Start thinking about your first €100m now
Published 26/07/2015 | 02:30
There are various revenue milestones in a start-up's life which are usually semi-useful indicators of market traction.
1. Any revenue at all: You'd be amazed how many firms don't even make it this far.
2. The first repeating revenue: One customer can be luck, but repeat revenue from the same customer is interesting.
3. The first half-mil: It depends on your product price tag, but this usually means you have at least three-to-ten customers. More importantly you are doing something that more than one person on the planet is willing to give you money for.
4. The first million: The first milly is partially a psychological barrier, but it's often your first test of scaling. Can you turn a handful of customers into two handfuls of customers? Or are you actually turning into a servicing company where your revenues are really just depending on multiple services/products to the same customers?
5. The first five million: For many companies, this ends up being a non-event because at that point they're focused on…
6. The first ten million: If you're reaching this level of recurring revenue with your customers you're probably doing at least a couple of things right with both product and support.
Anyone who hasn't scaled a company through these levels may think this is a linear process. The notion of scaling sounds simple. It's not. Getting from €1m in revenue to 5m in revenue is not five times the effort. Often it will be 10 to 20 times that.
A lot of founders think about this the wrong way - focusing on the next milestone and zoning out everything else. This may work for getting to €1m, maybe you can stretch that approach up to €5m. Anything beyond that requires a complete paradigm change.
Some of the best advice I've received on this topic has been absurdly simple. In a discussion about revenues at a time when the company was generating a couple of million in sales, I was asked: "So how are you going to get to a hundred million?"
It's a fiendishly brilliant question. At that point, I was barely thinking about how we might get to €5m next year.
Clearly an answer of '100x the sales team' isn't terribly credible (or practical). While it's possible to increase your sales team proportionately to reach €100m, this could be anywhere between 50 and 200 people. Start to factor in additional management, the obvious expansion which you require elsewhere (product, support) to manage the new throughput, and your answer ends up being: "I'll simply hire a 1,000 people".
The point of the question is sales efficiency. How are you going to build out your company and sales force in a way that gives you better-than-linear growth?
There are a range of approaches.
Partnerships and resellers: One of the first things to look for is other companies to help drive your sales activities. Obviously all a question of margin, but if you look behind the scenes at the biggest enterprise software companies, this has been a major driver.
Syndicated deals: A good way of creating an industry precedent is convincing several companies to jointly buy your product. This works particularly well in sectors which might have limited purchasing power.
Revenue guarantees: Usually in exchange for discount, revenue guarantees give your sales team better yield as it allows them to cover more clients.
Acquisitions: Do you have to build everything organically? Is it more cost effective to acquire additional companies (or regions)?
Of course, it is possible to scale by hiring, though it tends to get more operationally difficult as you also need to time the arrival of your new supporting management hires.
Inevitably people tend to discount the actual lead-time to recruit, so my rule of thumb is to assume every position you need (at any stage in the company) will take six months to hire. As a start-up it forces you into a scaling mentality almost immediately.
Finally, scaling of the actual product ideally needs to be done with as few moving parts as possible. It's hard to scale a multi-product business (which is part of the reason that growth often slows for bigger companies).
Product managers need to be ruthless arbiters of evolution and cut anything that isn't working well enough. One of the hardest things to do is sideline part of the company that is performing but simply not to the scale of the rest of the business. Easy to talk about, hard to do, and often even harder to explain to the rest of the team. But almost always right.
It doesn't matter how early in the life cycle of a company you are, start thinking about a hundred million now.
Sunday Indo Business