Pipeline Segmentation 101: Run Rate vs Big Deals
How Splitting Your Pipeline Can Instantly Improve Predictability
Welcome to Issue 13 of Cyber Building Blocks. Each week, I share one newsletter focused on helping you build a Go To Market engine for your cybersecurity startup.
Not what used to work 20 years ago, but what’s working today. Remember, I’m building side by side with you!
I often hear founders bragging about a specific big deal they just closed, and don’t get me wrong, it’s an exciting win and can be great! But that doesn’t really mean much in terms of scalability and predictability at a startup! You can still have a broken GTM engine even when you win one big deal and it makes the numbers for that quarter look good!
Too often an early startup will close a big deal one quarter and then be very disappointed when their revenue goes down the next quarter!
It often looks like this:
Q1 - $120k of new bookings, Great!
Q2 - $300k additional, Even better!
Q3 - $1M because of a $500k big deal, Incredible!!
Q4 - $800k new bookings…Ouch
Then it can get a little worse because you start Q1 down which can be seasonally slow and then your board is upset that the whole company seems off track with two poor quarters in a row! When really it was just the big deal that skewed the numbers. Especially when that big deal came inbound and you don’t have a repeatable way of finding those big deals consistently.
Many startups let a big deal make their quarterly number look better than it really is! If your average deal size is $60k and you’ve been doing 10 deals a quarter for about $600k and then one quarter you do 11 deals but that extra one is $400k so you jump to $1M that doesn’t mean that your business and pipeline is going to keep scaling based on the $1M number in the coming quarters. It will depend on if you feel confident in getting another big deal next quarter. That’s a big dependency…
This is where things spiral out of control very quickly! The VP of Sales or Founder doesn’t want to let the board down so they commit a big number including a big deal (Or 2…) cause you are speaking to a few others and want to keep the progress… but it doesn’t come through or at least doesn’t come through in that next quarter and you are in a rough spot!
The same thing can happen with your pipeline generation efforts! Many want to maintain 5x quota coverage for active pipeline. So if you plan to close $200k in a quarter you’d want $1M of deals to feel confident that you can hit your target! But if you have 1 deal that represents 50% or $500k of that pipeline that you really only have $500k of run rate deals or 2.5x ($500k/$200k) coverage, and your target is at risk if you can’t win that big deal.
A good rule of thumb is you never want binary deals. Binary meaning if you get the big deal you hit your target, and if you miss that big deal you have no other way of hitting your target. It’s too risky.
Big deals create a false sense of confidence that the business is in a better spot, or scaling quicker than it really is. You need to run your business off your averages, not off your outliers. Big deals are your outliers.
Even if you aren’t at the maturity level where you need to break up your sales teams into Commercial and Enterprise (Seriously call it whatever you’d like, don’t miss the forest through the trees with this analogy!), you should still break up your run rate deals from your big deals.
Quick Definitions:
Run Rate = +/- your average deal size
Big Deal = Another 2x your average deal size
Just a rule of thumb. You can tailor those to your business to make it even more helpful!
Big deals aren’t bad, if you don’t let them distract you from the other side of your business.
In the example above they actually were doing well, even without the big deal! But when they tried to force the business to scale without taking the big deal into account, then it broke the team down and derailed things!
Without the big deal their revenue looked like this:
Q1 - $120k
Q2 - $300k (+167% QoQ)
Q3 - $500k (+67% QoQ)
Q4 - $800k (+60% QoQ)
Still really good from a new bookings perspective!
When looking at your pipeline, forecast, team performance etc. Breaking up the run rate business from the big deal business is a great way to make sure those outliers aren’t covering up any cracks in your GTM engine causing you to start building on a weak foundation!
Even better when you can focus on growing both in parallel, without breaking team morale and confidence. It’s tough, but with the right leadership, it can be done!
Here’s what I’m trying this week: Remember I’m in the trenches building just like you
I spent all week talking with VCs, Founders, and other builders focused on early stage cybersecurity startups at RSA! It’s one of my favorite weeks of the year.
The community and ecosystem of partners, customers, and other startups is one of my favorite parts of building in cyber. As much as each vendor is trying to compete with others, we also are still very collaborative and are constantly sharing best practices!
If you don’t know the other people working in your territory, or your niche of cyber, you should reach out to them and build relationships! You never know when you might need to phone a friend and having that relationship makes that ask much easier!
That’s all for this week’s newsletter,
Keep fighting the good fight!
Konnor
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