Tech, Startups, Capital, Ideas.

Why should investors take sales risk?

By default, they shouldn’t.

Sales development is by far the biggest cost in venture-backed startups. Some investors estimate that as much as 70% of venture investment goes toward sales development. Few startups get it right on the first try. That frequently means an indeterminate number of additional rounds of funding to remove sales risk.

People have been selling for a lot longer than the professional venture industry has been around. So why does every company have to learn to sell? On the surface, it seems like getting up Mark Leslie’s famous Sales Learning Curve (SLC) should be easily repeatable. Tens of thousands of startups have taken a hard run at the curve, and some have succeeded. Just teach the right process, or better yet, hire an exec that has succeeded before.

The reason replicating sales success is so difficult is because success just isn’t that easy to replicate.

It’s the reason that the same team doesn’t win the Superbowl every year, that the same investors don’t make all the money year after year, the reason top mutual fund managers eventually break their S&P beating streak.

It’s quite possible, in fact highly likely, that an entrepreneur or sales executive benefited the first time from a great market and a great product. Not that they weren’t incredibly talented, but trying to repeat that success is as likely to depend as much on finding a tornado market as on the talents and expertise of the entrepreneur or executive.

Getting up the SLC is difficult because you have to get a lot right. The right market, product, and team. The right market is one in which customers or users want the offering now. They can’t live without it. The right product is one that delivers on its promise. The right team executes — it repeatedly runs experiments — and is expert at rapidly scaling the few that work.

Repeating the process, once developed, isn’t hard. What is hard is getting to a repeatable process.

There are lots of tools available that can help mitigate risk in the sales development process, including methodologies like High Probability Selling. But once the process is figured out, the best way to replicate it is through great hiring. There is little more frustrating than poor execution due to on the job training in a great market.

When Should Investors Take Sales Risk?
Why invest early when you could just wait, especially in markets where multiples are relatively low?

The answer is that, in many cases, you shouldn’t. There are few companies that are going to go from $100 million to a billion or more. The risks of investing later are: being wrong about where a company truly is on the sales learning curve and the opportunity cost of the money invested in a company that never truly has the capability to go from $100M to $500M or $1B+.

So when should investors make these early bets in relatively low multiple markets in which scaling sales is expensive?

• When the investor can buy a large portion of the company and believes he can get leverage on the early money. By leverage, I mean, backing an entrepreneur who will either be able to run a very low burn experiment to reach the inflection point of the curve, and/or has the ability to raise Other People’s Money (also known as OPM) repeatedly to iterate the sales model until the company moves up the curve.
• When a huge existing market is being radically disrupted or an entrepreneur has the ability to disrupt a market. Or put another way, when human behavior is changing (example: the shift from time spent offline to online) and a startup can take advantage of it.

Conclusion
As Chris Chase wrote in his Super Bowl summary, “Super Bowls are usually defined by conservative play. It rarely pays for coaches to be risky in the game. Little good can come from it. Nobody criticizes the safe play, only the bold one that doesn’t work. But when it works, it’s the stuff from which Super Bowl legends are made.”

One might easily say the same about investing.