Avoiding the Startup Graveyard

Two ingredients, a low price and a high-touch sales process, when mixed together create a poultice equal in its ability to seduce and kill founders and their companies.

Theory

Why it Matters: On the path to $1B in revenue, every company needs to figure out how they will get there. Will it be selling something for a lot of money to a small list of customers or selling something at a low price to an extensive list of customers? Depending on the answer to that question, a company has to decide how it will get customers to pay, and there are three choices, and choosing the wrong one can kill your company.

1. Enterprise: A high touch-sales process means multiple meetings, often over months or even years. These sales are expensive, meaning the company needs an expensive product to cover the costs of the sale.
2. Transactional: Some products can be sold in a 30-minute meeting or maybe two. The salespeople use a straightforward script and don’t require a lot of expensive training. As long as the company’s sales yield is >2, the company can afford to field a sales team. Refresher: sales yield is the fully loaded cost per rep divided by the revenue they bring in.
3. Self-Service: A company can’t afford a sales team below a specific price threshold. For example, if your product costs $1K / year, even with “cheap” salespeople, they’d have to close hundreds of deals per month to get sales yield >2 (assuming fully-loaded cost = $150K, $1K / year means 150 deals per month for sales yield to equal 2). In this situation, a company needs a website that clearly explains the value so that customers can decide whether to buy on their own or with minimal interaction with a person, also known as “self-serving.”

If that’s the case, how do some companies end up in the graveyard? Who would try to field an expensive sales team for a low-priced product?

• Before startups close their first sale, they’re in “discovery mode,” talking with potential customers to learn about the market, and customers’ problems, getting feedback on ideas and prototypes, and there’s a lot of pressure for founders to close their first deal.
• The discovery process is almost identical to sales. Both involve talking to customers, figuring out pain points, assessing how the company could create value, and getting customer commitments on how much they’d be willing to pay for a solution.
• The output of a good discovery process should be information on what the company can successfully charge customers. If that price is low, the founders must prioritize proving customers can buy it on a self-serve model. If the price is high, they need to determine whether it requires a simple (transactional) or complicated (enterprise) sale.
• But what often happens in the low-ish price scenario is that the founders only pay attention to the fact that they can sell the product, even if they don’t cover their costs with the money that comes in, especially if they have a war chest of venture capital. For months, revenue goes up until the company goes out to raise again, only to realize that their CAC is unsustainable, they can’t raise money, and they don’t have enough cash in the bank to pivot to self-serve.

Practice

Within months of founding Mattermark, we sold subscriptions to our product for $500 / mo. or $4,799 / year. Our fully-loaded cost per rep was probably between $200 - 300K. At the lower range, that means we’d need to close ~3.5 deals per rep per month, and at the higher end, that means 5.2 deals per month to reach break-even, but we’d have to hit double that to hit traction. Our CEO closed between $500K - $1M in the first year, and I closed another $500K in under a year, putting us well above a sales yield of two, leading us to believe we were ready to scale a team of salespeople. But once we hired salespeople, it was a rare month that our reps could close more than five deals a month.

What happened was that the complexity of our sale in the early days, when we were selling to early adopters, was low, but as we crossed the chasm in our market, complexity went up, which caused our sales yield to drop. And when our sales yield fell, we blamed it on poor sales performance instead of recognizing it as a red alert. We either needed to simplify our sale, build a self-service path, increase our prices, or create more value via new features. The company tried all of those things, but it was too late.

I hope this serves as a cautionary tale, both the theory and practice, for founders to avoid the graveyard at all costs. Please print out this 2x2, post it at the top of your Notion, look at it every day, and figure out which of the non-graveyard quadrants you’re going to occupy and use to win your market.