The Sales Doctors

Canada's Fastest-Growing Company for 2010 grew big by thinking big

Written by Rick Spence

To explain why the world needs sales compensation software, Dan Shimmerman tells the story of Matt, one telemarketer who knows where his bread gets buttered.

Matt called Shimmerman to pitch a new credit card. Shimmerman listened patiently, but he wasn’t ready to buy. “Oh, don’t worry if you don’t really want it,” said Matt. “Apply for the card and then just cut it in two when you get it.” “What would be the point?” asked Shimmerman. Replied Matt: “I get paid when you fill out the form.”

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In Shimmerman’s experience, business is awash in commission and bonus schemes that reward counterproductive behaviour. And that’s a key reason his company’s software, Varicent SPM, is taking off faster than a telemarketer at closing time. Complicated commission programs that depend on multiple variables — sales, pricing, collections, returns, different regions — are a nightmare that conventional accounting programs can’t handle. Worse, the difficulty of tracking these inputs discourages organizations from analyzing which incentives produce the most results.

In 2004, Shimmerman and Marc Altshuller quit their day jobs at performance-management software developer Clarity Systems and launched their own company with software that cuts through commission complexity. In the first year, Toronto-based Varicent Software Inc. drummed up sales of considerably less than $200,000. In the fiscal year ended Feb. 28, 2010, Varicent had revenue of $25.1 million. That 12,473% growth pace earns it top spot on this year’s PROFIT 100 ranking of Canada’s Fastest-Growing Companies.

But Shimmerman, 38, insists that Varicent is just getting started. He believes Varicent can hit $35 million in sales this year, and $100 million within three years. And big money is buying into Shimmerman’s dream. Last fall, the company raised $35 million in U.S. venture capital in the second-biggest venture-capital deal of the quarter — behind only a little company called Facebook.

What’s more, Shimmerman, who spends a lot of time in Silicon Valley, thinks more Canucks should be thinking this big.

“Canadians are terrific folks with lots of great ideas,” he says. “But I think, in many cases, we put low ceilings on our aspirations. We can aim higher. I think there should be a hundred more Varicents out there. There’s no reason why there shouldn’t be.”

But this is not your standard story of two geeks who get a great idea, start a business in their garage and then conquer the world. For one thing, Shimmerman is an accountant. But as soon as he got his CA designation, he left the accounting business to open a management consultancy. After 18 unsuccessful months, he joined Toronto-based Clarity as one of its first sales reps. His accounting background served him well in pitching enhanced planning and budgeting systems to CFOs: “I turned out to be a samurai when it came to selling software.”

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Shimmerman loved it so much he wanted to help build the business. But his bid to join the executive team was rebuffed; management wanted him in the field selling. That made Shimmerman determined to start his own software business — but he had no idea what to sell. Nonetheless, he arranged to meet Toronto venture capitalist Dennis Bennie to discuss his plans.

One thing Shimmerman had learned in his failed consulting business: you don’t get far by yourself. The day before he met with Bennie, Shimmerman invited a new Clarity employee, Altshuller, to dinner and asked him not only to join his business but also for any thoughts he had on what the new business might do.

Luckily, Altshuller did have an idea. In Fortune magazine, he had noticed an advertorial section from Callidus Software promoting the emerging field of sales performance management. Shimmerman got it right away; as a sales demon, he’d often had problems tracking commissions to make sure he was paid correctly. Here, he thought, was a chance to get in on the ground floor of a niche to professionalize one of business’s last frontiers: sales.

The next morning, Bennie gave the two partners three months to submit a formal proposal. In the end, Bennie decided not to invest; but his initial support galvanized Shimmerman and Altshuller into researching the market, talking to Callidus customers and exploring product-development options. When Bennie turned them down, they were already committed.

Estimating that the partners would need $1 million in capital for product development and marketing, Shimmerman worked his network. Toronto private-equity adviser Ian Rosmarin found a group of investors to put in $1.3 million for half the company, even though Varicent didn’t have a product yet. To Rosmarin, the key was that Shimmerman and Altshuller had dug deep to invest $150,000 each. “That was critical to me,” says Rosmarin. “It showed they didn’t just have the will to win, but a stake in the company. That was blood money.”

Since then, he says, Shimmerman and Altshuller have “never put a foot wrong. They delivered everything they said they would deliver, on time. They never took anything for granted, and they never got complacent. They never talk about the things they’ve accomplished, but about the things they have to do next.”

Working at Clarity by day and for themselves by night, the pair selected a product team that worked out of Altshuller’s basement. Their model called for selling the product before it was ready, and working with clients to stamp out the bugs. By Varicent’s official launch in early 2004, when Shimmerman and Altshuller finally left Clarity, the company had 12 staff. The first paying customer, with the software still in beta, was San Francisco-based Greater Bay Bank. Varicent’s customers were delighted with its caring client service, not realizing that every question and complaint they put to Varicent were part of product development.

What made Varicent different from the competition? Shimmerman says Varicent started out one step ahead of its rivals, who focus mainly on process automation — making incentive pay easier to manage. Leveraging the founders’ experience at Clarity in performance management, Varicent adds value through enhanced analytics. Whether it’s onboarding new salespeople, setting quotas or managing territories, Varicent’s data help clients master outcomes, not just the paper burden. As Shimmerman says, “Let’s stop thinking about how to calculate commissions, and figure out if our plans make sense.”

Over time, the founders found their roles, with Altshuller (executive VP, worldwide field operations) focusing on product management and sales, while Shimmerman (president and CEO) covers strategy, vision, executive leadership and customer “evangelizing.” Shimmerman’s sales pitch is rooted in ROI: Varicent promises clients a 100% payback on their investment in the first year.

Things never go the way you expect, of course. The partners learned early that the mid-sized businesses they originally targeted were not the right market; the sweet spot is big, multinational companies drowning in incompatible data. Today, Varicent’s clients include such names as Waste Management Inc., Robert Half International, Starwood Hotels, Cisco’s Linksys division and Canadian players such as Mitel and Rogers. With exports accounting for 96% of revenue, Varicent now has offices in the U.K., Hong Kong and 16 U.S. states, in addition to three offices in Canada.

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While market success can destabilize many growth companies, Varicent’s financial clout has kept pace. The company raised $4 million through Toronto-based Edgestone Capital Partners in late 2006, $10 million through RBC Ventures in 2007 and $35 million in a deal led by U.S.-based FTV Capital last September. Shimmerman notes proudly that previous investors all participated in each subsequent round.

The FTV deal was designed to bolster Varicent’s balance sheet and fund an array of projects: product development, international expansion and creating an on-demand service for smaller businesses. In explaining why VCs value Varicent so highly, FTV partner Eric Byunn notes that “FTV’s strategic limited partners — many of the world’s largest financial institutions — have a huge corporate pain point in ineffective sales-performance solutions. Varicent emerged at the top of our sector research because its solutions are consistently providing corporations with a measurable impact, driving sales effectiveness, increasing revenues, decreasing costs and improving internal visibility.”

That pain point is real. In Seattle, Brian Parker, director of sales operations for Getty Images, says the stock-photo agency turned to Varicent to relieve incentive indigestion: “We wanted to build more strategic business plans. We wanted to be very agile with sales commissions to keep our people motivated.” Previously, Getty analysts had to comb through 36 different Excel spreadsheets to learn who was making how much money from what — and the potential for mistakes was huge.

Parker says it took days to produce reports that are now done in one click. And with these variables under control, it’s much easier to analyze the results to see if sales incentives are driving the right behaviours: “Instead of spending all my time formatting numbers, I get to spend more time making sense of the numbers.”

No wonder the sales-performance management space is exploding. According to Ventana Research, the market was worth US$4 billion in 2008, and was expected to more than double by the end of 2010. And now that big IT integrators such as Oracle are entering the space, the competition could get furious. But when you ask Shimmerman about competition, he insists it’s Excel — he says 86% of his market uses spreadsheets to manage incentive pay.

Still, when asked about Callidus, the competitor whose Fortune magazine ad sparked his interest, Shimmerman can’t resist a dig: “Their revenues were US$100 million [in fiscal 2007], now they’re $80 million. We’re eating their lunch… They got pretty bad ROI on that advertorial.”

But Callidus and Varicent have one thing in common: neither is making money. Shimmerman points out that Varicent is still gearing up. “We continue to grow at a 60% to 70% clip, and as long as we keep that trajectory going, we can create value in spite of losses,” he says. “Our plan has us turning the corner in 12 to 18 months.”

With break-even looming, Edgestone partner Derek Smyth sees a chance for Varicent to shine. He foresees consolidation in the sales performance management market, and knows Varicent could be an attractive target. Still, he says, “Varicent is executing well enough that you could see them start to consolidate the industry themselves.”

At Edgestone, Smyth says, “We don’t talk [with investee companies] about exits. We really like them to focus on getting to the point where they really know how they’re generating their own cash. Because that’s when you’re totally in control of your own destiny. And Varicent is right there.”

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