Editors Note: Contributing post by Sam Jacobs, CRO of TheMuse.com, the employer branding platform helping companies recruit top talent.
The most common mistake I see startups make is equating “scaling” to “hiring”. They are not the same thing.
It’s incredibly common. A company makes it to ~$3M in ARR through the rapid conversion of early adopters. They then raise a huge round predicated on the extension of their percentage growth rate.
Meanwhile, they’ve made a critical mistake.
Namely, the financial model they built relies primarily on the number of ramped Account Executives as the driver and key input.
The following factors drive the performance of the model:
- Number of new reps hired and when
- Ramp period
- Quota attainment rate
- Employee turnover and employee churn
The problem: articulating growth in customers as a function of the number of sellers.
The answer: articulating growth as a function of the number of leads, meetings, and opportunities. Pipeline.
Growth in actual demand is not driven by hiring reps. Reps channel demand into money. Growth in actual demand is driven by a) a great product customers love and b) an incredible marketing organization that understands how to find and acquire new prospects.
All of the inputs I’ve listed above are the vehicles that harness demand – they are not demand itself. And therein lies the problem.
Because sales reps are the least efficient way to scale demand. Even when you’re using the right tools (eg Salesloft, DiscoverOrg, Jiminny) their ability to set meetings and convert those meetings into opportunities is expensive and time consuming.
Put another way, you want your reps spending as much time on the phone with qualified prospects as possible – and as little time cold prospecting.
Yes, you want your reps to prospect as a matter of organizational discipline and accountability. But your growth story will be driven by your product (as expressed through renewal rate) and your Marketing organization’s ability to generate leads from your target audience. Leads that become customers down the funnel.
Very few companies build a revenue model based solely on understanding the marketing funnel. Very few companies develop their growth plan based on a knowledge of the requisite marketing investment necessary to acquire customers first and foremost before hiring sales reps.
So what happens is fairly straightforward:
The plan is built based on hiring reps. But hiring reps has no meaningful impact on demand growth. And no corresponding investments in marketing have been modeled beforehand. So leads aren’t necessarily growing nor is demand. But new reps are entering the company. They are good people but being onboarded into a fundamentally different organization than the people who are recruiting them understand.
“Instead of building a plan around hiring more people, build a plan around increasing your marketing and demand generation … so you can flood your reps with leads”
The organization beforehand had enough demand to feed a small team of reps. And those reps and sales teams were having great success.
But new reps are entering an environment where the same pie has essentially been sliced into smaller and smaller pieces.
And the consequence of that is obvious: the business begins to miss projections and all the fundamental assumptions – assumptions about ramp time, quota attainment, and productivity – begin to slip.
Meanwhile, you’ve added a large number of newcomers to your culture – newcomers that are not succeeding and are beginning to have a corrosive impact on the rest of the team. People move from winning to losing and anxiety starts to rise.
The answer to these problems and issues is fairly straightforward.
Instead of building a plan around hiring more people, build a plan around increasing your marketing and demand generation investments (eg hire more SDRs) so you can flood your reps with leads. In this scenario, you have a forecast built primarily around a funnel and a cost of acquisition.
And you have a point of view around how many meetings and opportunities each rep can manage at full utilization and what that implies for the true quota potential.
Don’t make the mistake of assuming existing productivity remains stagnant. If your quota is $30K per month, work backwards to understand if there is possibility (given your deal size and sales cycle length) to move it up to $50K or $60K.
Don’t assume the only way to make another $30,000 is to hire another rep.
Here’s an example:
- A typical Mid-Market rep, at a roughly $30K deal size, should close between 2 and 3 deals per month.
- At a 15% close rate from Discovery, we need 16 opportunities open at any given time to hit quota.
- If 50% of meetings move to Discovery, we know each rep needs 32 meetings per month to hit quota.
- 32 meetings in a 21 business day month is 1.5 meetings per business day to hit.
Assuming you want to have good notes and records in Salesforce, a rep can probably handle 3 great meetings every day on the Mid-Market side and maybe 2 great meetings on Enterprise (given sale and deal complexity).
So now we know that your goal is at least 1-2 meetings per day and a great day is 3.
Now we go back to that moment just after you closed your last big round, right after you pitched your hockey stick growth to your next investor, and right before you hired all those people. We go all the way back and we look at how many meetings per day your reps are actually having. We know that anywhere south of 1 per day or 5 per week per rep and we have capacity in the system. Our reps are not at full utilization and before we hire more reps for growth we want to make sure we can get them up past at least 1 meeting per day and hopefully closer to 2 or 3.
This exercise is dead simple and can be eyeballed simply by opening up your rep’s calendar and looking at it. If you see a lot of blank space, please don’t hire more people. If the floor is silent because nobody’s on the phone or talking to customers, please don’t hire more people.
The order of operations is straightforward. First, build a great product that solves important problems and that your customers love. Then, make Marketing and Demand Generation a center of excellence. Before you hire more reps, demonstrate you know how to go get more leads.
“If your organization doesn’t know how to acquire more leads, do not hire more sales people.”
Evaluate your utilization and capacity ratios to understand when the reps are nearing capacity and, again, demonstrate to your organization that when you hire 3 more reps, you know how to go out and acquire 96 more meetings each month so they can hit their quota.
If your organization doesn’t know how to acquire more leads, do not hire more sales people.
The ability to generate demand is not optional. You must solve that problem if you want to scale and it can’t be solved by throwing bodies at it.
Sam Jacobs is Chief Revenue Officer at The Muse, helping great companies attract and retain top talent through best-in-class employer branding. Sam has spent the last 15 years building and scaling high-growth companies including senior executive experience at Livestream, Axial and Gerson Lehrman Group (GLG). Sam is a contributing partner at Building The Sales Machine.