Why do some tech businesses scale fast, while others never get off the ground?
#1 The vicious sales cycle
You’re elated that you’ve got the funding you need. You want to use your new money to race ahead of the pack. At the same time, you feel under pressure as your investors expect to see growth.
So, you focus on building or growing a sales team. If you don’t already have one, you hire a Sales VP or CRO. They hire sales reps and start estimating target quotas.
Your burn rate increases and your runway shrinks. You’re told you need to wait for the sales team and processes to bed in. You wait a few more months. Then, you’re told the problem is that you’re underinvesting. Or, that you need to pivot the product.
Your sales don’t grow as fast as you want. You present some mediocre figures to your investors. They’re not well analysed, and you don’t have a convincing plan for improving them.
Investor relations sour and, as a defensive measure, you blame the sales lead. Tech businesses are notorious for solving problems by firing and rehiring.
So, what’s the solution?
As a founding team, you need to keep ownership of your sales strategy. It’s you that’s done all the conceptual thinking, product design, and validation.
It takes time to transfer that knowledge and vision. But, it’s more than a matter of knowledge transfer. It’s about understanding your respective roles. Your sales lead handles dealmaking. You still own the strategy.
When hiring your sales lead, it’s tempting to hire someone who’s shown they can succeed at the level you want to operate at. But be careful that they have the skills you need right now.
Sales leaders that excel in companies with less than £1m turnover are visionaries. They rely, primarily, on instinct and experience at other start-ups. They’re specialists in building something from nothing.
Sales leaders that excel in companies with +£50m turnover are analysts. They manage massive sales funnels. They systematise everything. They never rely on instinct. They have a huge volume of data and large sample sizes available. They research, test, measure, and optimise every step on the buyer journey.
Between these two extremes, a range of other skills become vital. You have to hire someone who has experience getting you from where you are now, to your next milestone. Not your end state.
Growth doesn’t only come from salesmanship and dealmaking. You need to invest as much in marketing and customer service as you do in sales.
- Without the right marketing assets, your sales conversion will be inefficient.
- Without the right customer service, your churn rate will create too much drag. All that money spent on customer acquisition will get wasted.
You need to allow your sales and marketing leads to shape your product roadmap. Put aside your vanity projects, and empower them to sharpen your commercial edge. Your feature set should be responsive to the analysis done by your marketing team. And your developers have to deliver what your sales team says they can sell.
#2 It’s not an MVP you need, it’s an MSVP
An MVP solves the problem of working with unclear or unknown requirements. It enables rapid iterative development. For tech startups, it excels in helping you get early feedback so you can validate your product-market fit.
But your MVP may not have enough of a killer feature set to support rapid sales growth. If this is the case, it’s more strategic to front-load your product development costs a bit. Make your product easier to sell, before you make a large investment in your sales team.
The trick is to shift your thinking from MVP to MSVP – your Minimal Sales Viable Product.
- An MVP is a working prototype that’s good enough to generate meaningful feedback. It’s used to prove or improve market fit.
- An MSVP is an initial saleable product. It’s not there to showcase different features and see what lands. It’s focussed on your ideal customers’ single biggest pain. And convincingly eliminates or improves it.
The right time to invest in your sales team and sales funnel is when you’ve found and built your MSVP. Because you have a clear fit, your sales cycle is shorter and you generate ROI quickly.
You use the time while you’re converting your MVP into your MSVP to build awareness and create that “velvet rope” buzz.
#3 Steady-state marketing
Most tech startups lack consistency in their marketing. When they get some cash in they reinvest in marketing. Product awareness rockets upwards and they get a deluge of leads.
They feel confident growth is on track and attention switches to your runway. You’re on track to smash your growth targets, so it seems sensible to reduce burndown by cutting back on marketing.
The problem is that the heart of marketing is brand awareness. An on-off approach is inefficient. When you switch off, awareness plummets far faster than it grows when you switch back on. So you end up spending more and more just to recover lost ground.
Brands are like fires. Fires don’t start out huge. If you try to rush things by pouring on petrol, you get an impressive but short-lived flame. Plus some singed logs. If you want to build a solid brand presence you have to build your fire up. It needs patience and consistency. This is not something you cut back on when trying to get your burn rate down.
#4 Analyse everything
There is no secret formula for growth. No hidden design pattern. If there was, everyone would be a tech billionaire.
Your concept, product, and market are unique. So you need a growth strategy that’s unique and bespoke to you.
The other common misunderstanding is that the solution is based on creative genius. Finding the strategy that works for you is an experimental science. You need creativity to come up with ideas, but you need feedback to know what works and what doesn’t. It’s analysis that provides the feedback mechanism.
Those who succeeded weren’t just lucky, or better funded. They were disciplined and analytic in their approach. Every part of their sales and marketing strategy was developed iteratively. And it’s constantly optimised.
#5 Beware overtrading
Overtrading is a trap that many businesses fall into when scaling up. It’s not unique to tech businesses.
The difference with retail or manufacturing startups is that overtrading is a much more obvious problem.
As order volumes grow they keep having to find more and more cash pay for stock or raw materials. There’s an unavoidable physical delay before those orders are fulfilled and create cash income. Which means expenditure grows faster than income. Their cash gets trapped within stock and work in progress and, as they run out of capital, their growth rate hits a ceiling.
It’s a relatively easy problem to see and understand. And, the process is inherently self-limiting. So for most businesses, the outcome is frustration rather than bankruptcy.
Tech businesses don’t have such transparent costs. Your main expenditure is on customer acquisition. And, measuring the average end-to-end cost of acquiring a single customer is difficult.
What’s more, customers don’t make a single, easy to measure purchase. Typically, they create an ongoing revenue stream. Measuring the value of a customer is even harder. It involves complex lifetime value analysis.
This makes it much harder to spot and deal with overtrading.
The root cause of failure for scale-ups isn’t that they don’t secure funding, as most believe. This is a symptom, not the cause.
The cause is that they don’t realise their customer acquisition cost exceeds the lifetime value of the customer.
This is inevitable right at the start of your scale-up. But you need a credible plan to reverse it before you invest too heavily in growth. Otherwise, you will literally grow your way to bankruptcy.
You must always be vigilant about measuring your CAC:LTV ratio. That’s why it’s in our top three list of KPIs that matter.
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