People in the venture capital industry will often speak of results conforming to a power-law distribution. That means that only a handful (or even just one) of their investments will perform so exceedingly well that it will constitute the bulk of returns to investors. The flipside is that almost all of the investments a VC makes will not result in any appreciable return. To use a baseball analogy, they need a grand slam in order to stay in business.
What exactly is a “power-law distribution?” Without getting into a wonky mathematics explanation, it is a relationship where one value changes dramatically in the opposite direction to another value, such as venture returns versus number of investments made. Many scientific theorems and laws are driven by power-law relationships like Newtonian gravity and thermal radiation. When people refer to the “80-20 rule,” that is also a power-law relationship. What makes it a “power law” is the exponential degree of difference experienced as one valve grows to be very large or very small as a direct inverse to another value.
This dynamic of VC investing is by now well understood. Yet what many startup founders do not realize is that similar math drives their sales efforts. Sales revenue is the lifeblood of B2B tech startups. Unlike many consumer tech startups, mobile app developers and low-end SaaS tool vendors, the only metric that counts and keeps the lights on is paying customers. So how does one get all those paying customers? It starts with big numbers.
As I mentioned previously, the two key measurement tools of sales are the pipeline and the forecast. The forecast gets to what you will likely pull in from revenue, whereas the pipeline is how you gauge the health of your overall sales efforts. Most refer to the pipeline as the funnel, which is an apt metaphor given that as opportunities advance along, fewer and fewer will result in actual closed business. While every company is different and various sales processes may be applied, when it comes to the B2B tech industry, it is understood that the number of deals one starts with will be a magnitude or two larger than the number of wins. Thus by our power-law dynamic, only a small number of deals in the pipeline will result in a high probability of closing (or conversely, most of your deals have no chance in hell).
Now you might protest, saying that by this logic you should work a smaller number of high quality deals. Having the benefit of hindsight, that would obviously be a best strategy. However, the reality is that it is practically impossible to predict which deals will result in closures until we get much closer to the buyer’s decision point. If you only focus on a number of perceived “good deals” too early in the process, you risk not having enough of those by the end to reach the revenue goal.
Simply put, you need to frontload your pipeline if you have any hope of closing enough business, and that number is not small. Starting at leads, you can quickly see that most “deals” filter out pretty quickly. If we take the sales process we laid out previously, it is not unheard of that for every one committed solution presentation, you will have filtered out 100 leads. Later on, I will talk about where all these leads may come from and how to quickly filter them, but for now it is simply an example to illustrate that without enough leads upfront, you are unlikely to have enough quality deals that are both winnable and can generate enough revenue.
As you might have guessed, revenue per deal and the number of leads are equally important when it comes to the pipeline. If you need to close $1 million in business for the year and most of your leads can only produce $5000 each, you may have a problem at year’s end (assuming you use an enterprise B2B sales model). Sure, you can use more stringent qualification criteria (e.g. budget > $50K), but that will greatly reduce the volume in the early parts of your pipeline. Thus, you are still not going to make your revenue number because you will have too few deals.
This brings up a good point about measuring deal leakage at each stage of the pipeline. This is a critical tool for measuring sales effectiveness (per individual and across the team), as it provides the clearest view of the health of the revenue stream. If an usually high number of deals are falling out of the pipeline at a particular stage, that puts stress on the later stage deals and can indicate a flaw in how the team is selling the solution, can uncover new competitive obstacles or reveal poor qualification/verification earlier in the sales cycle*. Thus, a fundamental flaw in the sales process can have devastating effects on moving enough quality deals to closure, destroying your pipe.
They say that revenue solves all problems. I would say the corollary for the sales pipeline is that lots of leads solve all problems. This is power-law dynamics at its starkest. In the world of financial planning and insurance sales, one of the first tasks new hires complete is writing down 100 names of people they personally know and then pitching them. If they get 5 sales out of this first run, while that is considered outstanding, it is still not enough business to maintain a stable income. They will eventually go through thousands of contacts before they have enough of a pipeline to be profitable. Suffice it to say, most of these recruits bow out after a few months, because the numbers seem so daunting.
In the B2B enterprise tech world, things are not as bleak. If you did your homework, your market is more targeted and your solution is more niche. However, as a startup, you are pushing an unproven product, supported only by a risky business and few resources, against the overwhelming tide of competitive markets and skeptical customers. You still need to prime that pump with enough leads to buoy you when sales stall and too many deals fallout. Even if you are just starting out** and think you do not have the bandwidth to handle even a few deals, you still need to be prospecting and building out that pipeline. Just like the adage that you should always be recruiting, you need to be ready to jump on opportunities. Let’s face it, having too many opportunities is about the best thing that could ever happen to a startup.
*Every salesperson will fault the product first, but it often tends to be a red herring. Startups never have products that are “complete” enough, but they still manage to attract customers.
**Before you have product-market fit, your sales efforts may be geared more towards securing early alpha/beta testers or simply gauging market interest and awareness. Think of it as your soft sales effort prior to launching a full-fledged sales process.
This article was originally published on Strong Opinions, a blog by Birch Ventures for the NYC tech startup community.