Blog

The pros and cons of channel sales for startups

channel

There are two types of B2B sales: direct and indirect. In the direct sales model the company has one or more sales reps who call on customers, to use the antiquated term, either in person or via video conference. (The latter is far less expensive and can actually be preferred by customers, as it is more time efficient.)

The indirect model means the company uses another party or company to sell its product or services to their customers. The typical term for this model is channel sales. 

What are the pros and cons of channel sales for a startup company?

Pros

First, I urge all startups to study channel sales, as all startups are resource-constrained and channel sales reduces the need to add resources, namely one or more sales people. Sales people are typically compensated by a base salary, incentive payments based on how much they sell – termed meeting or exceeding their quota or sales projection- corporate benefits, and equity. A large additional cost for sales people calling on customers in person is T & E, another antiquated term meaning travel and entertainment. Thus sales people can be very expensive. However, if they meet or exceed their quotas they should be a net benefit to the company.

By selling through another company you incur none of these expenses. Nor do you incur the time and possible cost (advertising, recruiters) of hiring a sales person and the responsibility of managing them.

But the biggest pro for channel sales is that your partner already has customers for your product. The channel partner is already in contact with potential customers for your product by dint of having sold them their own product. Here’s a simple example. Let’s say you have invented a new type of high performance tire for sports cars. You could sell directly to owners of sports cars and keep 100% of the sale. But imagine the difficulty and time and effort needed to reach individual sports car owners. It would be much more efficient to offer your new tire to existing tire companies, who already have customers, such as auto repair shops, tire stores, etc. Or you could target a specific car, like the Corvette and try to sell your tires through Corvette dealers.

Time to first revenue can be dramatically shorter by selling through a channel. Your product may be such a good fit with your channel partners that you enhance the sales of their product! That’s truly a win-win.

Finally you typically pay for performance: if the channel partners sells your product, they get a sales commission. No sales, no commission. However, some channel partners may ask for upfront payment to cover their expenses in taking on your product.

Cons

Number one: where do you find a channel partner? How do you determine that they can successfully sell your product? Way back in the last century when I was in the PC software industry there were established channel partners. They were called VARS for Value Added Resellers. Their value might be training, support or even customization of their partners’ products to make them a better fit for the customer. Today consulting companies often act as channel sales partners. The best way to find channel partners is through the customer discovery process. First you define a market you have evidence (beta tests, focus groups, surveys, successful pilots, etc.) your product will fit. You need to add a question to your customer discovery interview: “What products or services do you or your colleagues purchase from a third party rather than directly from the manufacturer or developer?” and the natural follow up is, “Why? Is that the only way to buy the product? or do they provide some service not provided by the manufacturer, like training?”

If you conduct enough interviews you will be able to compile a list of channel partners or resellers. Say you have invented a new medical device for people with sleep apnea. Rather than attempting to find people who have this medical problem and then selling them to them directly you might well try using a channel partner. But what if the channel partners sales reps don’t like your product? They might find it too complicated to explain. Or maybe it’s so inexpensive that the commission they’d gain is very small compared to other products they sell. Or perhaps they perceive there is too much competition for your product so they don’t make an effort.

After finding and contacting potential resellers you need to perform due diligence on the company. What is their reputation? What do their customers say about their sales reps? Are the well informed and helpful? Or bothersome and don’t know much about the products they sell? How does the company handle problems and complaints? How responsive are they? What other companies do they act as a channel for? What do these companies say about the channel’s performance?

Channel partners aren’t cheap. You may need to give up as much as 50% of your net sales price to incentivize them. You will have to train the reps on how to sell your product. Sales people travel constantly, just scheduling a training session can be a huge headache. Turnover at your channel partner may be a problem, resulting in you constantly having to train new reps.

By using a channel you are giving up the vital link to the customer. How will you get feedback on how your customers are using your product? Their ideas on how to improve the product? Even their ideas on complementary products? You will need to hammer out an agreement with your channel partner on how they will gather and share market intelligence. Negotiating a contract with a reseller may be time consuming and expensive (legal fees). Even if they have a standard contract, you may well need modifications.

In Summary

One way to think about channel partners is that they are your customer: you need to find them, qualify them, convince them that your product should be carried by their sales reps, train the reps, provide support, and of course negotiate a price and contract with them. But I urge startups to explore the channel sales option in enterprise sales. Fielding your own sales force can be very expensive and consume a lot of management resources. On the other hand using in-house reps who can sell via video calls can cut that expense.

The two major variables are cost of customer acquisition and the lifetime value of a customer. You need to model that out for direct and channel sales. The other critical item is access to customer data and feedback. How will you get that if a partner is selling your product?

There’s a lot more to channel sales, but hopefully this short post will get you started in exploring you options in bringing your product to market.

Is “better meetings” an oxymoron?

meeting

I’m probably one of the few people who enjoy meetings. But it’s a very specific type of meeting that I enjoy: mentoring entrepreneurs. What makes these meetings so enjoyable:

  • They are scheduled on demand by the entrepreneur. I dislike so-called “standing meetings” that is meetings on a regular schedule, not meetings at which everyone stands up. The problem with standing meetings is often there is nothing to meet about – but people attend because they should and much time is wasted.
  • The number of attendees is kept small. Typically no more than two or occasionally three entrepreneurs and two or three mentors, at most.
  • Every meeting has an agenda, driven by the entrepreneur. The founder always has a purpose for the meeting: they need help with something, reviewing a deal, learning how to add a partner, etc.
  • Meetings end with an assignment – for the entrepreneurs. The first order of business of these meetings is reviewing the assignment from the previous meeting. The last order of business of each meeting is developing the assignment for the founder. Assignments, homework, to do’s, whatever you want to call them, tend to focus the discussion.
  • Each meetings is recapped by the founder. These summaries get sent to the MIT VMS office, posted on the intranet, and emailed to all participants. Knowing that it’s up to the founder to recap each meeting tends to keep meetings on track. Reviewing the previous meeting summaries helps prepare for the next meeting. Summaries are also helpful to mentors and founders who miss the meeting for one reason or another.
  • Meetings are held in well-equipped conference rooms. The walls are all whiteboards, thank to special paint; every room has a video projector, there are plenty of seats available. (But at MIT, like many institutions with old buildings, it is hard to regulate the room temperature.) All mentor/founder meetings are held in the same building, same floor, though the room may vary.
  • Superb admin support is provided. The MIT Venture Mentoring Service sports well-trained, diplomatic, friendly admin assistants who can do everything from bring coffee to set up a conference call to hook up a laptop to the video projector.
  • Excellent scheduling software helps ensure attendance. VMS uses Qipo to schedule meetings. Email reminders with the objectives/agenda for the meeting are sent the day before. While it’s not encouraged, those who can not attend in person can call in.
  • All meetings are scheduled for 90 minutes flat. While occasionally we might wait for an attendee who is held up for some reason, all meetings end firmly after 90 minutes, no matter when they started.

So here’s your checklist for holding productive meetings! For more about meetings you can read the article The Science of Better Meetings by Steven G. Rogelberg in The Wall Street Journal, subtitled You can’t abolish office gatherings, but you can make them shorter, smaller and smarter with the help of recent research

Here are some valuable points from the article, many based on research:

  • In a survey last year by Salary.com meetings, were cited by 47% of 3,164 workers as the top time waster at the office.
  • Keep meeting attendance small. Jeff Bezos of Amazon famously said that if it takes. more than two pizzas to feed the meeting attendees you have too many  people at the meeting.
  • To widen the scope of meetings without having too many people there you can ask those outside the meeting for their input beforehand and provide a meeting recap afterwards.
  • Sit-down meetings last 35% longer than standing meetings with no gain in effectiveness.
  • Use a count-down clock to make sure your meetings end on time, which is important in not affecting attendees’ schedules.
  • Agendas need to have clear goals and/or key questions to answer.
  • Preparation for meetings increases engagement and sense of purpose.
  • If you have problems getting the meeting agenda together, cancel it!

While not every meeting can be as stimulating as mentor/founder meetings, you can certainly do a lot to ensure that your meetings are both effective and productive. And for a fun way to teach your entire staff how best to conduct meetings, screen the video Meetings Bloody Meetings staring John Cleese of Monty Python fame.

Are you investor ready?

investor

Today is the deadline for applications to MIT’s Demo Day to be held in April. Demo Day gives selected Venture Mentoring Service founders five minutes to pitch to the audience of VCs and angels.

I work almost exclusively with raw startups, whether at MIT VMS, The MIT Sandbox Fund or the MIT Post-Doc Association. Very, very few founders want to rely on bootstrapping, the vast majority have “how do I raise money?” on their agendas early in the mentoring process.

But what I find is that few new founders understand what it means to be investor ready. Here’s a snapshot of what is needed before you decide to apply for investor pitches:

  • Team – most investors I’ve known focus on the team first. And in fact of the team, 90% of the focus is often on the CEO. Does she or he have what it takes to drive a company to a $100 million sales run rate? Or will the investors need to replace the founder with a seasoned veteran as the founder either can’t handle running a company with several hundred employees, or is often the case, is not really interested in doing so. They prefer to build things, as most founders tend to be engineers and engineers build stuff. So you need a CEO who presents well: confident, articulate, and passionate about the business, with a vision for how they will disrupt an existing market or create a new one. While investors don’t expect raw startups to have full teams, it’s tough being a singleton. At minimum you need a partner who complements, not duplicates, the founder’s skill set. Too often I see two engineers, a CEO and a COO – both are makers, not sellers. While it’s usually too soon to attract a proven sales person, early stage startups have to show that the founders can sell. We used to call that “executive sales.” Even when a startup hires sales staff often customers or clients need to be closed by the CEO – they want to know who is running the company they are betting on.  A good two-some is an engineer and an experienced digital marketer. A three-some might add someone with business development experience – building partnerships that turn into channel sales.  Teams whose members know each other previously and/or have worked together tend to be more successful than strangers brought together through networking events.
  • Product – investors want an unfair advantage, as one veteran VC told me. What’s your unfair advantage? These days with so many AI startups that advantage may be an algorithm or patent pending technology.  Secret sauce is hard to manufacture. But differentiation isn’t. How are you different than other products or services targeting the same customer? What is your sustainable competitive advantage? What is remarkable about your venture? The downside of today’s entrepreneurial explosion is that there may be a raft of competitors, no matter what niche you choose. And first mover advantage is not always that. But if you can’t demonstrate – show, don’t tell – a clearcut differentiator that will appeal to customers don’t bother apply to demo days. The stage of your product is also vitally important. The best is that you’ve launched and you not only have traction, but you have viral growth. That’s pretty exceptional and but a few very smart MIT founders have even raised money with just a prototype. But the further along the product lifecycle you are and the closer you are to building a customer base, the better.
  • Market opportunity – far too many founders want to boil the ocean. If you suggest they target a niche to start off they get visibly anxious that they will be leaving millions of customers behind. Quite the contrary, if you can dominate a niche you can then move into adjacent markets. Facebook’s classic rollout started with Harvard, then other Ivy League schools, then other elite colleges then to anyone with a .edu email address and so on. Mark Zuckerberg was careful not to make the mistake Friendster made of having so much demand their servers failed repeatedly. VCs want billion dollar markets and your market needs to be growing, not static nor shrinking. The better you can explain your market dynamics and how your solution will win against competitors or whatever customers are getting by with, the better.

VCs are all about managing and reducing risk, contrary to their popular image as swash buckling risk takers. There are three types of risks: management, technology, and market. To be investor ready you should be able to convince investors that you have significantly reduced risk in all three areas.

There’s one other intangible to being investor ready: capturing investors’ imaginations. While these Ivy League MBA-wielding financial managers pretend to be data-driven, they really go with their gut (and often what their kids say about consumer apps) and then justify their decision to their partners with the numbers. I have found one key way to know that you have captured an investor’s imagination: when they start telling you what new markets your product could conquer. A truly excited investor buys into the vision and will demonstrate that by throwing out ideas on how you can make you product even more successful instead of their default mode of strafing the poor founder with a fusillade of reasons why their venture will never work.

So run through the big three – team, product, and market opportunity – and if you think you have critical mass in all three areas go for it, otherwise get back to work. Don’t worry, investors will always to be out there and interested in a world-class team with a breakthrough product, solving a big problem for millions of customers.

The name game – naming is changing

Midsection Of Woman Holding Name Tag With Text

One of the biggest challenges for startups has been and still is coming up with a name for the venture. Decades ago, when I began my startup ventures with Real Time Audio, which I thought was a great name for a sound reinforcement company, one didn’t have to worry about urls. In fact I was so naive at the time I didn’t even worry about trademarks!

But today’s founders have a lot to worry about when it comes to naming and I have several posts on Mentorphile on the subject.

Sherwin Greenblatt, the head of MIT’s Venture Mentoring Service, always enjoys the monthly meeting time slot when he announces the name changes of VMS ventures. It’s a favorite of mine as well. Sometimes the changes are for the better, other times we collectively scratch are heads and wonder if the new name is actually worse! There’s always a few laughs mixed with groans at the oddball names.

The good news is that according to Joanna Glasner‘s article on TechCrunch Startup names may have passed peak weirdness. She quotes Athol Foden,  president of Brighter Naming, a naming consultancy: “As we reach the edge of strangeness… they’re saying: ‘It’s too weird. I’m uncomfortable.”

Crunch News does an annual survey of startup naming trends (news to me!) and the trend is that startups are choosing simple words that describe their business, including companies like Hitch, an app for long-distance car rides; Duffel, a trip-booking startup named after the popular travel bag; and Coder, a software development platform.

Joanna Glassner lists the common ways founders generate unique names:

  • Creative misspellings
  • Puns
  • Made-up words that sound real
  • Normal-sounding names

For some time now my advice to startups is that if they have some capital to invest they should simply buy a name that meets the common naming rules, that will save them much time, effort, and anguish. And domain squatters have plenty of names to sell. If you can’t afford to buy a name, one method that works for many companies is compounding two simple words; the best example being “face” and “book.”

While it’s true that your name is your brand and .com is the most highly valued domain, both are shifting. Companies change their names or create new parent companies like Snap for SnapChat or Alphabet for Google and other ventures. And even Alphabet eschews the .com domain, Alphabet’s url is abc.xyz.

One of my current mentees is in the midst of name change – I’m looking on, hoping they can improve on their current name, which doesn’t seem hard to do, but it is!

 

The one question you need to ask of job candidates!

uncle meat

I’ve been a fan of Frank Zappa since seeing him play at Michigan State University in the late 1960’s. I immediately went out and bought his firm album – perhaps the first double album released, or second to Dylan’s Blonde on Blonde, depending to who you believe – and many albums since then.

So what does Frank Zappa have to do with recruiting staff to your start up? Plenty! Zappa built and rebuilt the Mothers bands many times over the years as well as putting together other ensembles. He had vast experience judging and recruiting musicians, not only for their talent but for their cultural fit with him and his bandmates. That’s why I love this story about Ian Underwood, who despite or because of being a classically trained musician, still had to audition for Frank. Here’s the story courtesy of the Genius site as recorded live on stage in Copenhagen:

Ian: My name is Ian Underwood and I’m the straight member of the group
(Ha ha ha!)
Suzy: Wowie Zowie!
Ian: One month ago I heard The Mothers of Invention at the theater. I heard them on two occasions, and on the second occasion I went up to Jim Black and I said, “I like your music, and I’d like to come down and play with you.” Two days later I came up to the recording session, and Frank Zappa was sitting in the control room. I walked up and said, “How do you do? My name is Ian Underwood and I like your music and I’d like to play with your group.” Frank Zappa says, “What can you do that’s fantastic?” I said, “I can play alto saxophone and piano.” He said, “All right, whip it out.”

I was taught by the VCs never settle when hiring; A players hire A players, but B players tend to hire C players as they feel threatened by A players, and C players, of course, hire D players in downward spiral of mediocrity. As I’ve said elsewhere, hire slowly, fire quickly.

So what’s to learn from Ian’s story?

  • Ask your candidates to show you, not tell you, why you should hire them. Giving them a problem to solve – the HBS case method – is a great way to do this.
  • Give the candidate a chance to show off their talent – notice Frank asks the question What can you do that’s fantastic?  rather than telling Ian to play a piece of difficult music. What the candidate chooses to do or show gives you real insight which you don’t get by being more directive.
  • Frank wants and needs the best. That’s why the “fantastic” – you should be as demanding as Frank and seek out the fantastic as he did

 

 

Has all the low hanging fruit been plucked?

unicornsIf you believe The New York Times article The Next Wave of ‘Unicorn’ Start-Ups – Uber and Airbnb were part of an early generation of tech start-ups that quickly reached $1 billion in value. The up-and-coming generation is looking very different.

The author Erin Griffith, seem to think so:

… the easy opportunities for disrupting old-line industries are drying up. Now, many of the up-and-coming start-ups that may become the next unicorns have names like Benchling and Blend. And they largely focus on software for specific industries like farms, banks and life sciences companies.

But that’s not just her opinion; it is based on an analysis for The New York Times by
CB Insights, a firm that tracks venture capital and start-ups. CB Insights used a variety of data — including financial health and the strength and size of the market a company serves — to identify 50 start-ups that may be on a path to achieving a $1 billion valuation (though there is no guarantee they will get there).

For you entrepreneurs that are looking for the next industry to disrupt, here’s the CB Insights’ list of 50 startups that may become the next billion-dollar valuation unicorns. You might want to stop reading here and figure out which one to emulate!

For those of you with a bit more patience, here’s a bit more on the subject of unicorns. The number of companies with $1 billion market caps – unicorns – has gone from 131 in 2015 to 315 today!

So where are the next wave of unicorns coming from?

… a new class of software start-ups as different industries adopt more technology. Mr. Green, the venture capitalist, said it’s become clear that software aimed at niche sectors offers larger opportunities than previously expected.

“Health care, automotive, retail, consumer packaged goods, advanced manufacturing companies — they’re all trying to figure out how technology helps reduce costs or how technology is going to help them build their next business model,” said Mr. Sanwal of CB Insights.

This jibes with my experience as a mentor. I  haven’t seen any startups attempting to compete with AirBnB, Uber, or Pinterest. But I have seen startups targeting farming, for instance. Aside from finding new industries to disrupt, like farming, there’s also the “picks and shovels” startups, those companies providing services to today’s unicorns.

The rise of companies like Uber and Airbnb has created its own mini-economy of start-ups.

One of those is Checkr, which was founded in 2014 by Daniel Yanisse and Jonathan Perichon, who worked as software engineers at Deliv, a delivery start-up. Both had become frustrated at the slow-moving background checks for the delivery drivers they wanted to hire for Deliv, so they created their own business to expedite the process.

Now Checkr works with Uber, Lyft and Instacart. It has also added other types of customers like the insurance company Allstate.

The term “picks and shovels” refers to the California gold rush, where smart merchants sold picks, shovels, and dungarees to miners, rather than attempting to mine for gold themselves.

The megatrend that the article skips over is the rise of AI – the new electricity, and the blockchain/crypto revolution. I’ve been waiting since 1985 for the rise of AI! That’s when I joined Addison-Wesley Publishing Company, as General Manager of their Educational Software Division. My colleague, Bill Gruener, had built the best computer science list in the publishing world. I was reading books on AI, in particular what were called expert systems, by computer scientists like Patrick Winston. In fact, it was reading those AI books, that took about a year to go through the python of the A-W copy editing, proof reading, typesetting, printing, and distribution to reach readers that gave me an idea for a startup: Why not enable computer scientists like Winston to publish their books on computer science online, so they wouldn’t be out of date by the time A-W brought them to market? Unfortunately in those days the Internet was not available for commercial use – it was restricted to academics (and the military). Our only options for online publishing were CompuServe, AOL, and Prodigy. After studying them all and seeing if there was an alternative we decided that my idea was just too far ahead of its time – which has been the problem with many of my startup ideas!

But I’m far from convinced that all the low hanging fruit has been plucked. I believe applying AI and/or blockchain technology can totally disrupt large extant businesses like banking. So while I would encourage any would-be founder to study the CB Insights list for ideas, I would also encourage those with computer science educations to also study how some of that low-hanging fruit could still be pluck by standing on the AI or blockchain ladders.

Quora – a great resource for founders!

quora

If you aren’t familiar with Quora you should be. In their words “Quora is a place to gain and share knowledge. It’s a platform to ask questions and connect with people who contribute unique insights and quality answers.” But the reason I highly recommend it to founders is that there are many founders, technologists, and even investors who answer questions. Often there are even multiple answers to a question, providing valuable perspective.  I believe the reason Quora has so many users from the startup/tech community is that is the founders came from the Silicon Valley community and they started the venture with their own community  – a good lesson for founders. Quora is sort of a Wikipedia for Q & A.

Quora was founded in 2009, so it’s in its 10th year of operations – quite an achievement in my book! You can answer as well as ask questions. Quora provides a feed based on the topics you have searched which is quite useful if you need find further information on your question.

The one weakness I find is that there is virtually no About or Help to be found on the site! It has gotten very complex over the years, adding features like followers, sharing links, upvoting answers, sharing answers, etc. However, if you click on the Ask Question of Link the pop up window provides some guidance: Start your questions with “What”, “How”, Why” etc. and gives you the option of adding a link.

If you click on an answer you will find related questions, which is a very useful feature.

But I realized I could use Quora to find out how to use Quora! Here’s the first of a very helpful 3-part answer:

1. Quora works by having the community ask and answer questions. When you want to know more about something, Quora delivers you answers and content from people who know the answer – like real doctors, economists, screenwriters, police officers, and military veterans.

You can learn more by following these links:

There are dozens of questions and answers about how to  best use Quora, which I admit I have not delved into.

Here’s a brief story about how Quora was useful to me. Working for MIT Sandbox I had a mentoring session where the issue of a founder’s agreement came up. Surprisingly Google and startup books were unhelpful. But searching Quora for founders agreement lead me to multiple highly useful answers, which I passed on to Sandbox.

If you aren’t using Quora you are missing out on a wellspring of great information on starting and running a new venture and many other topics as well.