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.

Assumptions/calcs for chart:

Chart

Investing and building marketplaces

Akin to tech companies, tech investors must continually reinvent themselves. An investing thesis that worked five years ago is now likely to be a bust. We made several freemium/premium model investments in the early days of HPVP – FarmLogs and NoRedInk. They are turning out well with significant market share and paid conversion traction. But does freemium/premium work in agtech and edtech now? I don’t think so. Customers have come up the learning curve, seen (and paid for) the value software provides and may already have an installed favorite. These are markets more ripe for monetization with better product, less so “free”-driven land grabs. As I’ve discussed before, investment theses follow an arc of unproven bet to reality. SaaS is doing the same.

HPVP has been a committed SaaS investor from the beginning, and we will remain so. However, our conviction and commitment in SaaS is not without a realization that SaaS has become increasingly competitive. Many horizontal SaaS markets such as CRM, ERP, MarTech, Sales Enablement have broadly become hyper-competitive where only the best of the best executors can win. There is no margin for error, yet we all know there is so oft error in starting up. In these horizontal markets we see pockets of opportunity – sub-theses where there is not yet consensus and where returns favor experimentation and speed, in addition to execution. Such is the case with our Terminus investment, the early leader in the Account Base Marketing “sub-thesis” of Martech. We see much more consistent SaaS opportunity in the much-lauded vertical SaaS area and remain excited about agtech, logistics tech, digital manufacturing and supply chain, all industries with extreme Midwest advantage and affiliation.

We are also looking outside of SaaS to marketplaces. Chicago has had storied success in marketplaces. There is good DNA here including Grubhub (food) and Groupon (deals). More recently, we are home to Raise (gift cards), Parkwhiz (parking) and Spothero (parking). We are already investors in G2CrowdParkwhiz, Dolly, Partyslate, Truss, Tock, Pearachute and every day we are looking at more marketplaces.

Marketplaces can be harder than SaaS. They are often two business models in one (as if one wasn’t hard enough) and tend towards winner-take-all. However, they are also very large opportunities given the scale of consumer and B2B product and service markets, and they are increasingly favored by evolving tech trends and consumer behaviors. Seamless payment technologies, digital imaging (think matterport) and internet everywhere reduce transaction costs to enable marketplaces. Consumer acceptance of reviews as a trust standard, increasing preference for digital communication (text/email) and the gig/on-demand economy all favor consumer and business adoption of marketplaces as well.

For entrepreneurs considering a marketplace model, Bill Gurley’s seminal 10 Factor post is a great place to start. Bill’s is a terrific framework to sanity check marketplace ideas, but basic economic theory provides an even quicker test. In simplest form, the requisite conditions for a marketplace are trust, product standardization and potential for liquidity.

Trust:  People and businesses won’t transact on a marketplace without trust. In advanced marketplace exchanges (like Nasdaq or NYSE) the trust issue is solved by the exchange taking the counter-party performance risk. In most digital marketplaces (Ebay, Expedia, AirBNB, Amazon Marketplace, Uber, Etsy), user reviews are employed to mediate trust. Historically, this was a supplier side phenomenon. Users have long been creating and referencing supplier reviews on Ebay and Expedia to make buying decision. On-demand economy opportunities, however, place suppliers at much greater risk; having someone sleep in your home via AirBnB or be a passenger in your car via Uber is much riskier than mailing baseball cards via Ebay. These are shared experiences with valuable assets at stake, not simple product transactions. Enter the buyer review to solve this: AirBnB and Uber buyers are rated, and AirBnB has a $1M guarantee for sellers. Trust is also big issue in business-to-business marketplaces given the large dollars and reputations at risk as well as complexity of B2B transactions. Our portfolio company, G2Crowd, is leading the way in bringing trust and transparency to the B2B software market using reviews, both on its own platform and soon beyond.

Product Standardization: There are search goods and experience goods in economics. Search goods are products or services whose features, quality and value can be easily assessed before purchase. Experience goods can only be assessed during use or consumption. In general, digital marketplaces lend themselves well to a subset of search goods, standardized products – known physical skus, commodities, or other products with which the buyer has prior experience or can see outside the marketplace before being certain of buying the same product online (think visiting BestBuy to see a phone and then buying on Amazon… don’t hate me, BestBuy). So then what of all of the growing service and experience marketplaces like Uber and AirBnB? Uber jumps through hoops to standardize their service with expectations for drivers on type of cars, age of car, politeness and driving behavior. Travel marketplaces like Expedia and Kayak do the same by bucketing the multitudes of branded hotel rooms into simple 1,2,3,4,5 hotel star brackets. AirBnB is an outlier, actually turning standardization on its head by using non-standardization as a differentiator. However, it shoe horns “experience products” into “searchability” through extreme information sharing from hosts (pictures, commentary, maps) and prior visitor reviews.

Potential for liquidity: Even with trust and standardization, there must be many buyers and sellers – what I think of as many “match pairs” – for liquidity to be possible. For liquidity, there must also be a propensity or willingness for match pairs to change and stay on-platform instead of going off-market together for the next transaction. Match pairs on travel sites rotate, for example, because consumers want new experiences and the best price. On Uber they rotate because consumer want the closest car. On AirBnB, Grubhub, Etsy, (and Ashley Madison!), match pairs rotate because consumers want diverse experiences and goods. These are all examples where ongoing “coordination” costs and loyalty of relationships are low, something airlines and hotel brands have been trying to fight for years.

But where do I start?

Let’s say your idea checks out on Gurley’s key questions and the basic economics above. How do you actually get it started? I am regularly asked by seed stage marketplace entrepreneurs, “which side of the market should I build out first?” The flip answer is “both”… most marketplaces are built via correlated growth on both sides. However, in the earliest, earliest days, you need to focus your attention somewhere first. Where? To answer, I like to explore these three questions:

Which side of the transaction is more desperate? In any two-sided marketplace, there is usually one side(the buyer or seller) who is more desperate to transact. While there are exceptions, it is usually the seller – the restaurant, hotel, airline or maker that needs customers to survive and wants to explore new channels.

Which side of the market is more patient? There is a risk, however, of focusing too narrowly and too long on building seller inventory. How long will they wait for demand? The answer depends on the effort that is required of sellers to onboard and remain “active”. We have seen restaurants remain on marketplaces for many months without much action because their effort is limited. The menu is uploaded then stays the same; if an order comes through, terrific. The patience of sellers with changing inventory and prices that must be continually updated is much shorter. We have seen this with various B2B wholesaling marketplaces that failed – by the time entrepreneurs got to driving demand, inventory was stale.

Which side can be short-circuited? There are also cases where one side can be “short-circuited”. By this I mean inventory or demand is quickly onboarded through an aggregator or unique wholesale acquisition strategy to solve for one side of the marketplace. Then the other side can be quickly tested. Aggregators, for example, exist in the travel and the consumer deal industries. If you have a new twist on a travel or deal marketplace (bless your soul), building initial inventory to test demand is pretty doable. If demand materializes, you can later onboard direct supply to score a larger piece of the economics. Usually the seller side is easiest to short-circuit, especially if it is the “B” side of a B2B2C marketplace. Businesses are easier to aggregate and short-circuit than consumers.

Each marketplace fits  differently in this framework, but if the clear answer to at least two of the questions is the same side of the market, you have a strong indication of where to begin. Oh, and if you’re building a marketplace, let’s chat!

Celebrating SaaStr: The essence of software and zero marginal cost

My partners and I will make our first pilgrimage to SaaStr this week. The tweet at bottom from my colleague Jackie should give you a sense of how SaaStr feels for a SaaS focused VC. It’s like a StarTrek Convention for a Spock impersonator. SaaStr and – twice in one week – being asked “what does AI mean for SaaS?” got me thinking about the “essence” of software.

There is only one other technology in human history that has had the impact of software – the printing press, of course. (okay, maybe electricity too) However the growth of literacy rates that printed books spurred pales in comparison to software adoption, using internet as a proxy:

Essence.jpg

Source: Ourworldindata, OECD, UNESCO, Scribblrs

Why is this? The marginal cost (and often price) of software is truly approaching zero, putting it within reach of even the poorest of the poor. The marginal cost of a printed book has never been that close to zero, so the price and effort required to learn letters has long been insurmountable for poorer tiers of society. The good news is software itself has now too made the marginal cost of a book zero, which in turn will help drive literacy rates on their final climb towards 100%.

Okay, so software is “eating the world” rapidly, but what does this mean at its core? In short, software is a digital means to drive marginal costs of transactions of any kind – human-to-human, human-to-machine, business-to-human, and so on – to zero. This definition is pretty broad, but purposely so. From punch cards replacing the human “computers” of Hidden Figures to a bot managing customer service interactions for a banking app, it is all part of the same trend. Software can help humans do stuff faster, cheaper and more accurately, and each new wave of technology (eg, now AI) brings software that much closer to surmounting costs of existing transaction methods… and displacing them.

Nerdy, true, but I am using this specific economic framework purposely to lay groundwork for the AI question. I am not excited about AI itself; it is just another tool in the expanding toolkit of technology infrastructure that underlies software. What I am excited about is the specific situations in which it can make software work cheaper, faster and more accurately such that non-software processes can be replaced.

We’ve invested in two examples of this, both in Ann Arbor, MI. Why there? Surprise, surprise not every developer knows how to do AI just because they are a developer (a word of caution to the AI snakeskin salespeople out there… we’re on to you). There is real AI coming out of The University of Michigan. Notion uses AI to help me communicate with my colleagues more efficiently by knowing what and who is important. I use it instead of gmail. Clinc lets banks offer personalized chat interaction with consumers, foregoing frustrating phone trees, waiting and customer service reps’ own shortcomings.

But AI is only the most recent in a long line of infrastructure innovations that drove (and continue to drive) the adoption of software to the zero marginal cost singularity:

Silicon transistor (and Moore’s Law) –> Workstation/mainframe –> PC –> Internet –> SaaS (cloud) –> Mobile –> IoT –> AI

There are also UI innovations I’ve discussed that have a similar effect:

Punchcard –> Keyboard –> Mouse –> Touchscreen –> Voice –> VR

As with AI, when any infrastructure or UI innovation emerges, there is always buzz of exponential promise. However, entrepreneurs and investors need to see through the hype to specific use cases where transaction costs are actually diminished by the new innovation, and therefore adoption is warranted. We believe, for example, we are doing this with our investments in Notion and Clinc. A cool infrastructure or UI shouldn’t be used just because it can be and is not a customer benefit in itself. for this reason, I cringe when I hear startup one-liners like “AI for XX” or “ML for YY”. In many cases, the best innovation implementations will barley be noticed at first as with Google’s use of AI for image recognition, now a powerful consumer benefit in Google Photo that enticed me to switch from Dropbox. Google doesn’t call it AI; the new feature is simply an obvious enabler of search that makes search faster and more accurate.

So at SaaS this year, let’s not get caught up in the hype of technology but see the long arch of software for what it is, an unfinished journey of removing transaction costs in business and all facets of life.

Bonus 1: Internet adoption inflection point with mobile

In looking more closely at the internet adoption curve, it is amazing to see the inflection point to a higher adoption rate in the late 2000s. What caused this? The first major trend of linear growth happened from 1998 to 2007 with the PC boom while the second major trend of linear growth – at a higher rate – happened from 2007 through today with the mobile boom. This is driven by India, China and South America where mobile leapfrogged gaps in electricity, phone and other infrastructure in poor and/or rural society. No doubt access to mobile internet will help drive the final journey of global literacy rates in these places as well.

essence-3 Source: Scribblr

Bonus 2: VC excited for SaaStr!

 

Five cities, five days, unbounded opportunity

I spent last week meeting hundreds of top talent student and faculty members at Purdue University, University of Chicago, Notre Dame, University of Illinois and the MKE Water Council. My mission: find great talent for our companies and find the next great company to invest in. Thanks to the many folks at each campus who hosted us; I’m excited about the companies and people we’re now engaged with after the trip.

There were a few common themes I observed on campuses:

Entrepreneurship is finally an established career option: Even only 18 years ago when I was an engineering student, no one talked about “entrepreneurship” career options. 20 years ago at top MBA programs, “entrepreneurship” was a dirty word. Today, entrepreneurship is the top concentration at U of C’s Booth School of Business, and Purdue now counts 1900 students in their entrepreneurship certificate program, with 400 new students joining per semester. Wow. Yes, entrepreneurship is risky and volatile, but it can be taught, or at least coached.

Starting young is low risk: Of course, the entrepreneurial spirit cannot be taught. It emerges in macro and micro cultures – on campuses, in countries, in families – over decades and generations of attempts, successes and failures. Our modern cultural heroes of Zuckerberg, Levie and Jobs help as well. The beauty for students is that starting a company or working for a startup young is a great time to do it. Students and recent grads have little “expertise or experience” – and so may not be at the point in their lives to maximize chances of success – but cost of failure is very low. Students and recent grads without families and responsibilities can live cheap, and if they fail, they can hit the “reset button” of grad school or joining a big company. Moreover, students at top schools have not yet experienced failure – they are at a unique point in there lives where everything seems possible. Make it happen.

The only regret I have from the trip is that I couldn’t visit more places in one week, so I’m planning some follow-up trips. So far on the list:

  • Monday, February 20th  – UW Madison
  • Tuesday, February 21st – Marquette University
  • Rose-Hulman and Northwestern are also in the works

If you couldn’t make one of the stops, here are some resources for you:

Slideshare startup/VC primer: To learn more about startup internships, careers or raising capital, check out the Slideshare below of my deck from the tour. You can also check out my recorded presentation from Purdue’s Anvil at this YouTube link.

Find jobs: Our team at Hyde Park Venture Partners recently launched a talent portal to match top talent within our 50+ portfolio companies across the Midwest, Atlanta, and Toronto – please share your resume with us, so we can find a few opportunities for you: Hyde Park Venture Partners Talent Portal. Please also checkout TransparentCareer, the best place to find salary and comp stats for early career roles (shameless portfolio plug!). 

Career decision making: At many of my stops, I referenced this framework about how to think about career decisions: Career advice: don’t listen to it, but if you must…

Enjoy and see you on the road for the Midwest Startup Tour Round 2!

Midwest startup tour: Little cities, no little plans

On Jan 23, I kickoff a five day tour of some of the Midwest’s most innovative cities and campuses. It seems fit to frame this with the oft quoted “Make no little plans” from our favorite son, planner and architect Daniel Burnham. He turned the railroaded cow town of Chicago into a model of urban innovation.

Silicon Valley is unequivocally this same model for startups and tech innovation globally. Its concentration of talent, risk taking mantra, capital and history make it one of a kind. Unfortunately, the Valley’s bending gravity leaves most investors blind to the forming critical mass of these same ingredients throughout the college towns and small cities in the Midwest – many of these places are becoming mini tech hubs. Why here?

Positive selection of people: 20% of the top 50 computer science programs, 26% of the top 50 med schools and nearly 30% of the top 50 b-schools are in the Midwest (US News). Startups are built on people, and like Silicon Valley, these programs draw the best of the best people from around the world. These are smart, driven people, willing to take risk.

Ideas are championed – nothing is impossible: The academic spirit aflame around these top academic institutions engenders both ideas and respect for ideas. This is a key ingredient as every startup begins with a founder’s idea and a few other people saying “wow, that’s a good one”.

Midwest values:  However, without Midwest practicality, ideas would die on the academic vine. The Midwest values of sensibility and action-over-words drive practical application and progress. They ask of any idea “So what? Show me”.

Abundant talent: The institutions of the Midwest yield a wide and deep talent pipe – a few of whom become founders – but many more who can join an already seeded startups. While the job market here is healthy, it is not nearly as tight or as expensive as Silicon Valley. Talent is more affordable in the Midwest and yet itself can afford a better quality of life. This yields a more loyal talent base with less turnover.

It is true that for rapid scaling a startup will need to expand beyond a single college town or maybe even the boundaries of the Midwest. In any given Midwest city, the talent pool may be high quality, but is also usually small in absolute size, presenting denominator challenges as a startup gets large. There are also fewer people here who have built large tech companies – the startup DNA is thinner, though deepening by the year – and capital remains relatively scarce. When these considerations are balanced well with the upsides, however, big wins happen.

Most know about Grubhub, Groupon, Braintree in Chicago, but think also of ExactTarget in Indy, Workiva in Ames, Duo in Ann Arbor, Toa in Cleveland, just to name a few examples. There are many more to come. We are already thrilled to be part of FourKites and G2Crowd in Chicago and Farmlogs in Ann Arbor, a truly a unique startup hub.

There will be more big successes, and we are on the road to find them. For founders founding and others looking to join a startup, below is my schedule so far. Email me if you want to meet:

UPDATED 1/15

Mon, Jan 23: @ Purdue in West Lafayette, IN

Tue, Jan 24: @ The Water Council in Milwaukee, WI

Wed, Jan 25: AM TBD, PM @ University of Chicago

Thu, Jan 26: AM @ Notre Dame in South Bend, IN; PM at U of I in Champaign, IL

Fri, Jan 27: AM @ U of I TEC Center in Champaign, IL