So the B2B Tech valuation meltdown of January and February has stabilized. After a dizzying fall for cloud companies that have gone public, the market has not only stabilized, but bounced back. The Bessemer Cloud index is now off only 16% for the year. Salesforce, Workday, Box have reported good quarters. And private companies DOMO, Slack and Asana bucked the trend by raising money at excellent valuations.
So can we all head back to the go-go days of lobster salad lunches and prolific spending is search of growth and market domination?
I mean you can if you want. But I hope that most sane people are taking the opposite approach. Raising private capital for all but a few select companies will remain hard and expensive. The public markets and now the private markets have sent a clear signal to those of us running cloud companies: STOP LOSING SO MUCH MONEY!
In retrospect, it is easy to understand how we got here. With interest rates at zero, an influx of cash flowed into our space that was unprecedented and made money almost free. Many startups were funded and spaces became more competitive than they would normally be in emerging markets. Startups in turn, spent that money on engineering, on sales, on marketing, on nice office space and on lobster salad lunches. Worse than that, funding and market capitalization became the outcome. Large rounds and high valuations became the metrics for success. Companies used them to establish themselves as the gorillas in each category and attempted to use that status to get the best employees and to win customers.
But enough is enough. If public companies are going to devalued because of their lack of profits, and private companies are valued at even higher multiples, then the need for change of direction has never been more clear: STOP SPENDING SO MUCH MONEY TO FUEL GROWTH
At the same time, to be clear, if you are a tech startup, you have to continue to grow. You can’t simply stop spending, fire staff, curtail budgets and see growth rates slow. Most startups will struggle to get anywhere near cash flow breakeven without growing to the point of critical mass. Those companies that have reached critical mass and could be cash flow breakeven, must grow to establish valuation multiples.
So, the way forward to clear. GROW WITHOUT THE EXCESS OF THE PAST. I mean really, what we were thinking when we have public companies who spend more on sales and marketing than they have in gross revenues! I mean, there is aggressive and then there is just plain crazy. The truth is, we startups have been acting like big companies. We have been raising large amounts of money and trying to brute force growth through spending on sales and marketing; No marketing event was too expensive, no campaign was too expansive. We hired Account Executives, Sales Development Reps, Sales Engineers, Account Managers, Industry specialists, Channel reps, Customer Success mangers and we layered on a good dose of management along with it. Lets face it. We just got fat! It was like a huge brunch buffet and we just pulled our chairs up to trough and kept gorging.
The good news is we actually know how to fix this. We are smaller, nimbler smarter companies. We can let the Ciscos and HPs of the world gaze at their navels and complete company reorganizations while we move fast. We know how to do this, we just forgot because money was free and somebody started a bonfire with a bunch of Benjamin Franklins!!!
Here are the concrete steps to take immediately in order to keep growing while spending like a startup.
- Stop Selling and Marketing to Companies that Won’t Buy
Huge amounts of money were wasted by marketing and selling to companies that will not buy the products we have been selling. In our rush to grow into our valuations, we insisted that every company could benefit from our product and we started selling and marketing very broadly. We sold and marketed to small companies and mid sized companies, and to every large company. We sold to every industry and we expanded internationally quickly. We acted like we had never read “Crossing the Chasm” and we raced as fast as we could to broad markets.
Not only did this produce very high customer acquisition costs it also left us with a broad customer base to service. And if our product didn’t fit well in a certain market, we had low customer satisfaction and those customers are starting to churn. Yikes!
So here is what we must do. We must go back to tight targeting. Look at your customer base and segment that customer base by who uses and values the product. That will define your sweet spot. That is the segment that you have product market fit. Then focus your sales and marketing efforts on that segment. If you want to try other segments, select one or two and do some very targeted experiments to see whether you can penetrate that market.
And here’s another piece of advice. Be honest with yourself about how much engineering must be done to your product to reach a new market. Most companies want to expand to new segments by adding sales and marketing expense. But here is one of the lies we tell ourselves in startup land: “The existing product is great and we can expand to new markets without much product effort. If we get the right sales people, customers will get the transformative nature of our technology and not ask for frivolous features“.
Here is the truth of the matter. If you want to expand into a new markets, you need to do it with engineering first. If you want to be international, you need to do the work to make your product multilingual. If you want to sell to enterprise, you will need to build security, compliance and integration features. If you want to sell into specific industries, you will need to build features to fit that industry.
So, there is step one. Define where you have product market fit and concentrate your sales and marketing in that area. When you are ready to expand to new areas, lead with engineering and conduct some more pinpointed sales and marketing efforts.
- Make Sure you have the Right Sales Model
Lots of companies have not spent enough time on this. There are four predominate sales models: a) high velocity touchless sales, b) inside sales, c) field sales, d) channel sales. But also there is a lot of nuance in each model. There are multiple roles in each model, especially for those companies selling to large companies. So this should be revisited for all companies with an idea of selecting the best model and optimizing it. See my blog post on this.
I think most companies are not wildly off on their sales model. But most companies that have not optimized each role within the sales process and many are using the most expensive models on market edges. You need to define the roles, key activities of each person in the sales process and ensure you have the right ratios. In the “free money” period we have tended to specialize too much in sales roles and mimicked complex and heavy sales models built for large companies. Here is a news flash: If you want to disrupt large companies, don’t act like them. Beat them with speed and flexibility, not the heft of your sales force.
In addition to getting the right sales model and role definition, you need to define the handoff and roles with marketing and customer success. In many companies marketing can own the lead generation and nurture function and in some cases take the sales process further down the path. Also, many companies can use customer success and post sales to do expansion and second product selling. Don’t be afraid to make customer success an integral part of your sales model.
Sales model definition needs more thought that we have given it in the past few years, where we have thrown money at the problem.. Not only are we wasting money, but many sales and marketing processes suffer from “school bus” selling where we load the vehicle with too many people on every sales call and sales step.
- Follow a Sales Process
Sales is not a random series of events. Most sales cycles follow a common set of steps that must be executed to win a deal. The failure to follow an agreed upon sales process has two catastrophic implications. First your win rate drops because you miss important steps in the sales process. Second you waste a huge amount of company resources doing hurried, unexpected sales steps that are not efficient. As a further negative consequence, sales organizations that do not follow process lose the confidence of the rest of the organization. In particular, product and engineering see the sales team as unorganized and reactionary. This, in turn makes them less responsive on the “real” opportunities.
You don’t need to hire a team of consultants to fix this. Your people actually know the optimal steps to win a deal, but most companies haven’t had the discipline to write the process down, train on it and find a way to make the process stick. A good sales process will define 5 things: 1) Sales step name, 2) Typical activities, 3) Owner and roles of each step, 4) Resources used and 5) Deliverables.
I always think you can build and define this in a couple of weeks and then iterate on it constantly.
So let me summarize. We are tech startups. We must grow aggressively. We have gotten too fat and undisciplined during the free money period. It is eminently possible through simple steps to aggressively grow without starting a cash burning bonfire.