In previous posts I have written about various aspects of sales in SaaS models including the importance of the collaboration between sales and marketing, the role of inside sales operations, controlling customer acquisition costs, and the role of self-service processes in sales and support. Today I briefly wanted to touch upon business development. The management teams of young SaaS companies that come to present to our firm often mention that upon raising their round they will hire a business development executive to help them grow channel sales. These companies tend to have 20-50 direct customers and have raised either one institutional round of funding or are bootstrapped. It always strikes me as odd that after acquiring only 20 or so customers, management feels that they thoroughly understand their solution’s direct sales process and the costs associated with this process to the point where they feel ready starting on channel sales.
I would have thought, and continue to hope, that the management of such early stage companies would want to devote more resources in better understanding the direct sales process associated with their solution so that they can optimize it and reduce the costs associated with it, before embarking on creating and optimizing the corresponding channel sales process. By the way, we typically respond to such statements with a healthy dose of skepticism and never make an investment decision in an early stage company whose primary success must come from direct sales, based on the promised success of channel sales. Our skepticism regarding channel sales is almost always validated once we invest in such early stage companies. We usually find enough immediate opportunities for improvement around the direct sales process that we invariably delay the management team’s immediate plans to expand into channel sales. I’ve recently read this post which summarizes so crisply the issues we have with attempts by early companies to expand in channel sales that I thought of sharing it along with my commentary.
The Magic Number provides an additional way to evaluate whether the direct sales model is working and the startup is ready to invest in the development of the channel. Will Price in his blog posted the graph below which comes courtesy of Josh James, CEO of Omniture. The graph correlates the magic number score to a company's growth stage. Don't try to overanalyze it. Just another perspective around the type of attention that needs to be paid around getting one sales model right before adding another model.