Welcome to Episode 175! Jason Lemkin is the Founder @ SaaStr, the world’s largest SaaS event with over 20,000 of the world’s best SaaS founders and investors attending every year. Jason also invests from SaaStr’s debut $70m fund and has made prior investments in the likes of Algolia, TalkDesk, MixMax, Rainforest QA, and many more incredible companies.
In Today’s Episode You Will Learn:
* How does Jason think founders should approach long sales cycles in the early days? Why does Jason believe that ultimately long sales cycles do not matter? What can the truly great VPs do to impact those long sales cycles?
* How does Jason think founders can tackle lead optimization with their team? How can founders determine which leads to send to which AEs? What will the effect of this tailored lead distribution be?
* When is the right time for the founder to begin to take a step back from sales? Why does Jason believe that the founder must always be involved in the sales process? How does this look at scale when selling to thousands of customers? How does this mean the founder works with the growing scaling team over time?
* Why does Jason believe that SaaS companies have to raise so much money today? What is the core decision that founders must make when determining how much they need to raise? How should founders approach the topic of cloning? What are the 3 core advantages they have over their clones? What must they be mindful of when being cloned by incumbents?
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Jason Lemkin
Harry Stebbings
SaaStr
Transcript
Harry Stebbings: You are listening to the official SaaStr podcast with your host, Harry Stebbings. You can find me on Instagram @hstebbings1996 with two Bs. It’d be great to see you there.
To the show today, we have back to school for another of Lemkin’s Lessons. For those that do not know, Jason Lemkin is the founder of SaaStr, the world’s largest SaaS event with over 20,000 of the world’s best SaaS founders and investors attending every year.
Jason also invests from SaaStr’s Debut $70 million fund and has made prior investments in the likes of Algolia, Talkdesk, Mixmax, Rainforest QA, and many, many more incredible companies. In today’s episode, Jason will touch on everything from how to think about long sales cycles, when the founder should step back from sales slightly, how to think about revenue per lead, and much more.
You’ve heard quite enough from me. Without further ado, I’m thrilled to let Lemkin’s Lesson commence.
Jason Lemkin: Good. That’s perfect. I think we’re warmed up.
Harry: Kicking off the lesson today with how to think about and approach long sales cycles.
Jason: The other day I got an email from a founder that I know well. She was saying how they just closed a great Fortune 100 company, a great logo, but it had taken over a year since the first meeting. This company’s just crossing a million in revenue so a year seems like forever.
Let’s step back for a minute. Ultimately, long sales cycles don’t really matter. Why is that? A couple things.
First of all, one, it comes with the territory. Fortune 500 companies don’t buy in a week, or an hour, or a day like you and I do and SMBs don’t. It just doesn’t happen that way. There’s multiple stakeholders.
Two, ultimately, if you’re going long you need multiple steaks on the iron. You need deals closing this month, next quarter, next year. If it doesn’t close today, if it’s a good prospect, if you genuinely believe they’ll close in Q3 that’s still important.
Lastly, help will come. When you finally hire a great VP of Sales, what she she or he will be great at is not doing the impossible, not getting Google to buy in a day or BE to buy in a week. He or she will shorten it as much as possible. Probably, on average, cut these long sales cycles by half once you get that great help.
Until then, just hack it.
What’s the number one mistake we make besides being anxious? We set the wrong expectations for sales reps before we have that great VP. If you’re going to hire a sales rep and just have her or him work on big deals, are you going to give her two quarters before she closes anything? It’s pretty stressful.
This will be stressful when you’re a $20 million or $50 million AR, but at least you’ll be able to blend it against all your other reps and all your other channels to acquire customers.
My biggest suggestion in the early days is if you’re going to hire an EA in the early, just to do bigger deals don’t let that be all she does or you’ll be anxious for quarter after quarter as you’re paying her salary. Her OT will probably be the highest in the company. You’ll be stressed out when in the first two quarters she closes nothing.
Instead, split her leads 50/50 between big and large and later let her just do all the large ones. That will make your life better.
Good luck and get a little Zen about long sales cycles. At least you’re in the deal. That’s the first step to winning it.
Harry: Speaking there of how AEs spend your time, we’re now going to move on to lead rich versus lead poor and the right way to think about that.
Jason: One topic we’ve only briefly touched on, on SaaStr that deserves a lot more ink and time is lead rich versus lead poor environments. I think this is one of the most important ways to get more revenue out of all the good, hard work you’re doing getting leads into the company.
Getting this right is a mistake, actually, I continue to make as life goes on and I work on and with more and more companies. What’s the difference?
Roughly, a lead rich environment is when there are sufficient leads to each rep that they don’t follow up with all of them. A lead poor environment is where there’s barely enough leads, maybe not even enough leads, for a rep to make quota. I traditionally have liked lead rich environments because I love an environment where every salesperson can make or exceed quota.
I love the energy there. It creates low churn and low turnover. People recruit their friends. When there’s enough leads to go around, everyone starts to tap into their network and say, “Your start‑up is a hot place to work.
That, plus a great VP of Sales, is how you build an amazing sales team. A great sales team, because of this, have almost no churn whatsoever but, if you take it too far, reps don’t follow up with anything but the best leads. It happens again and again.
You’ll go in and you’ll find out if reps have too many leads that half the leads or more they barely even touch, or they’re not worth their time, or they push too hard, or they just want to put them into a cadence and not follow up.
What’s the right answer? I’ll come up with two suggestions. For a typical in‑site sales team it’s hard for a rep to follow up with too many more than 50 good, decent leads a month. You can score them how you want but there’s only so many demos a day you can do, so much follow up. If you give reps too many more than 50 it’s possible it’s too many.
Number two, put an SLA in place. If reps don’t follow up with leads, they’re added to another rep. Even consider having a dedicated rep, a cleanup rep, who her or his only job is to close the leads that the other reps don’t follow up with. Put that SLA in place and you’ll find much more momentum in your sales team.
Harry: Staying on the theme of lead optimization, now firms talk about revenue per lead.
Jason: There is a metric we talked about a lot in the very early days of SaaStr, revenue per lead that I’ve never seen anyone talk about since. I actually think this is one of the best tools for you as a CEO or founder for growing faster from sales rep 3 through number 20. It’s knowing revenue per lead.
What we all get really good at is understanding how much revenue a sales rep is generating. We know exactly how much Linda or Bob or Joe booked last month, but how did they get it done? How much revenue did they generate per lead?
For your first two reps you’ll know. Typically, if you have two reps you’ll split the leads in half. Bob will get half and Linda will get the other. You don’t need to know their revenue per lead. It’s hard to keep track from reps 3 through 20. Here’s the key.
Once you can start granularly knowing how many and which leads to send to which rep you’ll learn so much more. On my first team, I learned that some reps couldn’t possibly process more than 50 leads per month because as soon as I gave them 51 they didn’t generate any more revenue.
Some of our top performers could handle 100 or even 150 leads per month because they were so efficient. In other cases, there were follow‑up time issues. Some reps were great at following up in 60 seconds. Some took hours. You need to know how many leads of which type to route to each rep.
It is work, but if you can do this, typically you can get about 20 percent more revenue out of however many sales qualified leads, or just leads in general, as you would otherwise if you’re always routing the right lead to the rep that can process them the most.
Try to figure that out after about 20 reps, after as many as you can fit on one PowerPoint slide. It’s too many and you just have to judge reps and the whole process from lead to close based on how much revenue each human generates.
From 3 to 20, get each lead into the hand of the right rep for that lead and you will grow much, much faster.
Harry: The last element on sales for today’s episode being when should the founder take that first step back from selling?
Jason: I want to chat for just a little while about the number one mistake in sales that I see founders make, which is stepping away. I see this again and again. We’re not all‑natural born salesmen. Many of us, this is the first time we’ve done sales with our start‑up and somehow, we convinced the first 10, 15, 20, 100 customers to join us.
We finally find one good sales rep. We step back from sales. We don’t spend as much time. Maybe we wait until we hire a good head of sales and she turns out to be pretty good. Then, we stop working on sales.
I see this again and again. It never really works. When the CEO steps out of sales, sales always goes down. The real rule to remember is however much time you spend in sales when you started, it will never be less. If it’s 20 percent, it will always be 20 percent. If it’s 50 percent, it will always be 50 percent.
At the SaaStr annual, each year I ask many of the best SaaS CEOs how much time they spend in sales. Whether it’s Peter Gassner from Veeva, Jeff Lawson from Twilio, Phil Fernandez from Marketo, they all still spend a ton of time in sales. Phil from Marketo said he wished he could spend all of his time in sales and customers.
I also often ask them, “How much time should you spend with prospects, with potential new customers, or with co‑sales?” The answer from the best CEOs is always, “Both. You have to spend 100 percent of your time with both.”
That’s always not quite possible but the real takeaway is you never get to sell less. Your role may change as it scales. When things are bigger, you may jump in and out of deals. You may be there only for the big ones. You may fly in to fewer deals and spend more of your time doing other things but the amount of time you spend in sales will never go down.
I’ll tell you a last, quick story. I remember when we closed Groupon as a huge customer and I flew out to Chicago in the middle of winter with my team. We were meeting with their sales ops team. You know who was in the customer conference room across there? Mark Benioff from Salesforce with his team.
He was still in sales then. He’s still in sales now. You’ve got to do the same thing.
Harry: We heard Jason talk there about the amount of time you have to spend in sales as the founder and CEO, but you also have to spend an immense amount of time in fundraising. We’re now going to move on to fundraising and why SaaS startups have to raise quite so much VC funds.
Jason: Let’s chat for just a second about why do you need to raise so much money? The reason is competition. Think about it for a minute. Almost any SaaS company, no matter how they got there, should be able to be cash flow positive by four to five million in ARR. By then, you can hire 50, 60, maybe in less expensive areas 70, even 80, 90 employees. That’s enough to service your customers and ship some code.
Competition, then, is what drives the cost up. When you have multiple players all competing for the same leads, the same AdWords, the same everything your marketing expense goes way up and your sales efficiency’s going to go way down. You’re going to have to pay your reps out more when they win fewer deals. That’s a fact.
If you want to stay cash flow positive or get there you may need to pick your battles. You may need to figure out where you’re number one, which segments. Even niches you can be and stay there because the other ones are going to be a lot more expensive.
I think if you look at the SaaS companies that burn little cash, that’s what they did. They stuck to where they were strong and were number one and let other areas go.
The flip side is what SaaS companies do that raise a ton of money is they do dominate strategy. They also play to win in areas where they have no presence or are very weak. If you think about it, the flip side is that’s very expensive. If you enter the market as the fifth player in a niche, even if you’re number one in many other segments it’s going to cost you a ton in sales and marketing to get it off the ground.
If you had infinite capital, you might do that because that’s the way to win all the marbles. When you raise hundreds of millions in SaaS, you’re often playing dominant strategy.
There’s one thing that’s the losing strategy, which is the middle. Raise a bunch of money but not enough for dominant strategy and you’re stuck in the no man’s land. You’re trying to enter areas where you’re not as strong but you don’t have enough money to do it. Either stick to where you’re strong or go for all the marbles but be careful of getting sucked in the middle. It’s too many rounds of capital for not enough success.
Harry: What about when competition goes one step further and we start to see cloning?
Jason: Once you have something good, once you’ve been around for two or three years. You’re good at PR. Folks start to use you. You have even a bit of a mini brand. You’re going to have clones. Folks are literally going to take your product and copy it.
As a founder it will create some anxiety for you. It tends to create even more for the team sometimes. The knee‑jerk response is to dismiss clones, to say there is no way they’re as good as you.
That’s the wrong approach. Your first clone may be pretty weak but by the time the second or third comes around they’re usually pretty darn good because you wrote the playbook. Even more so, something that’s not obvious is that once big companies start to clone you, big companies always have 20 or 30 great engineers around. You don’t.
You will struggle to ever have an extra engineer. Believe it or not, you can make fun of big companies, but be careful. One thing they’re great at is having surplus great engineers.
Assume that the second or third clone will be quite good. In fact, in some ways, it may even be slicker, faster, more elegant than the superficial version of your product today.
The thing is the clones don’t usually win, not if the team’s great. You see this again and again. Why don’t clones win? A few important reasons.
First of all, the clones don’t know the market and customers. It doesn’t matter if they copy the end user version of your product. You have a thousand customers and you know what they want. That also means your product road map is 50 times better than the clones. They’re catching up to what they can see but you know five years into the future by the time the clones are good. They have no idea.
The third but subtle reason is 9 times out of 10 the big companies quit after a couple years. They do have those extra engineers but they don’t have an extra hundred salespeople, marketers, customer success people.
Once it gets complicated, once it’s more than software but it’s a team of a hundred plus revenue and product professionals going along with it they usually can’t sustain the pace.
Stick it out and go long. Take the clones seriously but have confidence in what you know. You know much more than they do. Build a team around it.
Harry: On the topic of building a team around it, our final lesson today on when to hire your first VP of Product.
Jason: First of all, most of us make this hire way too late, primarily because we’ve never worked with a VP of Product before, most of us. Typically, the way we build a product in the early days is you’ll have a CEO and a CTO who are the two founders. One of you will hack wireframes, and figure out what to build, and go talk to customers, and figure out requirements.
The other one will go do it. When you have two or three use cases and are figuring it out, that’s fine. The last thing you need is someone mucking that up and creating a bunch of Gantt charts and whiteboarding stuff when you don’t need that extra person.
You’ve got a couple use cases for your product, maybe 5 to 10 workflows, but then things sneak up on you. Even by the time you’re at two million, three million in ARR your product gets really complicated. That two or three use cases, you’ve got small, medium, and large customers. Now you’ve got 10, 15 use cases, different integrations.
Combine those with other things. Maybe you’ve got 50 workflows. You know what? It’s too many to hack. You will not make your customers happy. You will not be able to manage the myriad of complexity of the future of your application without someone that all he or she does, 50 or 60 hours a week, is figures out where your product should go and how to manage the team so it gets there today.
You can’t hack it 5 or 10 hours a week any longer. Then, you ought to make the hire. What’s the mistake most people make? They hire someone too junior. It’s the same mistake in marketing and, in many ways, the same mistake in sales. Let’s talk about this.
You can definitely hire a stretch head of product. People don’t do that. They hire a product manager from Box, from Yammer, from DropBox, whatever. The problem is the 88th product manager from these companies has never brought a product to market.
My one criterion for your first head of product is they have to have owned a product, not an entire product, but at least a piece that’s gone to market.
The last question is, do they need to be an engineer? Usually not, but I’ll tell you it sure helps if they’ve managed a small team. You can be flexible there.
[gong]
Harry: I think Jason Lemkin deserves an award there. The amount of nuggets of wisdom you can fit into a 20 minute episode, as always, fantastic to hear from Jason. You can find him on Twitter @jasonlk.
Likewise, you can see me on Instagram @hstebbings1996. It would be great to see you there. Do not forget to check out saastrpro/podcast where we train your team on SaaStr content. That is an incredible product.
As always, I so appreciate all your support. I cannot wait to bring you next week’s episode with Kristina Shen of Bessemer Venture Partners.
