This document discusses the sales learning curve (SLC) that companies experience when bringing new products and services to market. It notes that just as manufacturing costs decrease along a learning curve as production volumes increase, the sales yield, or production per sales rep, also increases along an SLC as organizational learning occurs. The document uses a case study of a company called NOCASH that experienced financial difficulties after rapidly hiring a large sales force before its SLC was accounted for. It advocates planning sales deployments based on an understanding of the SLC to avoid excessive cash burn and more accurately determine the timeline and costs to reach cash flow breakeven.

1. The Sales Learning
Curve
“It Always Takes Longer and Costs
More…”
mleslie@leslieventures.com
Copyright 2008, Mark Leslie 1

2. Development of Entrepreneurial
Companies
► Seed Stage
 Creating the Business Plan
► Development Stage
 Creating the product
► Go-to-Market Stage
 Getting Traction
 AKA “The Chasm”
► Market Expansion Stage
► Harvest
Copyright 2008, Mark Leslie 2

3. Where the Risk Is
► Seed Stage
 Creating the Business Plan
► Development Stage
 Creating the product
► Go-to-Market Stage
 Getting Traction
 AKA “The Chasm”
► Market Expansion Stage
► Harvest
Copyright 2008, Mark Leslie 3

4. Where the Risk Is
“If We Build It They Will Come”
“When We Build It Will Anyone Come?”
Copyright 2008, Mark Leslie 4

5. Go-to-Market
► Successful Beta
 Conversion of Beta’s to customers
► “Go for it”
► It is an exciting and optimistic time…
Copyright 2008, Mark Leslie 5

6. Rapid Sales Deployment -- The
Seduction of the CEO
► Cash Considerations
 Growing expense / Zero revenue -- Cash is being consumed
 Fastest / least painful route to cash is growing the revenue line as
fast as possible
 Pressure from the investors / board
► Competitive start-ups
 “We will not forfeit any game by not showing up”
► Each company must deploy to the superset!
 A battle to emerge from the pack: “First Mover Advantage”
► Overconfidence
 “The beta went great…”
 “The press loves us…”
 “We’re hot!”
-- (“…and a lot smarter than the other guys…”)
Copyright 2008, Mark Leslie 6

7. The Case of
Nano – Optical Customer
Adaptive Software and
Hardware Corporation
N O C A S H
Copyright 2008, Mark Leslie 7

8. NOCASH: Goes to Market
► With successful Beta in sight…
► Hire the VP Sales
 Often times a “regional” level sales manager at
a larger company in similar market
► New VP sets the plan and hires the sales
force based on a “Capacity Model”
Copyright 2008, Mark Leslie 8

9. NOCASH: Revenue Planning -- The
Capacity Model
► Revenue: For each sales rep assume:
 Quota
 Apply the company’s gross margin
 Start up productivity ramp (by quarter)
 Attrition
► Expense: For staffing and logistics determine
 On-Target-Earnings (OTE) per sales rep
 Number of sales reps per manager and cost per manager
 Number of system engineers per Field Sales Exec (FSE) and cost
per system engineer
 Number of inside sales reps per FSE and cost per rep
 Number and build-out of field locations
Copyright 2008, Mark Leslie 9

10. NOCASH: Revenue Planning -- The
Capacity Model
► Revenue: For each sales rep assume:
 Quota -- $1.5 M
 Gross Margin – 90%
 Start up productivity ramp (by quarter) – 0, 1/2, 1
(25%)
 Attrition –
 ~ $ 1,000 K / FSE per year net (after 6 months startup)
► Expense: For staffing and logistics determine
 Number of sales reps per manager
 Number of system engineers per Field Sales Exec (FSE)
 Number of inside sales reps per FSE
 Salary and commission levels
 Number and build-out of field locations
 > $500K / person / year
► Marginal contribution per FSE <= $500K / Yr
Copyright 2008, Mark Leslie 10

11. NOCASH: The Hope
► Based on a $1.0 M / mo burn rate starting point
► Hire 30 sales reps, get to cash flow positive by
end-of-year
1
0
-1
-2
-3
-4 Cash Flow
-5
-6
-7
1st Qtr 2nd 3rd Qtr4th Qtr
Qtr
Copyright 2008, Mark Leslie 11

12. NOCASH: The Reality
0
-1
-2
-3
-4 Cash Flow
-5
-6
-7
1st Qtr 2nd 3rd Qtr4th Qtr
Qtr
► Fire the VP sales and most of the sales force, do a
big cutback
► Maybe fire the CEO…
Copyright 2008, Mark Leslie 12

13. Would You Invest in this Company?
►I just built this device for $10,000
► Unfortunately the market will only pay $100
for this device
► The good news is my engineers tell me that
if we can ramp up the volume to 1,000,000
units we can manufacture the device for
$10
►The name of this company is
INTEL
Copyright 2008, Mark Leslie 14

14. Manufacturing Learning Curve (MLC)
► Well known principle in business
► Cost decreases as volume increase
► Shape of curve differs in different industries
 Semiconductor and Steel industry “price on the
curve”
► Learning is non-predictive – everyone doing
their job well
► MLC is visible to us based on available math
 cost accounting gives us the points to plot
Copyright 2008, Mark Leslie 15

15. MLC based pricing
Cost
Loss
Price
Profit
Volume (Time)
Copyright 2008, Mark Leslie 16

16. Sales Learning Curve (SLC)
► Analogous to MLC, but focused on sales interface rather
than manufacturing
► Key variable to measure is the effect of learning on SALES
YIELD
 Equal to the average production per full time, fully trained sales rep
per year
 Not measured, not visible
 Sales Yield is to SLC as Product Cost is to MLC
► Like MLC, learning takes place in many ways – “everyone
just doing their job”
► SLC is an Enterprise effect – not just the sales department
Copyright 2008, Mark Leslie 17

17. The Product Centric Corporation
Production Facing Customer Facing
Departments/Employees Departments/Employees
Production Line 1 Customer 1
d
Production Line 2 Customer 2
Engineering Product Marketing
Product Development
Production Line 3 Customer 3
Production Line 4 Customer 4
Manufacturing Learning Sales Learning
Copyright 2008, Mark Leslie 18

18. SLC Learning -- Product
► Completeness
 Features
 Installability
► Correctness
 Does it do what it is supposed to
 Does it do what the customers need
► Scalability
► Maintainability and serviceability
► Ecosystem
 Does it work in the required environments
Copyright 2008, Mark Leslie 19

19. SLC Learning -- Market
► Positioning
 Correct marketing messages
 ROI proof
 Market segmentation
 Competitive Analysis
► Promotion
 Customer success stories
 Correct and sufficient collateral material
 Correct and sufficient shows, PR, advertising
► Price
 Across multiple channels
 discounts
► Place
 Channels of distribution
Copyright 2008, Mark Leslie 20

20. SLC Learning -- Sales
► Sales model
► Sales pitch
► Training and development
► Availability of executive selling
► Correct sales profile
 Learning phase
 Development phase
 Expansion phase
Copyright 2008, Mark Leslie 21

21. The Sales Learning Curve
Standard Quota
Yield
Fully Loaded Cost/SR
Customer Transactions
Copyright 2008, Mark Leslie 22

22. Staffing for Learning
The “Renaissance” Sales Exec
Standard Quota
Yield
Fully Loaded Cost/SR
Customer Transactions
Copyright 2008, Mark Leslie 23

23. Staffing when Marginal Contribution
is Visible
Standard Quota
Yield
Fully Loaded Cost/SR
Customer Transactions
Copyright 2008, Mark Leslie 24

24. “Pedal-to-the-Metal” Staffing
The “Coin Operated” Sales Exec
Standard Quota
2 x Fully Loaded Cost/SR
Yield
Customer Transactions
Copyright 2008, Mark Leslie 25

25. NOCASH Revisited – Pedal-to-the-
Metal Staffing too Early
Standard Quota
Yield
Fully Loaded Cost/SR
Customer Transactions
Copyright 2008, Mark Leslie 26

26. Tracking Sales Yield
► Often times very few data points
► Often time very random data points
► However, any data is better than no data
► An exercise in data smoothing
 Six months trailing average
 Curve fitting
► But,probably a lack of clarity
► However…
…you will probably know it when you see it
Copyright 2008, Mark Leslie 27

27. Different Types of Companies 
Different Shaped Curve
“Faster, Better Cheaper” “Innovator” “Brave New World”
Copyright 2008, Mark Leslie 28

28. The Nature of Learning
Discover Discover
Test RemediateDiscover
Test Remediate
Test Remediate
Discover
Learning is oftentimes sequential
ABC Test Remediate
Copyright 2008, Mark Leslie 30

29. Planning for Learning
► Identify the specific characteristics of your company,
product and market
 Develop SLC expected model
 Identify, track and report on the learning opportunities
 Identify, track and report on sales yield
► Select initial sales personnel to enhance corporate learning
 The “Renaissance” Sales Rep
 Not the “Coin Operated” Sales Rep
► Mobilize the company for learning
► Do not ramp up expenses
 Perhaps reduce R&D expenses at this time
► Set investor and employee expectations to account for
uncertainty and learning
Copyright 2008, Mark Leslie 31

30. Quantitative Methods
► Marginal Contribution analysis
 Expected Gross Margin of FESR at Quota
 Minus - Cost / year of a fully loaded FESR
 Equal - Marginal Contribution
► Breakeven Analysis
 Number of required FESRs at Marginal Contribution to offset fixed costs
 Less effect of SLC (reduces marginal contribution)
 Factor in organizational build-out time – NOCASH example
► Needed 30 FESRs – example showed batch hiring of all of them
► Would need to hire Sales VP, 4 – 5 RMs, and 20 SEs, find offices, develop
training, etc.
► Sparse Data
 Curve Fitting
 Six months moving averages
► Sales Yield Accounting – the sales version of Cost Accounting
Copyright 2008, Mark Leslie 32

31. Channels of Distribution
► SLC principles are broadly applicable to channel
selling
► All of the same issues relative to “merchantability”
of the product by the company
 Company has to make the first sales by the channel
 And the communication with the end customer is more
distant
► In addition to all other learning, need to do the
learning relative to channel acceptance as well
Copyright 2008, Mark Leslie 33

32. Time to Cash Flow Breakeven
NOCASH Revisited
Scenario Result
No SLC Effect ►Break Month 15
Even in
►Hire 12 SR’s month1
►Maximum cash burned = $5.0 M
►Hire 2 per month thereafter
Linear SLC over 24 months Month 18
Breakeven in
►Hire 12 SR’s month 1
Maximum cash burned = $17.7 M
►Hire 2 per month thereafter
Recommended Plan ►Breakeven Month 16
in
►Reduce fixed 40%
►Maximum cash burned = $8.5 M
►Hire 2 SR’s / month for 2 months
►Hire 26 SR’s in month 10 (margin contribution >
0) to catch up
►Hire 2 per month thereafter
Copyright 2008, Mark Leslie 34

33. Time to Cash Flow Breakeven
► Time to breakeven correlates directly to the
learning curve
 Learning  Positive Marginal Contribution  Cash Flow
Breakeven
► Timeto cash flow breakeven reasonably
independent of sales staffing
 More staffing may increase rate of initial discovery, but
cannot make it less sequential
► MORE STAFF DOES NOT SPEED UP LEARNING –
JUST CONSUMES MORE CASH!
► Basically, it is not ready until it is ready
Copyright 2008, Mark Leslie 35

34. Some Corollaries to the
theory
Copyright 2008, Mark Leslie 36

35. SLC impact in the Mature Company
► As companies mature they develop and release new
products
 As differentiated from new versions of old products
 For example, in the software business, there are no “one-product”
companies with revenue > $1 Billion
► Often times new products given to existing sales force
 Doesn’t quite work right
 Hard to sell and install
 Sales reps need to make quota and “move on”
 The new product is…
►“Radioactive”
► Result:
 New product fails to meet plan by a wide margin
 New product is killed
Copyright 2008, Mark Leslie 37

36. SLC impact in the Mature Company
► Companies forget the learning curve they
experienced in their initial go-to-market
► Critical to replicate that product / market learning
process
 Segregated sales force
 Low productivity expectations
 Focus on organizational learning
► Onlydeliver to larger sales force when learning is
complete and sales yield by product is competitive
Copyright 2008, Mark Leslie 38

37. Impact of SLC on Venture Financing
► Pro-Forma VC financing
 A round = product development
 B round = go-to-market
 C round = market expansion
► Fenwick and West Quarterly VC Survey
 Eight quarters reported
 Percentage of C and later which are DOWN rounds always greater than for
B rounds
► VCs and Entrepreneurs underestimate the cost and time required to
move up the SLC after successful completion of Beta.
► Reconciling the SLC to VC standard practices
 View B round as financing the next (go-to-market) development
stage
 Pay less, consistent with the risk assessment
 Hopefully more up rounds later…
Copyright 2008, Mark Leslie 39

38. “It Always Takes Longer
and Costs More”
Maybe Not…
Copyright 2008, Mark Leslie 40

39. A New Framework for
Entrepreneurial Companies
► Plan the development of companies to include enterprise-
wide sales learning
 A second developmental stage
► ProductDevelopment
► Go-To-Market (Sales Learning) Development
► Value Go-To-Market Development rounds (“B” rounds)
appropriately
 Smooth the VC process, which is better for both VC and
entrepreneur
► Plan effectively for achieving cash flow breakeven
 Eliminate wishful thinking
 Consume much less cash
 Reduce trauma to the organization
Copyright 2008, Mark Leslie 41

40. The Sales Learning
Curve
“It Always Takes Longer and Costs
More…”
mleslie@leslieventures.com
Copyright 2008, Mark Leslie 42