I’m about to do a bait and switch on you. Remember what I said about pipelines and power laws? Well, you can forget it; it’s completely irrelevant. That’s right, irrelevant. This is sales for startups and the laws of startups do not conform to the normal ways of doing business. Like some topsy-turvy, Einsteinian relativistic world, things are not always as they seem.
The Power Law Pipeline is important, but not until the startup is in scaling mode. At that point, you are in a volume strategy and presumably have the resources to handle the fire hose. You are taking your sales process and turning it into a well-oiled machine. Thus, measuring things like pipeline efficiency is critical. However, when you are at the very early stages, you’re simply not equipped to handle the fire hose.
So why bring it up at all? Because it will become important if you are lucky enough to find product-market fit. But more importantly, you need to understand where you are going to find customers. In the beginning, it’s fine to work with a handful of early adopters who you know through your network, but eventually you will need to find more business. That requires lots of leads.
So if the pipeline is not critical, how are you supposed to measure sales results? That would be your forecast. However, this is not the forecast as it might be envisioned in a big company. That pipeline is actually tightly intertwined with the forecast in large sales forces. In a startup, the forecast can simply be defined as the list of active deals closable within a set timeframe. Let’s examine those key words from the previous sentence.
- List. What’s important about a list? Well, it shouldn’t be too short or too long. A long list leads to poor prioritization, and a short list means putting all your eggs in one basket. You know what happens with eggs and baskets. Make your list a healthy size — one that you and the team can realistically tackle — but have enough options so that you are not at risk when deals fall through.
- Active Deals. You are going to have plenty of duds over time. And the temptation is to keep them around, thinking these deals are going to resurrect themselves like Jesus. Not much chance there — a dead deal, for the most part, stays dead. Keep it in your CRM system or spreadsheet for accounting purposes, but do not put it on a forecast.
- Closable. To close is to bring finality to an activity, in this case finalizing a deal by selling the product or service. Of course, the customer relationship continues on, but closing is when the cash comes in and you can book the revenue for accounting and compensation purposes. This is the goal of every deal, and the key metric by which forecasts are measured and evaluated.
- Set Timeframe. An active deal can be closable either next month or twelve months from now. But not knowing when puts a real crimp in planning. The finances of a startup are always in a delicate balance between revenues, cash flow and bank balances. When that balance is not stable, that creates distress and a lack of paychecks. Therefore, we need to establish a timeframe by which sales are going to close. In most situations, dividing the year into quarters makes the most sense, though you might also do months.
This is why the forecast is so critical for the organization, it is your view into what revenue is coming into the business and when. It allows you to view what’s going on daily and it is important for the purposes of both strategy and tactical considerations. It is strategic-centric in terms of insight into overall business prioritization. It is tactical-centric in terms of directing resources and managing tasks to bring deals to closure. In many ways, it is the most critical business dashboard in the B2B enterprise software model.
Is this all that is in the forecast though? No. There are almost always some additional bits of information you will need to complete the forecast view. A complete forecast will include the following:
- Deal. This is the opportunity information. Since you may have multiple deals with a customer, you need to track things per deal.
- Account. It helps to know who the customer is, so let’s include the customer name.
- Sales Stage. This is how far along a deal is in the sales process. Sometimes, it is worth having even very early deals (still in qualifying stage) in a forecast if they are highly promising or high profile.
- Status. A bit more detailed than the sales stage, a deal status gives the current state of the deal.
- Probability. This is the salesperson’s gut-feel measurement. This is not always included, but it can sometimes be useful to bring up concerns that the salesperson or manager may have. Oftentimes, this number will be tied into the sales stage and will be used in determining rolled-up forecast numbers (i.e. expected revenue versus total forecasted revenue).
- Revenue. How much is the deal worth? By adding up all the numbers across all the deals, the potential revenue for the team can be determined and compared with sales goals. Therefore, it is important to get the numbers here as close to the mark as possible early in the process.
- Products. You cannot figure out a revenue number without knowing what and how much a customer is buying. In the early days, you may just have one product (or no real product at all), but later on when more products and configurations are created, this will need to be tracked.
- Close Date. This is when the deal will finally be closed, meaning all contracts are signed and the business is officially won. When deals are rolled-up (i.e. all the deals combined for reporting and analysis), it provides a sense as to when revenues can be expected within certain timeframes. Close dates should be as firm as possible to allow for accurate measurement of expected quarterly (or monthly or other time period) revenues.
With this tool in hand, and only this tool, you can begin to manage sales. There is no need for fancy software or processes at this point. You simply need a spreadsheet at the start, until enough salespeople are brought on board and enough deals are active where a CRM or sales forecasting tool would be useful. An important point to highlight though is that with any tool, it is only as good as the data that is put into it. The saying garbage in, garbage out, is quite apt when it comes to the forecast. It can either be an accurate view of sales and a predictable means of managing the business, or it can be as insightful as an amusement park fortuneteller. A forecast may not be totally scientific, but we do not want any crystal balls determining our future.
So this is the forecast in a nutshell. The forecast is your list of deals that you will close at a set time and that you will run your sales team on. This is the list that will be on the whiteboard in the office, be at the center of every sales strategy session, forecast call and sales review, and the living/breathing number that drives the team’s sales efforts. There is no list more important and it trumps all other considerations. Learn to love the forecast, be fanatical about the forecast, eat the forecast for breakfast, lunch and dinner. Be one with the forecast.
This article was originally published on Strong Opinions, a blog by Birch Ventures for the NYC tech startup community.
Image credit: CC by chimothy27