Friday, September 19, 2008

Inside Growth Strategies

The sales pipeline: It’s crucial for young firms

For early stage or growth technology companies, creating and maintaining a detailed sales pipeline can be a critical factor in achieving strategic objectives. Whether you’re looking to sell your business or raise capital, you will be required to show evidence of your company’s present and future business prospects.

Most venture-backed businesses have developed relatively robust procedures for tracking sales activity. A surprising number of other companies, however, do not track pipeline activity in any quantitative or consistent manner. Regardless of how difficult it may be to accomplish, investors and acquirers have come to expect that companies will have a well-developed approach for estimating near-term revenue. Failure to meet this expectation involves significant risks. At a minimum, you will compromise your chances of achieving your valuation objectives. At worst, you may derail your deal altogether. 

Your pipeline can go a long way toward building confidence in your revenue forecasts and organizational controls. Managers, however, often list a variety of reasons as to why they cannot develop a sales pipeline, including challenges in predicting the size of opportunities; evaluating  competitive bid situations; or receiving accurate data from sales teams. These classic objections no longer pass muster. Whether you’re dealing with a handful of inside telesales people or a globally distributed group of field representatives, low-cost online software solutions have made it significantly easier to create, update and monitor pipelines.

Furthermore, forecasting approaches based on probability weighting opportunities by sales cycle milestones alleviate many of the challenges associated with estimating the size, risk and timing of sales activity.

Investors and acquirers understand that you will have to make certain assumptions to generate pipeline data. In many cases, they are as interested in learning how you think about your market and customer opportunities as in the data itself. In my experience, the biggest obstacle to creating a detailed pipeline relates to the need to change management and sales team behavior. Given the stakes at hand, not implementing such practices can prove costly. Stating that you cannot develop a sales pipeline is a surefire way to concede value to a prospective partner during the due diligence process or scare them off entirely.

Failure to implement best practices in  managing a sales pipeline can create significant risks, even for investor-backed entities with well–developed pipeline metrics.

Companies employing best practices management:

• Use analytical tools such as dashboards and key performance indicators to monitor developments or potential problems during the sales cycle;
• Require sales representatives to regularly update customer data and cull out “dead wood” opportunities; 
• Hold weekly sales team meetings to manage performance and track deal progression; and  
• Measure the accuracy of their pipeline process by comparing actual to predicted results on a regular basis.

Consistent discrepancies between forecasted and actual results usually mean that something is amiss in your estimating methodology. By frequently measuring your performance, you can avoid learning about a poor track record of predictability at the same time as your prospective partners.   

A robust sales pipeline will not guarantee success, but it can bring benefits, particularly for companies that must closely manage their cash burn. This holds true even if the pipeline news is disappointing because early insight into problems will allow you to manage cash flow appropriately. Furthermore, if you think you’re going to have trouble hitting your numbers in the next quarter, you’re far better off sharing  this news with prospective partners rather than being caught off guard. However, the greatest benefit comes from your ability to demonstrate to prospective buyers and investors that you have a handle on your business activity and a rationale to support your forecasted numbers.

 

Bob Cronin is senior managing director at investment banking firm Stonebridge Technology Associates in Boston. He can be reached at rcronin@stonebr.com.