Go Slow to Go Fast (Part 1 of 2)

With billions of dollars of venture capital residing down the street from Stanford University on Sand Hill Road, two professors are attempting to answer a fundamental question, "why does it always take longer and cost more to build a hi-tech company than anyone ever expects?" For all the intellect, experience and graduate degrees in the venture capital industry, the sad truth is that 80 percent of venture capital investments do not pan out.

While the reasons for this high attrition rate are too numerous to list here, a simple fact defines every successful investment: the company figures out how to bring in more money than it spends.

The secret to solving this fundamental equation these two professors believe lies in the Sales Learning Curve. With the reemergence of interactive marketing, the pace of innovation will only accelerate venture investment and technology investment focused on internet-based marketing tools. Studying the learning curves associated with formerly new tools such as rich media advertising and search marketing can be instructive as new tools like behavioral targeting move into the mainstream and completely new technologies also emerge. Some of these insights can also be applied into non hi-tech products.

Mark Leslie -- an entrepreneur turned Stanford lecturer who took a startup company, Veritas, from nascent stages to over one billion dollars in revenues and a recent 13.5 billion dollar merger with Symantec -- and Charles Holloway -- the Kleiner Perkins Caufield & Byers Professor of Management at the Stanford Graduate School of Business -- have developed a framework that goes a long way toward answering the question "why it always takes longer and costs more?" 

Leslie and Holloway call this framework the Sales Learning Curve (SLC) and believe that it will prove as powerful a construct in the high tech sector as the Manufacturing Learning Curve (MLC) was to the manufacturing sector at an earlier time. Today, manufacturers wouldn't think of running their operation without tracking the MLC because of the dramatic improvements in productivity that it offers. Similarly, Leslie and Holloway believe the SLC holds the potential to change fundamentally how high tech companies are managed, and the believe that it will lead to more high tech companies reaching the promised land of "positive free cash flow."

Increasing the number of cash flow positive companies should lead to greater venture capital returns, more capital being allocated to the sector by Limited Partners, more early stage company formation, more innovation, more jobs, and increased productivity.

So what is the Sales Learning Curve?

As illustrated above, the Sales Learning Curve tracks the contribution margin per sales rep (sales yield) against the number of customer transactions. The shape of the curve will be different for every company and every sector, but the central tenant of the SLC remains constant -- the "go-to-market" phase is when companies should "Go Slow to Go Fast."

This is also the advice from a Nordic skiing expert that I recently received when I asked for some tips on improving my performance prior to an upcoming race -- run a Google search on the phrase and you will find that triathletes, grade school teachers, executive coaches, swimmers, and karate instructors are all well aware of the Go Slow to Go Fast benefits,

Leslie and Holloway believe the "organizational learning" that occurs as sales reps interact with customers to close initial sales is crucial to the ultimate success of the organization. The classic "go-to-market" strategy involves hiring a vice president of sales once the beta product is complete, and then hiring as many reps as the balance sheet will allow in order to "drive revenue and get to break-even."

According to Leslie and Holloway, this strategy is doomed to failure because the company has failed to take the time to understand the shape of the SLC for its product in its market. Some reports generated over the last two years by Fenwick and West, a prominent Silicon Valley law firm, bear out their assertion. There is a consistent pattern of inflated B-round valuations; the percentage of down rounds for C and later rounds is always greater than B rounds. As Leslie and Holloway state, "One inference from this is that both entrepreneurs and VC's underestimate the cost and time required to move up the SLC after completion of the Beta product. VCs and entrepreneurs often assume that the company is ready to gain market traction at this stage, when in fact the company is only ready to begin the SLC learning process, which, like product development stages, has a somewhat indeterminate duration."

When moving from beta release to first release, Leslie and Holloway argue that only a few technically versant sales reps should be hired. These sales reps should serve as a conduit between the initial customers and the engineering team, and should be compensated not on revenue targets but on the "organizational learnings" that are achieved. Only after enough of these learnings have been incorporated into subsequent releases of the product, and only after the entire organization knows how to sell the product (defined as the point at which each sales rep's contribution margin is twice their fully burdened cost), does it make sense to hire additional sales reps aggressively.

Leslie and Holloway posit that the SLC is immutable and can point to numerous theoretical models and concrete examples that indicate that the capital invested in hiring additional sales reps is simply wasted until you have reached this pivotal point on the SLC.

Tomorrow: Applying the SLC.

Dave Chase is a partner with Altus Alliance, which specializes in driving revenue traction for emerging businesses. He publishes a blog entitled Chase Market Velocity that focuses on how emerging businesses can gain market traction via the Enterprise Sales Learning Curve  principles espoused by Mark Leslie. Before joining Altus Alliance, Chase spent nearly 20 years in the industry with over a dozen years at Microsoft in various senior marketing and general management roles, including his role as MSN's managing director for industry marketing and relations. In that capacity, he was responsible for MSN taking a leadership role within the Interactive Marketing industry to grow Online's share of the overall ad market in concert with AOL, CNET, Yahoo!, Google and other market leaders.

Chase played leadership roles in launching several new businesses within Microsoft including Microsoft's entry into the enterprise software and server business which is now an $8B business. This included co-leading Microsoft's first vertical marketing efforts where he grew the Healthcare vertical market from virtually no presence to a market leading position. The healthcare business now represents nearly $500M in revenue for Microsoft.

From there, he was integral in Microsoft's entry into consumer Internet businesses that achieved both critical and financial success. These included Sidewalk, Encarta and HomeAdvisor, which were among the first profitable consumer Internet businesses for Microsoft. He has contributed to iMedia via articles and Summit presentations.