Data Shows Why Investors Dislike Brick and Mortar

Jason Lemkin is a seasoned entrepreneur turned venture capitalist (VC) living in Silicon Valley. He runs a very popular blog about software as a service (SaaS) businesses and hosts what is arguably the largest SaaS conference in the world.

In a recent article Mr. Lemkin discusses some of the metrics SaaS companies need to consider when building a successful enterprise. The explicit theme was don’t put a sales team in San Francisco due to costs – which should be obvious to anyone who’s been there lately – but there are a lot of things we can learn from Mr. Lemkin’s remarks if we know where to look.

And none of them are good news for brick and mortar.

We’ve shared our opinion on investor appetite for brick and mortar endeavors before. We know because investors frequently seek our feedback as experts in the space. It’s a blessing and a curse really.

You really should read this for data that explains why investors are less than enthusiastic about brick and mortar, but we’ll paste summary bullets below.

1. Brick and mortar merchants are cheap. Low profit margins – some of which can be blamed on their own incompetence – are not attractive to potential solution providers.
2. Brick and mortar merchants are often dangerously ignorant. This translates to disastrously long sales cycles for budding startups.
3. Brick and mortar merchants need adult supervision. Most products require a services layer to be implemented properly due to points 1 and 2. Services are not scalable and command a 1x multiple vs a 5x multiple for software. That’s not so attractive

Mr. Lemkin draws the same conclusion but in a different manner.

First, Mr. Lemkin goes to demarcate differences between SMB (small, medium business) sales people versus enterprise sales people. Enterprise sales people sell consultatively with annual contracts between $50K and $100K according to Mr. Lemkins example.

A seasoned enterprise [account executive] in a SaaS company doing $50k-$100k deals with a $1M+ quota really can have a $200k+ [account executive salary]

In Mr. Lemkin’s scenario, an account executive is selling between 10 (at $100K annual cost) and 20 (at $50K annual cost) accounts to reach their $1M annual revenue quota. Averaging these numbers get us to 15 deals per year per sales rep adding $1M in topline revenue to the business.

Anyone who has ever sold into the restaurant industry would drool over those numbers. Not only do restaurants rarely spend these amounts on products, they take forever to make the purchase decision.

Think about it this way – there are ~600K US restaurants. After segmentation there are probably 50K enterprise outlets (50+ unit chains). All an investor need do under this scenario is drop $1M at a $5M valuation to hire 5 sales reps that cost $200K/year. Over 3 years those 5 sales reps would have the business running at $15M ARR (annual recurring revenue), meaning the business is now worth at least $75M (5x $15M) but more likely $150M.

An investor would have 15x’d their money in 3 years! 

But obviously this math never plays out or investors would be all over it. It took Olo, a best of breed online ordering provider, 12 years and over $60M (though some of that may have been secondary capital) to reach 40K doors.

Another telling comment was this one:

But an SMB rep may struggle to close $350k a year on $3k deals

We’ve previously identified the upper limit for pricing at $100/mo per store. That makes the $3,000/year target pretty tough to reach in SMB unless you’re selling to multi-location groups, and we know those cycles are entirely too long to placate investors. Here’s a rehashing of those metrics

Note: ACV = annual contract value, or twelve months of revenue.

1. Deals < $2,000 in ACV should close on average within 14 days.

2. Deals < $5,000 in ACV should close on average within 30 days.

3. Deals < $25,000 in ACV should close on average within 90 days.

4. Deals < $100,000 in ACV should close on average within 90-180 days depending on # of stakeholders and gates.

5. Deals > $100,000 in ACV will take on average 3-6 months to close. Of course, some faster, some shorter. But on average.

For those of us who sell into this industry we know how long it can take even to get the decision maker on the line at a single store outlet. At the average monthly price of $100 per store, the sales cycle would need to be a week, which is a really fast turnaround.

Mr. Lemkin concludes with this:

I think $30k ACV is probably the cut off… and at $30k ACV, a good rep can probably close $800k a year (some more, some less).

Doing some math again, $800K annual volume at $30K a pop comes to 26 deals per year, a pretty high rate for brick and mortar industries at that average price point.

All of this is to say that yes, it’s difficult to make the economics tell a story that startups should put sales forces in San Francisco. But it’s even more difficult to make the economics tell the story that brick and mortar merchants are the right customer base to begin with.