Are your sales people farmers or hunters (or maybe both)? Photo courtesy of Silicon Valley entrepreneur and photographer Christopher Michel.
A few weeks ago, our friends at Norwest Venture Partners (NVP) wrote an interesting article on how CFOs should approach sales compensation (Sales Compensation Leading Practices: Tips for Entrepreneurs Building Recurring Revenue Businesses, by Terri McFadden). We’ve seen how our portfolio companies share the pain of modeling for recurring revenue that Terri talks about when it comes to compensating their business development team. In her words, “recurring revenue can be a minefield for CFOs who are trying to figure out how to compensate their sales forces, she goes on to indicate that, “one false step can explode the ambitions of a company trying to establish itself in the market.”
You definitely don’t want to be DOA by not paying close attention to how to create a compensation plan that makes your SaaS recurring revenue business model one your team can sell effectively. We’ve come across clients who created a plan on the fly by relying on their accountants to model it, and undoing it is not fun. That’s why I found the NVP post quite useful to share and expand on in this article.
NVP wrote their article following a round table with two experts from Accenture – Kevin Dobbs, Everything-as-a-Service Practice Lead, and Mark Wachter, Managing Director of Sales Strategy. Below is what they learned.
Sounds straightforward, right? You would be surprised how many times this obvious action is ignored. I think the culprit is speed: your time as a CEO in a young company is spent on product and actual selling, so thinking strategically about compensation seems like a luxury you have no time for. Terri writes that “the complexity comes from defining your key success metrics, how they are tracked, setting goals, what success looks like and then how do you want to pay for these results.” This is exactly where you can use cover from a part-time CFO – all the points their article refers to are part of financial planning and support to tie your incentives and strategies to the fabric of your business model, and keep a close eye as they progress.
For most SaaS companies, hunters are their sales people and farmers are their customer success people. Even if they start out the same, eventually, you need to separate these two groups in your financials and then operationally. How can a part-time CFO help you here? Hunters and farmers need completely different incentives. Hunters go for the big fish; farmers nurture that catch and make sure they reproduce (think renewals). A CFO can help you model compensation to reward both groups differently, according to their incentives, and evolve that model over time as your business grows and your customer success people become more specialized. In practice, the process of designing incentives for different sales behaviors is one of trial and error, so that it can be evolved as these roles change. At certain stages in your trajectory, hunters farm and farmers hunt, and you have to track and evolve incentives around this dynamic with cover from a seasoned CFO that can see the world from the eyes of your sales team.
You don’t need to go to a round table to know that. However, our experience helping CEOs with strategic finance actually coincides with what the Accenture experts told NVP: “When it comes to setting quotas, most organizations don’t set sales quotas correctly.” Correctly is the key term here. All companies set sales quotas, but setting them in a way that works – and keeps working over time – is actually tricky. Low base/high commission? The reverse? On total ARR? New ARR? What level of quota? When to change them? Well thought-out quotas reflect key elements of actual performance such as the length of your sales cycle, how much control do your reps have on the sale, whether you price low to go in, the importance of renewals, etc. To add complexity to this, all these elements evolve over time, so they need to be fine-tuned to keep sales quotas effective at driving sales. A part-time CFO with experience working with sales teams can ensure you keep your eye on the ball regarding setting up and fine-tuning sales quotas for your team.
Thinking strategically regarding your sales machine from day one will result in more confident growth and will attract the best people to your team. Terri at NVP puts it well when she writes that, “If you want your own recurring revenue business to drive a smooth path to success, you must set up a sales and commission plan that works in synchromesh with your strategy and goals.” I would only add that a CEO and a VP of Sales can do it with less pain and more effectiveness with the help of a CFO who thinks about the long-term implications of sales compensation and helps them model incentives, compensation and quotas to grow with confidence.
The CEO & Co-founder of Front wrote about her experience raising their Series A. It contains several insights such as:
We’ve been closely following the emerging trends in the SaaS business model. Several of our customers businesses revolve around it and, as most other tech models, it is going through a transformative change. One of the most insightful articles we’ve read lately about this transformation comes from Techcrunch. On November 13, our good friend and business school classmate, Sequoia partner Aaref Hilaly wrote a story smartly titled “Why the next great SaaS company will look nothing like Salesforce.” In it, Aaref points out that the newest crop of SaaS models turns the notion that to be sticky, a SaaS model has to become the “System of Record” (SoR) which used to be “the single source of truth, for customers’ most valuable information, such as customer records or employee data” like Salesforce. He adds that the emerging opportunity for SaaS is to become “Systems of Engagement” (SoE), meaning apps that employees actually use to get their work done” like Slack, one of the most “sticky” business applications, now the most valuable private cloud company according to Forbes.
Check it out here. Aaref’s article is quite interesting and goes deep regarding how this new business model for SaaS not only makes sense, it solves the real problem of “creating systems of engagement that get users and revenue, by leveraging data in the systems of record.”
This Thanksgiving week, Series A startups can be thankful for your funding, but realize that the B Round is now the tougher round and the time to start preparing is now. This presentation by Jed Katz (https://www.linkedin.com/in/jedkatz), who is the managing director at Javelin Venture Partners (https://javelinvp.com) explains how to do that. Jed posits that your next round of financing is much closer than you think, which catches some Founders by surprise. To prepare, he gives tips on setting 12-month goals, making cash last, managing & leveraging your Board, creating separate roadmaps for Sales & Engineering, and using the right metrics. Note how creating a brand serves recruits and investors in addition to customers. We especially like his final “words of wisdom,” that, unlike the perfunctory summary in some presentations, are useful and action-oriented.
These are valuable tips from a VC pro who’s seen everything. Check them out.