Funding Basics: Adopting the Best Business Model

The culture of nearly every business-to-business software startup centers on products. Everyone talks about product innovation and disruptive technology, but I think today’s founders need more than great product ideas to launch successful companies.

In my role as Managing Director of Hummer Winblad and also as an Alchemist Accelerator mentor, I share this advice with new entrepreneurs: Get as comfortable with your spreadsheets as you are with your product. By that I mean that your financial models show potential investors you’ll be a metrics-driven organization and that you understand you are building a business not just a product. I also believe that only metrics-driven companies can operate high-velocity business models.

A New, Emerging Approach

If success is 10 percent idea and 90 percent execution, deep thinking is required of teams pulling together new business models. For example, are you going to sell direct or through a channel?  Will you have a subscription or a perpetual model? Do you envision a “land and expand” model where you encourage a smaller, initial buy that increases over time? Does your business model reflect the way customers want to buy?

Teams developing enterprise software traditionally have had to factor in a 9-to-12-month sales cycle on top of the year or more it takes to deliver product. Both development and expensive sales professionals operating in this model require significant runway—and thus funding.

Fortunately, times are changing.

Taking a cue from evolving consumer models, I now encourage enterprise software founders to more precisely consider cost of sales (including customer acquisition costs relative to pricing and hiring) together with product decisions.

Our team members and other venture firms ask them to think about how they can achieve operational and growth targets from two perspectives:

  • The old model – Costly, large account-focused, in-person sales teams operating on a quarterly rhythm

  • The new model – High-velocity, mid-market-focused, inside sales teams operating on a weekly rhythm

The new, high-velocity model optimizes sales and marketing processes by measuring the end-to-end effectiveness of all touchpoints. With metrics, teams can determine what is and what isn’t delivering results. I created two blog posts a few years ago explaining the high-velocity business model and the metrics for a high-velocity business model—based on the success of teams that Hummer Winblad invested in early.

High-Velocity Benefits

For a startup pricing products in the USD$150,000 and up range, leveraging the traditional, enterprise sales model may still be practical and even preferred. For everyone else, here’s why a high-velocity model makes more sense:

  • Faster time to revenue – The combination of an assertive inside sales professional (who can reach 80 to 100 prospects a day) and a web purchasing model speeds sales, which enables the company to run on monthly recurring revenue.

  • Greater accountability – When your product team’s responsibilities expand beyond building the solution to the entire lifecycle (from first customer touch to download to using), teams are more collaborative and can achieve greater success faster.

  • Complete visibility – Companies operating high-velocity models are highly automated and instrumented, so individuals and teams are always aware of their goals and progress toward reaching them—from calls and demos to trials, seats, and monthly volumes.

Does Your Business Have the DNA?

In a high-velocity business model, leadership, product, sales and marketing teams all shoulder responsibility for success. We see entrepreneurs embracing this new approach taking a similar journey, learning from others that have succeeded already about how to ramp up fast.

My tips for them include the following:

  1. Hire consumer experts to run your enterprise marketing model, so it’s firing on all cylinders

  2. Simplify the sales process by adding a free or low-cost download feature

  3. Add insides sales professionals to follow up on every lead and upsell from the download

  4. Run everyone in the company through your sales process—from start to finish—to ensure everyone understands it

  5. Test online pricing and trial models by dividing traffic

  6. Test your social media and web flows, counting the number of clicks at each step

  7. If you choose to work with channels, hire someone that has previously built them

  8. Bet on mid-market customers to start, but establish a sales value that when exceeded, makes sense to add enterprise sales

For founding teams seeking funding, business models matter. Remember your ability to explain the thinking behind your business model is as important as explaining the product you’re going to bring to market—and sometimes, more important.

About Me

As Managing Director at Hummer Winblad, I oversee investments in SaaS, virtualization, cloud and mobile technologies. Prior to joining Hummer Winblad Venture Partners in 2006, I was involved in founding and operational roles at start-up companies. I was a co-founder of AutoFarm (now Novariant), a company focused on GPS and robotics. Although I spend less time programming now, I started my technical career coding and hacking computer games. I have a Master of Science (Engineering) degree from Stanford University, an M.B.A. from the Stanford Graduate School of Business, and an Engineering Physics degree from Queen’s University.

About the Alchemist Accelerator

Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley -- including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.

This blog is the first in a financing series with topics designed to help entrepreneurs be better prepared for venture capital conversations.