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What VCs Look For

A few years ago, I interviewed a candidate for a VP of Sales position at one of OpenView’s portfolio companies. Truthfully, I wasn’t expecting to be overwhelmed by him (he didn’t have the best resume of the candidates the company was considering), but I walked out of the conversation thinking the portfolio company should immediately make him an offer.

Why the excitement?

When this person walked into my office, one of the first things he did was pull out his personal operating report, show me exactly how deals move through his pipeline, and explain how each salesperson on his team was performing against their benchmarks. Just as importantly, he explained how his system was incredibly effective at:

  • Creating predictable sales forecasts
  • Determining when to ramp-up resources at various stages of the sales process
  • Enabling the recruiting and onboarding of top sales talent

I was sold.

When an executive can accurately predict results in each operating unit, it means less risk and a greater opportunity to scale a company without unnecessarily blowing through (or “burning”) capital. And this guy wasn’t full of hot air, either. Every reference check I performed only validated what this executive had claimed in our interview.

Really Want to Impress a VC? Show Us Accurate Predictions, Not Just Growth

As a business scales, missed quarters get more and more expensive. This is where growth can be deceptive.

Yes, growth is important. But to scale efficiently and intelligently, CEOs and boards of directors need accurate information from each operating unit. More specifically, accurate predictions and forecasts typically mean that a company has:

  • A true operating model (not just a collection of people), which allows you to scale better
  • A clear understanding of the key drivers of output in that operating model
  • A warning system (i.e., key drivers) that alerts the management team when the company dips below certain thresholds (which, in turn, helps them know where to spend their time)
  • A set of measures to benchmark against other companies that reveal competitive advantages and opportunities to improve
  • A clear formula for when to add staff or other resources before they’re desperately needed

Collectively, those benefits of predictability give a business a solid platform for experimenting with new approaches and evaluating the effectiveness of them (thereby allowing executives to kill the approaches that don’t work and expand on the ones that do). As a result, you get fewer mistakes, more efficient use of capital and human resources, and stronger growth on the back-end.

The CEO’s Goal: Accurate Measurement of Every Functional Unit

Ultimately, metric-driven management can (and should be) applied to every functional unit in an expansion-stage company.

For instance:

  • Product development should measure and report project management, bug fix reports, usability testing, etc.
  • Marketing should measure and report lead generation ROI, website path analysis, number of MQLs, etc.
  • Sales should measure and report sales funnel velocity, sales rep activity, close ratio, etc.
  • Customer success should measure and report response times, close times, customer retention, customer upsell, product usage, etc.

The key to getting the right metrics program in place is to understand the minimum number of measures that give you an accurate understanding of the state of your company. Growth is great, but if you can’t consistently (and accurately) forecast it, then it will be nearly impossible to efficiently and intelligently scale the business.

Some Caveats to Consider

Of course, many early-stage companies can get by without metrics-based management. That’s because the organization is smaller, the processes the business has in place tend to be quite simple, and managers can track things much easier. That being said, as soon as you start acquiring a significant number of users or customers, metrics-based management becomes incredible useful. And as you scale even bigger, accurate metrics become difficult to live without.

However, there’s no sense building systematic operating models and establishing a set of metrics if you’re not going to manage to them.

I have met many intuitive managers who don’t get (or don’t want to get) this approach. If you don’t believe in what I described above, shoot me a note or comment to this post (I’m happy to shed some more light on why it’s so important at scale). If you don’t completely get the approach and don’t want my help (I won’t be offended), I highly recommend hiring someone to work for you who does.

Lastly, once you lock into a set of metrics (it will take some time to determine the most important ones for your business to track), you should try to use the same metrics as you scale.

I’m always amazed when I go into board meetings and see a different set of metrics each quarter. This typically happens when managers feel the need to present the metrics that show off the accomplishments of the company. But I would rather see the metrics that show the improvement opportunities for the company. This is where the real upside is!

Over time, startup businesses will naturally move from simple approaches to more sophisticated approaches (more specialists, more channels of distribution, more products, more marketing channels, more approaches to customer service, etc.). And as that happens, you’ll want to make sure that you continue to evolve in the right direction (note: this is not an argument for increasing company sophistication just for the sake of it; rather, my point is that gradually increasing sophistication when it makes sense can lead to better operating results as you grow).

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As the founder of OpenView, Scott focuses on distinctive business models and products that uniquely address a meaningful market pain point. This includes a broad interest in application and infrastructure companies, and businesses that are addressing the next generation of technology, including SaaS, cloud computing, mobile platforms, storage, networking, IT tools, and development tools.

  • Jack

    Hi Scott,
    I very much agree with the approach. The challenge we have is that we target large enterprises and focus on delivering high value solutions. We’ve found it difficult to develop key metrics around sales process as we are not oriented around high volume. Our successful sales guys tend to be of the “renaissance” sales types. I’d love to instil a volume model that could be measured and managed… For us, the transition may well be key to our growth. Perhaps our focus should be on detailed measurement of progress within the context of a long, complex sales cycle?

    • http://www.b2bsalesman.com/ Ash Patel

      Jack, I would say your sales environment calls for a system that helps your reps thoroughly engage various stakeholders while employing relevant measures of sentiment to track deal progress and fuel forecasts.

  • Chris Beall

    Scott –
    I completely agree. Even early on at the traction phase when your drivers are still hypotheses, process definition and measurement are key to future scaling.

    We just launched a new service about 1 quarter ago. If we hadn’t rigorously measured the key inputs and outputs – dials, conversations, meetings set, project cycle time, new hire to production cycle time, cost contributions per dial – we probable wouldn’t have yet figured out what tweaks were needed to get to 1,000 dials per day per rep, or how to avoid over hiring during a fast demand ramp. It’s a new business that surely holds a few surprises, but at least our odds of scaling it – and not getting blindsided along the way – are decent because of a commitment to measurement.

  • Mike Sherman

    Predictable sales growth relies on having a high quality development process and a product operating environment, assuming public cloud infrastructure, that is trouble free. I’m constantly amazed at the number of early stage VC-backed startups where there are no best practices implemented in the development and hosting of the product offering! You’re obviously involved in helping your portfolio companies hire top sales talent, Scott, what are you doing to help them implement best practices around development methodology and public cloud infrastructure implementation?

  • Anthony Harrell

    Scott
    I find your comments to be extremely useful and easy to understand. Piggy Back Hwy is building a marketplace for B2B commerce and this will help us put in metrics where we will be able to track the performance of our members. This will also help us as we long to build a relationship with a VC.

  • Mark Weidick

    Scott,
    Great post. What guidance do you have about the indicators or triggers that point toward transitioning to more rigorous metric tracking, measurement and reporting? In other words, what events do you see that demonstrate the business has reached a stage of maturity that warrants narrowing the things that are tracked?

  • http://www.sunstonecommunication.com Kenny Fraser

    Using the right sales process and metrics makes complete sense. Making accurate predictions unfortunately is blind luck in any organisation. My experience of some of the world’s largest corporations is that sales forecasting is highly variable on its best days. I would be suspicious of a start up that claims to have it right. Key questionis are they measuring the right things for their business model.