Category: Entrepreneurship

I was in a board meeting last week reviewing a product release schedule for the next year.  I was extremely concerned that we missed the last release, and as we dug in deeper what we saw were a few features scattered throughout the schedule tied to deals that were just closed.  Now this would not be a big deal if these requirements were market-driven features that were necessary for a number of customers.  However, the big concern was that most of these requirements were one-off features for specific customers that were just closed in the earlier quarter.  So while engineering missed the release date for the product and should be held accountable, this analysis points to a much deeper issue and is a great example of how all of the various groups and functions in a company need to work together as a team.

My first thought was that if we continued on this path we would never have a product that met market needs.  There would be no way that the engineering team could execute against its development schedule with a number of one-off requests.  So we asked management to analyze the problem and report back to the board.  The first place to look was product management to determine whether these customer requirements were one-off adjustments or features that were significant market needs that product management did not identify.  The other place to look was sales to determine if sales reps were selling what we didn’t have and promising the world to close deals.  As you may know, a healthy tension between sales and product management will always exist.  Sales will always want any and every feature to close that big deal and product management should only want features that will address broader market needs.

After a week, management reported back to the board and determined that the problem eminated from sales.  More specifically, it was pretty clear that the sales reps were not properly trained or equipped to sell the product.  When not armed with the knowledge and sales tools to properly sell, it was quite easy for the reps to get derailed during sales presentations, flail when addressing customer objections to the product, and agree to add one-off features to close a deal.  To address this problem, management presented a plan to get the sales reps properly trained, equipped, and managed.  In addition, management would have to play an ongoing role stressing the importance of closing the right deals and walking away from the wrong deals.  So the next time engineering misses a release date, make sure you understand why because most likely it is a symptom of a much larger problem.

I have received many an interesting resume through this blog.  Given that, I thought I would let you know of some job opportunities at Gurunet, creators of Answers.com.  The company recently opened a New York City office and is looking to hire 2 in Business Development (one to help manage traffic partnerships and the other to manage content relationships), 1 in Marketing, 1 Online Advertising Sales Rep, 1 Linux Sytems Engineer,  and 1 Office Manager.  If you are interested, either send me a resume or send your information to jobs@gurunet.com.  More details can be found here (Download gurunet_open_positions.doc).

I recently helped negotiate an employment contract for a new hire at a portfolio company.  It was clear from the very beginning that this new VP of Marketing was the right fit for the company and that the chemistry was there.  Both sides were excited about moving forward until we got to the employment contract.  In theory, we were in general agreement on salary range, bonus, etc. but what ended up scaring us was the fact that every issue, big or small, was negotiated to the nth degree.  There was no give from the other side and when issues such as vacation days were hotly contested, I got quite concerned.  In the end we passed on the candidate.  We reasoned that if he was this difficult during a negotiation for his contract that he would be just as difficult to work with.  I am not sure if he relied on his lawyer too much or if it was just his style, but either way negotiating every nickel and dime is not how to get deals done.  I felt that the basic element of trust was never established in the negotiation. 

My only words of wisdom for you is that In any negotiation, make sure you mark down your most important points and put them in a bucket.  Place the less important deal points in another bucket. Try to put yourself in the company’s shoes to understand their major points as well.  I encourage you to ask for everything but at the end of the day be smart about what you really want-try to win on the big points but don’t be afraid to give in on the small issues.  At the end of the day, nickels and dimes do not add up.

I can’t tell you how many early stage companies I talk to tout their great list of partners.  I always step back in amazement at how a small company can support more than one, really large partner in the beginning.  In fact, I remember being in a meeting with a strategic partner once and having them tell me that we would break if they put their resources behind our product.  You have to realize there are 2 kinds of partners – technology partners and real partners.  In my mind, if you and your partner are not generating revenue for each other than it isn’t a real partnership but rather just a Barney press release.  Yeah, you know the "I love you, you love me" kind of partnership that sucks precious resources from a startup and yields no value and no customers.

So how do you make a real partnership work?  In theory, it is very simple but requires a ton of hard work.  Here are a few rules I like to use when working with partners. 

Rule #1 – Don’t rely on corporate; engage at the field level. 
Many early stage companies try to create partnerships from the top down without recognizing that the real action is in the field.  If you can bring your potential partner customers and lots of customers, you will get attention and be in a much better position to negotiate a real partnership.

Rule #2 – Focus, narrowly focus your opportunities.
Many of your potential partners are huge enterprises, and it is easy for a small company to get lost in the shuffle.  Try choosing a group in the large organization (it depends on how the company is organized) where you can effect a real P&L and create a strong value proposition.  In some companies that might mean focusing on a vertical like energy or financial services while in other companies it may mean picking a specific function like business intelligence or compliance.  Either way focus on groups where you can make a real impact. 

Rule #3 – Your partner’s sales force needs to get comped
Once you are able to demonstrate a handful of customer wins, it is time to get a deal done.  No matter what kind of deal it is, make sure that your partner’s sales force is comped for selling your product.  If there is no comp for the sales force, your product will not move in a highly leveraged way.

Rule #4 – Dedicate the proper amount of resources to make the partnership successful.
Once again, lots of companies think that once you sign a deal the hard work is done.  On the contrary, this is just the beginning.  You need to treat your partner like your largest customer and provide the same amount of focus on your partner as you do your customers.  You will have to develop a joint business plan together, figure out the proper sales strategy, put together compelling joint collateral and presentations, offer sales and SE training to your partners and their resellers, and finally get your customer support ready.  In addition, make one person responsible for making the partnership work.

Rule #5 – Don’t get sucked into your partner’s black hole.
Be careful of developing custom software for your partner or making too many proprietary tweaks beyond the necessary integration.  I have seen early stage companies too often bend over backwards without thinking about the real benefits of all of your partner’s requests.  As an early stage company you have to walk a fine line between leveraging partners for sales but also not becoming so glued to the partner that you alienate other potential channels.  As I have said in previous posts, it is ok to say no to some requests especially if you can demonstrate why it will not help generate more sales for both comapnies.  Either way, your partner will respect you and know that you are not a pushover.

As you can see, it is quite hard to support more than one partner for an early stage company. 

I was talking to a portfolio company CEO today about his sales pipeline and one of the key items of interest for me was understanding competitive dynamics.  Besides looking at the raw numbers, I like to understand whether or not we are seeing more or less competition, why we are winning, and why we are losing.  As I started to dig into this area over the last two quarters I have noticed that the big boys or incumbents have started to show up in more deals.  In my mind that is a good sign because incumbents don’t enter a market unless they believe it is worth pursuing.  I also typically do not mind competing with the larger players as they are generally less agile and less innovative than startups. 

That being said, incumbents tend to add confusion in the marketplace and lengthen any startup’s sales cycle.  Their typical tactics including saying they have the product when they don’t, promising they will have the product in one to two quarters (maybe three or four or never is the real answer), or giving it away for free in a bundle of other things that the customer buys.  The last one is a tough one to counteract – I mean if the customer gets it for free, then it doesn’t have to be as good as an innovative startup’s product, does it?  So how do you compete against these tactics? 

First, as a startup you have to get away from a feature/function battle because you will always lose against a big boy.  If a customer has already bought a product from an incumbent, they are more often than not willing to stay with that incumbent if they can deliver the extra feature/function soon enough in a good enough way. What I like startups to do is win with the product roadmap and vision.  Show the prospect how you solve their needs today better than the incumbent but more importantly why you are different and how your approach will solve their future needs.  If you can differentiate on this level, it gives you a much better chance to win. 

One other piece of advice is that you must qualify the opportunity early in the sales process.  If the incumbent is esconced in the account, you may be better off walking away quickly in pursuit of greener pastures.  As I got off the phone with the portfolio company CEO today, what made me happiest was not hearing about all of the wins against the incumbents, but how we walked away quickly from those types of deals. Just today the CEO had a conversation with a particular prospect who said that our software was the best but the incumbent was willing to offer it for $30k instead of $150k.  We ended up walking away from this deal and told the prospect to return to us when the product didn’t work.  Having been through this before, I can tell you that many of these prospects will come back to you.  Over the long run, if the market is big enough and you build enough market share and critical mass early it will always be easier for an incumbent to buy you rather than start from the scratch.  If not, you may want to figure out how you can partner with the incumbent or their competitors.  Either way, remember one of your key advantages is to keep innovating and staying a product generation ahead of your competition.

I have said many times before that with respect to doing deals that saying No is as important as saying Yes.  Let me elaborate.  A portfolio company has recently been in trials with a potential strategic partner about a reseller relationship.  We got in first, set the criteria for success to leverage our technical and business advantages, and were selected as the winner.  We had the most customers, the best product, and best customer support.  There was one huge caveat-one of our competitors who came in second place was willing to do the deal at a 50% discount.  The strategic partner asked us to do the deal at that price if we wanted the win. 

Of course, there was much deliberation on our side and as we ran the numbers over and over again there was no way we could understand how this competitor could ever make money on the strategic partnership.  From our calculations, it would take a couple of years to breakeven off the deal under the very best circumstances.  Trying to make the deal work for both sides, we went back to the potential partner and asked them to give us an NRE (non-recoverable engineering expense) and to handle level I customer support.  At the very least, if the partner handled the first tier of customer support, we could be marginally profitable.  The potential partner said no, and we walked away from the deal.  Trust me, it was a tough decision, and we tried to rationalize why it made sense.  However, when the deal is not a win-win situation it is very hard to make it work successfully. 

From my perspective, one of the huge problems is that there is tons of VC money out there and lots of me-too deals as Brad Feld elaborated in a post recently.  A space gets hot, lots of venture money pours in, and only a few companies survive while the rest vaporize.  We do live in a competitive world and taking market share and killing your competition is part and parcel with being in a startup in a large market.  That being said, what killed many companies during the bubble was pursuing market share at all costs.  I feel like that mentality is coming back in the market.  In my mind, losing money on every new customer signed up is not a long-term winning strategy unless you think you can get financed to infinity (yes, many did during the bubble).  At some point in time, to be a real business you have to generate cash flow from internal operations.  Having done enough deals, I am of the opinion that if it is extremely one-sided and never makes economic sense, it is a recipe for disaster.  To that end, I wish my competitor the best of luck because I can see the train wreck around the corner.  We will stay close to the strategic partner and when the time comes reopen the dialogue.

Professor Noam Wasserman of HBS along with individuals from J. Robert Scott, Wilmer Cutler Pickering Hale and Dorr LLP, and Ernst & Young LLP put together an annual compensation report for venture-backed companies.  If you are venture-backed and interested in participating and receiving a free copy of the report to baseline compensation for your employees, I suggest going to CompStudy to get started.  I cannot tell you how many times executives at my portfolio companies ask me for comp numbers for certain roles in their geographic area.  While there are biases in any report, it is helpful to get a few of these different surveys to make sure your new hire’s compensation requirements are in the ballpark.  One final note-if you want to be included in the survey, please fill out by February 28.

I was talking with a friend of mine yesterday about doing business development deals, and he was quite frustrated by the process that he was experiencing with one potential partner.  He was calling on the highest levels at the company and knew that the ultimate decision rested with an executive committee.  He met with 4 of the 6 members of the committee and each meeting seemed to be better than the previous one.  In his last meeting, one of the executive committee members told him to go to yet another person to get the deal done.  My friend was caught in a classic case of pass the hat.  Everyone was excited about doing a deal, yet no one was willing to step up and take ownership of it.  Before assuming any deal will happen, you need to ask yourself a few questions such as:

1. Who owns the relationship?  In the example above, everybody was excited about a potential partnership, yet no one stood up to champion the deal and own it.
2. Who will get fired for not doing a deal?  Every person has annual and quarterly objectives they need to hit.  If doing a deal with your company creates more work, then why should they do it.  However, if doing a deal with your company fits in the parameters of their overall goals, then you are probably in the right spot.
3. Who will implement the deal?  In many cases, VCs and entrepreneurs can do a great job calling on a high level with executives at a company.  However, the executives at a company do not usually implement the deal.  Once a deal is signed, you need to understand who the day-to-day interface will be and how you and your company can make that person look like a hero.

In conclusion, I told my friend to stop wasting his time with that company and to focus on other deals.  As a startup your resources are limited and some of the major decisions you make at a company are what you are not going to do rather than what you are going to do.  In other words, you need to know when to say no.  If you can do that earlier in a business development or sales process, the better off you will be.