Sales Fundamentals for Startups: Insights from Lou Shipley
In an impressive career that has spanned three decades, Lou Shipley has acquired insights into every aspect of sales as they relate to scaling startups. When he began his professional journey with Avid Technology, the industry-standard for media software, it was still an early-stage startup. Shipley developed deep expertise in sales, in generating $450 million in revenue for the venture as it grew. He also gained unique insights about the complications of launching the business in foreign markets when he founded and served as president of Avid Japan. He has held General Manager and CEO roles at several companies in enterprise and fin-tech, including Black Duck Software. Today, as Executive-in-Residence at General Catalyst and lecturer at MIT’s Sloan School of Business and HBS, he shares his knowledge with emerging entrepreneurs and executives in sales management. In this conversation with Shikhar Ghosh, Shipley discusses sales fundamentals for startups. He demystifies the sales learning curve, shares advice on creating a sales process, forecasting, and shares tips on navigating cultural differences when selling in a global market. An unedited transcript follows the unabridged video.
Lou Shipley interviewed by Shikhar Ghosh on sales fundamentals for startups, on November 15, 2019, at Klarman Studios, Harvard Business School.
Sales Fundamentals for Startups
SHIKHAR GHOSH: I’m Shikhar Ghosh, I’m a professor at Harvard Business School. This is Professor Lou Shipley, who’s got a long career in sales but in entrepreneurship more broadly and wanted to ask you, Lou, right at the beginning, every entrepreneur I know starts off by being a salesperson. You have to sell your idea to employees; you have to sell your concept to investors.
SHIKHAR GHOSH: You have to get the first customer and convince them, and you’re always sort of selling a little bit ahead of what you can actually deliver, because you’re trying to create the most excitement you can. At what point do you cross a line where you’re promising much more and what have you seen in your experience on that?
LOU SHIPLEY: Yeah, yeah. Right. I mean I think that the way to think about that is you don’t want to cross the line to the point where the trip doesn’t match the brochure, right? Because ultimately, you’re going to deploy to the customer and they’re going to say it doesn’t work. Or an employee is going to be told come to this startup and it’s going to be great. And they get there and it really isn’t, or an investor is going to see at a board meeting that you haven’t made the progress you promised.
LOU SHIPLEY: I think it’s about, the founder’s journey on entrepreneurship is a lot about enduring relationships, and I think about starting an enduring customer relationship because I think about the companies I’ve worked at. I’ve gone back to some of the same customers and they’ve moved on to different businesses. And if you can build those enduring customer relationships and solve some of their really tricky problems, it really helps because you’ve got trust.
SHIKHAR GHOSH: So in some ways, either you want to tell them why you’re really excited about the business, but you’re also building trust in them.
LOU SHIPLEY: You’re building trust and then helping them succeed in their job because you’re solving, hopefully, you’re solving a problem that really helps them, and then the reference ability of those first customers becomes so critical that you then use that for other customers but for investors, for employees, and for building the overall value of the enterprise.
SHIKHAR GHOSH: So, as you’ve looked at founders, what do you think a founder who might be more technical or more financial or product kind of person? What do they need to know about sales, about the sales process?
Understanding the Sales Mentality
LOU SHIPLEY: Right, I mean you’ve probably seen the Silicon Valley episode where they talk about the sales thing, where there’s behind the door, there’s all this noise, and these people are doing this thing. And the reality is I think a founder needs to understand the sales cycles, understand the buyer’s journey and the pain that the buyer’s in and how your solution can help them.
LOU SHIPLEY: And I think it also requires you to think in a different mindset because a lot of salespeople are, I guess coin-operated or think about things financially. And oftentimes I think some of the technical founders I’ve worked with just don’t really have that part of the brain. They’re thinking about I’m solving this problem, but they don’t think there could be a brain type out there that is simply motivated by just monetary reward. But I think it’s of trying to understand how that person thinks and what would motivate them is important.
SHIKHAR GHOSH: That in some ways salespeople, at least the archetypical salesperson is different from the engineer is different from the founder.
LOU SHIPLEY: There’s a different sort of a mindset and some of the mistakes I’ve seen made is you bring in a salesperson who’s used to being in a company where you have a predictable product and has done very, very well, has a strong track record and can get into a startup and just not be able to deal with the fact that it’s really not ready for prime time or there’s no repeatability to the process.
SHIKHAR GHOSH: So, when the founder himself or herself is selling, what would you tell them about the sales process? This is somebody who’s designed a product, has worked it through, is excited about the product, wants to talk all about its features, its benefits, its all this.
LOU SHIPLEY: Well, what I would say, and I’m involved now with a couple of companies where the founders have decided, “I am going to sell the first dozen customers,” whether they’re our perfect customer or not, but the first dozen or so. So I learn what happens in the process, how long it takes, what the justification needs to be, how it deploys, how it grows, before you go and hire a salesperson, a sales VP, or someone who’s responsible for sales. In a way, the founder that can get through that first piece of it on their own and really learn that piece is more effective at hiring somebody who they can delegate the task to over time.
SHIKHAR GHOSH: And in that process of selling the first half dozen, dozen customers, what did they need to know about the selling process that’s different from every other process?
LOU SHIPLEY: Yeah. Yeah. Okay. So first is, it’s not really about what you think your features and benefits are. It’s what pain you’re solving and what problem you’re solving for them, and that involves active listening. Oftentimes the technical founders are smarter than most people, but there’s a lot of customers that are really, really quite intelligent. And if you listen to their questions, you can understand how to, how to craft a solution for them that may be more repeatable than what you thought was the original concept of the product.
I’ve always found that the customers take products in different directions and they were the original what the foundational idea was, and they take it and stretch it in a good way to take the technology and extend it.
SHIKHAR GHOSH: And so, so when you say active listening, what does that mean?
LOU SHIPLEY: So active listening is the process, we always say, “one mouth, two ears.” That you’re in any typical sales process, you should be listening twice as much as you’re talking. And when you’re listening you’re not just waiting for the person to stop talking, so you can pick up and talk about the next feature. It would be somewhat probing, delicately, politely for reasons why they’ve said what they just said.
I mean oftentimes you’ll see salespeople just getting ready to sort of fire off everything that’s good about their product. But active listening is the process of listening and understanding before you continue on talking about your product.
SHIKHAR GHOSH: Are there particular techniques or questions or something that you can provide to founders going out on a sales call? I just tried this a few times.
LOU SHIPLEY: There are. There are three or four different sales methodologies that are taught— we teach here, they’re taught in other business schools. Some of the most effective ones, I think, are the ones that really focus in on active listening that comes from building a series of questions to understand if the buyer is in the kind of pain you think they’re in that your product can solve.
SHIKHAR GHOSH: So an example might be?
LOU SHIPLEY: An effective way to do this is to create a series of questions. We call it a pain funnel. Take the customer through a series of questions that is pre-scripted, two or three or four questions, and then each time they answer it, you ask for a little bit more of an extension of that original value proposition or the original pain proposition, so that you really understand what they’re trying to solve as opposed to saying, “I’ve got this thing, it can solve your problem.”
SHIKHAR GHOSH: And so an example there might be, it’s taking too long to get our product to market.
LOU SHIPLEY: If a customer said that, then the followup question is, “Oh, that’s interesting. How have you found that that’s impacted your business?” Sort of just to follow up the question as opposed to, “Well, I have a feature that can solve that problem, but can you tell me a little bit more about that? Or was there a time when anyone else in the organization had the same issue?”
LOU SHIPLEY: Or, “Have you looked at any other… What have you done to address that problem? Have there been other alternatives?” So you started to learn more about how they’re already dealing with the problem before you show up with your solution.
SHIKHAR GHOSH: So, you’re taking the pain and almost elaborating on the pain.
LOU SHIPLEY: Yep.
SHIKHAR GHOSH: So you’re understanding all the dimensions of it before you say, “I have something for you.”
LOU SHIPLEY: That’s exactly right. And this is one of the biggest problems sales organizations have is that their salespeople, beyond the founder, once the founder’s hired team, is they will have a conversation and think they have a qualified lead because they talked for an hour. And they sounded interested, but they didn’t realize whether they were really a qualified lead. And so that that lead went into the funnel and it sat there for a long, long, long time. And before you know it, you’ve missed your forecast, as opposed to asking the questions and really understanding the pain the customer’s in.
SHIKHAR GHOSH: So, one of the things that I’ve seen in a lot of spreadsheets that founders put together is they say, okay, we’ve got our first few customers so we know that we’re actually adding some value. These customers seem pretty happy. Now, what I’m going to do is cookie-cutter this. I’m going to hire… Five salespeople should be able to sell one unit per month each. Multiply the numbers through and now I’m going to have a full cost that goes like that. How does it work in real life? I mean, how does the sales…
LOU SHIPLEY: And I’ll speak from many mistakes here. We talk about in our class the notion of the sales learning curve. It’s an article written by Mark Leslie many years ago, an HBR article, about how often a founder or a management team will have a little bit of success, and then hire ahead of where their real demand is and put on a lot of salespeople. And then realize after some amount of time that they haven’t covered their costs and so that they’re spending way more on sales before the market is really ready. They have not understood in depth what the sales learning curve is.
LOU SHIPLEY: The sales learning curve talks about three things, when you’re introducing a new product, changing your route to market, say from direct to indirect or indirect or direct, or you’re launching into a new geography, that there’s this whole learning process that needs to take place before you can build accurate forecasting of how the product’s going to sell. And that learning curve is a curve. And if you don’t know where you are on that curve, and you hire too many sales resources before you know where you are on that curve, you can end up wasting a lot of money.
SHIKHAR GHOSH: And the curve describes?
LOU SHIPLEY: The curve describes on the Y axis, your sales yield, when you put a salesperson on, how much do you get back from that person? And the X axis is time. So time over yield or yield over time is that is the length and so you look at the slope of the curve.
SHIKHAR GHOSH: So simple way to think about that is you put a salesperson in the market, for the first couple of months they’re going to be learning their way around. They’re going to be learning how to sell. And so their productivity might be 10 or 20% of what it would be when they’re really…
LOU SHIPLEY: When they’re up in, they call it ramped, as a sales rep in a typical… Once a company’s established, it usually takes six months or so for somebody to be fully ramped to the point where they’re more than paying for themselves, paying back the investment you’ve made in paying them.
SHIKHAR GHOSH: But during that time, your productivity in terms of sales per salesperson is really low.
LOU SHIPLEY: Is really low, and that’s where… What I’ve seen the best companies, and founders can do this even with small companies, is invest in this notion of sales enablement, of really making sure your sales representatives are very productive. And if you can reduce that productivity time from say six months to four months, it pays back in spades.
SHIKHAR GHOSH: Right, and that also says that as you’re selling yourself or getting your first couple of salespeople, you spend a lot of time documenting and understanding what are those pains, how do you answer questions?
LOU SHIPLEY: That’s exactly right. And the best founders I’ve seen will look at a sales process, the steps. Say there’s 10 steps in a sales process, and find which ones people are struggling with the most and develop content to train around those sticky parts of the process. And so then you try and shorten that and eliminate those because new ones will pop up, new problems will pop, but you’ll have shortened the time in that process to get to a sale.
SHIKHAR GHOSH: Okay. So if we move from, the sales learning curve is one of the core concepts that founders should be aware of. You’ve talked about some new product into a new market. What about when you move into completely different geographies, so different cultural context? A lot of our experience, certainly my experience has been selling in the US, right? Now, when I go to Japan or I go to China or something, the way they buy there is different. You lived in Japan.
LOU SHIPLEY: I lived in Japan for three years. I started working out of a reseller with a company that I, with Avid Technology, and then I opened our wholly-owned subsidiary. So I worked through a channel partner and then decided to kind of go direct, the industry term, and hire our own sales representatives. And there are a couple of big differences. First of all, the length of the buying cycle is just different in Japan. And because there is a system where it’s sort of a more of a group decision about buying a new technology, implementing a new technology.
LOU SHIPLEY: So I think you have to be patient to understand the cultural differences, which is hard because you’re still being evaluated by kind of the same, “get it for me now,” kind of a…
SHIKHAR GHOSH: Right, right. I need to make my quarterly numbers.
LOU SHIPLEY: I need to hit, yeah, I got to make my quarter. And you need to understand that that’s going to change. The other…
SHIKHAR GHOSH: And if you didn’t know that, then your forecast would be off.
LOU SHIPLEY: Your forecast can be off and forecasting is likely to be different. How the buyer buys and how you forecast that sale has to require some coaching of the US headquarters about let’s look at this business a little bit differently. Then also one of the other big changes is compensation systems. I think if you cut and paste your US compensation plan and just bring it over to Japan, it may not work as well there as it does say in the US. Whereas a sort of a US system is pretty typically coin-operated with different acceleration rates and payouts for different performance.
LOU SHIPLEY: My experience has been it’s more of a relationship of trust and obligation on the part of the employee to deliver the results independent of how much you pay them. So I found the typical situation was, “…we said we are going to do this for you, we’re going to do this. We’re going to find a way to do it. You don’t need to pay me any more money to deliver a higher number.”
SHIKHAR GHOSH: And if I haven’t delivered then I’m going to keep trying regardless of what the…
LOU SHIPLEY: I’m going to keep trying, yep.
SHIKHAR GHOSH: … what the thing is.
LOU SHIPLEY: Sort of the cultural understandings of what commitments you make as part of a company are just a very different in each culture you go to.
SHIKHAR GHOSH: And the buying side is probably the same thing, which is that the way people buy when they say something, what it means-
LOU SHIPLEY: Exactly.
SHIKHAR GHOSH: … All those things are completely—
LOU SHIPLEY: Exactly. For example, I think a sales call for a founder in New York City is going to be very different than in Tokyo. I mean, independent of what product you’re selling, you’re going to probably get a little bit more direct answer in New York, “No, this isn’t working. Get it out of here.” Or, “Yes, this is great. Give me more.” And in Japan it may be a little politer, and a little longer and yes may mean no. And you just have to live with that. Yes doesn’t necessarily always mean yes. So…
SHIKHAR GHOSH: Yeah. And so, I was with a company and we’d gone to India, and yes meant yes, and yes meant no. And you had to tell-
LOU SHIPLEY: Which one was yes and which one was no, yeah, so. Those cultural differences are very… Well, what’s interesting is to build trust, I think people in the foreign culture need to trust you and know that you’re working at understanding that it’s going to be different and not getting impatient if you aren’t getting things done on the timeframe you’re expecting.
SHIKHAR GHOSH: But I think one of the common things across all of these cultures is that the conduit becomes so much more efficient when there’s trust.
LOU SHIPLEY: When there’s trust, absolutely, no question about that.
SHIKHAR GHOSH: And so one of the first things you’ve got to do, and if you erode that trust, if you damage that trust by over promising, by saying things that aren’t sort of, that are technically true but not quite and so on, you can set things back by quite a bit.
LOU SHIPLEY: It can be kind of unrecoverable. Yeah, you can lose it forever. And I think that’s why when you’re taking these decisions to go to these other markets, you really have to think of… It’s not unlike the sales learning curve. You have to realize it’s going to take a little longer to learn how to sell in this market. But when you do and you build the trust, it will be…
SHIKHAR GHOSH: Then it goes even faster.
LOU SHIPLEY: Then it goes even faster. Absolutely.
SHIKHAR GHOSH: So the last area that I wanted to talk to you about is if you think about founders starting up, and you say you’ve got product-market fit, you’re going across, you’re actually hiring a whole sales team to do it. And so do you start by hiring a couple of salespeople and learning or do you start from the top saying, let me hire the VP of sales and then they going to just build out everything else?
LOU SHIPLEY: Yeah, that’s a great question. I’ve seen both, and I think the founders that have learned a lot through the sales process of the early sales benefit from the fact that they know a lot about the function as it relates to their company. Because it’s different in every company. Every product’s different, every company’s a little bit different.
LOU SHIPLEY: So to the extent that you know that, then hiring, whether it’s a leader or an individual sales rep or to… You’re just going to have a much better time sort of bringing them up to speed. I think it’s important though to recognize as a founder that salespeople will often come in, sales leaders will come in with what’s worked for them before, and some of that will work well and some of it won’t.
LOU SHIPLEY: And you need to be patient to work with them on what’s the unique sort of sales process and sales forecast accuracy work you need to do to get to the point where you really trust each other and can deliver the numbers your board expects you to do.
SHIKHAR GHOSH: Okay. I’m going to ask you a last question, which is an unfair question, but it’s… You’ve been in sales now for what’s it, decades?
LOU SHIPLEY: 30 years. Yeah.
SHIKHAR GHOSH: So three decades. If there’s one mistake you’ve seen founders do or one or two mistakes you’ve seen founders do when they’ve approached sales, what would he say that is?
LOU SHIPLEY: Not intellectualize it, not understand that there are… The way a lot of salespeople operate is just a different sort of mindset and that you have to, instead of being frustrated with it, you have to seek to understand it and then work together with it cooperatively. Because it is I think a very different mindset as somebody who sort of more coin-operated incentive-driven and rewards driven needs to… You need to just understand that and spend some time thinking about it. Because it’s a different…
SHIKHAR GHOSH: Especially if it’s a founder who’s oriented around engineers, oriented around finance.
LOU SHIPLEY: Exactly, problem-solving and the brilliance and fun of just solving a tough problem can be a little different than the sort of mindset of a very commercially operated person who’s just looking to decide whether they can make a lot of commissions selling what you’ve created.
SHIKHAR GHOSH: And I’ve also seen founders often sort of think that buyers of their technology are completely rational.
LOU SHIPLEY: Right.
SHIKHAR GHOSH: That if I give them features and benefits and it costs this much, they’re going to absolutely buy it. And there’s so many other sort of human elements, right? Do I trust this person? Do I like this person? All of those kinds of questions come in.
LOU SHIPLEY: Right. And that’s back to the building enduring customer relationships.
SHIKHAR GHOSH: Great. Thank you.
LOU SHIPLEY: You bet. Great.
SHIKHAR GHOSH: When a company starts up, it’s really hard to know what the numbers are going to be, right? You sort of make up a set of forecasts because you just don’t know. And yet there’s no way for the board or for other people to also know what it’s going to be. In that period of uncertainty, what’s your sense of what a founder should do? Because so much of the judgment is “how did you do against forecast?”
LOU SHIPLEY: Yeah. Well, I think in the same way that founders probably spend a lot of time thinking of an idea for a product and estimating when the product will ship or be ready, first customer ship, and really do what you envisioned it would do. In the same way that you need to build accuracy around hitting your product release dates, I think it’s equally important that what you say you’ll do in terms of sales, bookings of new sales or up sales or renewals, is equally important. And if you don’t spend a lot of time understanding that and getting into the numbers of it as opposed to just the opinions of a sales person, if you don’t do that, it can go really badly because you’ll set one expectation from your board and continue to miss it.
LOU SHIPLEY: And I found this not as a technical founder but as a CEO, that if you do that too often you can get fired. Now, getting fired is a great learning experience as a CEO. It’s not one that you really are looking for, but I live through not understanding the forecasting to the point where I really should have as a CEO, and I got better at it so that in subsequent roles I was much better at it, and I have to say I slept a lot better when I really understood it.
SHIKHAR GHOSH: And so are the particular things that he’d do in the full costing that every founder should sort of just keep in the back of their minds?
LOU SHIPLEY: Yeah, I think a couple of key things. One would be starting with a clear mutually agreed upon, what we’d call a sales navigation system. When something comes into your pipeline or whatever you’re calling, the way you talk about a forecast, that you have clear definitions of what a marketing qualified lead is, what a sales qualified lead is, and how long something takes to move through that funnel to close where you get the purchase order from the customer.
LOU SHIPLEY: And I think a lot of companies don’t do that. I think they just use maybe what they use from their last company and not spend the time to think about what is it about, that’s unique with this product and this company that is going to… What navigation system we’re going to use, so we can navigate our forecasting system by this chart or whatever stages you put in.
And then, it’s to train everybody to use the same navigation system, whether they’re in the US or Europe or Asia. Try and get a common nomenclature so that everything you’re rolling up is, you’re all talking about the sort of the same kind of thing. Because it’s easy to not have a common nomenclature and then you can miss a forecast.
SHIKHAR GHOSH: So this is, you say, “A prospect means this.”
LOU SHIPLEY: Means this.
SHIKHAR GHOSH: “A qualified lead means that.”
LOU SHIPLEY: “A qualified lead means that,” or it can mean… Back to our comment about when you’re a founder selling his first few customers, how much pain are they in? Have we established that there is real pain or gain that the customer is going to get? Do they have budget authority and that kind of thing?
LOU SHIPLEY: And they don’t come into the forecast unless they’ve passed those gates, because if you don’t do that… we have what we call… a funny term we used… was “forecast furniture”. It’s a piece of furniture. It’s like you consider it, it just stays there. It’s not moving through the funnel. It’s stationary and then all of a sudden you’re at a board meeting, and you’re talking about an account that hasn’t moved in nine months even though you forecasted it a year ago.
SHIKHAR GHOSH: And I’d imagine that as you’re going through this process, you’re also learning.
LOU SHIPLEY: You’re learning, exactly.
SHIKHAR GHOSH: You think it’s going to take three months to move from step one to step two. But it’s always taking four.
LOU SHIPLEY: That is Such an interesting point, because the iterativeness about getting better at forecasting is you never stop learning. It’s constantly changing, especially as you grow or add new people or go to new markets and bring new products out. They’re all different. It’s a constant iteration process.
SHIKHAR GHOSH: And so you learn that your retail people buy this way, but the financial markets buy-
LOU SHIPLEY: Buy a different way.
SHIKHAR GHOSH: … A different way.
LOU SHIPLEY: And that’s where I think the role of sales operations becomes critical, even in smaller companies about having the data set around understanding how the business moves.
SHIKHAR GHOSH: So if you think about sort of the forecasting problem being one of the key drivers of success of a CEO, right? Then in the early stages when it’s really hard to forecast, but yet you’re trying to raise money, and so you want to put this hockey stick that’s going to go out there. How do you handle that?
LOU SHIPLEY: It’s funny, in the venture world, I think they call it the J curve. It’s the decline in sales after you’ve just raised the rounded and up valuation in the first quarter, you come in-
SHIKHAR GHOSH: Someone I know called it the Tammel point, which is then a miracle occurs.
LOU SHIPLEY: Yeah, exactly. Well, I think everybody knows that there’s that gaming going on in the fundraising process, but I do think it’s important that back to the pain that you really create. I mean, I’ve seen a lot of founders that have an idea and think it’s sort of technology in search of a solution, as opposed to so solving somebody’s real problem and as you’re trying to figure out how to do that more efficiently, more efficiently over time, that you constantly learn about those processes and that shows up in sales forecast accuracy.
SHIKHAR GHOSH: How long do you think it takes for a company to get to the point where the whole process is predictable within…
LOU SHIPLEY: Well, it’s a great question. My sense is it takes years. It takes years. I wish it took months, but it seems from the beginning of a company to the time when you’re really predictable, it’s multiple years.
SHIKHAR GHOSH: At that point, you can actually say, “At next quarter, this is going to happen, next quarter this is going to happen.”
LOU SHIPLEY: And that becomes, if you’re either taking your company and trying to go public or if you’re going to sell it to a strategic acquirer, somebody, the fact that you can… When somebody is interested in your company and they ask you what are you going to do, and you say, “I’m going to do X,” and they call you back when the quarter’s over and say, “How did you do?” I said, “Well, I did X.”
LOU SHIPLEY: If you do that three or four times, eventually they realize, oh, they really know what they’re doing. Maybe we should buy this or maybe… Because then you could go to the public markets and continue to be… If you’re not accurate as a public market CEO, it’s very… That can end badly too.
SHIKHAR GHOSH: So does the notion of product-market fit, is that you have a set of customers who are willing to pay for the product. There’s probably going to be some kind of a sales forecast market fit.
LOU SHIPLEY: Exactly. That’s a great way to say it.
SHIKHAR GHOSH: That’s completely predictable. How many more you’re going to sell?
LOU SHIPLEY: Sales forecast market fit may take you as long as the original product-market fit did, and I think that’s something that a lot of people don’t really think through.
SHIKHAR GHOSH: Great. Thank you.