Considering Hiring Your First VP of Sales?
Consider These Four Things First
vec·tor/ˈvektər : a quantity having direction as well as magnitude, especially as determining the position of one point in space relative to another.
I’m having the same conversation on repeat lately and it’s centered around when a CEO should hire the first VP of Sales. Some VC’s recommend hiring the first sales leader at $1M in ARR. Others say you should hire at $1M in bookings. The truth is that neither ARR or bookings alone are the deciding factor. What is? The answer lies in the mathematical definition of vector: direction and magnitude.
CB Insights conducted postmortems on over one hundred failed startups. The number one reason they failed was “no market need.” Focusing on revenue alone is like focusing on the magnitude of the startup’s accomplishments while neglecting the direction they are headed. The very first step in the process must be finding a cohort of customers who truly value what you offer. Yet it is a step that is most often skipped. Revenue has a tendency to obscure the possibility you may be selling to people who will ditch your product as soon as their contract expires. It is meaningless to value either growth or the magnitude of revenue alone.
According to CB Insights, the number two reason that startups fail is that they run out of cash. The average cost of hiring a VP of Sales prematurely can be significant; the average cost for sales leader churn lands between $3.5 to $4 million. As you increase in size and revenue, the losses can even be more dramatic. How do we arrive at this figure? If you’re curious to know what the impact may be in your particular environment, the following formula may prove useful:
(ramp + (2 * cycles)) * revenue/month = revenue * 50% prob
Using SaaS industry benchmarks (average deal size $75,000, average sales cycle 6 months, average ramp time at 6 months, $5M Quota) the potential for losses if a sales leader churns out in 6 months is = $4.1M
(6 + (2*6)) * $416,667/month = $7,500,006 * .50 = $3,750,003
There are a couple of ways to back into a ballpark figure. Based on our portfolio’s actual numbers, research with other VC firms, and the above back of the napkin calculation, the potential loss in revenue can range between $3.5 and $4.5M. In order to avoid the high cost of hiring prematurely, answer the following four questions before you take the leap.
Do you have product market fit?
Has the market validated demand for your solution? Are you winning more than losing? If you find that you can’t hire quickly enough, that customers are buying faster than you can implement or faster than you can produce your product, that money is piling up in your checking account, and the sales team is the talk of every company meeting- chances are you have achieved product-market fit.
When you haven’t reached market fit, feedback will indicate that customers aren’t getting enough value out of your product, customers won’t be talking about your products, sales cycles will take way too long, and most of your deals will never get to a close. If you find yourself in this situation, follow the scientific method: start with a hypothesis, test it, prove or disprove it, move on or further iterate on the hypothesis. Testing a good hypothesis goes a long way and it will ultimately drive the look and feel of your feature set and products.
Mediocre management teams can win in excellent markets, so pivoting into solving a huge pain point and the market will bring your startup salvation. My best recommendation is to pivot immediately and hold off on firing your sales team or hiring a veteran sales VP to save your company. A good VP of Sales can hide the defects in a product. Thus giving everyone the false sense that customer actually wants and will use your product. The temptation will be high to hand off the sales storm to someone else when revenue is flat, but as the CEO you will need to orchestrate and lead more than ever.
Do you know your customer?
Can you name what type of company they work for and the industry? Can you speak their language? Can you name them by title or position in their company? What pain are you solving for them? Where do they reside, geo, etc? In other words, do you know the anatomy of a perfect customer? I often hear CEOs describe entire markets and segments with billion-dollar TAMs as their target customer. The problem is you can’t sell to everyone in a giant market (even though you want to) because you are likely not solving major problems for everyone. The answer can’t be, “We sell to everyone in [blank] market.” If you are having a hard time identifying how your target customer likes to buy, you need to get out there and talk to them.
We talk to hundreds of startups every year looking for growth funding and nothing is more exciting than finding a CEO who intimately knows his customers. Get to know your customers. Talk to your customers. Listen to your customers. Take the feedback and make your products better. Don’t develop a new product or service to land a specific deal if 80% of your target customers can’t use it. Study win/loss reports and make sure your teams are required to gather this feedback. If you don’t, it will come back to haunt you in the end. The most successful CEOs regularly schedule time studying and talking to their customers. Leaving this work to a VP of Sales leaves the CEO at a serious disadvantage.
Is your online Sales Process perfected?
Understanding how a customer wants to buy from you is a critical component to designing an optimized sales process. A solid online sales process digitizes and records the customer’s buying journey through your systems and produces a data-driven flow of how you should sell to them. Meeting your customer where and how they want to buy from you is the name of the game.
The touchpoints captured throughout the buying journey allow you to replicate and create an offline sales process. Magic happens when you align your sales process with the way people want to buy from you. The typical buy cycle starts with awareness (why buy anything?), then education (why buy now?), and then selection (why buy from you?).
A solid online process will prevent leakage caused by customers researching your offerings online, not finding what they are looking for, and giving up on you for information. If you are selling to SMB or enterprise customers, think about creating a simple transaction with a limited-use version of your offering. The investment can often pay for itself with one deal. The learning from the online process will far outweigh any “previous playbook” brought to you by a VP of Sales outside of your company.
Are you ready to hand over control?
Are you ready to step aside and let the sales leader make decisions? Are you ready to hand over budget authority that would allow the leader to control a specific amount of discretionary funds? Are you willing to let your VP purchase sales tech without your approval? Are you ready to focus on other aspects of the business and start measuring your sales leader by highly defined metrics and MBO’s? Do you have a quota that is reasonable but also a stretch?
If so, prove it. Make sure everything is documented and that you have an ideal candidate in mind. Hire for talent over experience and make sure you have already someone willing to step into your environment and use the playbook you have perfected. If the answers to any of these questions are “no”, be ready to answer the “why” with a solid justification to a sales leader who has already “heard it all.” I have seen this conflict first hand and it usually ends with the VP of Sales and CEO parting ways.
If you can validate that your startup is going in the right direction and there is enough momentum in sales to support hiring your 1st VP of Sales, by all means hire away. If you aren’t quite sure on any of the directional vectors, you might want to pause and seek answers.
In summary, if you have achieved $1M in ARR or bookings and you have ensured the following vectors below are true, you are probably ready to hire your first VP of Sales.
Product market fit
Know your customer
Online sales process dialed-in
CEO is ready