Confessions Part 1: Doing The Math Wrong When Scaling Sales In A Startup

(This Post originally appeared on LinkedIn here)

This post focuses on a typical mistake startups can make when deciding to scale their sales. I call it "doing the math wrong". Its significance is based on the potential impact shortening the financial runway of a company, especially when the mistake isn't corrected within weeks but quarters or even the next fiscal year. In addition, it creates frustration amongst employees and investors.

Imagine a young company creating $1M business in their first full year after launching their product. After investing a lot of time and effort in the idea and the creation of the offering, everybody in the company feels great when real customers pay money for what is provided. It turns out that this company had one person taking care of sales during this period. They decide to scale their sales organization from one to five employees who carry a quota, expecting 5X $1M = $5M new business in the next year.

The mistake is that they didn't dive deep to really understand how the $1M were produced. If 75% of the $1M business was based on incoming leads, including the network of their founders and investors, only $250K were initiated in the market. This means that this company won't finish at $5M or higher with 5 sales reps - more likely it will end up with $750K + 5X $250K = $2M.

Readers might argue that $750K incoming leads might be a sign for "growing momentum" in the market or some of the existing customers might ask for expanding their business with the company. Well, banking the future of the company on the hope that $750K automatically scales to $3.75M is not a strategy...it is hope.

Even if the converted leads do scale somewhat to over $750K other circumstances won't. A prime example is the impact of the founder on growing the business.

Let’s say the existing business of $1M is based on an average contract value of $50K with 20 paying customers and the founder(s) were involved in 25% of the won deals or 5 paying customers. They won't be able to scale this to 25% of the won deals for $5M or 25 customers. Depending on the individual win rate it would mean the founder(s) would need to be involved in 75 to 100 prospective customers. Founders are great in front of customers. They are extremely credible, knowledgeable and excited with regards to their offering and company...but they have many additional things to do to ensure their company is flourishing.

Here are my top three recommendations:

1. Dive deep into customer buying journeys to understand how and why customers make their decisions, and learn from lost prospects as well.

2. Capture all relevant data points and analyze them to fine-tune your ideal customer profile (ICP) and product-market fit (PMF).

3. Assess the impact of founder involvement and develop strategies to empower non-founders to have a similar positive impact on the customer's buying journey.

Avoiding these pitfalls will lead to more informed decision making and sustainable growth for startups.

(Amongst the topics for my upcoming posts are views and recommendations for improving ICP and PMF, focus in a large total addressable market (TAM) and many more action oriented content to achieve hyper growth for startups)