Due Diligence Trimmed
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Successful start-ups tend to follow a predictable pattern: they identify a problem that needs solving, develop an innovative solution, find their first few customers and then seek to expand beyond their early adopters and exploit the full potential of a mainstream market they have so far merely scratched the surface of.

Geoffrey Moore described the particular challenges of expanding beyond the first wave of early adopters in his masterly “Crossing the Chasm”, and it’s a path many apparently promising companies have attempted to follow – with, it has to be acknowledged, widely varying degrees of success.

The initial investments in these organisations have tended to focus on building a viable product, but the next focus of investment (typically “B” round and beyond) is on scaling the business, and on the investment hypothesis that revenues will grow at least proportionally to the increase in sales and marketing resources.

And that – unfortunately – is where things can often break down. Investors are very used to doing their financial due diligence. They can build complex and sophisticated business models. They can normally get a pretty good sense of the character of the management team. But it seems to me that they often struggle to apply the due diligence required to accurately assess whether they are about to invest in a truly scalable sales process.

You can understand the difficulty. Whilst financial models and projections inevitably make assumptions, they at least follow a common framework and structure and are based on convention and regulation. And the essential building blocks of financial due diligence are (or should be) a highly familiar subject to any experienced investor.

Unfortunately, things are not as simple when it comes to modelling the effects of increasing sales and marketing resources, particularly in complex B2B sales environments that are inevitably subject to a large number of somewhat unpredictable factors (not to mention the implications of chaos theory).

The challenge is compounded by the fact that the initial wave of sales has often been conducted by a handful of individuals (often the founders). They have usually been selling to people and organisations who – as early adopters – bring their own energy and vision to recognising the practical potential of the new solution.

But this model – although it can bring early (and sometimes deceptive) success – simply does not scale, for two critical reasons:

  • Firstly, the founders are in a special and privileged position: they have a vision and are often very credible at articulating it. They manage to win the first wave of sales, but are – frustratingly – often unconsciously competent when it comes to explaining their success formula to others
  • Second, the early adopter buyers that they have sold to are typically already driving a change agenda in the pursuit of competitive advantage, and are more open to using what might seem to more conservative buyers to be unproven (if promising) solutions

It’s rare for organisations to have a fully developed and defined “sales process” in the early, often experimental days. But if they are to recruit a new wave of salespeople to exploit the potential of the rest of the market, it’s critical that they induct their new sales hires into a disciplined and proven sales process that equips them to target, engage, qualify and advance more of the right sort of prospects.

It’s equally important that vendors identify their most promising initial opportunities in the mainstream market (a combination of a critical business issue, a certain type of organisation, contacts who are change agents, and a suitable catalyst or trigger event) and focus their energies on establishing a defensible bridgehead, rather than dissipating their energies.

I’ve seen many situations where a new investment round has provoked a rash of recruitment of apparently promising salespeople, who then get thrown in the “deep end” only to find that few if any of them successfully learn how to swim in their new environment.

The personality of the sales leader can have a dramatic effect as well: it’s not uncommon to appoint someone with a charismatic-heroic sales leadership style who can channel their energy to perpetuate the momentum temporarily, but who lacks the systems mindset needed to establish a scalable, repeatable and provable sales process.

It’s sometimes hard to find (or afford) a sales leader with all the necessary qualities. But if you find yourself with a fundamentally charismatic-heroic sales leader, you probably need to buddy them up with someone who can help them apply some more structured thinking to the process.

I’d suggest that the building blocks of this scalable, repeatable and provable process need to be laid before too much of the new investment is spent (and even better before the investment is sought). I believe this must be a joint responsibility between investor and investee.

Investees need to demonstrate that they have established a scalable and provable sales process before they seek scale-up funding – at minimum, this ought to include well-defined targeted business issues, customer and key contact profiles, catalysts for change, qualification criteria, key sales stages and milestones and a crystal-clear view of how they create, capture and confirm uniquely relevant value for these target customers.

Investors need to expand their due diligence horizons to include all the above elements of the investee’s sales process – and to drill deeply into the metrics associated with the sales process and the systems that have been established (in particular the CRM implementation) to support the sales organisation.

Without these insights, any investment is inevitably going to be something of a punt. But if we can start looking at scaling investments through a sales due diligence lens, we can surely be more confident that the injection of new resources is going to result in the outcomes projected in our investment case.

And it’s not as if there aren’t powerful tools at our disposal: for example, I can’t imagine anyone thinking of investing in an organisation that uses the salesforce.com CRM system not wanting to use a powerful sales analytics tool like InsightSquared.com to reveal (and question) the underlying patterns of performance.

By the way, I’ve chosen to focus particularly on the value of having a provable sales process when organisations are looking to secure or to spend growth-phase investment funds. But the basic discipline of implementing a provable sales process applies at any stage of an organisation’s evolution.

What’s your experience (as an investor, an investee or an observer)? Could we be doing a better job of sales due diligence? Or are we going to fall back on the long-discredited “sales is (only) an art” argument?

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