Let’s say you’re at $50 million ARR [annual recurring revenue] and your peer group on average grows at 80 percent. That means your peer group would grow on average to about $90 million next year. You’re outperforming them, you’re growing at 100 percent. You anticipate adding $50 million in new ARR. Generally speaking those companies will spend anywhere from 30 to 70 percent of revenue on sales and marketing. Let’s just say we take 50 percent to make math easy for a second. That means $50 million of your $100 million next year will be spent on sales and marketing. And today, you’re spending $35 million on sales and marketing. That means you’ve created the cushion of $15 million to get more headcount, more marketing, more events, sales leadership, you name it, to your model in order to stay within the guide posts…. It’s important that finance doesn’t come across as the policewoman or policeman and is seen as a strategic enabler.
That was from a fascinating Venture Stories podcast, “Building and Scaling Enterprise Software go-to-market with David Eckstein and Yasmin Razavi.” David says that an individual salesperson will take home between 7 and 14 percent of revenue with about 50/50 mix of base vs. variable compensation. As they beat their quota, they can go into an accelerator of up to 2x. Potentially, a salesperson could earn up to 25 percent of more of the revenue they bring in.
Compare the enterprise software business strategy to defense. Bid & Proposal costs are usually buried within the General & Administrative expenses, which often comes in at 12 to 20 percent of total costs. Most of that has nothing to do with sales people hustling for a deal. Instead, the defense companies face a monopsony buyer that pre-determines its own solutions. The companies seek to get in on the requirements process early by “spoon-feeding” the military its own proposed solutions and shaping the RFI/RFPs. Defense companies rarely have a viable solution developed at its own expense, but rather attempt to get in on the ground floor to build something at the government’s expense.
The idea that a defense firm should spend 30 to 70 percent of its revenue on sales and marketing during its growth stage would seem scandalous to almost all defense observers. And yet, perhaps something near the lower end would make sense in a world where defense isn’t a market closed to startups and new entrants — where firms and VCs spend more money on IRAD to develop game-changing technologies and then the rest is convincing the buyer that it is in fact better than what the incumbents are providing.
Remember, sales and marketing isn’t just people cold-calling companies over the phone. It includes a rigorous process of proving value to the customer. For cybersecurity, it is a few days demo that shows how many malicious attacks were blocked, what is the cost avoidance, etc. For the military, it should be engaging with operators, doing real tests, understanding the problems, building reputation, iterating the solution, etc.
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