Why VCs need to stress-test their portfolio companies' sales abilities now

AS Covid-19 takes its toll on the startup ecosystem, venture capital firms (VCs) are focused on helping their portfolio companies survive the crisis. A recent report from research and policy advisory organisation Start-up Genome says that globally, 41 per cent of startups have less than three months of cash reserves - or "runway" - and 65 per cent have less than six months.

Most predictions are that the crisis will last well into 2021. Consequently, many startups are looking to drastically cut costs and reduce staffing levels, or possibly raise new funds, even if this means taking investment at an unfavourable valuation and potentially suffering dramatic equity dilution.

While founders remain confident in their fund-raising abilities, VCs are acutely aware that money is much harder to come by today than it was a year ago. This has been especially so in the wake of a spate of lacklustre (or in the case of WeWork, aborted) initial public offerings (IPOs) from underperforming, cash-burning businesses, and expensive failures like oBike and honestbee.

As the coronavirus crisis deepens, VCs are struggling, with investors failing to answer capital calls and release the funds they had previously committed. A survey of 139 investors by 500 Startups, which examined the impact of Covid-19 on the early-stage startup investment climate, found that some 75 per cent of respondents anticipated investing less than planned throughout the period that the effects of Covid-19 are going to be felt.

Rather than letting startup founders rest their hopes on investment lifelines that may not be forthcoming, VCs should encourage them to increase their sales efforts. Turning a profit on selling a product is how companies have always functioned - it is the very foundation of capitalism. But in recent years, startups' focus has overwhelmingly been on scaling at any cost, building up a vast user base and then figuring out how to monetise it.

Those days were already drawing to a close, even before the Covid-19 crisis struck. The current situation presents the perfect opportunity for VCs to stress-test their portfolio companies' sales know-how and whether authentic demand exists for their products.

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Billionaire entrepreneur Mark Cuban said attempting to establish a startup without building in a solid sales structure is a fool's errand. "Sales cures all. There has never been a company in the history of companies that has ever succeeded without sales," he said. Addressing founders, he said: "Anybody who has ever told you 'Don't worry about sales. You can grow it and worry about sales later' is lying to you. They will fail, you will fail."

Many startup sales departments are purely focused on inbound sales - basically, accepting orders that magically come in, thanks to marketing. In a situation like the current crisis, these sort of sales grind to a halt, particularly when marketing spend is slashed, as is so often the case in these straitened circumstances. So unless a business is selling rice, instant noodles, hand sanitiser or toilet paper, it has to contend with the reality that customers are not seeking to buy its product.

VCs must urge their portfolio companies to retrain staff and refocus efforts on outbound sales, the creation of new pipelines and the communication of legitimate product-value propositions. Startup founders need to acquaint themselves not only with the fundamentals of sales, but the challenges and advantages of outbound sales. Outbound salespeople face a rejection rate of up to 98 per cent, which requires understanding from a CEO and a tenacious, resilient nature in the sales staff, given the task.

Enforced isolation and work-from-home arrangements actually have their advantages in building up outbound sales. People are more receptive to participating in cold-call conversations, and are increasingly open to remote, non-personal forms of communication such as Zoom or phone calls, which have become the norm. This situation enable sales reps to reach exponentially larger numbers of prospects.

Mr Cuban said the sales process provides an effective means of assessing product-market fit, because sales is essentially "about taking the time to understand the needs of the person you are selling to. Because if you can't create a benefit for them, if you can't show them why your product is going to be better for them and their life than the other options out there or what they were doing before, you are not going to have a company".

VCs need to ask the founders they support: Are you still solving a legitimate consumer problem in the post-Covid-19 world? And if not, how are you ever going to make money?

An extensive CB Insights survey, 339 Startup Failure Post-Mortems, identifies running out of cash as the second reason for collapse cited by failed startups; 29 per cent of respondents cited this as the primary cause of their demise. The No.1 reason for failure, given in 42 per cent of cases, was a lack of market need for the startup's product. A robust sales effort can help remedy the problem of lack of cash and identify the issue of ill product-market fit, allowing a company to pivot rather than go on throwing resources at a product for which there is, in fact, no demand.

When a poor product-market fit is identified or - as has occurred during the Covid-19 crisis - when a dramatic change in market circumstances makes a company's product or service redundant or untenable, the startup's ability to pivot is put to the test.

In Singapore, when Grab's transport business collapsed during the 'circuit-breaker' lock-down, the company swiftly moved its focus to food delivery. On-demand logistics startup Lalamove has similarly shifted gear from last-mile courier deliveries to food. VCs need to question whether their portfolio companies will be able to adapt to a radically altered market landscape, and whether they will be able to function if faced with a double-dip recession and a reduction in revenue of 40 per cent or more.

A recent report from management consulting firm Korn Ferry's Global Technology practice, titled "From sales executive to CEO: Lessons on the journey", found that only 8 per cent of CEOs of the 100 largest tech firms in the United States have primary backgrounds in sales. Furthermore, less than 30 per cent of them possess any sales experience whatsoever.

Mr Cuban said it is a critical issue. To entrepreneurs, he said: "You have to be able to sell, and do you know who the biggest salesperson in your company has to be? You."

VCs need to impress upon founders the importance of being just as laser-focused on sales as they are on creating a great product. Even if their background is technical, a founder needs to be an outstanding sales person, setting an example of cross-function capability from the top down.

Startups with the resources to avoid downsizing should make every attempt to retain their staff. Companies that terminate talent today will struggle to hire the best people in future, when things eventually return to normal.

However, the reality is that many companies will have no alternative but to cut headcount - startups in this region are expected to lay off between 20 to 40 per cent of personnel. In these leaner organisations, it will be vital to foster cross-function capability across compatible fields (sales and marketing, for instance), so that one team member can perform the functions previously fulfilled by two workers.

Now is the perfect time for VCs to stress-test startups' abilities in these key areas. This may be the first major crisis new businesses are facing, but it certainly will not be the last. Recessions are cyclical, crises are inevitable. Companies that can remain solvent and both demonstrate and generate legitimate demand under present circumstances will be well positioned to navigate whatever turmoil comes next. In doing so, they will show and prove that their investors' faith was well-placed.

The writer is chief executive and founder of Konsyg, a consulting firm that helps companies increase their sales and attain sustainable revenue.