13 / The entirely avoidable super duper expensive sales mistake
Art: Wheat Field with Cypresses (1889), van Gogh.
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Welcome to Issue #13!
New year, new format. That’s what they say, right? After some good ol’ thinking, I’ve decided I was making this newsletter too hard on myself by writing a preamble essay and a big idea essay. Going forward, I’m going to try replacing the preamble essay with one paragraph intro., a question for you to do your own thinking on, and a quote. So here goes, and let me know what you think!
A Question
“How many of the voices in my head belong to others around me, and do I like that or not?”
—Jennifer Garvey Berger, The Knowledge Project #43
A Quote
”CEOs need to do two things well to be successful: run their operations efficiently and deploy the cash generated by those operations. Most CEOs (and the management books they write or read) focus on managing operations, which is undeniably important.
Singleton, in contrast, gave most of his attention to the latter task. Basically, CEOs have five essential choices for deploying capital—investing in existing operations, acquiring other businesses, issuing dividends, paying down debt, or repurchasing stock—and three alternatives for raising it—tapping internal cash flow, issuing debt, or raising equity. Think of these options collectively as a tool kit.“
—William Thorndike, The Outsiders
Big Idea #13: The Sales Learning Curve
The Sales Learning Curve (2006), Mark Leslie and Charles Holloway
In Issue 11, I wrote about Jeff Bussgang's "Jungle, Dirt Road, and Highway," a metaphor for the different phases of a startup. Once you see the jungle, dirt road, and highway, you'll begin to see applications of it all over. And one of my favorite applications of the model is Mark Leslie and Charles Holloway's "Sales Learning Curve."
"The Sales Learning Curve" is the title of a 2006 paper published in ye olde, "I went to college in Cambridge Business Review." It is the most critical thing a startup founder can read on sales strategy. So read it, goddammit.
Theory and Practice
The short of it is that a company needs to adjust its sales strategy—specifically, sales hiring as a product goes from infancy to maturity through three phases: (I) initiation, (II) transition, and (III) execution.
Getting the Numbers Right
Two points define the boundaries between the three phases: (1) the break-even point (where Sales Yield = 1) and (2) the traction point (Sales Yield ≥ 2). But what is sales yield, and how does one measure it right?
- Measuring Sales Yield: "Sales Yield" is the revenue a sales rep brings divided by their fully-loaded cost. So if an account executive (" AE") brought in $1M in revenue in 2022, but their fully-loaded cost was $500K, the Sales Yield is 2.
- Measuring Fully-Loaded Cost: A consequential mistake founders make with sales strategy is assuming that salary + commission = fully-loaded cost. If I had an annoying "wrong" button to push, that's what you'd be hearing. Fully-loaded cost per rep must include wages, taxes & benefits, recruiting, training & rehire costs, software, and overhead. See this piece for a breakdown of what you need to measure to get an accurate picture of your fully-loaded cost per rep and sales yield numbers.
The Three Phases and Corresponding Types of Sales Reps
The entirely avoidable super duper expensive sales hiring mistake founders make is hiring a sales rep who lacks the skills to sell in the sales phase the company is in on The Sales Learning Curve. I know this because we made the—very costly—mistake of doing this multiple times at Mattermark. So what are the phases, and how do you hire the right types of reps for each phase? (The nicknames for types of reps come from the paper's authors, "Leslie and Holloway.”)
Phase I: The Initiation Phase
"The Renaissance Rep." These people are incredibly challenging to find. Many people with the skills required here are either founders or go on to start their own businesses. And this is why, in many startups, the founder is the first sales rep.
- These people are capable of making their own sales collateral, they're not scared by ambiguity, they're capable of their own sales operations (keeping a sales model in a spreadsheet, tracking conversions from phases, and so on), they're genuinely interested in technology in the abstract and concretely interested in your company's technology, and they're adept at identifying opportunities for value creation with customers and then relaying that to product and engineering.
- Leslie and Holloway recommend hiring a maximum of 3-4 reps to kickstart the learning process and rule out incompetence if all 3-4 reps fail to sell.
- Jason Lemkin calls these "Magical Sales Reps."
Phase II: The Transition Phase
"The Enlightened Rep." This phase is all about repeating your initial success. The "Enlightened Reps" you hire need to learn the process the Renaissance Reps developed and deliver results. Still, they can't navigate the ambiguous waters of selling a new product to new customers. They need to tolerate more ambiguity than the Coin-Operated rep will be comfortable with, but they need much clearer swim lanes and direction than the Renaissance reps.
These people will expect to have a lot of things done for them. They'll expect leads and collateral from marketing, sales targets from sales operations and more training from sales management on the ins and outs of the product and how to sell it.
Phase III: The Execution Phase
"The Coin-Operated Rep." In this phase, you know you have a product people want to buy, but you've also had dozens of sales reps prove that just about anyone can sell your product. In this stage, you give reps a number to hit, a script to stick to, talking points, and the numbers should go up. These people are compensated at a much lower level and easier to find, but getting your product straightforward enough for a coin-op rep is an achievement few companies unlock.
Many founders think hiring a salesperson who works for an up-market competitor will bring knowledge and experience on how to build a sales team to their nascent startup—9/10 times, they're wrong. Why? They will unknowingly hire an execution phase rep for an initiation phase job. The only exception is when that salesperson at the up-market competitor has demonstrated a track record of success in the initiation phase.
To bring it all together, make sure you know your Sales Yield, use that as a north start to know where you're at on The Sales Learning Curve, and make sure you hire the right type of sales rep for where your company lands on the curve at any given time, and you're likely to save a lot of money, make even more, and finally, be able to sleep better knowing your sales are in the right hands.
P.S. The formatting on the digital version of Mark & Charles's original paper on HBR's website kind of well…sucks. You can buy a copy of the original PDF for $8 here. And if you're scoffing at spending $8 on a PDF, I guarantee understanding this paper will save you far more than you'll spend.
P.P.S. Mark Leslie published an abbreviated summary of the ideas behind The Sales Learning Curve on Sequoia Capital's website here.
Reads & Resources
Articles
If not this year, every CEO and founder will have to let an executive go in their career. In my experience, a good hiring process for executives will have, at best, a ~60% success rate. In this piece, Ed writes with empathy for the mental gymnastics founders do when considering letting an executive go which only comes from thousands of hours of coaching. My favorite part? His sections on what you owe an underperforming executive and what you don't owe them.
From Twitter
Martin Casado, a GP at a16z, shared a pithy tweet on how important it is for founders to sell first, and if the founder can't sell, no one can. In the comments, @BoredElonMusk added another critical insight: "The other danger is the founder can sell it well, but no one else can because the product is the founder, not the actual product." Beware of falling into the trap where you, the founder, can sell $500-$1M in ARR, but all other salespeople struggle to replicate your success.
Audio
In Issue #11, I recommended Phil Stutz's book, The Tools. Following the success of Jonah Hill's documentary on Phil, Stutz. Dax Shepard and Monica Padman recorded a 1.5-hour session with Phil. So why should you listen? Phil is a legendary therapist in Hollywood who has worked with many people whose names you should know and who credit him with helping them turn their lives around. There's even a new Apple TV+ series, Shrinked, coming out soon, where Harrison Ford plays a therapist based on Phil. I loved it, and I bet you'll love it.
Books
If you have to hire even one person this year and haven't read Geoff Smart and Randy Street's book, Who: The A Method for Hiring, you're making a mistake. If you're even part of interview loops or think you might have to hire this year, read this goddamn book. It's the "one book" on hiring that I damn near insist everyone I work with read. Is it perfect? No. Is it a solid B+ safe hiring process that's equivalent to a terrific NYT Cooking recipe you can use, build on, and make your own? Yes. And this one will save you hundreds of thousands, if not millions of dollars.
Dice Roll
This week's dice roll is a twofer. Faith Meyer and Dave Kline (respectively) created templates for managers to use with their direct reports to align on setting expectations and evaluating performance. If you're not using something like this with each of your direct reports regularly, you're setting yourself up for needless conflict, irritation, and miscommunication. And companies where that's the norm are companies that bleed people (and money).
That’s all for this week. I’m looking forward to what’s next!
Andy.