Why Sales Cycle Remains The Most Important Lever Of Early Stage Revenue
Early stage founders spend a lot of time on the revenue line and revenue organization once they have achieved product/market fit. We recommend focusing on the Sales Velocity Equation for a correct framework and metrics and have talked a ton on our blog about it. There are four key elements to the sales velocity equation: (A) the number of sales opportunities you work, (B) the average deal value, (C) your win rate and (D) the length of the sales cycle. Most founders work through these four one way or another. Some know it and are aware. Others do not. Consistently, the most underutilized and least respected input of the Sales Velocity Equation is the sales cycle. Decreasing sales cycle time in an early stage company is, in our view, one of the best ways to accelerate revenue for any company. Why is this the case? We lay out the details below with a reveal at the end.
The number of sales opportunities you work tends to focus on a forward looking analysis of what you need to achieve over a period of measurement (usually a quarter or year) and attempting to stick to that. For most early stage SaaS founders, various blogs and VCs put out a great amount of data on things like benchmarking exceptional Series A or Series B companies. They are your north star. Founders can usually work to develop coverage ratios and the specific elements of your opportunity stage forecasting model to achieve rhythm and understand how pipeline should be managed.
Average deal value size is usually translated into pricing and how a company should and will be pricing their product or service. Founders get comfortable in the beginnings anchoring their pricing (most times) against competitors. It usually is an easier sales conversation and your buyer understands this pricing relative to market and existing companies in the space. You sacrifice perfection here to make a “good enough” decision and focus on creating a smooth sales conversation.
Win rate is all over the place in an early stage company. However, founders can generally get a fair amount of data on win rate in today’s environment. If you are selling a mid-give-figure ACV product via inside sales what should your win rate be? There are a number of surveys out there and you will try and stick to those benchmarks. Founders spend some time on this, but it is very tricky to get right in the beginnings.
Which brings me to sales cycle. Length of sales cycle is perhaps the most important lever to adjust to your advantage. Closing the good deals as soon as possible, as well as qualifying out of the bad deals early, is crucial to sales effectiveness. If you let your sales cycle length slip, you undo all of your good work and damage your sales throughout. All of your hard work growing the numerators of sales opportunities, average deal sizes, and win rates by let’s say 10% can be completely offset by small movements in the denominator or the length of sales cycle. Most founders don’t pay enough attention to this and it can kill a company. It is far easier to grow opportunities, try and price higher, or increase your win rate. It is very, very difficult to think hard about sales cycle and figure out what is working and what is not in an effort to decrease sales cycle length. We continue to believe this is the most important component of the equation and remains under invested in.
As a SaaS company grows from Series Seed to Series A or Series A to Series B, founders should spend more time in their day on sales cycle length over all other metrics within the Sales Velocity Equation.