Why do big corporations find it so hard to innovate? Why is it difficult to create products that are somewhat different from what they have already produced or using different distribution channels? In short, what is the nature of innovation that makes it so difficult to process-ize? One of the reasons is the same reason why many startups do not get past the seed stage.
After decades of working with and creating startups, it’s clear to me that there are two phases of a startup. Phase I is what I call the Sales Engine Construction Phase. Phase II is what I call the Crank-Up Phase. Sometimes, when the financiers are in more of a rush (and feeling lucky), these phases get squashed together and overlap. Nonetheless, in the long term, a profitable, repeatable, and scalable sales engine is needed. Without a proper sales engine, the crank-up is financed by the investors—which is not sustainable as a long term strategy.
In the nineties, when a group of people got together to do a startup, there was not a lot of group-wide consciousness about the “job” of the startup. When you start up, your goal is not to make a lot of money… your goal is to figure out a profitable, repeatable, and scalable way to make a lot of money. i.e. your initial goal (in Phase I) of your startup is to build a sales engine.
When Mark Leslie retired from Veritas and landed at Stanford in the early 2000s, he (luckily for us) thought through his experiences starting up product lines at Veritas. (When Mark retired, Veritas had four product lines, each generating about US$250m revenues a year.) When he started sharing his ideas on The Sales Learning Curve with the startup community, we were all relieved and grateful that someone finally articulated a framework what we all struggled through, in our various startups, without a rigorous set of references.
I use the term engine because it is very often, when I work with startups, the comments on what they were learning on the Sales Learning Curve tend to be too qualitative. Yes, it’s about learning. Yes, it’s about experimenting. But when you build a sales engine, you have to be precise—as precise as when you are building a physical engine. You need to be as quantitative as possible. What is the efficiency of a component? What is the unit cost? What is the gearing ratio? And since sales have a higher level of unpredictability around some of the functions, what are the probability curves of the major components of the engine?
You will need to consider questions like:
- What are my acquisition channels?
- What are my CACs (customer acquisition costs) for each channel?
- What are the efficiencies for each channel?
- What are the stages of my sale cycle?
- What price points work best?
- What are the key value propositions?
- How do I ensure referenceability?
- What are the must-have features?
- Who are the decision makers; and..
- What is the retention, engagement, and virality expected over each cohort of users?
There are literally hundreds, if not thousands of questions that you need to figure out to build out your sales engine. Mark’s article in HBR (2006) is a good starting point. Ben Horowitz’s recent article on distribution is also a great framework to think about the distribution part of the sales engine.
Series A. Many of the venture investing I’ve done myself, is into Series A rounds. I know “Series A” is a label we put on a class of shares at a certain stage of a company’s life-cycle. However, I like to think that Series A funding is a round of funding that goes into starting the crank-up of a startup’s (exponential) growth. In real life, sales engines, being the fuzzy systems that they are, result in fits and starts as companies start cranking up.
The Crank-up Phase. After garnering the financial resources to crank-up (having at least a somewhat functional sales engine and Series A at hand), you can start taking the engine out to the race track. Step on the gas, and see if it performs as expected. If you put in $100, and, you know, $500 pops out after 3 months, then the next test is, can you get $50,000 out after 3 months if you pop in $10,000? And if you can, what if you pop in $1,000,000? Still good?
Failure to Construct. So why do many corporates find it so hard to build new businesses? My theory is after many years running in the crank-up phase, a company and its culture have forgotten the hard lessons learned when it was starting up. In fact, most of the time, the folks who were in the company during the sales engine construction phase are no longer in the “cranked up” corporate. Without a clear framework to build new sales engines, there is no new businesses to crank up. Of course, there are other reasons why corporations fail at creating new product line. (E.g. we can all go on at length about how the disconnect between risk appetite and experimentation costs hampers innovation.) But my experience tells me not having a disciplined sales engine construction process is one of the main reasons.
However, if you are doing a startup, you have no excuse. You know if you want to be able to get the financial support to crank-up your business, you need to demonstrate to your Series A investors, that you have at least a semi-functional sales engine.