Case 001Growth equity and softwareCore
A software sponsor wants to grow a platform-as-a-service business by hiring sales reps. What is the payback on a rep, and how many can the plan afford?
1The situation
Sanchay Cloud sells a platform that mid-sized Indian manufacturers use to run their plant software. Customers sign annual contracts. Gross margin is 75%. The new owner believes growth is limited by sales capacity, not demand, and wants to hire reps.
A fully ramped rep books Rs 1.2 crore of new annual recurring revenue (ARR) a year, Rs 0.1 crore a month. A rep costs Rs 0.4 crore a year in pay and commission, and each rep carries another Rs 0.2 crore a year of managers, pre-sales engineers and marketing spend for leads. New reps ramp from zero to full output in a straight line over six months. The board will let sales hiring burn up to Rs 15 crore of cash in year 1. Ignore churn for now.
2Your task
What is the payback on a rep, stated properly, and how many reps can the year 1 budget carry?
Quick check
A rep's fully loaded cost is repaid by eight months of gross profit at full speed. When does a newly hired rep actually break even in cash?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
A fully ramped rep pays back in 8 months fully loaded, but a new hire breaks even in cash only in month 20. Each rep burns a net Rs 0.28 crore in year 1, so the Rs 15 crore budget carries about 53 reps if all start on day one, adding roughly Rs 50 crore of ARR. The constraint after that is lead flow and hiring quality, not cash.
Step 1What does one rep cost, and what does one rep produce?
Start with a single rep, because the plan is just that rep multiplied. Think of a new branch of a coaching centre: rent and salaries start on day one, students trickle in over the first term, and each student pays a monthly fee. The unit is the rep: Rs 0.6 crore a year of fully loaded cost against Rs 1.2 crore of new ARR once ramped. Using only the Rs 0.4 crore of pay is the first error; the managers, pre-sales engineers and leads exist because the reps exist.
The steady-state CAC paybackCustomer acquisition cost divided by the monthly gross profit the acquired revenue earns. It says how many months of gross profit repay the cost of winning the business. is cost over the monthly gross profit of what the rep sells. Rs 1.2 crore of ARR at 75% margin earns Rs 0.9 crore a year, Rs 0.075 crore a month. Fully loaded, 0.6 over 0.075 is 8 months; on pay alone it would be 5.3. Eight months is a strong number for software, and it is the number in most decks.
Step 2Why does a new hire take far longer than eight months?
Because two delays stack. The rep sells little in the first six months, and every rupee of ARR they sell pays out over the following twelve months, not on the day it is signed. The formula assumes a rep already at full speed and a full year of revenue from each booking; a new hire has neither. By month 12 the rep has booked Rs 0.95 crore of ARR, but the company has collected only Rs 0.32 crore of gross profit from it against Rs 0.6 crore of cost. Cumulative gross profit catches cumulative cost in month 20.
Step 3How many reps can the budget carry?
Year 1 cash burn per hire is cost less the gross profit their bookings earn inside the year: 0.6 less 0.321, or Rs 0.279 crore. Rs 15 crore over Rs 0.279 crore allows about 53 reps hired on day one, adding about Rs 50 crore of ARR by year end. Staggered hiring through the year lowers the burn per head but also the ARR, so the budget buys more heads and less year 1 growth.
| Per rep, Rs crore | Year 1 | Steady state, per year |
|---|---|---|
| New ARR booked | 0.95 | 1.20 |
| Gross profit collected in the year | 0.321 | 0.900 on one year of bookings |
| Fully loaded cost | (0.60) | (0.60) |
| Net cash | (0.279) | positive from year 2 |
Step 4What would you tell the investment committee?
That sales efficiency is good and cash is not the binding limit; people are. Fifty-odd reps in one year means the plan rests on lead flow, manager capacity and whether new reps actually reach Rs 1.2 crore. The diligence asks are the ramp curve of the last twenty hires, quota attainment by cohort, and churn, which this case ignored and which lengthens every payback above. A rep who leaves in month 9 has cost Rs 0.45 crore and left a book that is worth keeping only if those customers renew.
Where candidates lose it
The usual loss is quoting the eight-month payback as the answer and sizing the hiring plan on it. That formula is for a rep already at full speed; the cash a hiring plan consumes depends on the ramp, which pushes breakeven to month 20.
The second miss is costing a rep at salary alone. Managers, pre-sales and marketing scale with the sales team, and leaving them out flatters payback by a third.
What the interviewer asks next
- Annual churn is 10% of ARR. How does that change the payback and the value of a rep's book?
- Half of new reps never reach full productivity. What does that do to the budget?
- Would you rather spend the Rs 15 crore on reps or on cutting price to win larger customers?
Asked at Vista Equity Partners, Generalist, Austin, 2021 (Wall Street Oasis): Questions around how I would grow a platform as a service business. Focused on sales optimization techniques
Company names and figures are illustrative.