention to their new endeavor.

This mode is not without risks, however. Experienced teams make mistakes, too. A common one is raising too much money, too quickly, at too high a price. This limits options for the company in the case where the team doesn’t get as far as it wants or burns too much doing so, eg, the company doesn’t hit plan. While experienced teams are much more likely to hit plan, it’s still a startup, so most don’t!

 

Do any other modes work?

Three dimensions, two levels each = 8 modes. We’ve talked about two. How about the other six? It turns out we almost never see success when teams don’t have industry and/or product experience in their target industry. The rare exception is the brand-new market which arises more often with consumer startups (think social in 2005), but rarely in B2B. So that negates four of the six other possible modes. The remaining two fall perpendicular to Modes 1 and 2 in the red/green axis above:

 

Mode 3 – “Exec-turned-founder”: 

First startup + extensive professional experience + industry/product expert

This is a tough one. These teams are often stacked with CxOs – managers or “leaders” who want big salaries from the start and want to hire armies of people to do everything for them. They know a lot about managing existing organizations but nothing about finding PMF or seeding scalable sales. These teams burn money fast and often fail or disband quickly as their financial and emotional dissonance with taking real risk pushes them back into corporate jobs. We have rarely seen success in this mode, highlighting some of the fundamental differences in traits between corporate leaders and startup leaders. Note that everything I just said applies to “IT” software startups. Biotech and med-device are very different – credentials and years of scientific experience and knowledge matter a lot, and those often come with long academic and corporate stints.

 

Mode 4 – “This is the big one”:

Successful startup exit + limited professional experience + industry/product expert

Even if this type of team is still young and inexperienced, they know what success looks like and can often do it again. Their first exit may have been decent or even great, but they want a huge one now. We have certainly seen this work.  The major risk is hubris or misplaced attribution. Young successful founders (and the investors who chase them) may conflate the success of being in the right place at the right time with the success of doing the right thing at the right time. The latter is more replicable, arising from judgment and skill, not luck. For some reason, more mature teams tend to avoid this type of mis-attribution. As an investor, that’s the crux of the other half of people assessment, assessing experienced characteristics like hubris and mis-attribution. That is for my next post.

Less any of this discourage a forming team that doesn’t “fit the mode”, please remember that these are only experienced rules of thumb. There are always outliers. I love being proven wrong, and I know many of you will do so.

When not to hire your first VP Sales

The VP of Sales is the most difficult hire – and highest stakes – at an early-stage startup. Across the many startups we’ve invested in, we see success with a company’s first VP Sales hire less than 25% of the time. This pales in comparison to a 60-75% success rate across all hires. Worse, there is so much riding on a VP Sales hire for a Series A or B stage startup because the cost of failure is high. Below is the estimated failure cost based on average contract size and assumptions on quotas, team size, etc for a range of software startups from SMB to Enterprise. (detailed assumptions and calcs at end of article for nerds)

Cost

There are two components included in the total cost above: (1) what you pay the wrong hire for the length of time they work for you, and more importantly, (2) the negative impact on potential rep quota productivity, assumed here to be negative 50% (you spend money on reps because generals need soldiers, but they are only half as productive as they should be because of poor leadership). The latter is the “opportunity cost” of not having a good sales leader. The total cost of the wrong VP Sales hire goes up significantly with contract size because longer sales cycles mean it takes longer to know if a VP Sales is effective. In enterprise, you might not know for as long as a year, and it could cost you more than $2M. That can equate to 9 months of runway. Bummer.

Why do startups so often fumble the VP Sales hire?

Here is the typical story: You had good momentum with founder sales and a few early sales people and got to $1M in ARR. This gave you the story to raise a $5M (Midwest) or $10M (coasts) financing. Now you’re in the big leagues; two VCs are staring at you in your first Board meeting waiting to hear how you’ll hit the $3-4M ARR you promised. They want to see revenue, and you want someone else holding that hot potato! Neither is a good reason to hire the VP Sales at this exact moment in time, but you do it anyway – quickly for the next Board meeting. That’s progress, right? It doesn’t work because:

  1. YOU: You’ve never hired a sales leader before, and they all sound great (duh, they’re sales people)
  2. THEM: Good sales leaders are rarely “on the market” – they are poached. While this is true of most types of talent, good sales leaders make a lot of money and really like money. They are the least incented of any talent to look for something new if they are doing well. This is unlike many tech and product people who more heavily value diversity of experience (and new option grants).
  3. YOUR STARTUP: The company isn’t actually ready to scale – the most common issue. Maybe you have 10-15 MB customers or 3-4 enterprise customers, but your brand is young, you are still honing your value prop/message and the repeatable sales process (where you find customers, how you convince them and how you close them) is still uncertain. Most of these need to be resolved before you hire a heavy hitting sales leader.

Points (1) and (2) can be overcome with the help of VP-Sales-hiring-experienced advisors in your interview process, combined with a methodical talent poaching strategy (you didn’t hear me say that). (3) is about nailing the basics of finding product market fit and a repeatable sales process. This means you. No one can do it for you. Practically, this is a “CXO sales model” where you and your founding executive suite – with the help of a few sales people for leverage and to test scale – find the repeatable lead sources, messaging and process to close sales. For companies with a $10K ACV, this typically happens above 150 customers or $1.5M ARR. For companies with enormous enterprise contracts of $500K-1M, it might not be until $3-4M in ARR or more.

Experienced tech founder and CEO Ben Alpert (sold Care Team Connect to the Advisory Board and now running Upfront Healthcare) puts it this way:

It is often a default reaction to assume that more sales people = more sales. One thing I have experienced when hiring too early is the natural desperation for the sales person to make something happen without the right support. That desperation can cause the person to chase the wrong prospects/opportunities which takes focus away…

What Ben describes is a key effect of hiring sales leadership too early. With generals come soldiers, and suddenly you have a flock of sales people desperately seeking revenue without the tools, process and brand support needed to do so at scale.

If instead you wait until repeatability is proven, a great VP Sales hire with appropriate company stage and business model experience is much more likely to be successful. There team will be too. You will also be better equipped to determine if the new VP Sales is executing. Having acted as the VP Sales yourself, there is a process you know works, and you can both train and hold the VP Sales accountable to it. As Ben puts it, the VP Sales hire is about leverage for the founding team in a proven process, not passing the hot potato.

Check out more VP Sales hiring tips and tricks from @jasonlk on Close.io’s blog post. The one tip I struggle with is Mistake 2: “Waiting to hire VP Sales too late”. It is true you should start scouting and meeting candidates early – casual cups of coffee now pave the way for a top VP Sales hire a year from now. However, 90% of the time the mistake is hiring a VP Sales too early, not too late.

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