Cost of Enterprise Sales—The Vast Not-So-Hidden Tax

What Do We Do?

Would you found an enterprise software company, take all the risk, go into debt, maybe mortgage your home if you had a built in tax of 40% – 70%?

That is what companies are paying today for the ridiculous sales and marketing costs of every new dollar in revenue. For each dollar they bring in, they have to spend almost half of it, or in some cases 70% of it to get that next dollar. How can anyone make money?

Well, they can’t, and that is the dirty little secret of many venture-funded companies. Only the venture guys will make a buck and some execs who consume that 40% – 70% hoping, actually praying for a liquidity event. (Someone, buy us, please!!)

You do not make any money if you are the employee or certainly a founder. You are going to have your (stock option) equity eaten up by round after round of capital raising. Ever hear of the E round? How about the F round?

So when your company CEO announces a great event—“hey team—we just closed our F round!” Does he or she then say “…and we are giving all of you more stock options for the 30% dilution you just took!” Listen for that after the next round at that company lunch.

Well if you are in an E or an F round, it is bend over time because you are not going to be rewarded for the work in any appreciable manner via stock options or founder’s equity.

Who goes to E and F round companies? Check it out—

You will NEVER find a luminary CEO or VP of Sales or great marketing talent in an F round.

They would never take such a crappy gig because they could never make any big upside on the equity. And if the company is not profitable by an E or F round, you can be assured that the CEO or the VP of sales has nowhere else to go. They are there to flip it, get out, make a small hit and happy to have a job.

Why do companies need E and F rounds?

It is to pay that hidden tax called sales and marketing overspend. Any company that needs to pay close to 50% of its revenue to get a new customer clearly has a murky value proposition or more likely not a very good one.

Perhaps there are three or four players who offer pretty much the same solution. Sometimes the product is a nice-to-have but not a must-have. Perhaps it is pretty hard to explain. Maybe it is more of a feature. Maybe it is a very small market.

The only known venture solution to the problem is to throw sales and marketing dollars at it.

A 40% – 70% cost of sales is unsustainable. Eventually this tax cannot be paid with ever-dilutive rounds of financing.

At an E or F round one usually attracts bottom feeder venture companies who, like the execs at these firms, have nowhere else to go (invest.) If a Tier 1 VC is in that late, it is because they miscalculated their deal and could not get an earlier equity event. You can be sure they are not happy to be there—it works against their model in a big way.

What does this say to the person looking to bring a new technology to market?

They need to look at companies like Atlasssian and others who achieved great goals with little or no venture capital. These are the companies who built life changing wealth for those who got them there.

They were wise to have gone to market without dilution-venture-capital and the sales machines venture funding demands.

A founder with a disruptive technology has alternatives to costly sales and marketing taxing machines. He or she can use well regarded techniques to get to market without the sales and marketing tax.

There is good news on the horizon. A growing number of CEO founders have done it before. They took in early venture money and lost control of their dream. But they had a second dream and now they are going to implement it without venture capital.

We at see it more often now than in the last 3 years. These founders are getting to market via partnerships with companies who need their technology and are willing to front money (with no equity strings) in return for early mover advantage.

It is not necessarily easy. But, then again, it is also not stupid. And taking venture money early when you have a truly disruptive technology may well be pretty dumb if you have alternatives.