Expansion Stage Companies
The webster definition of “expansion stage” is:
“Financing provided by a venture capital firm to a company whose service or product is commercially available. Though the company’s revenues may look strong and show significant growth, the company may not be profitable. Typically, a company that receives an expansion stage investment has been in business three years or longer.”
This definition was “ok”, but I was looking for something with more depth. That’s when I read an old blog post from Scott Maxwell at OpenView Partners where he states that “expansion stage” begins with:
- Whole Product: You have a core product vision and “whole product” offering with enough functionality and enough of a competitive differentiation that your target market customers are purchasing/using your “whole product” with a high enough win/conversion rate.
- Referenceable Customers: You have a set of happy (or at least satisfied) customers (that are willing to be used as references, used for case studies, and/or say good things about your company online and offline) and your customers and target market are generally happy with your product and go to market approach.
- G2M that works: You have a core Go-To-Market Strategy and are executing it in a way that gets solid economic results (sometimes we call this “sales economics”, “sales and marketing economics”, “distribution economics”, or “funnel economics“). Ideally, the management team has gone down the learning curve far enough that the benefits of growing the resources outweighs the more difficult continuous improvement of a larger set of resources (that you will have as you go through the expansion stage).
- Foundation: You have adequate organizational and operational methodologies and people to support additional resources and additional business.
I like Scott’s view of “expansion stage”. It is a high-tech startup CEO’s focus and goal to break free of the early-stage startup phase and enter into the beginning of this phase. So it is worth defining it for your organization and managing the change required to transition into it successfully. I reflect on this using my own experiences with Infochimps over our own transformation over the past two quarters.
Customers Buying “Whole Product”
If you are a high-tech CEO and you are reading this, you might ask, “What is a ‘Whole Product’?” Lets be clear, you are never finished developing, improving, and adding to your product/service.
However, you know you are still in the early-stage if you are only delivering on a part of your promise, with plans to “add XYZ when we’re further along”….and the part you are missing is still required for your customer to really receive the value you are promising.
For example, had Infochimps only delivered “Hadoop as a Service” as our cloud service for our customers, we would have provided HUGE potential. However, we would have fallen short on our promise of solving our customer’s business problems. ALL of our customers require MORE than Hadoop to solve their problems. Therefore, we needed to make sure that our cloud services provided real-time analytics, ad hoc analytics, and batch analytics – this was required to provide a “whole product” to our customers.
On the flip side, we have SO many ideas on how to improve the developer’s experience including a rich number of data flow and analytic libraries developed specifically around customer use-cases, customer GUIs that give our customers operational views into how our cloud service is operating, etc. However, all these ideas fall into the category of improving on the “whole product” we have today. In other words, our customers are receiving the value associated with solving their business problem, even if there are still some “rough edges” to iron out.
Scott also mentions another important element of “whole product” where you are experiencing a high enough “win rate”. This is a requirement that I have always struggled with throughout my 15 years as a startup CEO.
What is a high enough win rate? I can personally translate this into two things, which the team at Infochimps has spent several months perfecting:
- Having a sales process which is well defined. This means that although you may not have every phase of the sales cycle understood to the point that you can predict the odds of closing them perfectly (e.g. we have a “measurable phase” called “Relationship Building” which we associate with 50% odds of closing), you continue to measure and adjust our sales process with the goal of statistically closing what you predict (e.g. at least half of the customers who reach the “Relationship Building” phase in the sales cycle). What is important is that our entire sales team (sales operations, inside sales, direct sales, systems engineers) and even marketing are: a) aligned on what is being measured, b) know exactly what criteria the organization is using to define each measureable phase, and c) are constantly improving the process.
- Knowing how/when to say “No” to customers. In some cases, this means you don’t take on new customer prospects unless you have a high degree of certainty that you can make THEM successful. This statement is loaded because it involves understanding your customer’s business, their targeted use-case, and your ability to provide a solution that successfully solves that use-case. It also has a lot to do with knowing your target market (and knowing what markets you want to avoid). In the case of Infochimps, we would like to work exclusively with Fortune 1000 companies, scrutinizing smaller company prospects.
At Infochimps, we use a number of well-defined and measureable phases to help us understand how to qualify and obtain customers with a high win rate. Here’s how we define our MPs (measurable phases):
- MP1 (measurable phase 1 = Potential Opportunity): We have performed “business discovery” and we understand the customer’s use-case which equates to a “big data problem”, we know their goals (success criteria), we know their deployment requirements (e.g. public, virtual private, private cloud), we have confirmed that they have and can spend budget, there is a clear champion, and ultimately there is a compelling and/or impending event…all driving the need for our cloud services. Inside sales focuses on potential opportunities.
- MP2 (Confirmed Opportunity): Our direct sales force has a detailed dialogue with the champion to confirm all criteria in MP1, but digs further into the use-case and the potential impact on our customer’s business (how do they win? does it increase revenue? to what extent? how far does the needle move?). At the end of this phase we have determined that a significant level of our investment is justified (e.g. system engineering is brought in). We then begin to build what is called a “Client Specification” which details the opportunity.
- MP3 (Relationship): Creating a relationship requires understanding the tasks/timelines involved, knowing the people are involved in authorizing the spend / thumbs up, getting the customer to speak to their success criteria succinctly, reaching a point where the customer believes that our solution solves their problem (technical and business validation begins), and frankly getting to know the customer (creating a level of trust). The output of this phase is a “Proposal” to the customer.
- MP4 (Negotiation): This phase occurs when you have submitted your proposal to solving their problem and it includes the economics involved. You enter into a level of “technical” and “business” due diligence that can result in a “bake-off” where you may lose their business, or you potentially “fire your customer prospect” because they don’t fit your target market model, or you win their business and begin to move forward, formalizing the partnership. Our team then puts together what’s called a “Mutual Action Plan” (MAP) which outlines the steps to a formal partnership.
- MP5 (Procurement): This is the phase where business terms are drafted into a legal contract. At Infochimps, we have a standard “Cloud Services Agreement”. However, many of our Fortune 1000 customers arm-wrestle on certain terms and many provide their own “paper”. Note: don’t think that because you are in this “legal” or “procurement” period that customers will stay quiet on business terms. I find that customers still like to negotiate during this period (especially if timing gets close to the end of your quarter….which they always leverage). We’ve also seen deals fall apart during this phase.
- MP6 (Customer Win): Of course, execution of the contract is not the “end” of the sales cycle for Infochimps. In fact, our sales directors are incentivized based on a smooth process of “pre-sales” to “post-sales” so that our customers don’t feel an abrupt transition. We know that the hard work starts at this point, making our customers successful.
Our sales team reviews our customer prospects every week and shares these with the entire company every two weeks! We don’t expect to have the perfect probabilities associated with each of these above phases, but we do know what the goals are, how to measure them, and that we need to constantly improve in order to achieving and exceed our goals.
If you don’t have this as a company S.M.A.R.T goal, you are failing to meet one of the most important requirements to becoming an expansion stage company.
This is MORE than just saying, “Oh yeah! You can call any of our customers and they will vouch for us.” For us at Infochimps, we have a specific goal that all in the company understand.
I have an example to emphasize the importance of this objective from the senior team level down. Remember “Delivering Happiness” by Tony Hseih? Our entire executive team visited Zappos and met with Tony Hseih and Fred Mosser with the opportunity to spend personal one-on-one with them. The topic? How should Infochimps create a corporate culture of their own which makes customers the #1 focus throughout the organization? What are the important ways to establishing a customer-centric culture and making sure it is sustained with the addition of each new team member?
We too go out of our way to establish a personal connection with our customers. We will go the “extra mile” for our customers….maybe not quite as extreme as ordering pizza for them, but close. We’re also doing so in a way that scales economically. Unfortunately, our business can become very “professional services” heavy with each customer “touch” potentially leading to a “sucking sound” (customers love the fact that we are the ‘experts’ in Big Data….which can quickly result in them leaning on us to do a lot of customer work…and a business that is far from profitable).
So what processes have we established over the past two quarters which addresses this important characteristic of an “expansion stage company”? Some key milestones for us include:
- Establishing clear success criteria with our customers based on a clearly stated use-case.
- Clearly defining what is expected of our customers so that they become accountable to the success of the project.
- Involving our customers throughout the process with distinct checkpoints where we ask consistent questions – starting on day 1 (as part of a kickoff meeting), and at various phases of being deployed on our cloud (we have three phases today), and then on a regularly scheduled basis after “going live”. This is led by both our “expert services” and “customer service” departments.
- Onsite visits by our System Engineering and Product Management teams to assess “what we need to do better” which plays nicely into our cloud service roadmap.
- Executive sponsorship, involving our VP of Sales talking to our customer champion, as well as CEO to CEO dialogue. Yeap, I personally take the time out to have calls with my peers within every customer account. In some cases where the “CEO” is clearly not going to take my call (top ten bank globally), I go as high as I can within the organization to communicate our commitment and establish a direct connection. This may not fit your model (e.g. direct to consumer), but I find that it remains an invaluable opportunity for even expansion stage companies.
By the way, all our customers are “referenceable”…even those who were and are now not currently using our cloud service 😉
Go-To-Market That Works
There are two important aspects here:
- Having a Go-To-Market strategy (yeap, you actually need one of these to then measure your results against)
- Executing it in a way that gets solid economic results (your G2M needs to produce a profitable business)
- Where the benefits of growing the resources outweighs the more difficult continuous improvement of a larger set of resources (“just add water”)
These may seem like simple ideas, but I generally find that only 10% of my peers really understand the mechanics of these three things. Lets take a brief look at each.
Having a G2M
One of the FIRST things we discussed as a team was G2M. I technically spent an entire quarter defining it, testing it with customers, and going back to defining it. This was a very iterative process that involved talking to real customer prospects, as well as ecosystem companies we felt were necessary in helping us execute on it. I’ll mention a few components involved:
- Outline your ecosystem with your company in the center.
- Understand your target market – early adopters versus early majority
- Profile decision makers within your target market(s)
- Understand the sales process involved
- Define the Why, How, What of your product
- Create a plan around lead-gen & qualification
- Establish your Direct vs. Indirect plan
- Define your sales process for both
- Create competitive positioning
- Distill your market messaging
- Set your revenue goals
- Define the resources required and when
Then we knew we had to measure how well our work was paying off. For us this meant having marketing and sales tied to mutual objectives and measuring the lead process from “marketing campaign” all the way to “customer win”. It also meant A LOT of work with Salesforce.com. Wow, you’d think SFDC would be easier…but if you feel that you’re creating everything from scratch in this tool, you are not alone. Key metrics we measure include:
- Cost of Acquisition Cost Ratio (CAC): Bruce Cleveland from Interwest as well as the Bessemer folk talk about this metric quite a bit. Our CAC ratio is at 48%. Costs include campaign costs per win + marketing salaries allocated + direct sales commissions/salaries + inside sales commissions/salaries + pre-sales SE costs.
- Sales cycle (from lead generation to close). Ours is 4 months.
- Duration within the lead/sales lifecycle (all measurable phases). Email me for this.
- Conversion rates throughout each phase. Email me for this.
- Time from contract close to deployment (realizing revenue/value). This is 30 days.
Other “dashboard” items that assist us in measuring the business include:
- Monthly Recurring Revenue: I not only look at what is committed under contract (CMRR) but also the annual recurring revenue (ARR) or the first 12 months of recurring (CMRR x 12). Our average is around $20K MRR or $240K ARR.
- Total annual contract value (TACV): Which includes both recurring and one-time fees (expert or professional services) within the first 12 months of contract. I measure from start of recurring (when deployed) + 12 months out. This is currently around $300K.
- Pipeline (Pipe): All-odds pipeline is everything. Then there’s what is forecast in the current quarter, plus the upside/backfill (which could come in this quarter or next), and everything else (next quarter+). I measure both MRR + one-time = Total Contract Value. This is around $18M currently.
- Churn: How many customers do you lose after 12 months (we require a 12 month upfront commitment. So this milestone is important). This is 20% for us (due to our early focus on startups…need I say more?).
- Customer Life Time Value (CLTV). For our target customers, we’re seeing a 3 year minimum life-time on projects at an average of $780K.
We look at EVERY prospect customer deployment on our cloud as it compares to our “target profile” or what we call a “Standard Reference Platform (SRP)” customer. Infochimps has a “model customer” where we define everything from revenue to profitability – it’s a full “margin model”. We look at variable costs (all cost of goods, customer support, delivery services) that contribute to gross profit, and then allocated indirect costs (allocated sales and marketing, R&D, etc.) that drives profit (for a complete P&L view) for all the supported cloud configurations for our customers. My guidance to my peers, is that you make sure your gross profits (gross margins) are 70-90%, and your profit margins are 25-35%. This is a healthy operating model ;-).
Just Add Water
We all know that if your operational model requires many “human” moving parts, that adding more customers will actually exponentially raise the cost of doing business. In this case, “just adding water” doesn’t equate to a scalable growth, but rather a business which will implode. Over the past six months the Infochimps team has been focused on two things to make sure we avoid this outcome, and can scale with lots of operational leverage:
- Hardening our existing cloud services so that they support the largest deployments (making sure that as our size of customers, our size of problems, and the size of our cloud deployments all grow, we don’t experience a non-linear amount of effort in supporting them)
- Automation of our cloud deployment and management such that we have superior operational leverage. For a 10th of an operational engineer, our customers need 10 people to do the same…and by achieving this, we’ll always be 24 months ahead of our customers.
This concept also means that when we add another “sales team” (which consists of a combination of direct sales, inside sales, pre-sales SE, and post-sales expert services), that the number of customers, the resulting revenue, and ultimately the net profits scales well. I’m proud to say that over the past six months we have surpassed most companies our size with a process and “equation” which supports this. A message to my peers – it comes down to really understanding your margin model, and making sure the entire organization also understands their contribution to improving it.
Foundation For Growth
This is the most subjective characteristic, and yet the one that could have the greatest impact to your organization. The good news is that with the right leadership you can apply changes which ensure your ability to scale your business…and this, indeed, is all about “scaling” with “people processes”.
Remember, this means having adequate organizational and operational methodologies to scale your business. The number of areas within this category which we’ve focused on at Infochimps include:
- Establishing a vision that all understand and support
- Creating an ROI-focused organization (people understand that everything affects the P&L)
- Innovating by focusing on sustainable competitive advantage
- Being nimble and comfortable with change
- Hiring people with passion & commitment
- Fostering a level of communication that is “straight but sensitive”
- Creating a business that is centered around the customer (solving real problems)
- Creating a corporate culture which is about the “we” not “I”
I’ll add that we also deploy many typical processes like an agile engineering process, and a lean but effective product realization process. But let me focus on the more “fluffy” for a moment. I’ll give you an example (which my executive team didn’t exactly appreciate at first).
As a CEO, I know my job is to set the vision/direction of the company; make sure that we have the right people/resources; make sure we’re executing well; and ultimately being responsible for removing obstacles. However, what I believe many of my peers seem to discount is that if you establish the proper executive team communication practices, and push those down into the organization, your company can withstand the challenges associated with scaling to any size.
I can’t tell you how many times I’ve been told by an executive who says they are good at operating well under stress, and has fallen significantly short…..and it always has something to do with communication at its core. On example of how we address “communication” issues is at our executive meetings. Our weekly executive meetings have a seemingly standard agenda….except for one major difference. Here’s our agenda:
- Good news check-in
- Discussion around “Real Issues” & top priorities
- Customer and employee hassles
- Review of overall quarterly status
- Commitments/cascading messages
- Wrap – one sentence close
Notice the discussion around “real issues”? Here’s where our staff meetings stray from most. Our definition of a “real issue”:
- A topic that would make your stomach linings churn, if brought up as a team
- Something that you are uncomfortable talking about (especially as a team)
- Event(s) which are affecting the group (staff, company) negatively
Why does our executive meeting need to address “real-issues”?
- Teams (companies) fail based on process (team dynamics) not content (what is actually being talked about)
- Every team “hits a wall”. Great teams work through the “real issues”
- Every “real issue” that has the potential of “blowing the team apart” is exactly what makes it stronger
- Reality always wins. It’s our job to get in touch with it.
- There are no secrets in teams, just dysfunctional dynamics thinking so.
Our executive team actually works through issues which assist us in facilitating change needed to grow. That’s what every expansion stage company needs, and most early-stage companies lack. As an executive team we constantly assess and work to improve our ability to operate (see Five Dysfunctions of a Team).
Curious about my management style? Have other ideas about “expansion stage” companies? I’m always available for beers after work.