It’s a paradox, but early sales success in a startup can kill its chances of becoming a large successful company. The cause is often sales and marketing execs who’ve become too comfortable with an initial sales model and panic at the first sign of a Pivot. As a result they block new iterations of the business model that might take the company to the next level.
Fairchild
As I was reading a history of the startup years of Fairchild Semiconductor, I realized that a problem I thought was new – sales as an obstacle to Pivots – had occurred 50 years ago at the dawn of what would become Silicon Valley.
Fairchild, the first successful semiconductor company in the valley, was founded on two technical innovations: manufacturing transistors out of Silicon instead of the then conventional Germanium, and using a diffusion manufacturing process which enabled the production of silicon mesa transistors in batches on assembly line. (While this might sound like Greek to you, it was a revolution.)
Early on, the young company made a dramatic technical pivot when it discovered a way to build silicon planar transistors that dramatically improved reliability. (This was an even bigger revolution.) This increased reliability qualified Fairchild’s transistors for military weapons systems (airborne electronics, missile guidance systems, etc.) With orders from military subcontractors arming the cold war, Fairchild’s sales skyrocketed from $500K in 1958 to $7M in 1959 to $21M in 1960.
By the end of 1960, Fairchild was at the top of its game. In less than three years from the day it started, the company had pivoted its technology process, sales had done a masterful job of Customer Discovery and had found a sweet spot in the market and its fabrication plants were busy turning out as many transistors and diodes as they could make.
It was when engineering Pivoted again. And this time sales revolted.
The Revolution Will Not Be Televised
When Fairchild engineers realized that its planar process of manufacturing individual transistors could now be connected together on a single piece of silicon, the Integrated Circuit was born. Engineering thought this could dramatically change the way electronic systems were built, but the head of sales tried to kill the Integrated Circuit program, loudly and vociferously. Engineering was confused, why didn’t the Fairchild salesforce want a revolutionary new product line?
Over My Dead Body
From the point of view of the sales organization this new family of integrated circuits were a major distraction. The Fairchild sales team was on a roll executing a known business model – selling planar diodes and transistors into an existing market. In the transistor market, the problem was known, the customer was known and the basis of competition was known (technical features, price and delivery schedule.)
This meant that a high testosterone sales team that was busy “executing” as order takers and deal makers had to put on a different hat and become educators and consultative engineers. No way.
You Get What You Incent
What the engineers also didn’t know is that the head of Sales of Fairchild had cut a great deal on his compensation package. He was paid 1% of gross sales. While this made sense in the first few years when Fairchild was a startup, now it had unintended consequences. His salesmen were also compensated on a commission basis. Why would they want a product they had to force customers to take when they had existing products that were making them rich?
The VP of sales’ incentives led him to stifle any innovation that got in the way of selling as much of the current technology as he could – even if it meant killing the future of the company. Luckily for Fairchild and the future of the semiconductor and computer business, he quit when his compensation plan was changed.
The Land of the Living Dead
I see this same pattern in early stage startups. Early sales look fine, but often plateau. Engineering comes into a staff meeting with several innovative ideas and the head of sales and/or marketing shoot them down with the cry of “It will kill our current sales.”
The irony is that “killing our current sales” is often what you need to do. Most startups don’t fail outright, they end up in “the land of living dead” where sales are consistently just OK but never breakout into a profitable and scalable company. This is usually due to a failure of the CEO and board in forcing the entire organization to Pivot. The goal of a scalable startup isn’t optimizing the comp plan for the sales team but optimizing the long-term outcome of the company. At times they will conflict. And startup CEO’s need a way to move everyone out of their comfort zone to the bigger prize.
Burn The Boats
In 1519 Hernando Cortes landed in the Yucatan peninsula to conquer the Aztec Empire and bring their treasure back to Spain. His small army arrived in 11 boats. As they landed Cortes solved the problem of getting his team focused on what was ahead of them – he ordered them to burn the boats they came in. Now the only way home was to succeed in their new venture or die.
Pivots that involve radical changes to the business model may at times require burning the boats at the shore.
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Every chip company in Silicon Valley is descended from Fairchild.
Lessons Learned
- Sales organizations may get too comfortable to early.
- Sales execs execute to their compensation plans.
- Pivots are not subject to a vote in the exec staff meeting.
- CEO’s and their boards make the Pivot decisions.
- To force a Pivot burn the boats at the shore.
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