VC Fred Wilson offers up a bit of counterintuitive advice every new start-up should heed.
Stop rapidly growing a sales force? Seems like an absurd idea to appear on a website devoted to entrepreneurial endeavors. The whole idea is to build a strong and vibrant business. Part of that process is bringing in the money necessary to keep operations humming and to build a nice profit in addition.
But the early push to grow revenue, that can become an all-encompassing drive, can be a big mistake. According to a Harvard Business Review paper (via Fred Wilson's AVC blog), the "temptation… to immediately ramp up sales force capacity to acquire customers as quickly as possible" is strong.
The Sales Learning Curve
The inclination can be dangerous because too often a company simply isn't ready to effectively direct a large sales force. The reason? The sales learning curve.
Any new business or product is something of a mystery on arrival and there is an organizational learning curve. This is usually understood by the design and manufacturing aspects of a company:
Employees transfer knowledge and experience back and forth between a production line and the purchasing, manufacturing, engineering, planning, and operations departments. Over time, the entire process becomes more effective: The more times a process is repeated, the more efficient it becomes and the lower its cost.
However, companies, especially start-ups, often forget that there is a similar sales learning curve. You start with assumptions about how you will reach customers and sell them the product. The customers react in various ways to your distribution strategy, marketing campaigns, and even the design and features of the product. Your company must now react to the customers, because they who choose to spend their money always become right by default. This process works in an iterative fashion as the company learns how to sell the product.
The problem arrives if the company puts its resources into ramping up the sales force too early in the process. You can burn through cash too quickly before your organization knows how to make the business work, which includes the following factors:
- time required to educate customers about why and how to use a product
- rounds of design modifications necessary to satisfy customers
- service issues that arise when a product is put into use
- a repeatable sales model
- development of market positioning
- design of effective sales incentives
Because so much is unknown at the start, the process of designing sales capacity–understanding realistic expenses and quotas for a salesperson, determining per-salesperson margin contributions, calculating the size of the initial sales force, and then hiring sales reps–is heavily affected by the learning curve. Salespeople won't be as effective and their marginal contributions can become negative.
The more quickly you hire salespeople at first, the more money you collectively lose and the faster you burn through cash. Instead, you should carefully observe the sales yield–"the average annual sales revenue per full-time, fully trained and effective sales representative"–and implement planning based on how sales yield is maturing and developing to avoid financial waste.
Another Sales Trap
A company can face an additional problem, according to Fred Wilson. A sales-oriented founder or CEO can sometimes help talk the market into buying a product that still needs adjustment. What seems to be early success begins a feedback cycle in which the leader pushes for even faster sales growth and ramps up hiring salespeople. However, all the sales activity can mask problems the product has in the market. As the sales effort continues to ramp and headcount expense increases, so do customer churn and any negative word of mouth. The company now burns through cash without learning the basic sales curve lessons that it faces.
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