Money for the Middle Stage: Part 2 of a Conversation with Scale Venture Partners

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the scaling, which is why we picked our name. We are willing to partner with the engineers and the Series A investors to answer that question. Our view is that you run a series of experiments to find out which sales model works, and then you apply capital to that one.

X: Say more about the exact challenge that you’re trying to help companies with at the commercialization stage.

Rory O'DriscollRO: Steve Blank does a great presentation on the first stage, where you don’t even know what you’re doing, and it’s a discovery process just talking to customers and figuring out what you have and locking in on something. Software is easy to make, but it’s not always easy to sell. The second stage is where we come in. You have proven that 20 people will buy it. Now you have to prove that there are 100, or 10,000. It’s really about marketing and distribution. With the first 20 customers you don’t try to be efficient, you just try to get them. Then as you transition from early to mid-stage, the question is how do you help ordinary mortals sell this product. The CEO can sell it; now, can ordinary sales people sell it?

X: How can you tell whether it’s working? Do you push your portfolio companies to start multiplying their revenues?

RO: We have done a body of work over the past eight or nine years that has given us a very strong belief system on what kind of relationship you need to see between sales and marketing and investment and revenue. Across a number of our companies, especially Software as a Service companies like HubSpot, where we have just invested, there is a period of time where for a couple of years, the more successful you are, the worse the numbers look, because you are investing more, you have more expenses, and the revenue doesn’t show through.

KM: You are building an annuity stream, so the revenue doesn’t show in the short run.

RO: Exactly. The GAAP looks horrible, but the value creation is enormous. With HubSpot, Frontbridge, Omniture, ScanSafe, Exact Target, we have been strong advocates of pretty aggressive growth at a point in time when, on a GAAP financial basis, it’s not clear that it’s working, but it’s turned out to be entirely the right decision.

KM: It does go counter to what a traditional VC might say, but our industry experience says that it’s the correct thing to do.

X: You mentioned that you encourage your companies to experiment to find the right commercialization model. What kinds of things should they be experimenting with?

KM: Is it an OEM business, do you partner, do you sell direct, is it self-service? Can customers download an example, try before they buy? Is it something that needs to be sold over the phone? How important is lead generation, telemarketing, the Web, paid search? Is it a freemium … Next Page »

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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  • http://twitter.com/thyaga Thyaga

    Excellent. Moral of the story is ‘Entrepreneurs must build lean organizations to operate. Focus on customers and demonstrate sales traction’.