When it comes to the valuation of a technology company, a track record of achieving sales targets is clearly important. However, looking backward at past performance is not an automatic indicator of how a company will perform going forward in time. In order to maximize your firm’s return on investment you’ll need to be certain that the CEOs and VPs of sales of your portfolio companies are building a solid and scalable platform to support growth through sustainable, long-term sales performance.
Even before the current economic situation, think about companies that performed quarter after quarter only to then stumble, missing their numbers immediately before being acquired or the long-awaited IPO. In many cases, there were flaws that were exposed by the pressures relating to driving more business—the foundations that were expected to support sales growth just weren’t solid.
Superior sales capability is the most powerful competitive advantage
The single most important factor in achieving consistent sales performance is the disciplined and unwavering use of a sales process. That’s the cornerstone of a solid sales foundation. A process-driven sales operation, with the right people in the right jobs (more about that in a minute) will result in a superior sales capability, with the flexibility to deal with the rapid changes brought about by customer, market, regulatory, economic and competitive pressures.
If you sit on the board of your portfolio company or are an involved investor and are interested in increasing long-term valuation, here are just some of the critical areas where you can zoom-in to find out what is really going on in sales operations. You’ll want to find any major flaws or weaknesses before the market or a competitor exposes them, not to mention before investing.
- Make sure that qualification of sales opportunities is objective and unemotional. Salesreps love to go after marquee name accounts. Not that this is always a bad thing. However, it so often happens that the technical buyers in the account, interested in educating themselves on the latest and hottest technology, will go to school on an enthusiastic, unsuspecting, early stage company salesrep, but will buy nothing. Time wasted, real opportunities squandered. Not good.
Zoom-In: Ask the VP of sales to state why the team is pursuing a few key opportunities that appear in the pipeline or forecast. The VP’s response should be based upon comprehensive situation assessments, not gut feel or wishful thinking. A strong VP will know (1) when the prospect will buy, (2) what they will buy, (3) why they will buy, and (4) how much they will spend based upon their need and business conditions. If he or she doesn’t know the answers to those questions they may be taking an outdated, ineffective, shotgun approach to selling, pursuing too many opportunities to win any single one. I’m not picking on VPs of sales—just looking to uncover the root cause of the problem.
Results: A Boston-based software company that employed four reps finally got serious about qualification. During a day-long meeting with the team, the VP of sales eliminated 50% of their pipeline, immediately freeing up the team to focus on three opportunities, which they won, resulting in a quick one million dollars in license revenue. They never looked back. The company was later acquired together with a substantially more effective, and much more attractive sales operation.
- Assure yourself that an appropriate level of planning is done for every opportunity, and that those plans must be appropriately documented. There is an old saying, “The value is in the planning, not in the plan.” It’s the responsibility of the salesrep to (1) assess a potential opportunity, (2) determine a specific sales objective, (3) devise a strategy stating concisely why the customer will buy from them and (4) determine and execute the tactics for securing the business. That’s the planning. These four elements must then be either written down, or keyed into a computer. That’s the plan.
Zoom-In: A simple, “Let me see the account plan for ABC Corporation,” will expose whether that deal is being pursued through the use of a plan, or by the seat-of-the-pants. The VP of sales should have an up-to-date hard or soft copy of the sales plan for every key opportunity. There is no future in seat-of-the-pants selling.
Results: A small, Toronto-based enterprise application software provider was pursuing a $3 million opportunity with a tier-one automotive supplier, competing against the two largest companies in that space, one of them the incumbent. Prior to this, the largest deal they had won was less than $500k. For the first time in their history, they employed a formal sales plan, executing with discipline and determination. After a nine-month battle, they won the opportunity. The entrepreneur/engineer/CEO said, “The best thing about this win is that it is repeatable.” His team won more than $5 million in ongoing, additional business over the next 18 months from that same customer. If you were acquiring that company, how would you value this proven sales capability?
- Be certain that everyone knows the answer to the question, “Where’s the value?” Executives don’t buy software or services. They buy business improvement. That’s the value to them. “The value” for operational-level people may be ease-of-use or functional capabilities. IT will describe value very differently. Every member of the sales team—in fact, every person who touches a customer in any way—must be able to articulate the value that their products or services bring to individual constituencies within their customers’ organizations. Although it’s Marketing’s job to create clear, concise and compelling value messages, it’s the salesrep’s job to orchestrate the effective delivery of those messages during a sales campaign to the right people at the right time.
Zoom-In: Ask the VP of sales to explain precisely how salesreps link their products or services to critical components of their customer’s business plans and what the mechanisms are to cost justify those products and services. If the salesrep and the other members of that virtual sales team can’t quantify the value they bring to the table, their customers will consider them a commodity and buy on price.
Results: An early stage, software company, based in California, that develops, markets and sells a credit and collection solution to larger companies has figured out the answer to the question, “Where is the value?” They’ve created such a compelling value message that they have little trouble gaining and maintaining access to the CFOs of targeted companies. Since the vendor uploads their prospect’s live data for product demonstrations, the software has literally been installed and is ready to use, right then and there. By the way, they take a percentage of their customer’s incremental collections as their license fee. That’s business value.
- Have they convinced you that they are measuring what’s important and that they are continually improving? It’s hard to improve what you don’t measure. Without being distracted by statistics, good sales VPs track performance against key sales performance indicators: win rate, percent business to new name versus existing accounts, average discount off list price, attrition rate in the sales organization, performance by rep, by market, by product, etc. The best sales execs use metrics to continually refine their sales processes to overcome weaknesses and effectively adapt to changing buying patterns and behaviors.
Zoom-In: Request a win-loss analysis on two recent deals—one win and one loss. The VP of sales should be able to provide this in writing. Worthwhile win/loss analyses involve more than just the answers to, “Why did we lose?” But simple is better than nothing. You are looking for a solid foundation of good practices. By the way, a win-loss analysis should never to be portrayed or used as a weapon against any individual sales person, even an underperforming one. Doing that turns the whole team against the process. Rather, the win/loss analysis is a tool that can assist a company in determining exactly where their sales process breaks down and where it is most effective.
Results: A series of win/loss analyses for one public company just a few blocks from Route 128 revealed that a tough competitor was regularly requesting to go first when it came time for final vendor presentations. The competitor’s sales executive would isolate the prospect’s key decision maker, negotiate a deal and get a handshake right then and there. The prospect was given a rock-bottom price in exchange for no additional work (or risk) on the part of the competitor. Uncovering this valuable information was the basis of a complete overhauling of the company’s strategies and tactics against that competitor, resulting in a win rate of over 90 percent and market dominance.
- Ascertain that integrity is a key value for the company. Without integrity, you can’t build employee, customer or investor loyalty. It’s temping and easy, especially in today’s hypercompetitive, almost desperate selling environment to take shortcuts and focus on only the short term.
Zoom-In: A few brief calls to customers will enable you to determine whether they believe they have received what they were sold. There should be no gap between value promised and value delivered. If that is not the case, a fatal flaw exists that must be quickly and decisively addressed.
Results: Venrock Associates was the first investor (later joined by Alex. Brown, Partech Ventures/Bank Paribas and others) in Datalogix International, a manufacturing software company founded in 1984 that went public in 1994 and was later acquired by Oracle Corporation. Early on, upon discovering that a salesrep was misrepresenting Datalogix’ capabilities, a policy was put in place: the first time a rep misrepresented a capability, they would be “fined,” with “credit” given to Datalogix customer services who often had the burden of making things right. The second offense would result in immediate dismissal.
From the time the first (and only) salesrep was fired under that policy, the message to the rest of the company was consistent and unambiguous. For a number of years, Datalogix enjoyed extremely high customer satisfaction ratings and acquired more than 150 customers without losing a single one.
- Confirm that the company is hiring salesreps using a formal process—not the “old boy network.” Your portfolio company can’t build a consistently effective sales organization unless the VP of sales understands the unique skills, attitudes and behaviors that are required for success in their market and can hire to those criteria. Someone who may have overperformed during a different time or in a different market may not be able to deliver consistent numbers now. Currently my clients’ most value business, relationship building and consultative sales skills. They usually require a candidate to have a thorough knowledge of the industry into which they are selling and a network of contacts. And the candidate must exude executive-level credibility.
Zoom-In: Ask the VP of sales to show you the profile that is used for screening and hiring sales candidates. If there isn’t one, there needs to be. In addition, a documented, structured interview approach must be employed to assure that each candidate really fits the company’s requirements. I’ve often seen candidates outsell the interviewer and get hired, even though they are not close to being qualified for the actual job. They will cost your portfolio company hundreds of thousands of dollars in recruiting fees, salary, benefits, laptops, software, draws again commission, lost opportunities, customer relations, and travel and entertainment expenses, and will demoralize the rest of the team… Need I go on?
Results: A small software company with an international customer base was at the point of hiring their first professional salesrep. (Up to that point, the CEO, who was supported by his marketing and technical team, did all the selling.) The CEO knew that the first hire would be critical to his success going forward. A “skills and attribute profile” was specifically designed for that job in that market at that time. It was apparent through a structured interview process that a number of what might have appeared to be qualified candidates were not nearly capable of doing the job as required.
When a candidate was hired six months ago, his strengths and weaknesses were clearly understood by the CEO, they had been openly discussed between both of them, and most importantly appropriate support was readily provided to assure the rep’s success.
Today, Rich is well over quota, making a significant contribution towards his company overdelivering on their revenue targets, even in a down economy. This was not luck. It was the plan.
I’ve covered just a few of the many areas that need to be zoomed-in on. And don’t just zoom-in on sales operations. Marketing, customer services, delivery, development, and finance and administration could use a bit of scrutiny as well. If you find the flaws now, before a demanding market or a tough competitor exposes them, you’ll have made an important contribution to the future valuation of your portfolio company.
Dave Stein is the author of the best-selling book How Winners Sell (www.HowWinnersSell.com). Before founding The Stein Advantage, Inc., Dave was employed by several leading-edge high-tech companies in a diversity of roles: programmer, systems engineer, sales representative, sales manager, director of worldwide sales development, VP of sales, VP of marketing, VP of international operations, VP of client services, and VP of strategic alliances.