Often we meet founders who have lofty targets for their current or next quarter sales numbers. One of the simplest ways for an investor to understand if a startup is going to meet its targets is to look at its pipeline - especially in B2B and enterprise sales-led SaaS companies.

In SaaS, the sales pipeline typically starts with lead generation, followed by lead qualification, opportunity identification, deal negotiation, and finally, closing the deal.

For the sake of simplicity, for this post we'll assume only 3 steps in the process - lead generation, demo, and closure; and every deal has the same dollar value of $10,000/year. Most companies we meet have conversion rates of leads:demos:closures of 10:5:3 (this can change according to stage & industry). This simply means for every 10 leads generated, the company gives 5 demos (after lead qualification), and closes 3 deals (after successful negotiations).

Assuming a contract value of $10,000/year, how many deals does the company need to close to reach $1mn in revenues? Quite simply, it is Annual Revenue divided by Annual contract value, $1mn divided by $10,000 which is 100 deals.

For the company to close 100 deals, with a conversion rate of demo to closure of 5:3, how many demos does it need to provide? It needs to provide [target deals] x demo/closure, i.e. 100 x 5/3 = 167 demos

For the company to give 167 demos, with a conversion rate of lead to demo 10:5, how many demos does it need to provide? It needs to provide [target demo] x lead/demos, i.e. 167 x 10/5 = 334 leads

Effectively, for every 1 deal to close, the company needs to have 3.3 deals in its pipeline (i.e leads:closures 10/3). This number (3.3) is the pipeline coverage required for the company to meet its targets.

In a sales-led organization, it is imperative to be on top of these numbers as they can make or break your targets. Every rep needs to have targets so they can work accordingly to achieve them. The founders need to check the pipeline periodically to see how is it moving, what part of it is stale.

Further reading: What a Pipeline Coverage Target of >3x Says To Me