Gabriel Weinberg is a serial entrepreneur (latest startup: DuckDuckGo), an insightful blogger, and quality contributor to Hacker News. He is writing a book on how startups get traction due out this summer that includes interviews with folks like Patrick McKenzie, Jimmy Wales, and Paul English to collect lessons learned from a variety of perspectives. I was delighted when he approached me to take part and found it to be a very thought provoking conversation.
He has posted the full transcript on his blog at “Sean Murphy on the First Dozen Enterprise Customers” (with a related comment thread at http://news.ycombinator.com/item?id=1671852) here is a long excerpt devoted to hiring your first sales person.
yegg: At what point do you advise bringing in a sales person?
skmurphy: If you’ve made between a half a dozen to two dozen sales and you’ve got a sales presentation that you know works. If you’ve got a way to target prospects: you understand if they answer yes, no, or a number to these six questions, you know half the time they are likely to buy. You don’t necessarily win half the time, but you’ve got a reasonable presumption you can create value for them.
Then you know you can fire a sales guy if it’s not working because the problem is him or her, it’s not your product or process. What often happens is that the founders add a sales person before they can manage the sales process. They think somehow that guy is going to take his rolodex and solve all their problems. They have to get–at least one member of the founding team has to get–good at understanding the customer negotiation process, and what’s going on there, so that if the salesperson is bullshitting them, they can call them on it.
This is nothing against sales people: they have a critical role to fulfill. Most successful sales people won’t come into a situation that’s too early because they can’t make that much money. If the product doesn’t work well, if you can’t tell them “Go talk to people like this, look in your rolodex and find all the left-handed tuba players that used to live in Cleveland”, then they can’t make money, and they don’t like that.
yegg: For your typical engineering founding team, do you advise one of them to develop these skills, or go find another co-founder, or what?
skmurphy: Most of the time at least one of the folks is more outgoing and is willing to get out there and to take part in the process. If everyone on the team believes that they can stay in the BatCave and use Google AdWords to make their money then they better have a product that matches that profile. It is typically not the products at the price points we are talking about, where we’re offering an annual license that costs of anywhere from a thousand to fifty thousand dollars a seat, where deal sizes are in the twenty-five thousand to quarter million dollar range.
There are other markets where the founders don’t have to as outgoing. You had Patrick McKenzie on; his whole business model is B2C: he and I are on different planets. That doesn’t mean that I am right and he is wrong or he is right and I am wrong. We are just going after very different kinds of markets: I want to be very clear that I am talking about business-to-business software sales.
yegg: Is there a typical person on the side, e.g. title, that you are dealing with?
skmurphy: It’s typically a midlevel person who has got a real problem. It may be a first-level manager, may be a senior contributor, it could be someone in the finance, it very much depends on the product. When we help sell medical workflow products we call on very different people than when we help sell legal services automation or computational chemistry tools.
But ordinarily, it’s somebody who is one level or two levels up in the organization; they’ve got enough perspective on the problem and on the organization to understand what’s going to be involved in bringing change to the organization. As we work with them they may take us up the hierarchy to sell more senior folks.
We don’t tend to start at the top unless we are calling on a very small business in which case you’ve got to call on the CEO or one of the key execs because no one else can make any decisions.
yegg: Suppose you hire a salesperson. How do you approach that process–do you hire just one to start?
skmurphy: Yes, start with just one. And hire someone who wants to sell, not a sales manager who wants to hire sales people and manage them.
Sales guys are very expensive, but you have to realize that if they can’t make money then they can’t make money for you. They face a learning curve process on your product: you’ve got to develop real sales training material, which is different from the customer material that you’ve already got developed.
You’ve got to be able to teach them how to sell your product. Now, you don’t have to teach them how to sell–how to navigate a customer hierarchy or coordinate a sales process or orchestrate a sale. You are not giving them sales training in the abstract, but you need to give them training on how to sell your product.
For example: what does it mean when the customer asks this question; what’s our standard pricing and discount structure, how can you disqualify a weak prospect so that you focus on strong prospects.
yegg: Do you typically advise one of the engineers to become a pre-sales engineer in this stage?
skmurphy: Ordinarily, they are going to have to. We also go on sales calls, my partners and will also go on sales calls in Silicon Valley. And we will do “ride alongs” on webinars or telesales. We can help with this. It’s less stressful to be sales engineer than the sales person. But both people are involved in the sale, they each have to be able to read the situation and improvise to assist the other.
The biggest challenge that a CTO or a technical person faces in that setting is because they’ve developed their product with a particular perspective, they will sometimes tell the customer, you know you are using my product wrong, stop doing that. And, sometimes they’ll almost say those exact words. And, the reality is many times the customers “misuse of the product” is actually where a bigger market is. Maybe they are only using three of the seventeen features, but they are creating more value and you’ve got to be alert to that possibility.
yegg: The salesperson that you hire first–presumably you want them to have domain expertise. Are there other parameters that you are looking for as well?
skmurphy: In the markets we operate in we like them to understand what’s involved in an orchestrated sale. The early sales are still going to remain complex; it’s not going to become a transaction for a while. So, you need somebody who has done that. It may be someone that has ambitions to be a sales manager, or may have been a sales manager who was willing to take a step back for a year to be able to then help you build a team.
One other mistake we see folks make, not so much the bootstrappers because they just don’t have the money, but we’ll see teams with venture funding that’ll go hire, you know a VP of sales, two sales managers, four sales people. They don’t have training materials; they haven’t figured out how to manage a process; and you create this train wreck and you burn through a lot of cash.
yegg: So in either case (bootstrap or venture), you’re saying you should definitely start with one person, get the process down, and then bring in more people.
skmurphy: Yes, and referring to your earlier question about titles, there are going to be a few titles you are going to be calling on. You would like to know that this salesperson has called on those kinds of people, and perhaps has some in their rolodex.
yegg: Let’s back up to the founding team. What typically will the founding team consist of to maximize success probability in this arena?
skmurphy: Two to five people, engineers or scientists that have got relevant work experience in the domain or the industry that they are trying to sell to. It’s okay if only one of the two or two of the five, or one of the five has got domain knowledge because sometimes bringing people from different fields is useful.
Outsiders can create strategic surprise because they bring things that work from different fields to this new field. It’s not a requirement that everybody has worked in the field you are trying to sell into, but if no one on the team has worked in the target industry or field then you may be missing so much basic context that you just can’t get there.
yegg: Do you see that in real life? Entrepreneurs seem to do that a lot–approach an entire new industry looking for problems and hoping they can solve them within it.
skmurphy: I think that’s good for an “Act Two” where you’ve got a proven solution in a primary industry. I think as a startup trying to make your early sales in a new industry, I think the credibility problem can be very, very challenging. The only way we’ve seen that work is where you are able to very quickly ask the right questions and demonstrate some capability that people can see the benefit for themselves.
There is also a shibboleth effect: you may not be aware of how people in a domain use certain words in a way that’s very different form their everyday use or understand jargon or terminology that only has meaning in the industry. You may mispronounce words, use a term the wrong way, or misunderstand someone. This will put a prospect very much on edge and suggest that you don’t know what you are talking about. Sometimes there are dialects, especially in a very early market, and people from different companies or traditions will use different words to mean the same thing. So you also have to appreciate that and not try and correct the prospect.
Ordinarily we suggest people start with something they know pretty well, and then branch out. Now, the other way to do that is to bring somebody else onto the team that knows the domain you are going after really well. So, just to be clear, I am not saying that the entire team has to have deep domain expertise, but if no one on the team does, it can be very hard.
yegg: What else am I missing about this process?
skmurphy: I am giving you an astigmatic perspective, distorted by our focus on bootstrappers in B2B who typically have a decade or more of experience. We do work with younger teams but even there at least one has a couple of years of domain experience. Other markets work very differently from what I can observe. We are fans of Steve Blank’s “Four Steps to the Epiphany” which is fundamentally a B2B model.
I think one thing that we tell founders that seems to be the most baffling for them is “We are not going on a sales call, we are going to have a conversation; we are going to be genuinely interested in the person’s problems and learn more from them.” The teams that tend to be more successful are motivated to solve the problem as much as develop a particular tool they’ve got today to solve it.
For example, whatever you start out with in January of 2010, by the middle of 2011 your solution is going to evolve considerably. Too often there is “better mousetrap” thinking: the entrepreneur believes he has this fist-sized chunk of kryptonite in his trunk, and people with Geiger counters will find him in a parking lot and buy a piece. It doesn’t work that way.
I think the other challenge that new entrepreneurs have trouble with is that it’s as much about self-improvement and developing new skills as it is taking what you’ve developed and finding a market for it. I mean it’s a very difficult journey and you have to change if you want to continue along it.
yegg: How long does the process of getting the first stage of customers typically take?
skmurphy: Let’s assume for the moment that we are doing some amount of rehearsal before the conversation; that we are making small modifications to the one-page or to the material, later on it becomes maybe an eight-slide deck, ten-slide deck at most. You can do maybe two of those a day if you are working really hard.
Realistically, it takes a while to get on people’s calendars. You are really trying to talk to people that are legitimate proxies for who is going to ultimately buy it from you. So, that may take two to three months to have those conversations, learn from them, and be where you are. And, there are sometimes ways to accelerate that by going to what we call target-rich environments, by going to the right conferences, by going to the right places where you can talk to lot of people.
But in the very beginning telling the same story to ten people is a lot of times less efficient in the long an than if you took the time reflect on the interaction, and make small improvements. You lose that ability to learn and adjust if you try and go too fast.
yegg: Would it be then fair to say that the first year is about securing those first few customers and getting it working on-site?
skmurphy: That’s a reasonable timeframe: six to eighteen months to have a couple of customers really in production and some testimonials. Part of the reason why we so tolerant of consulting is that it allows you to sell a mix of things and your product gradually takes over the mix.
yegg: Then roughly, by the end of the second year, you would expect to have defined the sales cycle quite a bit, and potentially hiring a sales person at that point?
skmurphy: Yes, it can vary but somewhere between nine months and eighteen months, if you’ve been able to close business, you can definitely start to interview people and to look to bring someone on.
There are also ways to leverage partners as intermediary. The next step up sometimes can be your product actually works well with other products. You’ve got customers in common; they find it advantageous to bring you in because you solve problems that then create opportunities for them. So, there is also the possibility of other kinds of solution partners or channel partners.
yegg: In the channel partner case, are there any particular gotchas or ways that you like to frame those agreements?
skmurphy: So a pure sales channel is actually harder to bring on then individual salesperson. You should bring on an individual salesperson first because you’ve got the sales training problem magnified by a factor of ten or a hundred. Whenever you are negotiating those agreements, figure out how you are going to get out of them; figure out what constitutes good results and how do you terminate if it’s not working. Spend some time up front on how both sides are going to keep score on the agreement. Be careful of exclusivity: if they want exclusivity, there is going to be some kind of guaranteed payment or guaranteed revenue stream.
So ordinarily we would see some kind of solution partner or somebody else that can help, then a single sales person, from there you may add a second sales person, you may look for channel partners. A lot of companies end up in the four million dollar to ten million dollar level, and if they’ve got a recurring revenue model then one or two sales guys can keep it going.
yegg: On the bootstrapper side, is there a particular way you look at this as the right time to raise outside money or not?
skmurphy: When you go to raise money you need to be able to explain to investors how you are going to pay them back. If you really are held back by an inability to take advantage of the opportunities you’ve uncovered, if you’ve got a real recipe for making your business work and how to scale sales up, then that’s a good time to raise money.
But, if you are running out of money and you can’t meet payroll, and you can’t quite figure out who you’ll sell to next, taking six months out trying to raise money will probably kill you. I mean a lot of people that are running out of money think that finding investment is the answer, and that’s almost never appealing to an investor.
yegg: Putting that in the context of the cycle we’ve been talking about, it seems you’d be raising money when you’re a little further a long, i.e. after the first few customers and you’re ready to bring on the first sales person?
skmurphy: Sure, it’s legitimate to seek investment to be able to pay the sales guy if you have a proven sales process one of the founders can manage. A brief detour on commission only sales people: it seems like it’s a way to save money, but in general you don’t get their full attention and it doesn’t do you a lot of good.
yegg: And how much would you price an initial sales person?
skmurphy: As a base, again Silicon Valley, recessionary times, I mean might be 5k a month, might be 4k a month–depends on the person sometimes, a little less. There might be a non-recoverable draw of that much again for the first three months. The real challenge is you’ve got to be willing to fire them within sixty days, ninety days if it’s not working out. And, you’ve got to have a plan for how you are going to evaluate how good they are, and go on to the next person if this guy is not working.
yegg: And that would presumably be you’ve set aside some leads, you send them on those calls, and see what happens?
skmurphy: It’s still a team effort, you go with them; you keep a close eye on them. It’s very different from an engineering hire where you can look at the guy’s code and make an assessment of what’s going on. Sales is primarily improv. You can look at the proposals; I mean there is some amount that’s written. But, one of the founders has to be going on the sales calls.
yegg: But ultimately, even if you like what they are doing on the calls, if the business isn’t closing, it is probably time to look for someone new?
skmurphy: Well, the presumption there is that prior to bringing them on, you had been reliably closing business. Now, reliably closing business may mean it still takes you six months from the time you first talk to the person to close the deal. The sale cycles can be long, and I am not saying you’ve got to fire somebody in ninety days if they haven’t closed a sale, but you should be able to see bona fide progression markers pretty quickly. You are moving from initial calls to customer supplied data to evaluations to final proposals.
I am not a fan of “probability of close” metrics. I like to see sales milestones that are tangible: the prospect has to have done something in the last two weeks to indicate interest or progress in making a decision.
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