REffP: The right Pace of Scaling

Joel just finished a meeting with his leadership team, Keren, the CTO, and Brad the CRO. The team has
been working on this venture for the last year, relying primarily on the seed funding they got from several
local angel investors, as well as family and friends. They believed they were ready for the next round,
given the consistent results they have been demonstrating, even with a small team. Their sales process
and customer conversion, as well as the very high customer satisfaction, have resulted in an extremely
low churn. As they were getting ready for their final VC pitch, they had to choose at which pace to scale.
The speed affects the size of the sales forces, the investment in digital marketing, and the amount of funds
they need to raise to support that growth. While the VC was trying to convince Joel to raise a significant
round of funding, Joel was hesitant to do that given the number of people he had to on-board and the
uncertainty about their ability to deliver with the same consistency the team has done until now.

The problem. The product.

While working for his family chemical manufacturing business, Joel realized how many Request for
Proposals the firm had to fill on an ongoing basis. While both Joel and Keren were pursuing their MBA,
they devoted their classes to test the viability of the idea to build a Software as a Service platform helping
firms automate that process. When they graduated, they launched REffP, a proposal and knowledge
management software that simplifies the process of responding to Requests for Proposals (RFPs), Request
for Information (RFIs), Due Diligence Questionnaires (DDQs), and Security Questionnaires. The tool aimed
to empower sales, marketing, proposal teams, and subject matter experts to manage company knowledge
and collaborate on client requests. REffP streamlined the way organizations respond to information
requests, helping companies across several industries collaborate more intelligently on a platform that
embodies simplicity and an exceptional user experience. This made for a better overall software
experience that helps deliver the needed results. Finally, REffP allowed its users to manage and segment
their library of RFP and Security Questionnaire content with a customizable structure made up of multiple
mini-libraries, categories, and tags, enabling the user to quickly access and pull answers from the
customer’s library into their projects.

The venture
Keren, who served as VP of R&D for several ventures, decided that it would be easier and cheaper to start
the R&D center in Israel. After building an initial MVP, Joel and Brad started working on selling the product
to small and medium businesses (SMEs). They raised an initial seed round that allowed them to test the
viability of the product and the demand for the product. REffP was moving towards $200K Annual
Recurring Revenues, with a very robust sales process and customer satisfaction. Since the product was a
Software as a Service (SaaS), REffP sold the service for a monthly subscription, with simplified pricing of
$500 per month (after a 3-month free trial).

The firm used multiple channels to acquire customers. The primary channel for customer acquisition was
inside sales reps who called and customers, demonstrated the product, and ushered the customers along
the sales process. Another channel was acquisition via email campaign where customers signed up after
a short webinar about the features and ease of use of the product. The firm also tried a limited digital
campaign using Facebook and Google ads, which was quite effective. The firm is planning to use the
additional funds to drive growth through sales and digital marketing.
Planning the next steps
Based on their current sales representative performance, Joel assumed that he could hire up to 100 sales
people and expect a performance of 5 new customers per month per sales rep. The sales process was long
and started with lead generation and prospecting, until activation. It took a sales rep around seven touch
points (either by email or call) to convince a customer to adopt the product, but the conversion, once the
process began, was entirely consistent and predictable. All new customers received a trial period of 3
months. After that period, 75% continued to be paying customers. Once a customer began paying, only
1% per month stopped using it. Joel knew that hiring more than 100 people would require him to
compromise both the rate at which sales people bring new customers (to probably 4 customers per
month), as well as increase the churn gradually to 1.5% and then 2%. An existing customer also referred
new customers; the rate until now has been 2% of users in each month. Brad was expecting these number
to go down to 1% for the second year. Brad himself was supposed to make two sales a month, and the
firm was expected to hire a strategic sales-rep that was expected to add five new customers a month, but
these were expected to be more strategic.

The firm also used an email marketing campaign. The firm had a list of 150,000 SMBs. Of those who
received the email, 1% signed up for a webinar, and 30% of those who attended the webinar signed up
for the free trial (out of which 75% converted to a paid subscription). The firm also planned to invest in a
digital marketing campaign on Facebook and Google. Brad estimated that it would cost them $10 per click
and around 1% of the clicks would convert into new customers (after a webinar and conversations with a
customer support agent). Here, Joel, was expecting this level of convergence to change once the firm
reached more than $250K spent per month, due to channel saturation.

Based on his experience from earlier ventures, Brad budgeted $250 per month per sales rep for travel and
$1500 for business development for himself and Joel. For G&A, Joel estimated that office and related Rent
costs would be around $1000 per employee per month and the utilities and communication 66% of rent.
These were standard assumptions. Finally, he estimated the professional services of Accounting, Audit
and Legal to have the monthly costs of $700, $250 and $1,000 respectively. He expected the growth to be
50% of the revenue growth in the second year. Finally, he allocated to “others” 20% of total expenses.
Keren outlined the number of software developers she will need over the next 18 months, required to
fulfill the vision of the firm.

SW
Developers 10 12 14 15 15 15 15 15 15 15 15 20 20 20 20 20 20 20

She also needed 2 Quality Assurance engineers and one product manager (all salaries are outlined in the
table below).
Table of Annual Salaries (in USD)

Cost of Salaries
CTO 73,620
Product Manager 84,000
SW Developer 105,000
QA 45,000

CRO 96,000
Inside Sales Reps 80,000
Strategic Sales rep 96,000
Client Success / Account mngr / On- boarding 45,000

CMO 54,000
Campaign Manager 45,000
Data Analyst 45,000

COO 73,776
Chief Product Officer 73,776
Director of finance 60,000
Director of operations 60,000
CEO 250,000

In their model, they also outlined the main assumptions on how these were to grow, outlined in the
table below:

HR - Assumption
Annual Salary Increase (from 2nd year) 3.5%
Number of new clients per Account mngr 300
Number of existing accounts per account mngr 300
Max number of account managers 10
Recruit director of finance when rev 750,000
recruit director of operations when number of employees 20

CEO Salary attributed to Sales and Marketing 50%

CEO Salary attributed to G&A 50%
CPO Salary attributed to sales and marketing 50%
CPO Salary attributed to R&D 50%
The Decision
The critical question for Joel and his team was how much to invest in growth. In particular, how many
salespeople to hire, how much to spend on digital marketing and how much to raise.
Joel was afraid that scaling too slowly will not attract enough customers and will require him to continue
and raise money (and burn cash). He was also afraid that scaling too fast requires him to raise too much
money upfront and would require him to get resources at a pace he and the team are not ready for.
Joel had the first tab of the Excel Spreadsheet with the data about the revenues and cost of the previous
year in front of him as he started building the model for the next 18 months.