The Fallacy of Channels: Startups Beware

by Mark Suster on February 23, 2010

This is part of my ongoing series on startup advice but also filed under my sales & marketing posts.

TV Remote ControlNo advice I give will ever apply to 100% of companies, 100% of startups or even 100% of tech startups.  I just want to state that up front because while I believe that this post will apply to most startup technology companies out there, I’m sure there will be exceptions.  By all means light up my comments sections with any cases you believe where this advice doesn’t apply.

Let me start by saying that most channel relationships don’t work.  Period.  (Full Stop for you Brits.)  I’ve seen way too many startups spend all their energy getting channel deals done only to find out that they don’t produce ANY revenue.  Yet startups continue to pour tons of energy into a relationship that with the current structure will never work.  This post is dedicated to explaining why channel relationships suffer and how you can improve them.

A Channel Love Story

You’ve got the perfect product.  You’ve invested $1 million in building the perfect application the meet a large market need.  The only problem is that you can’t afford all of these expensive direct sales reps to go and sell it.  Nevermind.  There are these great big companies that have large sales departments looking to supplement their existing products so when they’re with clients they can increase their average order size.  Sort of amortizing the costs of their sales reps over more products.

Channel partners come in multiple flavors.  The favorite of many Silicon Valley startups is the Big Tech Co distrubution deal where you get to how off how effective your biz dev capabilities are.  Ink some deals with Salesforce.com, Intuit, Google, eBay, Verizon, etc. and you’re ready for your big round of VC investment to come in.  Or if you’re not planning to raise money you’re ready for the profits to roll in.

Or there’s the more old school deals with VARs (value added resellers) or consulting companies.  Here they’re already carrying a bag with products from many vendors so while there at the customer they just have to mention your product and budda bing.  It’s a perfect love story.  I got the brains, you got the looks, let’s make lots of money.

Except that most of the these deals end up going in the PR waste bucket.  Great inches eked out on tech blogs or industry rags.  End of story.

What Went Wrong?

Here’s the problem.  If you haven’t already sold enough of your product directly to have enough volume to satisfy your channel partner he/she simply won’t end up pushing it – no matter how excited their MBA adorned biz dev guy was when he inked your deal.

Imagine this.  You decide to go out and hire a sales rep.  He’s senior and used to earning $125k basic and $125k bonus.  Because you’re a startup he cuts you a deal (these sales guys are so good at this ;-) to work for only $120k basic in exchange for some equity [no, I'm not sales person bashing - I think sales reps are the lifeblood of any company - I'm just offering my realistic sense of a sales person's salary negotiation strategy!].

So he decides to work for you without a guaranteed draw (which means his pipeline where he’s coming from wasn’t strong) and he hits the road selling your product.  And because it’s a nascent market, an evangelical sale and you have very little sales today the lead times to sell are longer than he’s used to.  The price points are not as high as your beautiful Excel spreadsheet had forecasted when you raised your seed capital.  So 3-6 month’s in your sales rep is complaining she’s not going to hit her numbers and earn her expected commission.  But at least you gave her a base so she’ll gladly bank that as she looks for her next job.

OK, I’m being harsh for emphasis but the reality isn’t far off of this.  People need to feed their families.  Channel partners are no different.  You think that Salesforce.com rep with a $1.2 million sales quota and the exact knowledge of how to sell salesforce automation tools is going to sell your dinky product that is unproven?  Heck, they can barely figure out how to sell all of the other Salesforce.com internal products let alone your product where they have to explain to their client that it isn’t part of his/her company.

People sell what they know how to sell to hit their quotas.  If your stuff flies off of the shelf then they’ll sell it all day long.  If it doesn’t they’ll soon forget what your product even does.  The sales market is as pure capitalism as it gets.  And your product isn’t going to fly off of the shelf.  Just do the math.  If they have $1.2 million quota to sell and your product sells for $20,000 / year (or even $100k / year. even $200k) – how much of it would they need to move in order to get their commission checks?  Don’t forget that when they sell their own products they get 100% margin.  On yours it’s at best 50/50.

So Should I Avoid Channels at all Costs When I’m a Startup?

No.  Not necessarily.  But here are my suggestions:

1. Limit your number of sales channel partners.  They will not sell on their own – they require even more training and nurturing than your in-house sales reps would

2. You still need to sell yourself, your channel partners fulfill the order.  What?  That’s crazy?  Then what’s the point of having them?  Well, I will tell you first off that in any sales channel relationship you need to sell the product before your partner does.  If you have a hard time selling they will have a harder time.  Channel partners will put the effort into training their people, developing sales collateral, bonusing their reps and moving other products off of their price list only when they know it’s dead easy to sell your product.

But channel partners give you huge credibility.  Imagine your visiting IBM and telling them to buy your product.  It sure would be easier if you announce Intuit as your channel partner and Intuit can actually sign the master services agreement and act as the single throat to choke when the order is signed.  Also, many businesses scale more cost effectively through channel partners.  So putting them in place now isn’t going to necessarily help you sell more products in the first year or two but once you’ve cracked the market then your partner will be ready / able to ramp up sales.

Also, channel partners are often your best potential acquirers and let’s be honest – most companies end up selling rather than IPO’ing these days.

So remember that you need to sell your product.  You need to market your product.  You need to stimulate demand.  Then hand the order over to your channel partner to “close” the deal.  P.S. Never let them actually close.  Don’t let anyone between you and a signed order.

3. Your partner needs to “earn” - Resist your temptation to be stingy.  ”But I did all the work!  Why should I share huge margin with my partners?  I’ll share it when they get off their arse and start selling!”  That’s missing the point.  You’re investing in your channel partners’ success in the early years so that they’re motivated in your scaling years.  That’s going to cost you margin.  It’s the definition of “investment.”

Margin deals can be all over the map.  My starting point mentally is about 30% for the channel partner.  You can get away with 25% if they’re not doing much.  You should be willing to go up to 50% if they play a significant role in the sales & marketing.  Also, another effective strategy is for you to take most (75-80%) of the sales margin but give them all of the service revenue (but then they actually have to do much of the implementation or servicing).  If anybody thinks these percentages are off please weigh in in the comments section.

4. You need channel resources – Most tech companies realize that they need Biz Dev resources to get lots of deals.  And frankly there’s lots of people running around wanting to be a Biz Dev person.  It’s a sexy title when you can’t design products, program  computers or sell! [yes, I'm joking. I love Biz Dev people - no hate comments, please ;-) ]

But where many startups under invest is in “channel managers.”  These are people whose job it is to manage the channel partners you do sign.  They need lots of love and attention.  They need to constantly be reminded of your company (they are by nature promiscuous).  You need to stay top of mind.  You need to go beyond their biz dev person and get to know actual sales reps, sales engineers and professional services staff.  They’re the ones who can help you identify customers that have a need for your product.  You then tip off your sales rep to focus on the deal and the channel partner gets their commission.  Everyone is happy.

Channel managers create channel partner specific marketing materials.  They help prospect deals together.  They understand the channel partner’s own product weakness and how your product helps them sell more of their core product (a sure recipe for you to get more sales).  They take the sales reps and extended staff out for drinks to remind them of what you do so you’re always top of mind.  They work on joint spiff programs with the channel partner. They are your lifeblood.  Know them. Hire them.  Without them you have great press.  Nothing more.

In summary I say that channels can be the lifeblood of startups.  In a world where we all raise less money we need to find more capital efficient ways of going to market.  But 80% of startups fail the channel test.  They understand how to ink the deal but not what makes their channel partner tick.  They end up being penny wise, pound foolish.  They blame their partners for not selling better rather than recognize the channel parter for what it is.

And I promise you.  If you start to make your channel partner successful – it will pay huge dividends when your business is ready to seriously hit that “j curve” you promised your investors.

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  • David
    Great article. We founded our mobile content company 3 years ago and wasted the first 18 months on trying to secure channel deals with carriers and big content aggregators.Same with expensive biz dev 'experts'. We spent a lot of money and equally important time chasing these deals.
    We finally saw the light , cut down the biz dev people and focused on taking our product direct to our target users.
    That single decision saved the company.Theres no way we would have made it sticking to the original startup plan.
    We now have biz dev people back and are producing good solid deals,but if you have a product that you can sell direct to the target customer base then do it and figure out how channel deals etc can help you grow.Selling B2C costs money but in our case it was less than trying go after deals with the big guys.
    Finally be prepared to be very disappointed with the results of some these deals.When you sign one, it feels like you have really met a milestone,but unless you and your product are red hot the channel partner will not be banging your drum right off the bat.
  • mschvimmer
    This was a great post. Too often channel is misunderstood. One area I would focus on from the VAR standpoint is how to monetize the offering. VARs are typically used to getting a percentage of revenue based on the perpetual license sale plus the implementation fees. Some may even provide support and handle upgrades in subsequent years. When transitioning to SaaS, suddently implementation can be greatly reduced and upgrade revenue simply goes away. Usually the license sale was done at low margin to get to the more lucrative services business. So with SaaS, the traditional VAR needs to be convinced that they can still earn a healthy return. It's a heavy investment to get this transition started and frankly, many traditional VARs will be unable to make it. So with that said, I agree on the white whale allure of channels but in order to make a business of that you either need a) good direct sales momentum to prove the market and/or b) hungry VARs who see the risk to the traditional business model and are willing to be early adopters.
  • Hi Mark - Good post. I've worked with technology channels (and start-ups) most of my life. Channels can be extraordinarily beneficial to a company if you understand them and their business model - and you have the proper expectations. There are also lots of different channels and one size does not fit all.

    For the value-add channel, generating services revenue, can be as important, or more important, than generating product revenue. Just like your end-user customer, you must understand your channel's needs and pain. A start-up who does not offer a product or channel program that addresses the needs of the entire value chain will struggle to succeed. Priming the channel - having sales ready to go to - can help channel partners see early success. Until they can actually make money with your product, they won't support it - and for a startup, nobody will have the same passion as you do.

    Building an effective channel takes time and money. I've never seen a startup do better than 25 partners in a year and a good portion of those 25 never make a sale. Start-ups should plan on churn, ongoing recruitment, training and support. And building a channel is not necessarily less expensive then selling direct. Sure your not paying for expensive direct sales staff, but if you do the "channel math" you still have recruitment, training, marketing and a reduced margin.

    Over time, a good channel can be an efficient way to sell, deliver and/or deploy your product or service, but startups should never forget that it is their responsibility to drive sales and that a channel requires ongoing care and feeding to grow and thrive.
  • joehenry
    Well said Mark

    I/We completely agree with you. We see channel being actively touted in Scotland as an alternative to developing sales and marketing capabilities internal. It's suicidal - because what they don't understand is the investment in generating demand for the channel to satisfy.

    It's a pernicious myth for most start ups - peddled by people that don't really understand how a channel relationship works.

    I wonder if some of you guys would be interested in looking at and lending your thoughts to another issue that we have in Scotland.

    We cannot create large tech companies . Why - because of a lack of understanding and investment in sales and marketing skills. The people that have contributed to this post will get this in one. But here in Scotland - our Enterprise Development Agencies, Investors, Legal Advisers and University Commercialisation teams know nothing about it. The result - no great tech businesses.

    Please have a look at this if you have 10mins:

    http://www.planys.com/blog.html

    It's a short paper called - 'Somehow a Miracle Happens'.

    I would be fascinated to see whether or not you guys in the US see the same problems and issues - and what you think might be done.

    By the way - the link to this post was sent to us by a US based member of the GlobalScot network in response to a blog that I was making on exactly the same subject - the Myth of Channel Marketing for early stage businesses.

    I can tell you - it is a great relief to see that I am not the only one that recognises these problems. I thought I was going mad!

    Very Best Regards to All

    Joe
  • I think the channel partners can offer realistic and practical advice to improve the products as well. These are the people close to the customers, and able to feel the market pulse.
  • First, thanks for a great post - I have been looking for a post like this for a while. It is such a difficult thing to get right, everyone tries it, most people mostly fail to nail it and not enough has been written about how to get it right. I'm new here and will be coming back, so thank you.

    "Full Stop for you Brits" ouch! Why is it harder over here? Is it because channel strategy is less developed/people have less experience, size of market/opportunity or something else. I had a quick look at your grp website - is this from your experience with lastminute?
  • josburger
    Henry, I agree that Europe is more challenging. Quite often you must take a country by country approach. I have build channels in the UK, Germany, France, Italy and a few smaller countries. I learned the hard way that there is not one single model. What really helps is recruiting local channel specialists, but I have to say that it is a rare breed. Busdev guys you can find everywhere, but what you really need is a sales guy with busdev capabilities in channel sales.
    BTW. I still see US companies making the same mistake again and again: setting up a base in the UK and then trying to expand in Europe from the UK. It ends with a a strong base in the UK and hardly any sales in other European countries. Going local is the only way. That is quite an effort, but if done right it really pays off.
  • OSU_Matt
    Very interesting post Mark, and I really enjoy all the insightful comments by the community here. I am currently interning at a VC firm in town that invests mainly in early stage companies and it is amazing how many companies are struggling with their distribution/marketing strategy. As a few of the other commentors had mentioned, learning sales is often looked down upon (at least compared to more exciting either tech or finance positions), and in my desire to hopefully someday run a successful start-up am curous if anyone has any other resources/books focusing more on this subject. I have read the Innovator's Dilemma, a few of Guy Kawasaki's books, and am in process of finishing Crossing the Chasm, but always open for more suggestions. Currently all by roles have been in financial capacities, so maybe the best answer is to get some sort of sales experience, but just curious to any suggestions from all the more experiencd members here. Thanks.
  • philsugar
    Looking at my shelf in no order: The Sandler Rules, Getting to Yes, Instant Rapport, Solution Selling, Strategic Selling, Power Base Selling, Navigating the Partnership Maze, How to be a Rainmaker, Close the Deal, Getting to VITO, You Can't Learn how to ride a bike at a Seminar.

    I think the thing that puts people off is that in every single one of these books if you use the techniques crudely you will come off as an ass.

    However, if you read them and reflect on them and don't try to "use a technique" on anybody, it will put how you sell much more into a framework, and you'll understand what you're doing not just fumble around.

    I'll give one example: "The take-away" if you've built a rapport, and clearly defined the value proposition, understand the pain you are solving, and they have budget, there are some people that the more you push the more they pull. The "take-away" basically is a you saying....hey I don't think we're right for each other right now. If you're at the right place the person will now take your side.

    Now is this a "technique"? Yeah, I guess so, but when you think about it, its really what you should do....if there is something you've missed they'll tell you, if its really a no you're a hell better off knowing that, it takes away the maybe. (Maybe is the ultimate killer in sales.....remember Yes is great, no is fine, maybe SUCKS)

    Edit: You know looking at the list and seeing your question, I thought: how cool would it be to have a course where you read each book each week and then had a discussion with a real salesperson about the book. The problem would be giving a grade. Colleges just aren't setup for this...you really couldn't give a grade. About the most you could do would be to give a quiz each week before discussion and kick people out who didn't read the book. But it really doesn't lead itself to being a course, but it would be invaluable.
  • Mark, completely agree with your thoughts here.

    You correctly point out that a channel relationship can often lead to an acquisition. I've personally seen this many times. However, in my view, there are some key rules to follow in order to increase the chances that a channel deal will result in an attractive exit.

    I've posted my thoughts on this topic here: http://kevinspa.in/post/409705009/turning-a-cha....
  • Jos Burger
    Great post and very relevant contributions from your readers. I would like to add two elements:

    a) Make sure that after sales support is minimal, very well organized and not taking resources away from your channel partner. It may take a year to see the first results of channel sales, but you can lose the support of the channel in a day if you face them with after sales issues that are not properly addressed by your company.
    b) Especially if you want to sell to corporates you can hugely benefit from channel partners because they can add you as a line item in their offering which prevents you from going through very cumbersome, time consuming and costly negotiations with purchasing and legal departments. That is if the corporates want to deal with you directly. Quite often their is no willingness to open the door for small start-up companies.
  • timduff
    Sorry, I'm a bit confused. I've never done sales and marketing.

    If I'm a startup targetting for a business with a subscription $49-$99 a month; will Channel Partner help me? I thought Channel Partner is for a long sales cycle for deal in hundreds of thousands dollars.

    Our approach is only SEO and Social Media and engange with a few customers. If this is another way to do, where I can start? What web sites are good for matching startup with sales channel partners?

    Searching on Google for Channel Partner does not yield good results.

    Thanks
    Tim
  • Channel partners come in many forms and at many price points. For companies that want to sell low value, high volume products it can still apply. This is the role software distributors used to play. A channel is anything standing between you and selling directly to your customers. Unfortunately I don't know where any great resources are but maybe someone else will chime in?
  • Tim - Mark is right, size doesn't matter (figuratively and literally here) - what market does your offering serve?
  • Having been pitched on the Utopian virtues of Channels as a head of sales and a CFO, your remarks are spot on. Who wouldn't want a sales channel that was free of any variable cost? "You just pay them when they make a sale!" If it was only possible. You correctly highlight the need to budget for internal resources to manage relationships (Channel Managers) and to budget management time to manage the Channel Managers . And of course in a startup one of the founders will probably be managing the relationship with The Channel.
  • great post; I harbor a belief that there's a dark side to "channel": I think entrepreneurs feel pressure from VCs to have artificial "magic bullets" on the customer acquisition side, and so talk up channels too early; I think many VCs push startups towards the channel before they, the product, and the product's reference base is truly ready. It's one thing to develop the necessary relationships over time -- that's important -- but another for everyone to get expectations out of wack, and then deal with the unfortunate consequences, because they were unreasonable to begin with. But perhaps I am being unfair?

    but beyond that, I just have to say that I am loving the quality of comments. *This* is where your experience on both sides of the table is creating something pretty special. It is so obvious you have been in the trenches like the rest of us, so refreshing, and it's bringing out great things from others. So thank you for diligently writing and participating in the comments (that gets people out of passive mode; it's something you and Fred Wilson both do well); and thank you to everyone else -- the growing community here willing to contribute to the discussion.
  • Thanks, Giff. Yeah, I know VCs can sometimes pressure entrepreneurs into showing "results" and a channel partnership sounds like results. I think you're right - it's the difference between being book smart and street smart. I have the scars to prove it. I hate seeing my teams spin wheels on the wrong stuff. With one portfolio company in particular we're spending a lot of time as a team working through how to get our channel partners performing. It's tough.
  • philsugar
    That's a good point, if its too early in the product lifecycle, you can spend a lot of effort to prove to a channel you're not ready.
  • Reminds me of Citrix early days when the first Make It Work began selling Winframe. Steve Pace of Citrix pushed me hard to become a channel partner. They had a great product and built a massive channel program which led to amazing results. Later we became a Platinum partner, one of 42 (of a pool of 10k) and that helped us climb even further and led to my company's sale. Everything just fit in this case. Not always such.
  • Congrats. Sounds like it was a great outcome.
  • Roman Giverts
    BTW, has anyone else noticed that Fred Wilson's MBA Monday's series is a rip off this blogs's style of posts and organization around a variety of series? When was the last time you saw Fred write more than 3 paragraphs in a blog post? (that wasn't about one his portfolio companies j/k). Its not necessarily a bad thing, but he should probably give some credit for the inspiration. My guess is he's noticed that the community that comments on his blogs is very petty, while this community is very sophisticated. Who wants to be solicited for investment by a bunch of petty people :)

    Hope you don't mind the off topic comment, just wondering if anyone else noticed.
  • Well, I for one am very grateful for Fred giving me inspiration to blog (and before that it was really Brad Feld with his "term sheet series") and for "covering" my blog a few times. It really helped me in the early days. One of the things that I want to emulate from Fred is his industry analysis. He's great at it and I want to do some more in depth stuff there over time.

    But thank you for the kind comments.
  • Roman Giverts
    Yeah, those guys are the "pioneers." Perhaps you can write a post about how to get a blog started and how to make it take off--for entrepreneurs not VCs. The growth of this blog in such a short time has been amazing. I've considered starting one numerous times because i understand the obvious benefits, but wonder if my network is largest enough on its own to make the blog grow.
  • Roman Giverts
    Very insightful post as always. About half of this post is really about understanding reps. If you understand reps, it becomes much easier to understand channels and why they do or do not work. I thought I'd share a few pieces of wisdom about reps (which were alluded to in this post) that I had nicely explained to me by one of my mentors :

    1. "Reps always take the low hanging fruit." Reps are going to sell what's easiest, and what gets them their commissions fastest. This is why companies have a lot trouble getting their own reps to sell THEIR new products, let alone YOUR new products. Give the evangelical pitch you need is far too much work for the typical rep. As you alluded to, channels are a way to help scale. Once you have a cookie cutter pitch, momentum/buzz, and a strong willingness to buy in the market place, a channel may be a faster way to scale then hiring dozens (100s?) reps. But a channel is probably never going to unlock the market for you when you dont already have traction in it.

    2. "Reps are coin operated, you must put a coin in and pull the lever to get what you want." One way to make channels work is if the company gives their reps an additional bonus for selling your product. I believe this is rare, but in my company we had an somewhat related, interesting example of this. One of our customers wanted to help us generate video content in our niche community, particularly content that would refer to their products. The CEO of the company came up with a fairly clever idea: they have a sales force of 300 reps, so they offered bonuses to reps for every video they could get posted referring to their product (they reps themselves could not post the videos due to the nature of our product). So the reps were asked to go out there and not only sell the idea of contributing in our community, but actually help contributors make the videos. This example is quite different than the type of relationship described in this post, but nevertheless an interesting way to use a partner's reps. We've seen a huge growth in content related to this company's products, which is great for both of us. I believe this was primarily because they put the coin in the slot and paid their reps the bonus.
  • I never thought of it quite that way, but you're right. Half the battle is understanding the mindset of a typical sales rep and understand how that plays out in the channel.
  • Thanks Mark, great post! 3 most important things that make sales people tick are simplicity, relationships and CASH. If they love your channel manager (meaning they have to know who he is first) and understand your product - they'll try selling it. If they are making commission on your product, they'll keep selling.

    The most important point is compensation. Make sure the price point makes sense within their quota, make sure they make good margin (over-invest in the beginning!), and run spiffs with a few LARGE cash prizes (not a bunch of $100 Amazon certificates).

    Maybe by your Nth deal, once you have leverage, try to include in your deal some requirements for the sales reps commission plan (i.e. they have to sell XX units of your product each month).
  • Well said: simplicity, relationships and cash. The second is obvious. The third SHOULD be obvious but can be overlooked. The first is where too many smart people trip up (including myself in the past). Simplicity is so important.
  • Roko
    "Distribution is definitely king". I guess they make more sense once the startup has proven the product to be market-fit and actually made enough sales. These deals are usually bad in the early days of a startup as they can eat up lots of time.
  • Thanks for the thought-provoking post Mark. I think this issue can be summed up as, the right channel partner can be rocket-fuel for your business but that can only happen if your business objectives are properly aligned with your channel partner's business objectives and your offerings are properly aligned with your channel partner's sales capabilities.

    Four details that have mattered a lot in my experience.

    1. Being properly aligned with your channel partner's sales capabilities includes making a similar sale to a similar buying center.

    2. On the topic of splitting margin I find that by using a model P&L as a guide you can sort out who is providing what to the joint effort (i.e. you provide sales and marketing you get that portion of a model P&L) and then split the margin fairly. (Dan Tinpina shared a different approach to splitting margin in a comment above.)

    3. Biz Dev/Channel deals carry significant amounts of overhead to lots of areas of your organization if you do them right, so don't enter them lightly.

    4. Biz Dev/Channel deals can take a long time to get up and running. Make sure you are prepared to invest enough time to make a partnership successful, but you also need to know when you've done enough to prove out the concept and it's time to move on.
  • Another solid post...I do think the rev share %-ages can be all across the board, it really depends on how powerful the distribution partner is.
  • And how much you want to make them feel incentivized to sell your product.
  • Sound advice. In fact, 87% of alliances fail to meet their stated objectives (semantics are important here, but let's assume channel = alliance). It's tough out there. However, for those that do succeed, the ROI is often much better than build or buy options. Data on both of the aforementioned is plentiful, so I'll leave that exercise to the reader.

    One of the key questions to answer when recruiting a channel partner is this: are you portfolio or are you strategic? Portfolio = I'll sell you when it works for me. Strategic = I'm going to pitch you in every deal, every time. To your point about fewer, better, it's all about going where you're strategic.
  • Using the 87% failure number, would any player still be in the majors if they were a consistent .130 hitter?
  • A couple more points:

    If your application sale pulls significant services, then you can start by bringing services partners in for deployment and then graduating them to making the sale themselves. Not so common with the move to SaaS, but effective with Enterprise Software.

    Plan in advance for channel conflict. If your direct sales force loses (or thinks they're losing) money when a partner closes a deal then they will fight to kill your channel. You will probably need to start by giving the direct sales force at least partial credit for deals closed by channels in their territories.
  • re: quota credit - totally agree. It's better not to be cheap. Channel conflict kills.
  • 100%. Having worked at Big Tech Co (Symantec), this is pretty consistent with what I witnessed. Bottom line, when doing these deals its important to understand the psychology of the big company as you point out at the end of your post. When you're at a startup, the thinking is that your product is the greatest thing since sliced bread, and that's what you're usually selling. The reality is, BTC's aren't always selling the greatest thing since sliced bread, but the unsliced bread that is still making them billions of dollars. And it will take a minor miracle to convince them to sell sliced bread at the possible expense of hurting their unsliced bread sales (innovator's dilemma).

    Also, you may have done the deal with a certain division within the company that is super excited and has all the conviction in the world to push your product, but you have to also understand where they fit within the grand scheme of the company. A lot of the time the product team of a strategic product at BTC will do the deal, but they themselves have no control over the sales force, which is entirely separate group and only meets at the upper echelon of the executive ladder. So both you and the division that you're working with are super excited, but the salesforce is not actually properly aligned and it's almost impossible for them to get aligned. Also kills your channel deal.

    Lastly, as you alluded to already, when change happens, BTC will look out for themselves first, as they should. For example, I'm sure there were many channel partners at Symantec (speculation on my part, no insider knowledge here of specific instances) that got very frustrated when Symantec merged with Veritas. But guess what? Suddenly you have two gigantic sales forces that have to figure out how to sell each other's products, each product a billion dollar business in its own right. So how much time do you really think they will spend selling some strategic seven or eight figure product? And the reality is that the way the public markets work, BTC is incented to grow business quarter after quarter, year after year, and the only way to realistically achieve that is to buy other companies, so that will *always* be a potential risk and distraction in working with BTCs on channel deals.
  • Thanks, Mike. Yes, BTC's are notoriously hard to monetize through channel sales.
  • Mark you absolutely nailed it - I read a post recently about the "silver bullet CEO" - your post could be titled the "silver bullet sales strategy". Throw your product out on a lot of shelves and see who buys it. But as another VC always tells me - "which aisle, which shelf". The channel won't tell you that, you have to tell THEM.

    Also, you mention the importance of Channel Managers and I couldn't agree more - however, my experience has been many CM's have been "relationship" people, not sales people. These CM's have to be out in the field with their channel partners doing the proselytizing and helping find the early adopters.
  • Yes, in the early days CM's can be out selling with partners OR you need to allocate a sales rep to work deals with customers and give them quota credit. The problem with CMs is that the best ones are "farmers" and not "hunters" in my experience. So not always easy to get CMs to perform in the field.
  • Like many here, a subject dear to my heart. And one you have addressed with great accuracy.

    Perhaps the most telling point you made of the change we have seen in channels in the last 10-15 years is the notion of selling your own product first. It is now true but (I come from telecom) there was time not that long ago that when you went to market you actually first chose between an indirect and direct model. And channels that saw you going direct stayed away from you on the basis that you're sales team would be distracted by their direct revenue goals (ironically much in the same way that today's channel reps are 'distracted' by their own core revenue responsibilities).

    Times have clearly changed. In fact now I see more 'Direct Touch' sales teams that anything else, which means...you open the door, I'll close it and give you credit'. But this works, if as you say, everyone understands their role and goes in with the right expectations.

    In the startup community, you rightly identify the lasting misconception out there that once a deal is signed, the revenue will follow. I see it as two distinct sales processes: the first with the BD/PR department, then the steeper, never ending one with the sale team (and yes, channel managers are still critical, just difficult salary to rationalize in early stage.) Channel takes a lot of patience, but if they hit, it scales.

    Early channel targets, like customers, need to be properly identified and qualified before efforts are expended. And ahead of time you need to decide what the goal is and set your expectations accordingly. In some cases, it may be ok to specifically go after an PR event - as long as you know that is all you're getting. This is more the exception, though.

    Channels offer us customer relationships. Challenge is that these relationships form the core equity of the channel's business, so they may not be so quick to expose them - especially to an unproven entity. When seeking or nurturing a channel, I always force myself to think like them. And in doing so, find ways to position my offering in such a way that it will bring them strategic value. It is less often that you can bring something to a channel that will offer a high impact revenue opportunity. But you can bring them something that will 'pull through' their core products or services in the process.

    Although sometimes frustrating to accept, channels are not good at evangelizing (or at least not as good you!). They're great when the phone is ringing, though and in those cases the sales process is typically accelerated because of their relationship. So while I agree that you should first do adequate direct selling to generate market validation and selling acumen, make sure you are also laying the ground work along the way with some select channels. This way when you're ready, you can move quicker to turn them up.

    Thanks again for the post, Mark.
  • "channels are not good at evangelizing (or at least not as good you!)" ... exactly from my message book to startup CEOs.
  • philsugar
    Good post. The best takeaway for people is if you can't sell your product nobody can.

    I think one of the biggest omissions business schools have is looking at selling as "dirty" or "beneath me" instead of critical. So they think if I have channel partners I don't have to be a salesperson. Actually it means you need to double the time initially on selling: you have to sell the channel partner staff AND the customer. So look at it that way.

    I'd add two simple obvious points that occasionally are overlooked:

    If you are small you need your channel partner to be big. When I see a deal between two small companies I know its not going to work.

    Clients make partners. YOU need to bring a client to a channel partner to start the deal, not the other way around.
  • 100% on your needing to bring the deals to the table. Also, every time I speak to students I tell them, "if I could tell you one job to do when you're young it's sales. Most of you will think that's a "dirty" job but it's the most practical skill you'll ever have. And at 40 you can't easily go back and acquire sales skills.
  • philsugar
    I constantly push my alma matter (Wharton) to explain why sales is important and study it....this is probably because I know I've already made my biggest business mistake: coming out of school turning down a sales job for a tiny little unheard of product called MS-Excel. Truly I thought it was beneath me....I didn't get an engineering and business degree to do.....sales.

    The biggest issue is that if you are at the top of your profession you are going to be engaged in sales. Certainly as an entrepreneur, but everywhere...you have to sell to your LPs, Lawyers have to get work, IBankers do deals, consultants: "you only get to eat what you kill", etc, etc.

    It sucks to have to acquire those skills when the stuff you're working on is really important versus being able to learn on somebody else's dime where there is a process and mentors to support you.
  • Great post. Too bad most everyone will think they are the exception:)
    my experience on splits - I start at 50/50 assumption - for full distribution.

    With the following logic:
    Product Value - 50%
    Lead value - 10%
    Product presales value - 10%
    Sales cycle leadership - 10%
    Closing/Contract/pricing ownership - 20%.

    If you think through it in these terms, you can give referrals 10%, if someone distributes, but needs pre-sales help, they would get 40%, etc.,
  • That's a good way of looking at the splits. Helpful.
  • I love this column. Channels are a favourite topic of mine.

    Here's the tips I would say about building a channel, based on my experience building the most successful channel in the enterprise mobile workforce management space, leveraging thousands of phone company sales reps, several years ago. I'll cross post a fuller version with the context for these comments, over on http://richardjordan.tumblr.com in a bit anyway, so if you think this comment is too long I won't be offended if you delete it, just trying to add to the debate.

    Lesson 1: Fit the salesforce

    Phones sales people cannot close six figure sales. They sell $50 monthly plans for a living. We had done a small implementation of the platform that I pushed to be broken down and sold along an ASP (nowadays we say SAAS) lines at $12-a-month per subscriber. Not $200,000 a pop. This makes it a complementary sale for the phone company sales rep. The CEO gave me the resources to build this out as a side product, and later pivoted to make this the entire company when we started getting real traction.

    Lesson 2: Don't assume the high-level relationship translates.

    I worked the ground game. I showed up in every regional office and trained their data sales teams on our product. They'd been instructed only to sell official partner products, and explicitly not ours. But I was there. I held hands.

    Lesson 3: Close the first deals yourself

    I created a simple pitch that any sales guy could take into their prospects - "if I can show you a way to put this phone in the hands of each of your employees, to pay for the phone, to pay for the service on the phone, and to still save $2-3,000 per employee per year is that worth an hour of your time". It's simple. We gave a credit-card sized ROI calculator showing this to every sales rep. Then I WEBEXED every single sales appointment that the reps could set up - sometimes at 4am to get a 7am East Coast pitch, and I walked them through the signup process at the end telling them to get out their credit card and sign up now. We had a 30% (yes thirty!) with this approach. I personally closed the first 200 companies this way. Sales guys remember this. They don't want you in every deal, once they've seen the close they will do it themselves.

    Lesson 4: Create heroes

    The sales force had quotas. Sell so many voice plans, sell so many data plans. By being there for the data sales guys we helped them support their voice sales guys in the field. The data sales guys made the voice guys win new business, hit their quotas, take an extra check home to the wife. They were heroes. And they loved us for it - they didn't give a crap what higher-ups said, they were selling our product and not competitors'.

    Lesson 5: Numbers speak for themselves

    The main take-away: we made our product complementary to the core product of the channel. We made it priced in a way that the channel was used to selling. Then we went further than all of our competitors in supporting them. I was on airplanes 2-3 days a week. I saw 30 states. But in six months we had market lead, growing to more than 50% market share, and the carrier made my company their protected partner in that space with preferential billing. Why? Because they had to ask "where are all these data sales suddenly coming from?" At first they didn't like the answer and tried to get the guys in the field to sell a competing product. But sales people want to get paid. You make them get paid you win.

    One last thought. Our competitors gave cash "spiffs" and non-monetary gifts to sales people who sold their products. We gave nothing. Sales Managers told us "our guys won't sell your product, they'll sell this other one because it spiffs them". They were wrong. Making people successful wins every time. Oh, and our product started out with less features & functionality than our competitors - in many ways old-school thinking would have called it an "inferior" product. But we were lean startup / minimum viable product before we'd even heard those terms.

    Channel building is hard. Very hard work. Most of the time you'll fail. But it's not rocket science. However I've not seen many successes that don't follow the above formula.
  • Wow. What a great contribution - thank you. I like all points but especially 2,3,4.
  • Great case experience Richard. This is starting to become much clearer.
    The sales channel partner is nearly a franchise system where you make the sales process fluid to each executor.
  • This may be controversial, but I also think it's a mistake to put a VP of Sales at the top of the Channel pipe instead of having it sit under business development. The problem in my experience is by trying to let the sales team build the channel is that they try to maximize for short term numbers and kill the channel early.
  • This post is 100% in-line with what I have experienced in the market...even more so for companies trying to enter the US market. We get several prospects a year that ask us to "just hook them up with one of the big vendors". It never works.

    As usual, thanks for another great post.
  • Aaargh. I had meant to do a whole section on international deals. Was rushing to get post out so forgot. Thanks for bringing it up. Any equally big fallacy is that "I'll just sign a deal for this guy in Malaysia to sell my product. No harm for me. If he sell, he sells. If he doesn't he doesn't." These deals rarely work without investment on your part - time and money. And they always consume more time than you expect.

    Thanks for reminding me!
  • Great post and completely consistent with my experience (and the experience of almost everyone I've talked to.)

    If you can't sell your product in large quantities, then the channel certainly can't.

    Channels can fulfill customer demand on large scale, if there's customer demand (and some semblance of product-market fit.) A channel is a photocopier, while your start-up is a (hopefully fast) computer). They can only copy your success (maybe), and cannot create it for themselves.

    Basically, in startup sales, no one will do it for you. Founders and early employees need to get their feet on the street and get out there. There's just no other way.
  • I agree and well said. When the channel partner brings nothing to the table other than human resources to sell your product, it's very much like the App Store for the iPhone. Just placing your app on the store won't make it sell. Sure you're a licensed developer for the iPhone (you inked the deal) but you still need to market and advertise your product. Apple's not going to sell it for you. No one sells your product like you do.

    Isn't this the same as outsourcing the development of your product? If you can't build it and you can't sell it, then what as an entrepreneur did you bring to the table for your equity stake in the company? If you can only build it or sell it, isn't your position during investor negotiations severely compromised?

    Leaning on a channel partner early on in the game can also be seen as a weakness I would think. Sure, given an established product, channel partners can help you grow much much faster but they're, at that point, external to the core success of the product and business.

    -- Edited because it read like a huge run on paragraph of points I wanted to make.
  • 100%. I was planning to cover the iPhone App Store and the Salesforce AppExchange and similar channels in a future post. But macro lesson is exactly the same. Thanks for pointing out.
  • Let me applaud you first for helping entrepreneurs that don't have much sales expertise start to understand this issue.

    Let me also "net out" for your readers what a channel is really is - It is simply way for you to get more mindshare to your market more quickly IF you do the following:

    1) Understand that any business focuses on what it does in it's own best interest first. Why is that? Because a channel partner you have teamed with AUTOMATICALLY makes more money selling their own stuff before they sell yours. Does that mean you shouldn't pursue a channel? No, just recognize their motivation is like yours. Money is like water. It flows naturally to the easiest point. If you are the CFO - or any exec that gets compensation/bonus based in net profit, higher EBITDA, whatever you are telling your sales team to push your stuff first, the channel second.

    2) Why do channels accept your stuff - so they can sell theirs more easily. You are bringing something to the party they don't have. That's fine, just understand that this is how it works.

    3) As you state correctly, you need channel managers. What are these mysterious creatures? They are called sales people that understand how to 1) prospect, 2) make deals, and 3) close deals. They also understand and execute on all the care and attention they have to give to the channel partner sales team so they can work together.

    4) The sales team of the channel you have signed need to get paid on your stuff. You make the point of margin and I won't comment on any percentage but let me state that plenty of deals get done where you co-sell. These are fine but only work if you have a direct sales team of your own that will follow up and sell because the partner won't. Quick example, you have a wireless business app and you want to sign on with a major Tier Carrier (VZW, ATT, etc...) if the rep does not get paid specifically on your deal, they won't do much of anything for you. That's OK because they are providing leads, just understand that if the rep is selling data plans for their carrier, that's all they will do so you need to complete the sale of your piece.

    5. Don't expect channels to provide you a forecast, they don't. You or your channel reps will have to get on the phone and interview their reps to forecast deals. This is a lot of work.

    6. If you want the channel to work for you, be responsive to their requests. A sales person from your channel partner has a question, get back to them ASAP. You only have so much time (especially if you are an entrepreneur), so look for the 1-2 major field sales reps at a major partner and put your effort their. Help them and you will grow as the success of the deal their rep just did get's told internally. If you boil the ocean you'll find you waste valuable time with the 80% that will do nothing for you.

    The only true "minimally supported" channel that most people really think is a "normal" channel is an OEM because usually the OEM partner must have your stuff to make their stuff work (to solve the specific pain their customer has).

    Nicely done Mark.
  • Roman Giverts
    really good stuff, thanks for adding.
  • Great post! Thank you for the time and effort that you put in to help small business owners and entrepreneurs alike.
  • Thanks for the added clarification Marc. This partnering method was new ground for me.

    And of course this makes 3 Marc/ks in a thread.
  • Wow. Awesome input. Thank you.
  • Mark, thank you a lot for your articles. They are really helps for me - to get an "order" in my head.

    I'm wonna show you my startup in Russia - at which addres i can send an email? Already contact you at twitter - i'm apologize for insistence and offtopic.

    with regards,
    artem
  • mark at grpvc dot you know what. but I'm admittedly bad at email. Send. I'll do my best to respond. If I don't it's nothing personal - just persist.
  • Great post about a subject near and dear to my heart. Another reason good channel managers are worth their weight in gold - the quarter after your channel deal finally starts making money, your competition will be trying to steal the deal. If the channel is being well managed your partner will recognize the switching costs of re-building the channel and you won't need to get into a margin draining competition.
  • For sure. Yes, I forgot to cover that pesky little thing - competition! Thanks for adding.
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