Sales v tech: Where does the real value lie?
For a fast-growth tech firm, your tech or IP gives you a USP to monetise. But without an effective sales engine, your business will struggle to grow. Investors weigh in on how to balance the priorities of sales and tech in a fast-growing business…
‘Direct sales in tech isn’t always the right way’
By Dave Moreau, serial entrepreneur turned independent board member and investor in early-stage tech companies.
‘My experience of tech businesses over the last 15-17 years is that founders and shareholders frequently underestimate the complexity of selling into the tech market - and a key part of that picture isn’t just sales, it’s distribution.
‘As a board member on digital companies, I often see that direct sales in tech isn’t always the right way - it can be more about selecting the right distribution channels and partners that fit with your product and service. It might be OEMs, manufacturers, mobile network operators, big software distribution partners - these are big companies with their own lead times and ways of working that you need to factor in. If you don’t pick the right distribution partner to work with, then the ultimate sales cycle to generating revenue can be extraordinarily long - the biggest companies can take several years in the worst cases to get something from discussion into market.
‘So yes, people underestimate the complexity of generating meaningful revenues in tech, and the people who are building the tech don’t always think about monetisation. Drafting in some sort of external expertise early on could help here.’
‘Venturing into the market can help fuel tech improvements’
By John Cordrey, Senior Investment Manager at Foresight Group LLP, a £2.8bn infrastructure and private equity investment manager which makes investments between £250k to £5m in exciting UK growth companies. John is an experienced private equity and venture capital investor, who has completed numerous investments within the technology and ecommerce space.
‘Value lies in both the tech and sales traction. For longevity you need the tech to be unique and defensible so as to remain one step ahead and ultimately be desirable by acquirers. Buyers will attribute a value to the time and labour cost, the potential savings or lost opportunity cost of acquiring a technology versus building an equivalent platform in-house. At the same time, a strong base level of sales and exciting growth potential combined with high quality customers will evidence the desirability of the tech. A good story regarding sales traction and retention, an underpinned pipeline and a clear sense of why your tech will remain differentiated for the next several years is key.
‘One of the primary issues an early-stage business faces is whether to keep investing in technology development, or to begin hiring salesstaff. This can quickly feel like a catch-22 situation. Tech-led teams may favour continued development which can sometimes create interesting technology - but without anyone to sell it, the outside world and potential acquirers may never know about it. Conversely, if you hire too fast and sell an under-developed product, you may alienate that prospective potential lead. Your first several customers can be a valuable panel for feedback and may want additional modules or tweaks. As a result, venturing into the market and making sales can actually help fuel technology improvements that you may not have envisaged previously.
‘Investors will typically want evidence of commercial traction and so you may start by finding trusted resellers if your margin permits, or a strong salesperson who could be incentivised by options and a performance-related bonus rather than a high base salary. This will reduce your cash outgoings and also sift out the believers versus the salespeople looking for an easy life.
‘The hardest part of building a sales team is hiring high quality staff. Management teams who succeed in building a profitable sales team tend to abide by a pre-set collection of metrics including the ROI that a salesperson must return after all gross costs (usually 3x is a base target) and a date by which they should have made a sale (3-5 months). A sufficient probation period is useful. Where the salesperson isn’t on track, the CEO must be prepared to consider the hard decision to replace a salesperson. Often, it can be unwise to hire lots of staff in one go without evidence of each of them performing - it can be a drain on cash and also create the wrong culture.’
‘A management team that understands the commercial model is essential’
By Charlie Robinson, Partner at YFM Equity Partners, with a focus on growth investing in the UK SME market place and deep experience in software and technology investments.
‘This is a hugely relevant and important topic for us as investors, especially in terms of the stage at which we get involved with companies. We only tend to work with businesses that have already established some meaningful sales traction in financial terms, so they’ve done the hard yards of proving the technology and getting beyond proof of concept.
‘One of the hardest things for us to assess is always: how good is the sales engine of a business? So we ask: Does the business have a very clear view on their proposition and where the value sits for their customers? Can they articulate that vision to people who, like us, aren’t living their business day in day out, in a way that can give us confidence once we invest? And, given, that most of the time our investment in these kind of companies is to help them scale up, which normally means recruitment of resource, we also need to know: Is there the infrastructure and the strength in depth in the business to start delivering growth when we flip the switch? Or is there going to be more work required to refine the go-to-market and be effectively patient to give people time to deliver?
‘This whole piece has become more and more important to us over time, because you can't afford to spend too long waiting for a business to get its value proposition right and develop in a new market or even in an existing market place. If the founder or management team struggles to make the business case clear for their customers, if they’re too technology-centric and not customer-centric, then that's an area that we’d want to look at very closely, and we would need to work out if that can be fixed. Even in a high-growth tech business, the technology is not enough. A management team that understands how to drive revenues and how the commercial model works is essential.
‘The classic scenario you see is where a product gets over-engineered because it's what the first customer says they want or because it's what the founder had in mind as a vision, but the business neglects to adapt to changing market demands or needs. It’s so important with software and technology assets that you understand what difference your offering is going to make for the user - what the use case is, what the return on investment is, what customers’ purchasing drivers are, why they're going to buy it, how long they’re going to use it for and so on. Because if you haven't got all that in mind, you're very likely to take on external investment and continue to develop the product in a way that the market may not require.
‘We increasingly look for what I would call product management skill sets within the business, or at least a recognition that they might be required. By product management, I mean the interface between the front-end sales & marketing side of the company and the research & development side, to make sure that you are developing your product in a way that meet the needs of the customer and make the best use of your resources.’
‘To support businesses here, we use a variety of measures, such as interims or consultants that can go in and assess the state of affairs. We’ll also recruit senior sales resource into the business on an informed basis. We look to bring in external expertise wherever possible because moving the needle with B2B sales is hard. Sometimes you just need someone who really understands the base disciplines of the sales pipeline, the rigor around how you manage a sales team to make sure that you’re getting the most out of them, and the quality of opportunities that you're looking to progress.
‘So, from our perspective, a big part of the attractiveness of a business is a sense that the team has given some thought to commercialising their offering, and to the back-end of how they would actually operationalise the selling. These things can often be fixed, and our capital is there to help businesses do that and develop their proposition further. But we do look for a recognition in the business that this is an area they need help with. And that's positive for us because we can do something about that. We can't do a lot about the founder who sees themselves as the best and only salesperson for the rest of the company's life because that just won't scale.’
‘You need to develop IP in every aspect of your business’
By Jason Roomer, Principal at Capricorn Capital Partners, an early-stage fintech and financial services investor.
‘We are early-stage investors - often pre-revenue - in fintech and financial services. We provide a platform of resources to support founders, including data science, project management, finance, IT, strategy and regulatory. We also develop our own ideas into businesses and bring on great entrepreneurs to partner with us.
‘In the very early stages, the relevant questions are: do we have something that can scale, and how do we position ourselves to scale rather than how do we scale? These questions pose a critical understanding of the market for entrepreneurs.
‘At the outset, founders and investors need to clearly understand the problems they are attempting to solve. They should “get in the van” (thanks Michael Sippey) and go speak with people.
‘Founders need to understand: if the perceived problem really is a problem, who is it a problem for, and how much do people care about the problem? If the potential solution solves all or part of the problem, would someone actually pay for the solution, and if so, how many someones would pay for it?
‘A business isn’t scalable if the problem is only a real problem for a handful of people or businesses.
‘This should be an iterative and deliberate process. During the process founders should be developing their tech in line with the learnings. There’s no point in building great tech that no one wants, needs or is easily replaceable.
‘This iterative process helps founders develop the right IP in their tech while they bolster their understanding of the market. Through this process founders become subject matter experts and, importantly, develop their ability to sell their solution. However, for a business to be scalable the question is whether someone besides the founders can sell the product too, i.e. can they build a sales team that believes in and understands the product and customers’ needs well enough to sell it?
‘This process should be repeated prior to any material product changes or any new products being introduced. Technology is the greatest disintermediator of our time and current solutions need to be continuously tested against the ever-changing technological landscape.
‘Post proof of concept, founders may have something scalable and need to think about how to position for scale. As the business and team evolve so too will specific roles and responsibilities. Various teams emerge - including tech, product management, product marketing, marketing, sales etc - and they all need to work together effectively to scale. Therefore organisational structure and communication processes become crucial. Each business is different and founders need to spend time designing a structure that works for their business.
‘Founders should also be hiring the right people for the right jobs at the right time. One must have an eye on the future but one must hire the right people to get there or risk never arriving.
‘At Capricorn we really like the idea of building IP into all aspects of a business, to create a layered competitive advantage and economic moat.
‘Beyond the protectable IP in the product there is increasingly protectable IP in sales and marketing due to the volume of data available and the ability to process it. It’s no longer enough just to have a push cart full of quality apples. To compete and have the greatest chance of success, the vendor needs to understand the propensity of each customer to buy an apple, what kind of apple they may like, when they will want an apple, how best to present the apple to them, and when to approach them again to buy another apple or perhaps even a grapefruit.
‘However, meaningful IP doesn’t have to be patentable. The way the team communicates, the hiring process or employee training are examples of other key areas that require a calculated approach.
‘Ultimately both forms of IP are crucial to build a defensible and scalable business. Anyone hungry now? Can offer you a grapefruit*.’
‘Getting the recruitment piece right is essential’
By Philip Edmondson-Jones, Investment Manager at Beringea, a transatlantic venture capital investor that backs scaling technology companies with £2m-£10m to create international success stories.
‘At the stage we start investing, which is normally Series A or Series B, we typically expect to see not just a minimum viable product but that the company’s core technology is largely in place. In most cases, however, the sales engine isn’t in place yet - you might just have a founder salesperson and a small number of junior sales development reps. So that's one of the things that we end up prioritising when we start our board engagements with portfolio companies. Most of the raise will usually prioritise expanding sales and marketing vs making step changes in the technology.
‘We’ll focus on figuring out what the right structure of the sales machine is going to look like over the next year or 18 months, and helping the founder to transition out of a primarily sales role and create a sales and marketing function in its entirety that’s properly structured and able to deliver against the goals the board sets for it.
‘To help with this, we often introduce headhunters and help facilitate interviews. Introducing good senior recruiters is critical, as recruiting talent gets almost exponentially harder the more senior the role you're looking for. Whilst hiring SDRs (sales development representatives) or junior account executives is pretty straightforward, it’s very hard to find someone with grey hair who understands an industry or particular vertical inside out, has a black book of client names, and international scaling experience as well. These people are rare and they command large salaries, so for an early-stage company it’s an expensive and important hire. Spending a lot of time introducing the right recruiters and getting that hire right will really pay dividends.
‘We can also share best practice from other portfolio companies. So if we’ve just invested in a software company, say, we can look across the dozen or so other software businesses in our portfolio and see, for example, the typical size and structure for a sales team in a company with $3m ARR (annual recurring revenue), and see too how that would scale for a company that’s looking to double ARR over the course of a year.
‘One of the key attributes we look for in a founder when we’re investing is the ability to accurately self-assess their own strengths & limitations and ideally they will have the capacity to appropriately delegate and offload responsibilities to their teams. There comes a time where the founder needs to learn how to step back and pass on the reins to a senior head of sales or sales director. They don’t need to be involved in every single sales pitch any longer, although sometimes it can be helpful to bring out the founder at key strategic moments to help get a big deal over the line, for example if you’ve got a very long sales cycle, a very technical product and you're selling to very senior decision-makers.
‘Iterating the technology in a business through feedback from your key customers is something that we really try and prioritise, and sales can help here too. There should be a very regular feedback loop - we see more and more businesses have a client or customer advisory board, who speak not just to things like onboarding, but also to key feature development and even the technology roadmap of the company. It’s a good way to ensure that the technology function of the business is prioritised in that roadmap, and the customer success team can be the conduit for this feedback.’
‘The sales engine is made up of different roles and capabilities’
By Robert Toms, Managing Director, Smedvig capital, a family-based VC investor with a focus on supporting Series A and Series B stage tech-enabled businesses.
‘Not many products sell themselves. You only get close to that if the product is compelling to a target market that is pretty easy to identify and access, it obviously delivers good value for money and is easy to implement. That doesn’t happen very often.
‘So you have to be very slick at sales and marketing. In our portfolio we have businesses where the core idea is conceptually very compelling, but there is still significant work to do to educate the market about how the tech can add value to them and be applied in practice.
‘We look at businesses with at least $1m of recurring revenue, so even to get to that level one of the founders needs to be a good salesperson. Such a founder becomes the consummate salesperson because they know the product inside out, they’re passionate about the value-add it brings to businesses, and they’ve spent years negotiating and discussing it with customers and VCs and employees. But when it comes to scaling growth and handing over, it can be very tough to recruit someone else who can do all that really well, so you have to divide up the role.
‘The marketing and sales engine is actually made up of quite different roles and capabilities. An enterprise SaaS product, for example, requires a lot of work to target companies and generate leads - it could be a big commitment for prospects, running into thousands or even millions per year, with a sales cycle that could run into years and C-level buy-in required. So you need people who can deploy a marketing platform, source exciting content, develop your marketing-qualified leads - and then do an effective handover to your sales force.
‘From there, you need people who are very good at demonstrating the product. You need a sales engineer type function who can deliver an informed product demo - someone who knows the tech inside out, is in love with the product and can keep an eye out for how the product might evolve. But this again is a very different type of person to the salesperson who can take the interest that the demo has generated, mobilise the prospect’s decision-making unit, talk commercials, and bring things to a close.
‘You also need a strong customer success function too, to minimise churn. You need to see how customers are using the product, if they’re getting enough value out of it, and make sure they’re educated in its functionality. This is a different skillset again -- these are real people, people who love to help and support and solve problems.
‘You can’t expect one individual to have all the skills required to take a business from a run rate of $1m or $2m to revenues of $50-$110m over a period of, say, 8 years. But we do look for founder/CEOs who are adaptable and open to learning, in order to be able grow a team.’