One of the roles I really dislike playing when I am on the board of one of our portfolio companies is the role of the pessimist. You know this guy – Dr. Gloom, Mr. Cloudy Day. Everyone else is sitting around talking about what is going to happen this quarter and how many deals are going to close and how great it is all going to be and then boom – Mr. Glass Mostly Empty has to stop the discussion and ask a couple of questions like:
Optimism on deals is endemic with entrepreneurial organizations but understanding how pipeline translates to wins and wins translate to cash is critical.
Most of our portfolio companies sell to enterprises and experience long sales cycles. This is the nature of the beast. But enterprises, once sold, are highly valuable assets and have the potential for massive customer lifetime value. The problem with managing a pipeline is that each deal has two critical dimensions: “Will we win?” and “When will we win?” In general, I would say the typical portfolio company is good to very good at understanding the odds of winning and is bad to very bad at predicting when the wins will occur.
I have a couple of simple rules that I use when looking at a pipeline for evaluating the question of “when will we win?” They aren’t always right, but they are close enough, often enough. These rules include:
Some of these seem redundant and may be. Here is my logic for each:
If it isn’t over 50% at the start of a quarter, it isn’t closing in that quarter: This is a case of just doing the math. Assuming a six month sales cycle (at least), if you have more than 50% to go, that’s over 90 days to close, which means – not this quarter. Just to note, many enterprise sales cycles average longer than six months. A deal that starts fast because the business buyer is in a hurry will not necessarily continue to move at that pace – who says the rest of the organization will move as fast? Some deals start fast and slowdown. Others start slowly and speed up. I play the averages. And if your enterprise sales cycle is well less than six months – please send me your business plan.
If the proposal has not been submitted, it isn’t closing in the current quarter: Much of this is similar to the comments above, except some companies put pre-proposal stages at 50% or higher odds (a mistake in my view). This is just another way to screen the deals that are too early. If you are pre-proposal you are only just talking – and talk is cheap.
I take the next three rules together:
If you have not been selected by the end of the first month of the quarter – closing within that quarter is highly at risk
Add 30 days for procurement and 30 days for legal – at least (and procurement is now involved increasingly often)
If procurement has not yet been involved but needs to be, you have not yet truly been selected
Procurement is the emerging challenge. Most enterprises require procurement’s involvement with purchases above a certain threshold. The challenge with procurement is that they often know things the business buyer does not know. They ask questions like – “can’t we do this under our global Oracle agreement?” or “the UK division just signed a global agreement with a start-up that is listed as a direct competitor – you can use that for free.” Even if procurement is wrong, the business buyer needs to go through a process of proving why his or her purchase decision is justified. Procurement isn’t just a time lag – we have seen deals get killed in procurement after a nine month selection process and not come back.
Bottom line – legal and procurement take time as do final signatures and final approval. Sometimes it takes a month to get a signature on an approved deal even after it has been blessed by legal.
It hurts to pull things from the current quarter pipeline and push them to the next quarter, but the discipline is critical. If you are not selected with sixty days to go – pull it. If you are not in legal with 30 days to go – pull it. Don’t take the pressure off the sales team – they may work miracles – but don’t promise your board that the improbable will happen, and don’t make your cash projections based on these deals closing inside the quarter. You are playing against the odds and making promises you can’t keep. This is no way to run a business.