Fallacy of Channels: Startups Beware

No 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? (…)

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