2. It takes at least $300K of CMRR to climb the Sales Learning Curve - Stop at three sales reps until at least two of them are making $100K MRR quotas.

Years ago Bessemer was fortunate to invest behind Mark Leslie at Veritas, and as a result our firm became big believers in a concept Mark helped pioneer around the Sales Learning Curve (SLC). The core concept is that software organizations often fail because they staff up their sales efforts too quickly and make them too large before the sales model has been refined.

The SLC worked well in the traditional enterprise software business and works well for the SaaS model - with a few key modifications. To understand when the business has started to climb the sales learning curve and is in a position to hire more reps profitably, you have to think in terms of CMRR instead of bookings. You know you can profitably scale sales when a couple of sales reps are at an annualized run rate to sign annual contract values (MRR x 12 months) equal to twice their fully-burdened cost of sales. For a direct, enterprise sales business model, this is likely to be $80,000-100,000 MRR (approx. $1-1.2M annualized), and for tele-sales models, this may scale down to $60,000-75,000 MRR ($720,000-900,000 annualized). It is usually time to accelerate sales hiring when at least two out of three sales reps are hitting quotas at these numbers, and the business has at least $300,000 of CMRR.


3. Separate your "hunters" and "farmers" - As soon as you've climbed the Sales Learning Curve, begin ramping your sales force by hiring renewal-oriented account managers. Keep the hunters moving, and let farmers tend to the crops.

When a SaaS company starts to hit the sales inflection point, it is important to keep the new business reps (the "hunters") busy with finding new deals, while a team of account managers (the "farmers") tends the established customers. CMRR is a function of new sales net of churn from your existing accounts, so you should have dedicated experts for each of these two revenue groups as soon as is practically possible. Once a company has a few sales reps achieving quota and a significant customer base, it is time to hire dedicated account management experts who are compensated to focus exclusively on customer service, renewals and upsells. These farmers should be compensated on the net change in CMRR among their installed base accounts.


4. It's a whole new ecosystem - Channels are very hard for SaaS companies to build, so don't base your plan on SIs and traditional ISVs. You will need to sell directly for a long time.

SaaS products, by their nature, don't require massive amounts of systems integration (SI) work to implement, so they're not a great fit with the traditional SI business model. They don't pull through large stacks of hardware boxes and software licenses so they're not very attractive to traditional independent software vendor (ISV) partners either. Channel relationships are very hard for any small company to establish, but even more difficult for most SaaS companies given the restricted value proposition to the SI and ISV community.

Unfortunately many software executives have spent years building deep relationships with executives at the major software and integration companies like IBM, Oracle, HP, and Accenture...only to find they aren't much help to SaaS businesses.

Most SaaS businesses have to be comfortable with the fact that they will live or die by their ability to sell directly, and only if they are successful alone will they be able to build meaningful channel relationships with the new generation of partners and resellers. In the interim, many SaaS businesses focus on joint sales and marketing activities with the emerging SaaS incumbents (Salesforce.com, Webex, etc..) and the new generation of smaller, more nimble and SaaS-savvy SI firms.


5. Stay local - Prove your business in North America first. Only after reaching $1M in CMRR should you consider hiring European sales and services execs behind customer demand. Save Asia for post-IPO.

Almost all businesses will look to go global at some point if they continue to grow. But SaaS vendors face more barriers to globalization than traditional software companies because you can't just localize the UI and ship a new CD to some remote country. Given the different architecture and high service level expectations in the SaaS industry, companies are faced with questions about latency, data access and security through replicated local datacenters, in-country customer support personnel, packaged integration with other regional software and SaaS products, and other similar issues.

Simply put, North America is a massive market with a rising tide around SaaS. There is no need to go global early and force this cost and complexity upon your organization. A rough rule of thumb is that you should look to pass $1M CMRR ($12M annualized) before even considering Europe, and even then you should let customer deals pull you into the region as you incrementally hire sales and services professionals. Unless you have some extremely unfair advantage in Asia, wait until Europe is a clear home run before even considering opening up a sales war on another front. Your default position should be to consider Europe as your pre-IPO growth story, and Asia only after you're a high-flying public company.

Continued...

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