In the public realm, analysts are now fixated on determining not only what a company is projecting in revenue, but also what portion of that revenue is "real." In an era of shrinking budgets and general austerity, no public company takes sales for granted any more.
But an equally telling, and much lesser known barometer, is how smaller private companies are faring on the sales front. If the travails of these start-up companies are not the stuff of most tech writing, there's a good reason. During the Internet years, solid companies weren't private for very long. In an era when it took eighteen months to go from formation to IPO, if you blinked you would miss a company's gestation period. But now that companies are sitting in the private category for the traditional three-to five-year period, a look at how these companies ply their wares is a very telling leading indicator.
So what's it like selling into corporations as a small, unproven company? It's hard. Really hard. At the same time that large companies are trimming their spending on technology, they have hundreds of little companies biting at their ankles trying to get in the door.
Sales cycles for small companies are brutally long, often six to twelve months to get to a meaningful agreement. The better small companies start early, and begin a conversation with large customers during the product design stage.
To be more specific, the best start-up companies begin life focused solely on a targeted "pipeline," that ubiquitous, dog-eared spreadsheet that lists prospects and status. Companies that delay in putting together a target list and working it are not only late to the game, but they are also missing customer feedback in very important stages of a company's life.
But straight pipeline bloat can be a double-edge sword for a nascent company. Yes, it certainly takes a lot of cold-calling to bring in customers (I've seen call-to-close ratios of 100 to 1 or more). But having a company's sales force carpet-bombing the nation with unfocused calls can burn a lot of cycles as well.
The best companies have a three-tiered approach:
Know your market segments intimately.
Nail down your first couple of "founder accounts" and do anything to keep them incredibly happy.
Turn to a larger pipeline and turn up the heat.
When I push back on a company's sales efforts, it's unfortunate that a common refrain is "But if we had too many customers, we couldn't support them all." Let's not kid ourselves; this is a good problem to have.
Yes, there are a few companies that over expanded and could not service valued customers (a few DSL providers come to mind). But for most start-ups, the chance of having "too many customers" is so slim these days that it's worth the risk of pulling in as many as you can. Besides, if a company has so many customers that it can't service them, that sounds like the kind of problem VCs with money to spend are looking to fund.
Which brings up the issue of "creativity" in start-up sales. Although public companies get nailed for playing games with revenue recognition, these games pale in comparison with what private companies do to prove customer validation. In the trenches, you see a lot of deals called "design partners" or "pilot projects" or "trials." While there may be meaningful interest here, it really just demonstrates what start-ups will do to close a deal. Private companies go to great lengths to tout their first few "relationships" (I hesitate to call them customers) and venture capitalists are sometimes leery of these skimpy deals.
It might seem ridiculous, but the question of getting paid for one's products is a real dilemma for private companies today. Most start-ups really struggle with the decision of whether to charge a customer. Do you push for the "sale" with no revenue, or strive to get money out of a customer, prolonging the sales cycle. In fact, many private companies choose to forgo revenue, doing whatever it takes to be able to name a marquee client as "closed." I am even hearing of larger companies that are making start-ups pay themfor trials!
Here is where it becomes important to understand why you are pursuing a customer. If you're looking to simply get the product into the hands of customers, then non-paid deals are fine. In fact, they are a great way to get real-world testing of technology. If some large name-brand company is going to take your product in-house, more power to you.
Show me the customers!
But let's not call them customers. Customers pay real money. The most aggressive start-up CEOs won't sign a deal with prospects unless there's real money on the line at some point.
As for quantity of customers, the common perception is that the magic number for start-ups is two. The premise here is that if you can get "more than one" customer to adopt your product, you have market validation. I only have one response for that: no way. Using insider contacts and advisor connections, just about any start-up can get two customers. But real market acceptance is about finding large markets with the potential for repeatable revenue. When I talk to later-stage venture capitalists about my seed-stage companies, I get a strong sense that they want to see more customers, in multiple market segments, and a flush pipeline behind it.
What can we take away from this analysis of private company sales processes? More than ever, the sales process is about the grime of working the pipeline to bring in meaningful, repeatable revenue from customers that are much more than marquees. Some public companies do a lot of hand waving with regards to revenue. Perhaps it was a trait they learned as private, venture-funded companies? Moving forward, this tactic isn't working for private companies anymore, so tomorrow's public companies should emerge with better breeding than the mutts of the Internet era.