Thursday, June 25, 2015

By the time you're at $2-3M in ARR, you need a VP of Sales who's done it before

For most SaaS startups, the VP of Sales (along with the VP of Marketing) is one of the most crucial hires they need to make. Unless you have a no/low touch sales model and you're growing virally (a.k.a. you're successfully hunting flies or mice), someone needs to build a scalable sales organization, whether it's an inside sales team (a.k.a. hunting rabbits or deer) or a field sales team (a.k.a. hunting elephants).

It's also one of the toughest hires. Jason M. Lemkin gave an epic talk about the subject at our 3rd annual SaaS Founder Meetup, last year in San Francisco. Jason also wrote extensively about the topic on SaaStr. If you haven't read his articles yet, make sure you read all of them.

As Jason explained in this post, one of the things that makes hiring the right VP of Sales so hard is the timing. If you try to hire your "Mr. Make it Repeatable" or your "Ms. Go Big" VP of Sales too early, say at $500k in ARR, you'll almost certainly not get a great one. The reason is that a great one will most likely not leave his or her current position at a successful, fast-growing, well-funded SaaS company, which pays him or her hundreds of thousands of dollars in salary and bonus/commission per year, to join your tiny little startup.

Starting to look for your VP of Sales too late is equally dangerous, though. If you want to grow roughly in line with the T2D3 formula, which most venture-funded SaaS startups should shoot for, you need to hire a lot of sales people in year 3. An exception are SaaS startups with a no/low-touch sales model and viral growth (see above) and potentially companies which have a massively negative net MRR churn rate and therefore don't have to acquire as many new customers. If you're fortunate to be in one of these categories, you may not need a big sales team, but most SaaS companies aren't.

That's why I think most SaaS companies that don't have sales management experience in the founder team need to start looking for a VP of Sales by the time they're at around $1.5-2M in ARR so that by the time they're at around $2-3M, they've recruited a VP of Sales who can take them to $10M and beyond. My thinking becomes clearer if you take a look at this model, which calculates how many sales people you need to get from, say, $1M in ARR to $10M. Note that a big and productive sales team may be necessary to achieve that goal, but it's obviously not sufficient. You also need a great product, great marketing, etc. – otherwise your sales team won't have enough warm leads and closing them will be too hard.

(click for a larger version)

Click here to download the Excel sheet.

Here's how the model works:

  • Enter your current ARR in cell D10. You can of course also enter your ARR target for a future date, depending on what you want to calculate. In the template, I'm assuming that you're at or close to the end of year 1 and want to work out your hiring plan for year 2 and year 3.
  • Enter the monthly growth rate that you're targeting for year 2 and year 3 in cells D11 and D12, respectively. Note that this should be your "net MRR/ARR growth rate", which takes into account all MRR movements like churn, expansion or contraction. The sample data that I've put in reflects the T2D3 formula (grow to $1M in ARR in year 1, triple in year 2 and triple again in year 3).
  • Input your monthly net MRR churn rate (i.e. [churn MRR plus contraction MRR] minus [expansion MRR plus reactivation MRR]) in cell D13.

Using these inputs, the spreadsheet will calculate the new ARR from new customers that you have to acquire in order to meet your growth targets. See row 25.

Now ... how many sales people do you need to achieve these target numbers? This depends on the following inputs:

  • Your AEs' quota, i.e. how much new ARR you expect each AE to bring per month. The model assumes that your AEs will on average meet their quota. In reality, some of your sales people won't meet their quota and some will exceed it, so this number really is just the average which you expect to achieve.
  • Ramp-up time, i.e. the time it takes your AEs to reach full productivity. The model assumes that they're 100% productive in month 4. For months 1-3, you can enter different percentages in cells G10-12.
  • The size of your sales support team. In cells K10-14 you can enter how many Sales Directors, SDRs and SDR Directors you expect you'll need in proportion to the number of AEs.

The sample numbers that I'm using in the template are broadly in line with the results of this benchmarking survey. As you can see in the spreadsheet and in the chart, based on these assumptions your total sales headcount increases from 2 to 9 in year 2 and from 9 to 30 in year 3. So in year 3 you'll have to hire and train 21 new sales people (plus replacements for people that leave or are let go). 

Without a VP of Sales who has built and scaled a sales team before, that's tough. 

PS: As you can see in the chart below, there's a 1:1 correlation (approximately) between ARR and sales headcount. That's OK in the $1-10M ARR stage, but in the longer term the best SaaS companies manage to grow revenues faster than sales spendings, primarily by focusing on account expansions to achieve an ever-increasing negative MRR churn rate and by continuously getting up sales efficiency.

(click for a larger version)

Tuesday, June 16, 2015

Why we politely ask for a deck first

When founders reach out to us to pitch us for an investment, they usually have a fundraising deck which they’re happy to send over. But every so often it also happens that a founder wants to set up a call or a meeting before sending over any material. In these cases I usually ask the founder if he or she could send us a deck first, with a view to have a call or meeting as a potential second step. But every time I do this, it makes me feel uncomfortable because I don’t want to come across as impolite, arrogant or unapproachable. In this post I’d like to give some background on how we work, which will hopefully make it easier to understand our behavior in the scenario I described above.

I have understanding for founders who want to walk us through their story and vision rather than sending over some slides. A startup is a founder’s baby which they often have a deeply emotional relationship with, and it’s understandable that when they pitch it, they want to leave the best possible first impression. It’s also understandable that founders want to get to know us first and learn more about us before sending us confidential information. What’s more, most founders are very smart people who are great to talk to. For all these reasons, I wish we could talk to all founders who reach out to us.

But it’s impossible. In the last 90 days we’ve logged 987 potential investments in our Zendesk (which we use for deal-flow management). Even with three Associates and one Intern, we can’t talk to all of these startups. If we did, we wouldn’t have enough time to dive in deeply into sectors, do due diligences, spend time with our portfolio companies and do many other things which are important for our business.

This is why using the pitch deck as the first filter is so important for us. When we go through a deck, a couple of minutes are usually enough to determine if we want to learn more. There are plenty of reasons why a company may not be the right fit for us (and Point Nine not the right partner for the company): It may be too early-stage or too late-stage. It may be a sector we’ve looked at before and aren’t excited about or it may be an area which we don’t have any expertise in. Or it may be in a field that’s too close to one of our existing portfolio companies. Most of the time when we pass quickly after having seen a deck, it doesn’t say anything about the quality of the startup and only means that the company is outside of our investment focus.

Obviously our process isn’t perfect. Not taking a closer look at each incoming request means we will miss great companies (and grow our anti-portfolio). But the same is true for any other approach.

A few closing comments:

  • I know that most other VCs feel the same about this, so if you want to raise money, spending time on producing a great pitch deck is time well spent. I also think that creating a deck is a great exercise because it helps you think through each area of your business systematically.
  • Michael wrote a great post about “What should be in my fundraising slides”.
  • Don’t ask for NDAs.
  • Don't send your pitch deck to dozens of VCs. Do your research to find out which 5-10 firms look like the best fit for you and start with those.
  • You don’t have to include everything in your “teaser” deck. I would recommend to include KPIs in the deck, since these are crucial for the investor to determine if you’re at the right stage, but it’s perfectly fine to leave out sensitive information like details on your product roadmap.

Wednesday, June 03, 2015

Announcing Point Nine Capital III

Today we’ve announced Point Nine Capital III, our new €55M fund. Investors in PNC III include institutional investors like Horsley Bridge Partners, Sapphire Ventures, Flossbach von Storch and Vintage Investment Partners as well as a number of highly successful Internet entrepreneurs. To our existing LPs: Thank you for your continued trust! To the new ones: Welcome on board!

When we raised PNC II, our goal was to build a leading independent European early-stage venture capital firm. While it’s still very early days for us, we think we’ve made good progress towards that goal in the last years.

PNC II was based on a couple of ideas and principles:

Live Berlin, think world
We saw a strong need for a Berlin-based seed VC because Berlin was starting to become a great startup destination, yet there was not a single VC that was headquartered in the city. At the same time, we didn’t want to limit ourselves to investing only in Berlin (or only in Germany for that matter) because we saw great startups being founded all over Europe (and elsewhere). Before PNC II we had already invested in Berlin-based companies like DaWanda, Delivery Hero and Mister Spex as well as in companies from Denmark (Zendesk), the UK (FreeAgent, Geckoboard, Server Density), Canada (Clio, Unbounce), the US (StyleSeat, Couchsurfing,...) and even New Zealand (Vend) and Japan (Gengo), so we were already used to this approach.

Focus on early-stage investments in SaaS, marketplaces and eCommerce
While we wanted to be pretty agnostic with respect to geography, we were going to be pretty focused when it comes to stage and industry. We’d only do early-stage investments (seed and early Series A) and would focus on three categories: SaaS, marketplaces and eCommerce.

Be “The Angel VC”
Both Pawel and I had a background as angel investors, and just because we raised a fund we didn’t want to give up our angel investor mentality. We wanted to combine a founder-friendly, no-nonsense, value-add approach with the ability to make bigger investments and do more follow-on financing.

Think long-term and give before you take
VC investing is an incredibly relationship-driven business. To be successful, you constantly need other people’s help and goodwill. What that means is that if you’re a newcomer, you should try to “give” as much as you can to as many people as you can in order to build long-lasting relationships.

Small is beautiful
Our original goal for PNC II was to raise €30M. We ended up raising a little more (~ €40M), but it was still a typical micro VC size. One reason for becoming a micro VC was, of course, that we wouldn’t have been able to raise a €100-200M fund, so it was an easy decision. :-) But we also felt that a €30-40M fund was the right size for a European seed fund: Big enough to invest needle-moving amounts in startups and have capacity for follow-ons, but not a size at which you need multiple unicorns just to survive, as my friend Jason M. Lemkin put it. (Not that we have anything against unicorns, but you know what I mean.)

Three years later

Three years later we feel encouraged by the early results of our strategy. Many PNC II portfolio companies have raised large follow-on financings from great investors like Accel, Acton, Balderton, Bessemer, Emergence, General Catalyst, Matrix, MHS, Storm, Valar and others. In many cases, valuation has gone up significantly since our initial investment, in a few cases as much as 10-20x and more. Again, it’s still very early and it will take another five years or so to see if we’ve done a good job with PNC II, but we’re super excited that so many of our portfolio companies are on a great track. We’re also extremely grateful for the appreciation that we’re getting for our work – from portfolio founders, other investors, our LPs and the bigger startup community.

Finally, we’re also extremely happy with the team that we’ve been able to build. Assessing an ever-increasing number of investment opportunities and managing a portfolio of around 50 companies wouldn’t be possible without the fantastic work of our Associates or our Operations Team. Thanks guys, you’re awesome. :)

So, we’re happy with our strategy, and we’re going to continue it with PNC III. We’ll continue to invest heavily in Berlin but will also continue to invest all over Europe and beyond. We’ll keep our “Angel VC” tagline, and we’ll continue to do our best to be a “good VC”. We’ll stick to early-stage, and while PNC III is a little bigger than PNC II, we’re not leaving micro VC territory.

In terms of sectors, we’ll stay focused on SaaS and marketplaces, although we’ll also keep exploring new areas like bitcoin, IoT or drones (interestingly, the investments which we’ve made in these new areas so far all fall under SaaS or marketplaces from a business model perspective). The one area which we got somewhat less excited about in the last years is eCommerce, mainly because it requires so much capital and because the margins are usually small. There are (very) notable exceptions, of course – Westwing is one of the best-performing companies of PNC I, and if Stefan Smalla ever starts another eCommerce company we’ll invest in it again in a heartbeat.

Copy & paste?

So a lot of things are going to stay the same, which explains why, when we told our partners at Horsley Bridge about our plans for the new fund, Kathryn said, with her inimitable wit: “Sounds like copy & paste”. That’s true, but I should point out that other things have changed and will continue to change rapidly. Some of the “pattern matching” that we’ve used to pick great companies 3-7 years ago doesn’t work any more because what used to be innovative a couple of years ago is table stakes today. Many of tomorrow’s unicorns might and probably will be based on technologies which barely exist today. Add all the changes that are happening in the funding ecosystem, and it’s clear that while we’ll stick to our core values, we’ll have to keep re-inventing ourselves to stay relevant. So don’t worry about us getting slow and saturated. We’ll stay hungry and foolish.