To understand why, let's step through a hypothetical example together. An imaginary company, Unicorn Software, currently has $3 million per year in annual recurring revenue (ARR). The CEO is contemplating a $10 million venture capital raise, the first outside capital into her business.
We're about to do some math. Stay with me.
She estimates that the deal will value her company at around $30 million before the investment, and therefore $40 million after the $10 million investment comes in. Her new investor will own 25 percent of the business ($10 million / $40 million = 25 percent).
This CEO, knowing how venture capital works, understands that her investors are going to underwrite the deal expecting ten times the return on their money.
That means that she needs to turn that $10 million dollar investment into a $100 million outcome, which means generating a boatload (the actual phrase is much more colorful) of growth in a short amount of time. Since the venture capital firm owns 25 percent of the business, she's going to have to figure out how to grow the business from $40 million in value to $400 million in value over that time frame.
I'm going to oversimplify business valuation dynamics and impact of customer churn for the ease of our discussion:
- Assuming that the market will value her business at 10 times forward twelve month revenue, she needs to deliver $37 million of annual recurring revenue to go with the $3 million of existing business ($37 million of new ARR x 10 = $370 million);
- Her average customer contract is $20,000 per year;
- To generate $37 million in new ARR at $20,000 ARR per deal, she needs 1,850 customers;
- It takes three fully qualified contract proposals to get that one closed deal;
- It takes six vetted and qualified opportunities to yield three proposals submitted;
- To get six vetted and qualified opportunities, a sales rep needs to run ten qualified product demos;
- To run ten qualified product demos, a sales rep needs to set twenty initial meetings;
- To set twenty initial meetings, a sales rep needs to make 200 phone calls;
- It takes a week of sales rep effort to make 200 quality prospective phone calls;
- Therefore, in four weeks' time, a sales rep can make 800 phone calls, run 40 demos, qualify 24 opportunities, send out 12 contracts and close $80,000 in new ARR;
- Therefore, in twelve month's time, a sales rep can generate $80,000 x 12 months = $960,000 in new ARR.
Let's assume that her investors want revenue to double every year until they get to a $40 million run rate. That means she needs to deliver:
- $6 million in ARR year 1;
- $12 million in ARR year 2;
- $24 million in ARR year 3;
- $37 million in ARR midway through year 4
Translating these numbers into a staffing plan, her recruiting team will need to hire and maintain:
- $6 million / $960,000 = 7 sales reps in year 1;
- $12 million / $960,000 = 13 sales reps in year 2;
- $24 million / $960,000 = 25 sales reps in year 3;
- $37 million / $960,000 = 39 sales reps in year 4.
Making the very broad assumption that her B2B subscription business model requires the hiring of one non-sales resource (engineering, operations, customer success, management, or administrative) for every sales hire, she'll need to hire and maintain:
- 14 people in year 1;
- 26 people in year 2;
- 50 people in year 3;
- 78 people in year 4.
She should probably add in a 20 percent revenue churn rate per year and a twenty percent team turnover rate per year, so add 40 percent to these hiring numbers. At that rate, in her fourth year post-VC investment, she's going to need to hire 109 people, or nine new people a month, every month.
If she doesn't make recruiting, hiring and onboarding new talent a core competency of her high-growth company within 24 months of her investment, she's going to miss her target by a mile. Worse, she won't realize until it's too late to course-correct.
You can use this exercise for your own startup--just plug in your own numbers and see how the math turns out.
Are you ready for VC dollars? How's your recruiting game?