An exercise we do often with our portfolio companies is helping them model out their next two years once they've hit early signs of product-market fit, and need to transition from founder-led sales to a repeatable and scalable sales engine. Typically, we see this transition take place around the $500K to $750K ARR mark. There’s no magical number here, but somewhere in that range, two things happen:
Founders start seeing early signs of repeatability in terms of sales messaging and identification of target customers. There’s a sense that if you can get in front of enough target customers and sell with a consistent message, sales will happen. It’s never a perfect sign, but you can directionally feel this.
Once you’re in this $500K-$750K current ARR range, growing 5x+ in the following year requires more than one person’s sales capacity on pipe-gen + closing deals.
Prior to $500K ARR, the operating model is simple: how many engineers do I need to build the product? What’s the associated burn? Do I have enough runway to hit my next milestones? But once you hit this phase of repeatability, the hiring and accordingly, opex hit a different gear.
Okay, so we’re at the $500K mark. What next?:
Let’s say you’re at $500K around the end of Q2-2024, and you expect to end the year at ~$1M of ARR, and want to go to $5M of ARR next year.
That means you need to add $4M of net new ARR in 2025. If you assume a $1M quota per AE (Account Exec = sales reps) and 80% quota attainment, you’ll need $5M of carried quota capacity for the year, and at $1M/AE, that would imply 5 reps worth of ramped AE capacity for the full year.
I am using $1M quota here to illustrate the point with round numbers, but the actual quota depends on your deal sizes + whether you’re selling to SMBs, mid-market or enterprise. And typically your first few AEs might start with a lower quota ($600-800K), which means you’ll need more AEs for the same objective function of $4M of net new ARR.
Likewise, one could argue that 75% attainment against quota is more reasonable to assume.
It takes at least 60 days to hire a new AE, another 30 days for them to join and then +/-90 days to ramp to some level of productivity. Sales cycles have a direct influence on how fast a new rep ramps to full productivity. For enterprise AEs, ramp period to 100% productivity can be as long as 6 months. SMB AEs ramp way faster.
As the above illustrates: a GTM engine doesn’t get turned on overnight. Takes 2-3 months to hire SDRs and AEs; takes another 2-3 months to start seeing early results and know whether you made the right hires; and if you made a hiring mistake, the replacement will again take another 4-6 months before yielding early results. All to say, you need to bake all of this into your thinking to plan out the next 2 years.
So for the last several years, we've been sharing a "Seed to Series A Operating Plan" with our seed stage portfolio founders when they’re at this juncture of needing to transition from founder sales to a scalable sales engine. Today, we're open sourcing this. Below is a google spreadsheet that we hope is useful to seed stage founders outside of our portfolio too. The purpose here isn’t to create a financial/accounting model, hence you won’t find a balance sheet or an income statement here. It’s an operational plan that speaks to the growth plan, the associated hiring, the associated opex and runway.
Some thoughts before you dive in:
There’s no formula to startup life. I’d use this as a framework/template, not a prescription. As an example, in the headcount assumptions, I’ve assumed two founders with no head of engineering and no PM for the first couple of years, because typically one of the founders is the technical leader for the first couple of years and the founder-CEO is the soul of the product and the first PM. But if both founders are non-technical, they might need a head of engineering early on, and some of the team assumptions would have to be adjusted.
Some founders start hiring sales reps earlier, some later but the more important point is that you should transition from purely founder-led to sales rep driven when you feel that the sales process has become somewhat repeatable. If you’ve gotten to $500K and don’t feel that you’re seeing pull from customers in the sales cycle repeatedly, don't hire reps yet. But assuming you are, you’ve gotta get started on building the sales engine.
Quotas depend on deal sizes because the constraint for a sales rep is how many deals they can handle concurrently. I put $800K as the quota assumption in the model, but you can tinker with it based on what’s appropriate for your company.
As an example, if your deal sizes are closer to $25-30K, I would recommend a quota of $600K. Giving AEs an unattainably high quota is only going to lead them to churn. Setting the right quota and on-target-earnings (OTE) is a very important input to you being able to recruit the right AEs and making them feel successful once in the seat, while also getting the optimal performance out of your sales org.
A common mistake I see when founders first start doing this model in their head or an excel sheet: they assume that every rep they hire will work out. Even seasoned sales leaders will tell you that for every 5 reps they hire, 1 doesn’t work out. Your hiring plan and forecasted sales capacity needs to take rep churn into account.
Keeping all of the above in mind, my general recommendation is that founders should at all points have a 24-month sales hiring plan that they revisit every quarter. A 12-month plan isn’t enough because it doesn’t take into account the hiring you have to continue doing at the end of that period to set up the following 12 months for success. Additionally, you need to revisit your plan every 3 months because at the seed stage, your assumptions are constantly getting updated based on market pull or lack thereof, and many other factors (eg: are you getting more pull from SMB, mid-market or enterprise? Need to adjust the spec of the AEs you hire + quota/ramp/deal size assumptions accordingly).
There is a tab in the spreadsheet that speaks to non-payroll expenses (eg: office spend, tech spend on AWS, CRM etc) which I intentionally leave blank when I share this template with founders. Every startup has different needs on these fronts so I typically leave these open as placeholders for them to fill out based on their specific situation. The main goal with this operating model is to illustrate how GTM engines don't get turned on overnight, and the sales hiring you kick off today really starts showing an impact 6 months from today.
Finally, I’ve assumed that the company has raised a pre-seed to build the MVP, raised an additional $4M of seed funding when they were getting started on monetization and then around $1.5M of ARR, the company will raise a Series A and modeled these rounds into the cash forecast. Needless to say, the hiring/opex plan needs to adjust based on size and timing of the seed and Series A.
So without further ado, here you go: Audacious Ventures: Seed to Series A Operating Plan.
Hope founders find it useful!
PS: Many thanks to Hiten Shah and Nick Mehta for battle testing my thoughts here, and providing valuable feedback on the post and the operating model!
