Sales Force For Startups

When should startups build sales organizations?

Unlike mature companies, startup companies rarely focus on maximizing profit. In 2019, only 31% of tech startups going public were profitable, up from 15% in 2018.

Startups often focus on maximizing valuation, especially as they enter the growth stage and look forward to an initial public offering or to an acquisition by a private equity firm.

While diverse approaches exist to value startups, these methods often combine profit and revenue metrics. Even though a startup can be unprofitable, it must show its ability to grow its revenue base rapidly and entrepreneurs must then build sales organizations to fuel the growth of their budding corporations.

In 2016, Slack’s CEO Stewart Butterfield declared for example “I think we can get away without having a sales team in any kind of traditional way probably forever” and seemed “committed to bucking the trend by not relying on sales people and only spending on little advertising”.[1] Yet, in its first quarterly filling in 2019, the firm declared that “[it] plans to continue expanding [its] direct sales force, both domestically and internationally (…)” and listed, as many other startups filing for IPO, their sales forces as agents of growth.

Despite the importance of sales forces on startups, the existing sales force management literature has not explored how and whether startups should optimize their sales operations to maximize their valuations. This paper fills this gap and offers a novel analytical model to analyze how sales force decisions by startups should differ from those made by profit maximizing firms.

The study first establishes that a startup’s optimal go-to-market strategy is to adopt a self service selling model (i.e., no sales agent) when the sensitivity of the startup’s valuation to revenue is low (or when it just maximizes profit). In contrast, when the sensitivity of the startup’s valuation to revenue is high, then embracing the sales force route is optimal, as it is the only way to optimally steer the startup’s valuation to its full potential.

Finally, the paper explores how competition impacts startups’ go-to-market decisions. It shows in particular that the intensity of competitive rivalry between two competing startups can lead them to a prisoner’s dilemma, thus showing that sales forces can be both risk factors and agents of growth for startups.