Some Work of Noble Note

May Yet Be Done

Asking the Right Questions

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I’ve worked for one startup in my life – Dash4Teachers, and the lessons I learned from that experience deserve their own series of posts. However, I recently had the opportunity to work for a “startup” in a very similar capacity.

One of the portfolio companies I work with (“Company B”) is a respectable grower that happens to generate a ton of cash. But while most businesses in its industry and at its maturity level trade based on the scale and quality of their profitability, Company B has opportunities for real, “next level” growth in the business. Consequently, we believe our exit could be meaningfully improved if we could build a believable growth avenue over our hold period. Right now, that means entering a tangential market by offering a similar product to our current core offering.

Company B had bought a small, 7-person startup in a tangential market a few years ago. A few months ago, our appreciation of this division could be summed up in one line of revenues – $0M in 2010 to $20M in 2018. For a long time, that was purely how we referenced it. The market opportunity seemed huge so that kind of growth just made sense; and, prior to 2014, it was too small to meaningfully affect our cash flows. As a result of those two factors, we hadn’t ever bothered to develop a concrete understanding of how to get to that $20M number in 2018.  I was assigned to help the division head figure out just how we build to $20M in by 2018.

The Project

Everything was going well at this division since we initially purchased it; it had cruised along through 2012 and 2013. Then Company B’s 2014 budgeting process starts and we realize that we need to think about actual resource commitment for the division. No longer could our “operating model” for this division remain exactly that one line above: $0M -> $20M in 8 years. Problematically, while our aspirations for 2014 revenue were modest, the path to generating that level of revenue was murky. By the time you looked at the 2015 number, we were completely in the dark on how to get there. It’s very different knowing a number is achievable and knowing exactly how to achieve it.

I’m not sure if every single investing firm models this way, but at JMI, we start by figuring out sales reps, the quotas that they carry, and their quota achievement. (This gives us a bookings number which then gets converted into revenue based on how the company gets paid and how they recognize revenue.) This was the exact sort of model we needed at Company B’s new division. As a small, 7-person startup, they had sales, product delivery, and product support all spearheaded by the same individual, their then CEO (now division head). That worked great when you only needed to generate $1M in revenue a year. As you scale, you obviously need a more structured approach to going out and signing business vs. going out and delivering a product.

I spent a remarkably productive two days with the division head out at the group’s headquarters. I realized I hadn’t come close to appreciating just how much knowledge she had earned in her industry of choice. We made a great team given how complementary our backgrounds were. The division head had never thought about her product as an institutionalized business; this just happens to be one of the things that I think about every day as an associate. On the other hand, I had no real knowledge of her industry. To oversimplify it, I had all the questions and she had all the answers (and more and better questions). Who buys this product and why? How sustainable are you in your role as sales head, product delivery head, and support head, on top of being responsible for the division’s P&L? What kind of resources do you need to support this product? How do the customers interact with the product? What will their expectations be of its improvement in the coming years? How do we leverage the broader Company B resources to scale up more profitably? You get the picture.

All those answers helped us build the division’s first operating model. More importantly, it codified the division’s business plan for the first time in its history. When you understand how a product is sold, and under what operational structure, only then can you start thinking about scaling the business.

What our operating model told us was that we needed to dramatically over-hire sales reps early on to get the kind of revenue growth we were projecting. It told us product support and admin were luxuries that we couldn’t afford until 2016 at the earliest. Understandably, the base expectation at Company B was to scale the team up in its current proportions. For every sales rep we hire, we’d hire another product delivery rep and another support rep. Ten years out, this will likely be the steady-state headcount proportion for the business. This business, however, has a lot of indicators that suggest how important sales reps are to us: long sales cycles, C-level decision making, expensive price points, etc. We couldn’t rely on marketing the way many other businesses can.


The result was not just a very different hiring plan from what we thought going in; it changed the way we thought about product development, support, and the broader sales cycle as well. When you know that you can’t commit real R&D resources to a product for two years, it has to be built, sold, and delivered differently. When you know you’re going sales heavy on headcount in the near-term, you have very different profitability expectations, too. Sales reps are not only better compensated than most other positions within an organization, but there’s also a lot more uncertainty to the division’s all-in salary expenses given the significant variable component to sales rep compensation.

At the end of the day, you could say all of this wonderful business understanding came out of one surprisingly simple Excel model. Ultimately – and this is what I take real pride in – I would say this came out of knowing the right questions to ask when you’re building a product and trying to scale it to achieve real impact. I’m only 26 and in this humbling process, I learned definitively just how few answers I have to most of the questions in the world. But knowing what questions need to be asked in the first place is a great start. I’m deeply gratified that, through two years of investment banking, and two-and-a-half years of growth equity investing, I’m starting to ask the right questions.

Note: as with all work-related experiences that I reference, I change all the specific numbers (and, occasionally, industries) for confidentiality reasons. Rest assured, the changes do not impact the broader message that I’m trying to convey.

Author: AJ

I'm an education enthusiast, growth equity investor, and MBA student at Wharton.

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