Silicon Valley / SF has gotten incredibly expensive. Rents, salaries, and perhaps most importantly, turnover. I’ve invested in 5 French start-ups. SF costs 2x Paris, fully burdened. It’s crazy.
And sales teams have gotten particularly expensive, because they don’t quite scale the same way engineers do. You can pay great engineers a ton, eventually, because 1000s of folks can use the same software. But you really do need Y reps for every $X00K of new bookings. Sales gets more expensive as you add customers. Engineering generally goes the other way, if you are doing it right.
Why have sales teams gotten so exepnsive in SF? It’s not just salaries and bonuses. Those actually haven’t grown 2x in the past 5 years. But the fully burdened cost probably has grown 2x, because:
- Effective Quota Attainment is falling. As the competition for reps has heated up, reps are getting paid more on lower quotas as a % of the deal. The AEs may not feel it, but they are often taking home 35-40% of the ACV of a deal, vs. a traditional 20% or so in enterprise software.
- Specialization has turned out not to save money. Over the past 5 years, we’ve all learning to specialize in SaaS sales to grow faster. BDRs, SDRs, segmented AEs, more sales ops, more sales engineers, more training. This works — it increases sales for sure. But what most SaaS companies haven’t done is increase quotas to cover the costs of all these specialists. Realistically, quotas need to go up 20-30% to pay for all the help AEs get now. But they haven’t.
- Churn is endemic in the SF Bay Area. The best sales teams really do stay together forever. So do whatever it takes to find a great VP of Sales. But overall, sales churn seems to be at a peak. And churn drives your effective cost per rep way, way up. Churn is dramatically lower outside the SF Bay Area.
- SMB sales reps in Bay Area want to be paid almost like enterprise reps. This is subtle but sort of kills your ability to scale. A seasoned enterprise AE in a SaaS company doing $50k-$100k deals with a $1m+ quota really can have a $200k+ AE. That’s still 20% of the quota attainment, which is scaleable. But an SMB rep may struggle to close $350k a year on $3k deals. But many of them want to be paid like their Big Deal counterparts. It doesn’t work.
Net net: I think in 2018, it’s close to impossible to justify a large sales organization in the Bay Area unless the unique expertise in SF is worth the cost. It may even be impossible to scale much beyond 10 reps in the Bay Area cost effectively with a low ACV.
Self-service, freemium SaaS, apps that are inexpensive — you can start a sales team in SF, and if you are here, you certainly should. It doesn’t really matter what % of ACV you pay your first few reps. But scaling is very hard. Reps are too expensive, the churn is too high, and the numbers just don’t work after the first 5–10 sales reps in SF for low ACV startups.
I think $30k ACV is probably the cut off. Here, you’re edging into a true solution sale. And having an experienced VP of Sales and VP of Marketing that know how to sell and market solutions is important. And having experienced reps (vs. kids fresh out of college) helps a lot. And at $30k ACV, a good rep can probably close $800k a year (some more, some less). That makes competitive Bay Area OTEs attainable and affordable, even with the turnover.
You will likely scale faster and easier tapping into the best, experienced vets in Silicon Valley in SaaS at $30k+ ACV, even with the crazy expense. I’d probably build most of the core team in SF at that price point.
But below that? For sure, hire your first reps in the Bay Area if you are here. But at least after you hire your first sales leader, I’d look to Utah, Phoenix, Atlanta and other markets that still have plenty of software and sales talent for the next batch of reps. These other markets don’t have the same executive bench in enterprise deals. But they have most of the rest of what you need, especially for transactional sales. At a much lower price. With half the turnover rate. Maybe even less.
(Cross-posted @ SaaStr)