EP177: The Problem with Correlation in VC-Funded Companies

Chris and Corey discuss the dangers of correlation in the tech industry and the impact it can have on valuations. Chris explains how the venture capital industry is focused on headcount as a metric for success, leading to inefficient practices among funded companies. This correlation can create a house of cards effect, where the collapse of one company can trigger a chain reaction that affects the entire ecosystem. They also touch on the pre-chasm state of companies and the importance of finding visionary buyers who can provide the necessary funding without relying on rounds of financing. As a sales professional, it's important to understand the broader industry trends that can affect your company's success and plan accordingly. Chris and Corey's insights offer valuable perspectives on the challenges facing tech companies and how to navigate them. Listen to this episode of Market Dominance Guys, "The Problem with Correlation in VC-Funded Companies."

Corey Frank on LinkedIn
Chris Beall on LinkedIn

Branch 49
ConnectAndSell

Full episode transcript below:

(00:21):

Chris and Corey discuss the dangers of correlation in the tech industry and the impact it can have on valuations. Chris explains how the venture capital industry is focused on headcount as a metric for success leading to inefficient practices among funded companies. This correlation can create a house of cards effect where the collapse of one company can trigger a chain reaction that affects the entire ecosystem.

(00:46):

They also touch on the pre-chasm state of companies and the importance of finding visionary buyers who can provide the necessary funding without relying on rounds of financing.

(00:57):

As a sales professional, it's important to understand the broader industry trends that can affect your company's success and plan accordingly.

(01:04):

Chris and Corey's insights offer valuable perspective on the challenges facing tech companies and how to navigate them.

(01:10):

Join us for this episode, the problem with correlation in VC funded companies.

Chris Beall (01:20):

That's it. I mean, in our company, the flow rate that we shoot for meetings attended is about 30 a day, and we have a more precise number. And being precise doesn't help you here by the way. It's just 30 is as good as 29 when you come right down to it, but it's not the same as 36. So, you've got a flow rate of meetings that are happening, and they're happening somehow. So, the question is what's the flow rate of meetings per dollar that you're spending overall on sales and marketing? What is it?

(01:55):

Before you go for revenue and say, "Well, how much revenue am I getting?" First you got to know, "Am I getting in the neighborhood? Am I getting meetings?" Because meetings are that thing that must happen before you have business. And again, very rarely, can I ask somebody? So, hey, what's your flow rate of meetings per day held? Held meetings per day, what is it? And they just go, "Uh. I don't know. Sometimes we have five, sometimes we have sixes." I'd say, "Flow rates aren't about sometimes. Yes, there's variation. It's a flow rate, and you've got to know that that flow rate supports your business plan.

(02:32):

Or say you convert. We convert the fairly small portion of meetings. We have a high flow rate, 30 a day. We have a flow rate now of the next thing which we standardize at ConnectAndSell. It's called the test drive, and it is the next thing, and it's always the next thing. That is, you can have three meetings, but the next thing that's a new kind of thing is always this thing called the test drive. And all test drives are the same. You actually use the product in production, and you have the experience and blah, blah, blah.

(03:05):

Well, we know what the close rate is on test drives. That percent that turn into something. 39% of ours turn into deals. That average $24,200. Got it. That's easy. Okay. Do I know the step before that? What is the percentage conversion of my flow of meetings to my flow of next things?

(03:28):

Ryan talked about something really important which is knowing your cost of acquisition numbers. I think you've got to actually know in addition, the actual elements of acquisition-

Corey Frank (03:38):

Without a doubt.

Chris Beall (03:39):

... And know how that works in the real world. And then, you got to find the levers, and there're probably only one. There's probably one lever because the theory of constraints says there's one constraint. So, you got to find the lever. What is it? More stuff at the top, higher conversion rate, what is it? That takes real thinking. A lot of experiments.

Corey Frank (03:56):

Well, I know our friend, Trish Bertuzzi for The Bridge Group. She just released the latest state of the SDR industry here. And the one on the screen right now, I'd like to get your opinion on, Chris, is what Trish and the folks call quality conversations per rep per day. You talk about going up the funnel and measuring some of the key factors here.

(04:20):

It used to be back in 2014, according to Trish's cohort, that a team, a rep would average eight quality conversations per day. I guess, that's when people seemingly thought that people picked up the phone. And now, today, in 2022 was down 55% to 3.6 per day.

(04:41):

Now, I imagine most of these folks have not heard of ConnectAndSell or Fast Phone numbers or Phone Ready Leads or any of the other optimizing weapons that are out on the market. So, unfortunately, the people who are conducting these type of phone calls and engaging in these type of efforts, man, say a quiet prayer for them every evening because they certainly need it. That is a tough gig, Chris, to do every day, to only talk with 3.6 people a day. Is it not?

Chris Beall (05:14):

Well, it's actually worse than this, which is what's interesting. So, let me read. You have this on the screen. It's really super. I love this chart. This is my favorite chart in the entire world right now because I don't experience it. I just love it.

Corey Frank (05:28):

That's right. Do you know how the movie ends.

Chris Beall (05:30):

I know how another movie ends. So, let me read the paragraph. It says another useful metric is the number of quality conversations QCs per rep per day. We define a QC as... Listen very carefully here. A connect or response where at least one piece of qualifying or disqualifying information is learned. So, if I get an email back from somebody that says, "Hey, this makes no sense to me whatsoever," or "Stop pestering me," or whatever. Anything comes back, that's a response.

(06:03):

So, the emails that come back that you've never spoken with the person, and you now think you have one piece of qualifying or disqualifying information, which is by the way, wholly unreliable because it comes from somebody whose purpose is unknown to you, but their purpose is probably to make you stop sending them emails. So, if you really think about it, am I disqualified for what Corey has to offer because I'm getting tired of being inundated with emails from Corey? Think about that for a moment. That's a nonsense concept. It actually makes no sense. The fact that I respond to being flooded by everybody's emails, including Corey's, and maybe I have the hope that if I send it back an email that says, "Stop sending these," that I can reduce the flood into my box here.

(06:55):

The idea that that's a quality conversation within a sales context in which there's qualifying or disqualifying information that's learned is crazy, but it's in the definition. So, the numbers vastly worse than people think. And if you go to... Let's try this. A QC... I'm going to redefine it, is a connect with a potential customer. Somebody you think has potential where trust is increased as a result of that connect. Now, that number on this chart goes down to zero for most of these SDRs.

Corey Frank (07:31):

Yes.

Chris Beall (07:31):

So, it would have started at whatever the number would have been, and then, it goes to zero for almost all, which means almost all that investment is placed in. Because in the world of B2B, without trust, you don't make any progress. And I'll go back to what Chris Voss's taught us. Seven seconds. So, how can a chart that shows these things happening, almost none of which actually engender trust. How can that talk about the future of your pipeline?

Corey Frank (08:05):

Well, Chris, but I'm sending out a whole bunch of emails in LinkedIn and SMSs. Those are activities as we send from the other chart here that the wonderful team at Bridge Group put together from Trish is we're looking at the median number of activities per day per SDR by type, phone, email, LinkedIn, and SMS. And the total is 104 for all those activities, and only one of these... I think Chris, you would obviously I would lead the witness here, but probably validate kin and gender trust.

Chris Beall (08:38):

Certainly, an email is not a trust building thing. It might lead to a conversation. You can actually stimulate conversations on occasion through an email. I think they call us getting lucky, but I responded to one.

(08:51):

Right now, looking at some situations where if somebody sends me a particular kind of email, I will probably respond to it because I've got something I'm interested in right now. Okay, fine. I won't say what it is. Otherwise, these podcasts last for a while and you'll be sending me emails.

(09:08):

So, activities, it's funny to add them up. It's like saying, "I'm going to add up the following. The number of steps I take in a day, the number of cuts I make with a knife, the number of times I say hello to somebody, and the number of times I blink my eyes and I'm going to add those up and say there's 372 of those things."

Corey Frank (09:31):

Yeah.

Chris Beall (09:31):

There's a rule in the world of adding, of stating what numbers mean which is you cannot add together non-commensurate items. You can't add phone calls to emails, to LinkedIn's, to SMS texts. There's no such thing as an activity. There isn't. I mean, when I run around in the morning, I go out. You know me, I get my 20,000 30,000 steps before breakfast. Is each step in activity? Is it professional? Well, in my brain it is because I'm thinking of things. Do we count those activities? Should I go to the board of directors and say, "Oh, I engaged in so many activities this morning because I was thinking, and I was also writing something down, and then, I typed it with a keystroke on my computer." It doesn't make sense. These things, literally adding them up, you can do it because we can do funny things with numbers. But look at this chart, I think it's cool that the numbers are left justified. If we really think they're real numbers, we write justify them, so the zeros add up, the ones place adds up, the tens place. Remember we were taught that as kids?

Announcer (10:39):

We'll be back in a moment after a quick break.

(10:47):

ConnectAndSell, welcome to the end of dialing as you know it. ConnectAndSell patented technology loads your best sales folks up with eight to 10 times more live qualified conversations every day. And when we say qualified, we're talking about really qualified knowing what kind of cheese they like on their impossible whopper kind of qualified. Learn more at connectandselldotcom.

(11:16):

And we're back with Corey and Chris.

Chris Beall (11:20):

These are clearly names of things. They're not really numbers, but there's only one of them whereby getting lucky, you can succeed 100% of the time, and that's getting somebody on the phone. I was talking to some very nice people who sell for IBM the other day, and we were out in Atlanta, and talking to a great group of people, very sincere, mostly young, but little bit farther along in their careers than you might run into it in a lot of SDRs. Very well-trained, big mission. I won't say what the mission is, but it's got big, big numbers they're going after. Loved it.

(11:57):

And so, we were talking to them about ConnectAndSell. The LinkedIn people were talking about LinkedIn. ZoomInfo was talking about ZoomInfo and so forth and so on. And I said to them, because I was last up, "Hey, here's the deal on B2B. B2B is built on trust, and it's built on trust for a funny reason. Your buyer is afraid for their career. It's not their money. And you should have seen looking around the room with these smart, sophisticated people, how many eyes got big." And then I said, "And this is the shocking part. When you cold call, you succeed 100% of the time. If you're skilled enough, as long as your goal is to get trust. If your goal is to get a sale, to get a meeting or something else, you may fail. But success builds on success, so why not succeed 100% of the time by setting your goal to getting trust and then become a master at getting trust."

Corey Frank (12:54):

Yeah, for sure.

Chris Beall (12:54):

First you have to deserve it, and second, you have to do something skillful to get it, okay? Now, how many of those should you have per day? Now, let's build our funnel from that. So, my view is that the number of trust building conversations a rep should have per day. If they're an SDR is something around 30. Out of those 30 conversations per day, you'll get a flow rate per day of about 10% of those that will flow downstream into meetings. So, that's about three meetings a day. So, your flow rate of three meetings per day is going to run into a attendance rate, a net attendance rate of about two meetings per day for somebody. That immediately tells you what your ratio of SDRs to account executives should be.

(13:45):

If your account executives have got room in their calendar on average for two meetings a day, then, each one of them should be probably paired up with one SDR. The reason they should be paired up is then the SDR could say, "No. I can't recall a single time when somebody told me that meeting with Corey was a waste of their time." Never happened that I recall. So, it improves your ability to close for the meeting because the meeting product includes the person that they're meeting with. So, okay. They're meeting with an expert. The expert's an important person. You want them to look up the expert on LinkedIn. "Oh, Corey is an expert on this," that kind of thing.

(14:25):

So, that tells you immediately what your investment level in SDR should be if you're having an SDR led approach to getting meetings. Now, if you expect your AEs to get one meeting a day, then, it's different. Then your ratio changes. One SDR could serve as four reps-

Corey Frank (14:43):

That's right. Yep.

Chris Beall (14:43):

... Not quite four. You have to be very careful when you do the math. So, it's that kind of thing. You got to start with the number of trust building conversations. My issue... And I love The Bridge Group. You know that I love them. Trish Bertuzzi has always been very kind to me. She wrote a great book, the Sales Development Playbook. And she corrects me every time I golf with her. And she tells me how to park the cart, and how far away... The stuff that I suck at.

(15:12):

So, okay. [inaudible 00:15:14], right? But I see why The Bridge Group chose QC, that definition because it's an extensive definition. You can point at one and say, "See, you got an email back, and you got this data and so forth." And it corresponds to reality. But the reality that we miss is that to analyze correctly. We have to bifurcate the context into those who build trust and those that don't build trust. That's what we really have to do because the eye of the needle that we got to get this camel through is the trust needle. We've got to get that prospeq who's big through the eye of the trust needle.

(15:54):

And sadly, or unsadly, or whatever it happens to be, when we talk with them, we have seven seconds to do that. This is according to Chris Voss not according to me. And he's told us what those seven seconds have to have in them, and why they're in there. And it makes a lot of sense. And we have hundreds of thousands of millions of data points that say, "Yeah. He's probably right."

(16:16):

So, that's what I think is interesting about these times, and we tie it to the whole SVB thing. What's happened is, venture capital likes to put money to work because they got more money than they have time. They prefer that their portfolio companies do things that are the other portfolio companies and all the other portfolio companies because variation doesn't help. That's crazy. You're trying to make a machine-

Corey Frank (16:44):

My playbook, the Vista playbook, thou shall run your SAS model like this. Yep.

Chris Beall (16:48):

Exactly. You want to put money in one end and get something out the other end. So, variability is considered to be not a great thing if you're a VC. So, what's the simplest thing to count? The simplest metric is headcount. Money buys headcount. Headcount produces results. Therefore, things that happen per rep per day, or per rep, per whatever, since you can hire them, you can onboard them, train them, do all this stuff people talk about. And then, eventually, in six months they start actually producing something. You can figure it out then, "Oh, this is just a money problem." And if you pour money in, keep track of the headcount, and then, what the production of the output is, you're probably good. You're probably good but you're not necessarily efficient with regard to not needing as much money because that's not the problem of EC solving. They're solving the problem of what would you do if you had enough money like all the other VC funded companies. That's what you're being compared to.

(17:51):

So, if you want to be more efficient, you might have to choose to change some things, but you might get pushback from your VCs at least during good times because that become, "Well, you're not helping me put money to work."

(18:04):

Same thing by the way, this is not about this go-to market, but visionary deals are like this. So, when you're in the pre-chasm state, which most companies and their founders will never admit that they're in, ask Jeffrey Moore, "How many people you talk to that you know are pre-chasm will raise their hand and say, I'm a pre-chasm."

Corey Frank (18:23):

That's right.

Chris Beall (18:24):

Zero. "Oh, we're post-chasm. We're doing this."

Corey Frank (18:27):

Oh, yeah. Yep.

Chris Beall (18:29):

Like a simple test. Do you sell by reference, or do you sell by persuasion? If it's persuasion, you're pre-chasm. If it's for reference, you're post-chasm. Got it. So, you're usually selling by persuasion, or I'll call it what would they call spray and prey luck. You're getting these folks who are seeking whatever they're seeking. They're all buying for different reasons, and there you are pre chasm. It's like, "Wow, what should I do here?" Well, the temptation is to treat it as post-chasm and to get across the chasm. Just for those of you who haven't read the book. You essentially buy your way into your first true post-chasm market, and you do it by "pricing down," which doesn't mean you reduce your price by the way. It could, but it could mean you provide extra services, you help more, you're nicer, whatever. You smile more and things like that. So, in that post-chasm state, you get all these flows, and you can pay attention to all that kind of stuff.

(19:27):

In the pre-chasm state, you should be paying attention to one thing. And that is, can I get so much money from a visionary buyer? Visionary customer who's seeking competitive advantage that I actually don't need a round of financing to cross the chasm. I just got it from my visionary. ell, no VC on earth is going to encourage you to do that deal. They're going to talk to you about scale. "Oh, that doesn't scale." Well, of course, it doesn't scale. By the way, nor does a single round of financing. It doesn't scale. You pay. It's a chunk of money that goes into a bank like Silicon Valley Bank was, and then, you're burning it off hoping to get to the next round. That's why it's called a burn rate. It's called a build rate. It's called a burn rate because you're burning.

Corey Frank (20:14):

That's right.

Chris Beall (20:15):

This was the point I was making earlier with Ryan about correlation. So, now you've got all these companies doing stuff the same way. They're all doing it inefficiently because that's okay. It's the way to do it is inefficiently, so it can all be done the same way, because to get efficiency, we have to tune to the circumstances.

(20:33):

And so, now, you have this high degree of correlation among these entities that created, and then, they're buying and selling from each other. So, how much of their revenue is fake effectively, or how much of it is contained within the system? And if the answer is a lot, then, for purposes of understanding the fragility of that system, we have to take that revenue out. It's like the Icelandic trade.

(21:01):

I have a dog. You have a cat. I tell you, my dog's worth a billion. You told me, the cat's worth a billion. We each take out loans for a billion dollars. I buy your cat. You buy my dog. Look at us now. We each have 2 billion. It's fantastic, right? So, you get a version of the Icelandic trade that's going on systematically among these companies, and it's not bad. They're not doing it for a bad reason. They're just doing it because overfunded companies are easy to buy from, and tech companies make stuff other tech companies tend to like. So, it's easy to sell to somebody who's flush with money, who's being encouraged by their venture board to spend that money on the stuff that could grow the company. They're easy marks.

Corey Frank (21:43):

Yeah. That's an echo chamber in a lot of ways.

Chris Beall (21:45):

It is. It is. So, now we have the problem of correlation. And correlation is what causes modest sized risks to turn into disasters, collapses, houses of cards. The house of cards, all of the cards are correlated with each other. Here's how we can tell. Take one at the bottom out. That's what correlation looks like from a risk perspective. And some people were talking in an interesting way out there on the internet, Twitter or whatever. It's like, "How could this happen so fast?" Well, because these things always happen that fast. They always happen that fast because what you see is the culmination of something that was building up. It's like an earthquake. You don't see the earthquake for the... I was there in California for the Loma Prieta quake. How long do you think that pressure built up before that big monster went off?

Corey Frank (22:41):

Well, I think our friend, Robert Vera who runs the innovation center here, who cajoled our friend, Ryan Edwards to jump on our podcast. He was saying his thesis was that the Fed was terrified of a meltdown that was triggered by their interest rate increases that were triggered by unrestrained inflation that was triggered by near zero interest rates for years. So, did that happen overnight? It happened slowly at first and then all at once, I think is the phrase goes, right?

Chris Beall (23:12):

Yeah. And I think the situation was even worse in one way. We went through this pandemic thing that went both directions at the same time. So, it boosted some industries, like everything that helped people work at home and all that kind of stuff boosted. It hammered other industries like hospitality, and it really confused some other industries like commercial real estate where in the city centers it got worse, but out in the suburbs it got better. All of the stuff's going on at once. And then, it also created mechanical supply chain disruption because moving stuff from one place to another requires that the people in both places can work. And they have to be able to work in the place where the things are moving from and too. We don't yet have robots moving everything. So, these ships have got to move around, and containers have to be on them, and people have got to be involved in at least operating the equipment that gets the containers off and driving the trucks, and we were short of truck drivers, blah, blah, blah, blah, blah. It goes on and on.

(24:09):

Can you tell as a policy analyst, the inflation that's due to the low-interest rates for a long time? And the inflation as though that's what it is, that's price increases in various things moving around in the economy due to supply chain disruption. I guarantee you nobody could tell the difference between those two. You can tell it conceptually, and then, they feed on each other, so you can't tell which one's being driven by which other one. There's cascade effects. So, what happens? Well, I only have one thing to do with inflation interest rates. Treated as a monetary phenomenon and interest rates. So, okay, we knew one thing for sure. The first time interest rates were raised by the Fed, the tech economy was going to lose a big chunk of its value.

(25:01):

And when you lose a big chunk of value fast, more value goes out immediately because of the fear that all the value is going to go out. It's going to zero. So, as soon as the Fed raised interest rates, the entire world of tech, which is predicated on zero interest rates for its, the valuations as a multiple of revenue went down. How far should it have gone down? Who knows? But it went down 70% or so. So, Silicon Valley Bank as an example, its customers suddenly lost 70% of their value in 24 hours, and that was predictable. That was completely predictable. So, that effect had nothing to do with inflation because what Silicon Valley companies charge for their products is not relevant in the economy. Trust me. It doesn't cause anybody to have to pay more for a grapefruit.