EP179: Conversations Over Headcount: What VCs Should be Counting

In this episode Chris Beall discusses the common mistakes made by CEOs when seeking funding and how venture capitalists (VCs) make their decisions. Chris explains that VCs are in the business of pattern matching, meaning they compare the characteristics of a company seeking funding to those of successful companies they have previously funded. However, this approach can lead to the exclusion of companies that do not fit the pattern. He uses his own company, ConnectAndSell, as an example, explaining that his company's reputation and the age of its founders did not match the pattern favored by VCs, but the company was still successful. He also notes that VCs often encourage companies to spend their funding on headcount, specifically sales development representatives (SDRs), who set meetings for account executives. Beall calls this a "comfort" for VCs, but emphasizes that it may not always be the most effective use of funding. Join Susan Finch as she takes the host’s chair with Chris as her guest for this episode, “Conversations Over Headcount: What VCs Should be Counting.”

 

Full episode transcript below:

Susan Finch (02:35):

Okay. Well, Chris, I know this is near and dear to you, and you have a lot of experience in this, and you've had many successes and maybe a couple failures along the way, but that makes your successes all the more sweet. I'm wondering, what would your advice be for CEOs as they're seeking to get funding, and what are the biggest mistakes that they make thinking that it's an obvious, oh, that's obvious. You need to do that, or that's obvious you need to do that. What are those assumptions that they make that it's like, no, no, no, no, no, no. How can you guide them with a small checklist, what they need to be aware of, where the common pitfalls are and how to avoid them? 

Chris Beall (03:18):

That's a fantastic question. When you take money as a founder from VCs, especially venture capitalists, you're taking money from folks whose business is pattern matching. So what they do is they match your company as you describe it, and as their due diligence reveals it to other companies that they have seen that are in the same categories or similar categories to yours. And if the patterns match enough with previous success, then they might be inclined to fund you. So I'll give a counter example. A few years ago, about three or four years ago, the head of strategy of Google Cloud called me out of the blue. Now this is somebody I actually had met at a conference. We'd become friends. I'd actually sold connect and sell to Kaizer Compressors before his eyes at the conference as kind of a demo. What do you do? I said, I won't tell you what we do, point to somebody at lunch and I'll sell it to them and you'll learn what we do. 

Chris Beall (04:16):

So we became friends. And a little while later, a couple months later, he called me and he said, we're Google As, and I said, yes, I'm fully aware of your goos. And he said, well, so we know everything. And I said, yeah, yeah, yeah, I got it. And he said, I mean literally everything. And I said, yes, you are creeping me out now lj. So get on with it. And he says, well, I just want to tell you, we've come to the conclusion that Connect and Sell is the most interesting company in Silicon Valley. And I said, well, that's a very weird word to apply. Interesting. If my children use it, I say, try another adjective. So you're going to get away with it because as you say, you're a Google, but what do you mean? I said, well, for one thing, your reputation is just bizarre. 

Chris Beall (05:05):

It's like off the charts strange five Sigma to the right of everybody else. I said, that's not very interesting to me. He said, okay, well, here's something that might be interesting. You're very, very old. I said, no, we're not. We're like a 13 year old company. He said, not your company, human beings who run, connect, and sell are so old. And this is the pattern matching part. So old, there is no chance that you've ever been properly funded in Silicon Valley because you don't match the pattern for founders. Founders are predominantly these young-ish thirties males who that's kind of it, who went to Stanford or whatever it was, and they've got an idea, but they look like each other. And this is why women I think, have such a hard time getting funded as they're sort of like human beings have got some real skills at telling people from people according to their perception of somebody's gender. 

Chris Beall (06:09):

So my point is, here's a pattern matcher. In fact, there's a whole cadre of 'em. They go up and down Sandhill Road, and what they're doing is they're matching patterns of companies they've seen and they believe, everybody believes that whatever works for step A of A process must work for step B. Step A is deciding who to invest in Step v B is helping them along the way. As a helpful board member, you're a vc, you're on their board, and now you're going to say, here's how you help them. I want to see X, whatever X is. What's your plan? How are you going to use our money? Well, the pattern of using venture money is to spend it on headcount early in the cycle. You spend it on headcount. And headcount is therefore a good thing to a vc always has been. And it's a comfort. 

Chris Beall (07:04):

If you're a venture capitalist, it's a comfort when one of your portfolio companies buys heads, they buy people. Why? Because you can count why they're called head count. Otherwise they'd be called human beings. But nobody calls 'em. Human beings call 'em head count. Okay, I count 'em. And then if you can claim you're getting leverage, because everybody in the financial world loves leverage. I get a two for one. What's that? Well, I hire them and I hire them as sales development representatives, SDRs, and they set meetings for my current crop of account executives and thereby give them more work to do, so to speak, more companies to sell to that have been selected by our SDRs through their research and their outreach. And that sounds great. I wrote a book about it called Predictable Revenue. It's got to be good. It's like, here's the reasoning pattern. 

Chris Beall (08:01):

Salesforce successful salesforce.com. How was it done? According to this book, it was done by this specialization thing. Let's do more of that. So VCs love to measure what can easily be seen because they don't have very much time is their constrained resource, not money. I was just talking to somebody yesterday. I said, oh, and therefore, and he said something about what a VC we'd want, assuming that what they're trying to do is to have a higher proportion of their investments, of their portfolio succeed. And I said, you don't get VCs. VCs want that one in 10. They want the others to go away relatively quickly to free up their time so they can go get another 10 of which one will be a unicorn. That's their model. These are not, they're not nurturing. What they're doing is pruning like any good gardeners do, right? Oh, it 

Susan Finch (08:56):

Sounds so dark and evil. 

Chris Beall (08:59):

Well, it is it, and it isn't actually a legit way of thinking about how to make a whole bunch of money at the edge of innovation as you get the mega innovations and then you salvage the rest. And by salvage being over dramatic but not much. Right? Read the financing documents from any VC sometime and ask about each word. Who's this word for and what's it for? And most of the words are for what happens when things don't work and when things don't work, these words protect the VC so they can salvage value out of the company, and then they recycle the people. So if they're all suicide missions, some of which fail that is they don't reach suicide, they reach unicorn status, and then you recycle the people. And so everybody's working for, I'll call it VC Inc, right? Well, here's your problem as a founder, if you go down this path, you are going to get advised or we're going to get advised until very recently to lay on headcount in the form of sales development reps who will become account executives. 

Chris Beall (10:01):

That's your two for one. Not only some meetings, but hey, look, I get free recruiting. I got 'em already, right? The problem that you're going to have as a founder is for your own good, the good of your company, which you have a fiduciary responsibility too, for your own good. That capital efficiency is fantastic. That is, if you had a choice between 10 reps having four conversations a day and one rep having 40 conversations a day, you would do the math and you'd take the one rep every time the VC does the pattern matching, takes the 10 reps every time. And so the 10 reps are going to have four conversations a day. And that, by the way, is pretty standard, right? Okay. And now your scaling mechanism, say they always talk about scaling as a substitute for growth, scaling sounds great and multiplying numbers together. 

Chris Beall (11:00):

That's so much better than adding. So let's scale. So let's go from 10 to 20. Let's go from 20 to 40. I had this conversation once with the head of business development company called Zenefits. I think they're still around. They got in some trouble at one point. His job was to hire and train onboard, et cetera, et cetera, 250 SDRs in Phoenix. From scratch. From scratch. And I asked, I was alone with them at lunch. And I said, well, that's a lot why? And he said, well, it's what the VCs want because we're, we do the math, you put it in a spreadsheet and each one of these people produces so much output per day, and some of them become AEs, and that provides us with our flow of future account executives, blah, blah, blah, blah, blah. And I asked him flat out, I said, I could show you how to do that job with 25 people instead of 250. 

Chris Beall (11:58):

What would you say? And he said, I'd say no. Why would you say no? He said, well, the VCs want us to hire to show we can hire 250 people to scale the business. This sounds to what I'll call a normal business person in say, middle American. Say you're running any kind of a thing like running casser compressors and your name's Matt McCorkle and somebody says, your job is just to hire lots of people in order to scale the business. You'd brawl your eyes and say, not here in Milwaukee. We don't do that right across our country, but in Silicon Valley land, this is regur. And yet just, I just want to say for you, the founders, the money wants you to do what the money is comfortable watching you do. So they want it to match the pattern that they're comfortable with, and they want it to be visible, easy to count. So here's something that's easy to count, head count, but you know what else is easy to count? And it's on this picture right behind me here is actually conversations, relevant conversations. Now, weaning your VCs from headcount conversations is probably really hard. But before you take on the headcount, think about establishing the conversation flow of the business as the replacement for the headcount. How many conversations per day are we having with potentially relevant targets? 

Susan Finch (13:29):

So I want to make sure I'm understanding this correctly. Then when I'm seeking I'm A C E O, I'm seeking funding, I'm seeking VCs. They are not going to see that logic. They only want it done their way. Even though the way that you're proposing would be way more profitable, the company would be stronger and more stable, and it would grow at a very realistic, manageable pace. But I'm going to have to fight for that with the VC to actually get them to understand this concept. Or they don't care. 

Chris Beall (14:02):

Yeah, they're not, you're going to do worse than fight with them. You're going to be, you're not going to get funded. That's all there is to, I mean, the now times are changing. So we've entered a period of, I'll call it a desire for capital efficient go to market even among venture finance companies, because now they're all looking at what they call runway extension. So think about these terms, right? Runway is the amount of distance an airplane has to get in the air. So they're saying their companies are not in the air, they're not flying. They're just trundling along the ground, bouncing along, trying to gain enough air speed to lift off. Well, what keeps you from lifting off? Well, weighing too much. There's a reason that I just saw hummingbird go by. It can fly. SPI can't. I can flap really, really fast. I could put some wings on, but you know what? 

Chris Beall (15:00):

225 pounds going that way? That's all there is to it. There's no heaven above and hell below, but I'm staying right here because I can flap until every bit of flapping is done. But they have this notion of runway. So what they're doing now is saying to their companies, Hey, funding is going to be tight for the next round. Probably won't happen. You guys need to become capital efficient and extend your runway. So now is the time actually when as a founder ceo, E O or just a plain old c e o, because they got rid of the founder and you're now on a series C or D or whatever, and it's like, well, how are you going to extend your runway? Well, one thing you can do is radically shrink your top of funnel team. In fact, I was just talking to Sean C who was talking about big company, and they completely eliminated their SD R T, and now the AEs are expected to prospect. 

Chris Beall (15:55):

Well, that's actually a good thing, but only if the AEs are given the means to prospect. Because here's another problem, folks add all these tools to their stack. So that's the other thing that the VCs will tell you. Tools in the stack, tools in the stack, you got to have a sales stack. You'd think that this stack goes out and sells for you. But what they like about it is you can see it. You can name it like, oh, there's an outreach or a SalesLoft. There's a sales force, there's a sixth sense, there's, there's that. They're names. People are comforted by this kind of stuff. So the stack is going to go do the work. Well, here's a rule to apply as a C E O to every single element of your stack. Does it allow somebody to do something valuable, somebody in my sales team or marketing team or whatever to do something that has measurable value that otherwise they would not have done? 

Chris Beall (16:45):

Notice I didn't say, does it reduce the time that it takes to do something of value? As we all know, when you free up time, every leader of every company knows this. When you free up time at the individual level, you generate what we call used to call water cooler time. That is now there's what is this law? Law, right? Work expands to fill the time allocated. Well, it works the other way around too. If you shrink the time required, the work will, the amount of work will just stay the same. You'll just shift the time into idle time, which is interesting. But if you have technologies that enable something to happen that literally would not have otherwise happened, and that thing's of value, that's a valuable part of your stack because then you can measure what it does and say, I have this. I wouldn't have had it at all. 

Chris Beall (17:37):

Right? So that's immune to Parkinson's law. It's in and it's inverse. So it's kind of funny. Think about conversations. So if you were to take your average AE team and say, sorry, no more sales development or business developed BDRs or whatever, nobody's feeding you. So unlike bears at the zoo, having meatballs popped into your mouth, you now have to go out and do some foraging. You're going to have to turn over some logs and lick some ants up, and you're going to have to go stand on a river with your mouth open and hope a salmon jumps into it, whatever it is, you're going to have to start doing that stuff like you did back when you know, can barely remember, right? Well, if you do that, your issue isn't that they will do more or a less conversational word calling, for instance, ambushing people than they did before. 

Chris Beall (18:30):

They'll have to go from zero to something, right? Because they're doing zero right now. So if they're doing zero and you want to have to do something, then providing a means to do that something easily will actually move the needle because they'll do it rather than not doing it. That's the key. When you think about your sales stack or whatever, any of these stack things, just categorize 'em like this, does this, let one identifiable person over here do something of value for our company that I can measure that they would not have done before at all. That's how you think about your sales stack in a safe way 

Susan Finch (19:13):

That really thins out the list. 

Chris Beall (19:15):

It thins out the list, 

Susan Finch (19:16):

Holy cow. Because if we, as soon as you take out the, does it just save time? No, no, no, no, no. Is it something new of value only, 

Chris Beall (19:26):

Something that wouldn't have done? 

Susan Finch (19:28):

Oh my gosh. 

Chris Beall (19:30):

And that. So if you apply that rule and now you think about capital efficiency and say, well, what do I need? What is the one thing I need? I need conversations. I don't think anybody actually disagrees with this. This is not a Chris Beal controversial statement like, oh my God, that guy bee, he's saying it again. What is this? With the conversations already, what about just like having closed one business walk in the door? Well closed one business doesn't walk in the door. Very many places. I mean, we went out to sirens last night here in Port Townson and had a nice margarita and looked out at the water and watched the river rotters, which we don't have sea otters here. We walked in the door, but they had to pay the rent in advance, right? Well, in regular innovation economy businesses, ain't nobody walking in the door. 

Chris Beall (20:16):

You got to go out and get 'em. And you have to introduce them to an idea. So now the question is, what is the most capital efficient way to do this? And the reason I have this little thing behind me, which people not watching this on video, can't see, it's called an attribution report, is it shows something shocking about capital efficiency. And it says, if you enable your people to just have conversations with targets who are probably in your target market, they're good hypotheses, right? Something magical happens that you're completely unaware of in advance. And that is not only do you have conversations, do your people have conversations that lead to meetings that lead to net new business? No one's obvious conversation leads to meetings, leads to business. That's what you were trying to get with your SDRs. So say you say no, everybody's going to be their own SD R, but I'm going to provision with them with the means of effortlessly having conversations with relevant people in a way that the boss can actually see happened. 

Chris Beall (21:18):

I can listen to them, I can think about them. I can analyze the targeting, and I can do it all without a lot of help. I can use some primitive product, I don't know, Microsoft Excel or something to do this. So say I do that, here's what I'm going to find, the positive conversations, the ones that, so super conversations that set meetings actually are, the least benefit that I'm going to get is a company from net new conversations. Most of the benefit is going to come from the advertising impact of talking to people. So for every meeting that's said, and if you look at these people can't see these numbers here, but I could probably arrange to see them. Just 

Susan Finch (22:01):

Give us an example. Give us a 

Chris Beall (22:03):

Few. So our, so I'm looking at ConnectAndSell's own numbers here over a period of time of I think three years. So during this time, we generated, our team generated 128 million. So pipeline, by having conversations, that means conversations that led to meetings, and those meetings led to opportunities in the pipeline. And those opportunities turn into all sorts of stuff. Some expire, some are lost and all that. They got to get in the pipeline before you have a chance. So 128 million in the pipeline based on 5,671 opportunities generated from 220,000 conversations. Okay? That's our team. So that sounds pretty good. Those pipeline dollars are being generated and get this number, $4,152 per rep, hour per hour that a rep spends in just one conversation after another, including taking notes, wrapping up, waiting for the conversations. On average, about three minutes and 20 seconds each. It's about $4,000 an hour. 

Chris Beall (23:16):

When I look at what, but what about the negative conversations? What if I throw those in the mix? So I have the ones that set meetings, and then I have the ones where they said, Hey, they're interested or whatever, but they don't take a meeting. But what about all of them? Well, I go from 128 million to 177. Where does that extra, roughly speaking, 50 million of pipeline come from, by the way, that came with an additional four point something million of closed one business. Where did it come from? Came from talking to people who then went to our website. Did they love the website or hate the website? We don't know. All we know is it was better than a Google ad because we were talking with them and they went to the website. Why is it better than a Google ad one targeting? They were on our target list. 

Chris Beall (24:11):

We're not idiots. We put people on our target list that we're targeting. That's why it's called targeting. So it's better targeting than you get from advertising. Conversations are better targeted than advertisements because they can be, right? It's just like they can be. Secondly, there is trust influence. When you have a conversation with somebody and you hold it with any amount of skill and its purpose is to build trust. Now you have a person who trusts somebody at your company actually looking at your website. Now, there's a third thing that happens. If you send them an email, they open it. Why? Because the email says, thank you for our conversation today. Or the really powerful email comes from the boss and says, thank you for speaking with my colleague today. Yes, it's very personal. It's actual gratitude. You talk to one of my peeps, I love you. 

Chris Beall (25:05):

And guess what? That comes with a link to the website. And so now you have a new relationship that's formed. You have an extension of trust over time. Those mature, we all know from all of us market dominance. Guys know, right? That only one 12 of your market is in market right now. 11 twelves is out there in the future. So now how are you going to get 'em in the future to become the present? When the present rolls around, well have a relationship with them, but it's not an abstract relationship. It's concrete. It starts the conversation. And it's not a vacuous relationship. It actually has content because they went to your website. In fact, think about this. When you speak with somebody, the biggest mistake you can make other than blowing the trust part of the conversation, the first seven seconds, seconds is telling them what you're all about. 

Chris Beall (25:59):

Why? Because they'll say, we're all set. Well, when they go to your website during the conversation, your website says what you're all about. So when they say, we're all set, it might not be because they listened to you. You might not have blown it. Your website blew it. Your website was obliged to say what you do. And they look at that and they go, it looks like with connect and saw, they go, oh, it looks like a dial. I don't need no stinking. I already got a dial of some kind. What do I want? This thing? But then, well, then this information comes to them in the form of an email. It says, thank you for the conversation today. It's like, that's different. They actually followed up with, then you talked to them a quarter later. Did they take a meeting? Not necessarily, but they're reminded now. So the ultimate drip advertising campaign doesn't drip content onto somebody in a Chinese water torture fashion. And that was not anything about people. Chinese, it's just a phrase. We'll just say water torture, which is drip, drip, drip. I don't know why we use Drip to say that we're doing something to somebody That's good because it's not good. 

Susan Finch (27:16):

Does not sound good 

Chris Beall (27:18):

In our house. The toilet is dripping on the floor. Oh, so great. I don't know. Why did marketing people choose the word drip? I have no idea. But if we really want to drip some love on somebody and talk to 'em once a quarter, that's the consideration cycle. The replacement cycle for products is three years. The consideration cycle is a quarter. Therefore, we talk to 'em once a quarter. Every time we talk to them, they're not going to just jump in a meeting. We're going to go from 5% to 10% taking meetings. But more and more often they end up visiting our website more and more often. They sign up for our podcast. So that's a kind I wanted to talk about. The money will drive you to do something dumb, do something smart, have fewer people, lots more conversations, and take advantage of the fact that negative conversations drive more pipeline even than meetings. 

Susan Finch (28:18):

I think that's great advice. Getting back to one wrap up point though, I'm going to ask the question again. How, or rephrase it. How do people seeking funding, CEOs seeking funding, help find the VCs that are actually interested in this type of logic rather than just headcounts? 

Chris Beall (28:38):

Oh, it's a tough one right now here, here's the key to funding. Don't need it. 

Susan Finch (28:42):

Yeah. 

Chris Beall (28:43):

The key to funding, really the key to funding is turn on capital efficiency at a very high level early. Except that your growth is not going to be instantaneous. You don't need to pattern match either, unless that's your biz right. Now, the other thing you can do is you can kind of do it like this. This is what I call the slow roll. So you take the money, but you turn on the efficiency immediately anyway. Nobody's going to tell you not to do that. And then it turns out you're generating the conversation. So mix the conversation flow into your board package. This quarter we had this many conversations with decision makers, right? So don't leave it out. Don't let the head count and the stack be what somehow magically did the work, right? Provide that little link in between. That said, we had this many conversations and here's our efficiency metric around them. 

Chris Beall (29:40):

And even better go with an attribution capability that looks at your pipeline starting from day one and point back at the conversations and say, pipeline influenced by conversations that set meetings pipeline influenced by conversations that had positive outcomes. Pipeline influenced by any conversation. Put that in front of your board every quarter or however often you meet six times a year or whatever, and get them accustomed to thinking about capital efficiency and go to market in concrete terms. And after a while, they'll start to get a little okay with the fact that you didn't hire 30 SDRs that you only ended up hiring. Fa. 

Susan Finch (30:25):

Love it. That's great, Chris. Well, we're going to wrap up this conversation because I think we can do a part two at another point. Cause I would like to tackle a few more questions and give some action items to people because a lot of people are new. But I love the way to actually way it's easy for you to say don't need it, but to be able to give a checklist of you might need it if you might need it. If I think that'd be a great follow up episode. 

Chris Beall (30:56):

It would be. And there is an actual program. We have the folks at Partner Tap doing it. So Partner Tap was introduced to me by Helen and it's, this is Cassandra who's at the heart of the Fem Empire, which is the thing that Helen has been doing now. You must have seen it, right? She does these dinners and she gets invited to them by Cassandra. Well, she, intro Helen introduced me to Cassandra. Cassandra said, I'm going to hire 10 reps. I asked her, how many do you have? She said, none. I said, you're seven years in and you're succeeding in this business and you have no reps, 

Susan Finch (31:33):

Right? 

Chris Beall (31:34):

Why are you going to hire 10 reps? Well, I've got to scale the business. I said, okay, so do me a favor. Instead of hiring 10 reps, let's take an intermediate step. You are the rep, right? Yes. Let's get you more meetings. I'm going to introduce you to Cheryl Turner. Cheryl Turner will work with you where you can learn to get more meetings on your own, but she will also set meetings for you, I believe. Feel free to go do a deal with her that where she'll help you. And then you'll have a pattern that you can use for the behavior of the first rep you hire. Then you have a success pattern. So it's not like hire a rep and hope it's hire a rep who is going to do specifically what Cheryl is doing, which is hold conversations, get meetings, and they'll bring you in in order to be the closer. Then you'll wean them over time from being the closer and they'll set meetings for themselves. And then you can hire a second rep. That's great that that's a success program and you can't sort of can't fail. And she said, whoa. I said, you do realize you'll destroy your company if you hire 10 reps. We're going to learn that you don't know how to hire 10 reps. And guess what? I already know that. 

Susan Finch (32:55):

Yep, 

Chris Beall (32:56):

Great. Can't be done. 

Susan Finch (32:58):

Yeah. Scaling up. People think it only means one thing. So of reframe it to the ultimate goals times. You do have to step back and just throw that old plan away. And like you said, all the patterns. 

Chris Beall (33:10):

Yeah, yeah. If you substitute conversations for headcount and you make that your focus every day, how many conversations are we having with whom? And then you start asking what's happening as a result, but not what are we forcing to happen as a result. Exactly. So it's that relaxation in between that says, let's see what's happening from these conversations. 

Susan Finch (33:33):

That's hard for people to do. It is can kind of sit and watch. They just want to keep making it happen. Making it happen. Yeah. 

Chris Beall (33:39):

Yeah. All the forcing. All the forcing only forces one thing to happen. Anxiety. Anyway. Well, thanks so much. It was really fun.