Growth Times

If you still read magazines… you might have seen GotoMeeting’s “Do the Math” ad, comparing the cost of their service to that of a business trip. Brilliant.

Companies too have noticed and, in virtually every sector, they are leveraging ubiquitous electronic connectivity to chomp the cost of sales and improve lead generation and conversion rates.

Always be (electronically?) closing

A good way to do that is to map the sales process, slice it into different pieces, and hand each over to specialized sales “agents” – be it a piece of software, an inside sales person or a road warrior. With new online capabilities, it is now possible to keep it all synchronized without losing information between each agent. Additionally, ideal sales paths are created for different types of prospects to maximize the ratio of “sales outcome” over “cost of sales”. The sales outcome is roughly based on the “probability of success” times “sale payout”, over the anticipated life cycle of each prospect.

Over time, by tracking wins and losses electronically, companies develop a nice database that can be mined to create predictive models and used to enhance the sales process.

Of course, the business payoff is in improved efficiency, by getting the most expensive agents (road warriors – in general) to spend more time on what they do best – and having the rest completed both effectively and cost-effectively. At last, road warriors can “always be closing” rather than sourcing and nurturing leads.

For the company, that also means that less field sales reps are needed. Expensive road warriors – where they are still required – are becoming one small part of the process, more the exception than the rule. Most transactional sales can be completed over the web, and consultative sales are greatly facilitated through web support. According to a recent survey by Dr. James Oldroyd, a professor at the Kellogg School of Management, hiring of outside sales reps is almost flat, while hiring of inside sales reps is growing healthily at 7.5%. The recession plays a role in this, but I have no doubt the change we are undergoing is deeper, and will continue to amplify as the web gets smarter and our world gets smaller.

Develop your sales process as you would develop a product

Funneling prospects and clients is nothing new. But the web has taken it to a whole new level, making the entire process cheaper and more precise. And with the bar being constantly raised, a focus on the “whole sales process” is increasingly decisive: established companies must further invest in updating and refining theirs, and early-stage ventures in nailing it through deliberate design and rapid testing.

The sales process needs as much attention as your product – and sometimes more. The sewers of history are filled with dead companies that got their product right but their sales process wrong. Poorly managing the sales process is a sure recipe for disaster. Think of it this way: the sales process really is about creating a “product” around the product.

What we call the product, ultimately, is just a mechanism enticing customers to give us money in exchange for value. But there is generally much more to delivering this value than the product. Apple, for instance, offers quality products, but not just that: it provides excellent support, an intelligent approach to sales by staffing its stores with lots of relatively well-paid and relatively smart attendants, a brand that makes you “cool” by association, an integrated online store, a higher price point that reinforces the impression of quality – and overall, a controlled, consistent, reassuring purchase experience. A lot of the sales process is even built into the product itself, when you think of it (especially for the iPod).

Still, it’s not perfect. There is no follow-up on purchases (or is there?), or little that makes it possible for them to capture expression of interest and categorize them by probability of sales (or is there?), and failed attempts at capturing a more mainstream audience in computers – largely attributable to the narrow reach of their sales process in my opinion.

If engineering the right sales process is tough in B2C, it’s even harder in B2B, because of the cheer range of options available to a company there. Just think about the many different ways one can market a knowledge management solution, for example: pricing (subscription, one-time fee, freemium+consulting),  , delivery model (cloud, on-site, hybrid), market (legal, medical, etc…), audience, lead generation (wherefrom?), follow-up (when, how, what?) etc… Surely getting it right and keeping it right is going to take quite a bit of trial-and-errors. Like developing the product did.

So why have dedicated product development and management people, and not a sales process development and management function in your company? The only reason I see for that is that most tech ventures are started by product-oriented people. So the solution is simple: think about the sales process in terms of a product and have it managed likewise. Ultimately, you need sales process experts in your company, and functionally those are not much different from product experts. It’s just the subject of their attention that differs.

Illustration with some sales process innovations

At a small, fast-growing cleantech venture I worked with recently, we introduced changes and innovations to improve their sales process.  We developed a Lead Generation and Client Satisfaction Manager role to qualify and learn about prospects prior to handing them over to a sales rep, created an online CRM system with Lead Scoring, added automatic Google Mapping (when completed, all prospects will be visible on the map – reducing the cost of visiting a particular area) as well as a “Nurture Marketing” capability (grouping leads and customers into different clusters based on precise criteria, each going through a different sales path). They’re even creating a demo video that – together with an inside sales phone call – will replace sales rep visits to low-potential prospects.

(This is the complete version of a post published on the RIC Mississauga blog)

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Josh Kopelman, Managing Director of First Round Capital, wrote a great post today building on Fred Wilson’s VC math problem, and call Why VC Performance Has Fallen Off A Cliff.

I argued in a recent post that in parallel to the “moonshot” approach Josh rightly describes as the norm for VCs,  there must be a model that focuses on extracting revenues from a portfolio of tech companies with lesser risk.

Overall, it’s pretty clear to me that what we call VC companies should cover the entire risk-return frontier for any early-stage tech company, because that would allow large investors to place their bet as they like in this category. I’m not suggesting VCs turn into bankers or private equity investors, but there is a clear case for filling the early-stage funding gap towards tech ventures that hold less risk and more proven revenue models than moonshots.

For all the analytical firepower of VCs, it feels a lot like playing this field is still an art not a science. If really, VCs take a classic portfolio approach to early-stage returns, like I’d argue they should, then risk-return is a continuum and the industry ought to cover it entirely to offer interesting options to large-fund investors.

Which brings me to this: the expectation of a 20% return yearly is completely unrealistic, when the average growth rate for the world economy is 2-3%  (tidbits from my finance classes at Stanford – I don’t think our average growth rate has gone much above that since I finished my degree there…) If VCs as an industry grows faster than that rate, then by definition it will have to return to the mean (back from the moon) sooner or later, hence the cliff. Risk has nothing to do with this, since we are talking about a risk-return continuum in a vast portfolio managed by the entire VC industry – over time the failed companies bring you back to that 3% mean.

If you can do better than 2-3%, or say 5% to be a bit more optimistic about the growth capacity of our system, then you’ve nailed some distortion in the market and/or you’re taking more risks than you should. It’s hard but possible to do that as an investor, but impossible to do it sustainably as a large industry. Sooner or later, the industry will lose big, just like gamblers. Keep in mind again that I am talking about the VC industry as a whole, not individual players here – there is much variability there.

The problem with promoting those 20% rates is that it fuels hype and bubbles – the only viable mechanism to achieve those returns for the entire VC industry, if not a sustainable one. So I think it would be great if VC as an industry could stop pretending it can do much better than the mean, and focus instead on offering a decent continuum of risk-return options to their investors based on early-stage plays. From that angle, VCs are just expanding the range of investment options available and that, I think, would be good enough for everyone.

Unfortunately, the current system is set up to create monopolies of sorts by maintaining a complete imbalance between money pools and money needs. VCs are encouraged to bet on moonshots because that’s how, individually, they can make it and retire (with that feeling of intellectual superiority one gets for betting on the right horse at the tracks). They don’t lose much money on failed investments, but they make tons on successful ones, so of course they swing for the fences. The first thing VC firms should do is take a good look at their compensation system and rehaul that.

As things go well and returns grow, a few investors that actually beat the mean quite consistently (there will always be some – they are the right dots in the normal distribution of investors) make everyone hope over time that they can too – and thus the system as a whole progressively takes more risk without realizing it.

Meanwhile, companies with a lower risk-return ratio – but not low enough to warrant a bank loan – have a heck of a time finding money. Angels fill some of that gap, but while they’ve structured themselves greatly in the past few years, they don’t have the discipline a VC firm could bring, which only would attract the big money from the big funds.

Unlike what some observers think, I’m convinced the VC system is here to stay. But not without adjustments – either angels will structure themselves more and more to fill the void VCs left, or VCs will get back in there as they should. The overall lesson as a VC is that you can shoot for the moon if you wish, but keep your feet on the ground, because your industry will go back to the mean sooner or later.

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To any current or would-be entrepreneur, I highly recommend the following video of a presentation this month by Aaron Patzer, CEO of Mint, which was recently sold to Intuit for $170 million.

At first I thought it was a bit long, at 22 minutes, and so I figured I’d only watch the first few minutes. 23 minutes later, I am writing this blog post. Aaron goes over the start-up creation and growth process in practical details, even presenting slides from his own original pitch.

One thing, I’m not a fan of the first advice he gives, about focusing entirely on the product and hiring only engineers when you start, which has some truth to it in a number of situations but can lead to complete trainwrecks in others. Someone on the team needs to tie your development to a market need and a winning revenue model – it may not have to be a business person, and a well-atuned engineer can do that as Aaron shows, but it’s got to be someone with a certain ability to think ”market”. Leaving that detail aside, his advice is a gem.

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Develop, Fund, Market, Scale Aaron Patzer, entrepreneurship, Fundraising links, growth stages, Mint.com, Start Up

A great post today by Suzanne Dingwall Williams of Venture Law Associates LLP in Toronto, regarding the recent considerations by the U.S. to increase the number of H1B visas for skilled foreign workers, apparently thanks to a push by venture capitalists.

The stats she quotes are startling: 

“A recently released study by the NVCA notes that (a) immigrants have started more than 25% of U.S. public companies that were formerly venture backed, and (b) more than 50% of the employment generated by U.S. public venture-backed companies has come from immigrant-founded companies like Intel, eBay, Yahoo!, and Sun.

The New York Times has also taken note, citing Harvard Law professor Vivek Wadhwa’s claim that 52.4% of today’s Silicon Valley startups have at least one foreign founder. US VCs are figuring that, to expand domestic deal flow, they need to expand the immigrant entrepreneur base.”

Having lived in six countries including the U.S., I can tell for a fact that the amount of energy I deployed to learn about and obtain the visas and other administrative passes giving me the right to stay and to work is stupendous. In volume, it easily equals the time required to launch the operations of a start-up. This truly is wasted time. If the U.S. had made it easier for me to stay after my years at Stanford, I’d likely be there. I truly love Canada and Toronto is my favorite city in the world – but on a professional level, for tech entrepreneurs the environment is just not comparable to California. So the main advantage of Canada over the U.S., as Suzie points out, is that it is easier to immigrate as a skilled worker here.

But if that advantage diminishes, what’s left to retain immigrant tech entrepreneurs in Canada?

Better public support for start-ups? More grants? Sure, that’s one thing we have over the U.S. But it’s also a double-edged sword: in the previous years and months, the government and semi-public/nonprofit bodies have rapidly enriched their offering to better support the local tissue of tech entrepreneurs. That part is great. But a problem that’s not often raised -no one wants to publicly irk the hands that feed them, I guess- is the increasing institutionalization of venture commercialization actitivities that came with it: internal competition between agencies and “nonprofits” (whose employees clearly profited from this boom) are now leading some of them to expand into the private sector’s realm, for example by offering free market research and consulting services for start-ups. That move even goes against the public service mandate, as those services are generally only available to handpicked “clients”.

Even though it is motivated by a will to better support start-ups, it troubles me that the government and the bodies it supports increasingly choose to nationalize this activity as opposed to supporting the private providers already present. I didn’t leave the most successful communist country in the world – I’m talking of France – to land back in a growingly soviet-like environment, and have to make a living by begging for public grants! Hubs and catalysts are much needed. But it is to complement and promote, not replace, our private entrepreneurial ecosystem.

Sure, there is a lot of good work done hand-in-hand by private, public and publicly subsidized nonprofit organizations here, but when it comes to actual commercialization projects, it’s been my experience again and again that someone with a guaranteed salary and an institutional job simply doesn’t deliver as much value as a private sector provider whose next job depends on the quality of the one at hand. But unfortunately for us, it’s hard to compete with free. ”Free” also creates the wrong culture up north, with start-ups getting used to focusing on the technology and not investing much in commercialization and marketing, which obviously comes back to bite them. The higher valuation Americans place on commercialization activities, in my opinion, is another characteristic of the U.S. entrepreneurial ecosystem that still makes it more compelling than the Canadian one. With higher quotas for H1B visas, it won’t just attract better entrepreneurs , it will also attract better professionals to support those entrepreneurs.

As for VCs in Canada, there are few left, and so companies here are forced to look south or reduce their fundraising expectations and go after angels (who have done a tremendous job filling the gap left by VCs in early stages, but simply don’t have the same financial firepower). Interestingly, the VCs that are left also tend to only provide small amounts and thus really start looking more like angels with extra overheads. Among the Canadian clients I helped this year, and other start-ups I know here that received term sheets from Canadian VCs, not one accepted them. They went for local angels or U.S. VCs. Canadian VCs are stuck in the middle.

Luckily for Canada, U.S. H1Bs are not as compelling as the permanent residence our country is handing over to skilled workers, since they are tied to employment – it’s E visas and green cards the U.S. should make easier for entrepreneurs to obtain (and perhaps they are working on that too, I haven’t checked). But if the great Canadian advantage in facilitating entry and residence of skilled workers goes away, there will be little left here for immigrant entrepreneurs. A Canadian spouse and public healthcare (also something the U.S. may address) as the main reasons for most of them to stay here doesn’t make for great headlines about the state of our entrepreneurial system.

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