Protecting Investor ROI with Revenue Operations
By Tara Kinney on February 9, 2016
There are many great products, great companies, and great investment opportunities but one core question is not emphasized enough, “how have sales occurred historically and is this a repeatable and scalable sales process to validate revenue projections?”
Investing is largely about how a management team will use funds to buy revenue that provides a desired Return on Investment (ROI). We look at financial operation models, leadership teams, pitch decks, and business plans as well as other factors during an often lengthy and arduous due diligence process. However, focus often remains on the product, IP, market size/need, and the management team resulting in emphasis towards a product-focused organization that may struggle to operationalize revenue generation. According to the Startup Genome Report published by Stanford and Berkley, sales-focused startups are 6x more likely to succeed versus product-centric startups.
In the due diligence process, if we consider a company’s plan or strategy to generate sales we would need to evaluate Whole Revenue Operations. According to many investors, this requires a fundamental paradigm shift in the investor model to 1) drive more accuracy into customer acquisition projections of financial operations models; and 2) build a stronger understanding of the people, process, and data requirements unique to each company’s revenue operations model. If investors require marketing operations, sales operations, and customer success infrastructure from the entrepreneurs pitching for investment, we could see the needle move with regard to the 92% failure rate of startups which is a troubling statistic. At the very least, investors may select investments that produce a more significant ROI on a more consistent basis.
If this paradigm shift is to occur, revenue operations would need to become a required component of a standard investor due diligence process at a much earlier stage in the funding process. If companies were asked to focus on how they plan to operationalize sales in pre-series A funding rounds, how much faster could Series A investments produce a meaningful ROI? The revenue operations infrastructure needs to exist pre-Series A and entrepreneurs need to understand that no matter how great their product, if they cannot operationalize sales, it will fail to achieve its potential despite quantity of investor funds received.
That being said revenue operations combines several emerging disciplines lacking broad understanding and sometimes against the comfort of how we have traditionally approached revenue generation. Here’s a couple examples of why investors should emphasize revenue operations:
- People comfortably understand marketing focused on a “package” that looks good enough and sounds good enough to generate a high volume of interest (unqualified leads). Unfortunately, 79% of all business to business leads produced by marketing never result in a sale (Source: MarketingSherpa) which means that $790,000 of that $1 Million marketing budget you funded will never turn into revenue that contributes to your ROI. The reason for this is largely due to poor integration between marketing operations and sales operations.
- Sales receives high emphasis on results but low dedication of planning as functional business discipline–its often considered a primarily people-driven success factor. However, the emerging discipline of sales operations brings new emphasis to sales management as a fundamental missing link in revenue operations. Investors at early stage companies fund hiring of sales teams by companies that have no sales operations infrastructure or capacity to properly evaluate, compensate, or manage salespeople. The result is clear as multiple 6-figure hires produce little to no sales (= no ROI). We get this call all the time.
- Very few early stage companies do a good job with Customer Success largely because they are trying to make a sale wherever they can get it even if it’s not in the customer’s or the company’s best interests. With a focus on user experience to purchase, they fail to address total customer experience. Even worse, with marketing and sales setting foggy expectations, product and service delivery is challenging and expensive so customer satisfaction is the low goal of many early stage companies. The resulting low profit margins, long sales cycles, high attrition rates, and negligent customer advocacy directly impact investor ROI.
Revenue Operations is the strategy by which companies generate revenue from whatever product or service that they offer the market. It requires a well-designed series of coordinated actions, communicated with clarity to produce maximum output with optimal efficiency. Yet the emphasis in spending investor dollars on small implementation tasks without the operational infrastructure leads to tactics masquerading as strategy, loads of rework and failed efforts, which leads to the need for more investor dollars in order to produce revenue. It’s a vicious cycle. Are any your early stage companies are in the thick of it? Contact us to help get your promising investments out of the cycle of sales failure (and as a tip, helping them hire a 4th or 16th sales title of some variety may not help your ROI or their path to success because people need to animate a process–the process matters).