Beware of the White Label Deal

I have talked about the cycle for moving from early exploration of business models to testing to scaling. Each stage a critical step in building your startup. There are a variety of models to explore and see what works best with your product but it is important to ensure that resources are aligned around one model as you scale the company and this is where a white label deal can become a problem as you grow the business.

White label deals are tempting in the early stage when money is tight and a big partner with a strong brand shows interest. Check out my other post regarding revenue vs money – a white label deal can often be a textbook example of the main point of this post.

A typical white label deal puts the customers brand on your product and gives them influence or control of the feature set. These deals are a temptress for a company starved for cash and can become a viable business model but it is important to understand the longer term implications of a white label deal before you sign the agreement and start work.

Beware

1) White label deals put your company in the service business. The partner is lending their valuable brand name and distribution channel, they may like the innovation your team brings to the table but ultimately they decide what goes in front of the customer. The “other golden rule” goes like this, “the one with the gold makes the rules” so once you deposit that check, the rules change. That feature they love and you know is silly? It may very well be part of the next release.

2) Scaling two businesses is a tightrope few can walk. You have a vision for your product and limited time and resources to execute. Balancing those resources against the partner demands stretches the team and leads to stretching resources too far, falling behind on the product vision or failing to meet partner expectations. In most cases, resources and momentum follow the money, for better or worse.

3) Unwinding white label deals is difficult. This is where BD needs to be trough and negotiate terms around the wind down as part of the deal. Neither party goes into the relationship thinking it will fail but legal agreements are not written for all that goes right in a deal. How long you support a product, what happens to source code if the deal ends, who owns the custom data, what gets communicated to end customers etc. are all key terms that should be in your agreement.

White label deals are not bad deals if this is the model that works for your business. You can absolutely build a business around white labeling products and may be worth exploring.

The danger is signing a white label deal thinking it brings in temporary revenue while you sort out your “ real business model”

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5 Tips for Getting A First Meeting

Product to market fit or go to market strategy involves getting in front of prospective customers or partners. In an earlier post I talk about the three stages, scouting, testing and scaling.

So if you are in the scouting or testing stage, at some point you need to go outside the network of warm leads and introductions and engage people you have never met nor heard of your company. Generating a list of names and email addresses using a contractor (eLance and oDesk are great places to find people to do this cost effectively) is a good first step. Now you need to email these strangers so here are a few simply tips to keep in mind when crafting your email.

  1. The goal is to get a meeting, not make a sale. Get. The. Meeting.
  2. Assume no one reads past the first parapraph – use bullets and links they can pick out quickly and skip the rest.
  3. Be specific and focus on why versus what. Telling prospects what you did for a client is not as important as why you did it.  For example, “we helped Samsung meet their objective of having a great app in a limited time period that showcased their interactive TV platform.”
  4. Always propose a date for a call or meeting. It is easier for the reader to respond to a proposed date and time than having to propose dates and times.
  5. Think about the time and day you are sending emails to hard to reach prospects and how it may impact getting a response. Hard to reach executives check email over the weekend – you may even get a few exchanges between early Saturday morning and Sunday afternoon.

It’s not rocket science so don’t over think things and never start with the best prospects. Get some experience first, build your confidence and improve your introductory email and then go after the most valuable targets.

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Compensation for Business Development

The stage of your company should determine what type of BD you hire. Early stage companies need to find a business person that can drive feedback to the product and engineering team, identify paths to market and outline assumptions to test with the first few deals. My earlier posts walk through the three stages for go to market.

So, how do you to compensate a BD person? Start with establishing what is the desired outcome. What do you want from the conversations, deals the BD person will drive?

Customer feedback / market validation

What features are most valuable

Testing pricing models

Identifying verticals

Path to market

Going to a heavy variable component too early creates tension because it incentivizes the wrong behavior. The BD person wants (or needs) to hit certain targets to achieve their target and get paid. If feedback and data are more important than revenue (often the case in the early stage) you want to align the incentives accordingly.

In the early stages, I recommend a high base or straight salary. If you are still working on product to market fit, testing revenue models and other business model basics, pay a straight salary. If you are set on having a variable component, I recommend it is less than 20% of total compensation.

Once you have product to market fit and a clear pricing model you can bring on a sales team and have a split closer to 50% base 50% variable or 60% base and 40% variable because driving revenue is the primary focus. Sell more, make more.

Last tip, this is something to discuss with the BD person before they join your company.

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Revenue vs Money

When it comes to growing the business, there is a difference in money versus revenue. Before you thank me for crystalizing the obvious, let me explain what I mean in the context of a startup.

Revenue deals are tied to a company’s core assets and talents and become a repeatable and scalable transaction. This involves an understanding of the different pieces that need to come together and how it comes together in your operating plan (people, servers, commissions etc.).

A “money” deal does not play to the skills and vision of the company and does not leverage the core assets and talents. These deals typically happen someone approaches the company and offers money in exchange for what amounts to customized development or when a company is struggling and trying to reduce burn, find a business model or simply build momentum.  There are exceptions here – sometime the right deal can take the company out of its comfort zone and lead to bigger and better opportunity but, that is more of the exception.

I have found that teams can often agree on a plan when they have a good framework for a discussion. If there are serious differences of opinion you may want take a step back before moving ahead with any deal and make sure the team is aligned on where you are going.
Print

Obviously strategic deals and revenue deals can overlap, hopefully they do. However, there may be instances where the path to revenue is not immediate or as clear as you hope. This is a great time to get advice from your board, advisors and key management personnel.

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Qualitative vs Quantitative Value

There are pitch decks for raising money, outlining the vision of the company, selling the product, recruiting partners for product integration etc.  In an early stage company pitch decks often focus on the product and company vision which makes sense. A business wrapped around the product is key so it is important to ensure the business opportunity is clear to your audience.

I have seen a number of companies try to build a business purely around a qualitative value prop which is hard and has a higher likelihood of failure. The market is less willing to pay for a better user experience or the promise of increased engagement, even if they like the product and find it useful.

A quantitative value (lowers cost, drives revenue, more customers etc.) dramatically increases the odds of success. As I pointed out in my post re Stages of Commercialization, the role of a good BD person at the early stage of a company should be to drive this process which includes talking to prospective customers and partners.

One way to remember this rule is the pacemaker versus the hearing aid, if you could only have one, which one would you choose?

pacemaker

You may have a value prop to users and another to customers (e.g. Facebook provides a qualitative value to consumers and quantitative value to advertisers).

The biggest challenge I see companies face is being candid about their value. The time and energy in building a product creates an emotional attachment that can make it difficult to step back and quantify the benefit a customer or partner will receive but it is worthwhile to do in the early stages of development.

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Sales vs BD

I started my career in sales and have tremendous respect for sales professionals. It is a craft and I have been fortunate enough to work with some true pros. I have also spent years in business development and each role can play a vital role in your company. So what is the difference and which one is best suited for your company?

I hesitate to say BD is long term and sales is short term because it leads to confusion. Some BD deals are near term and some sales cycles are longer term and asking one team to hand off a deal all too often creates tension in an organization.

In general, business development will identify and create partnerships that create leverage for driving revenue, distribution or enhance the product and business development often is a company evangelist.

Sales is focused almost exclusively on driving revenue and the same thing applies when hiring a sales leader for an early stage company versus a more mature organization.

The sales team is in front of end customer (who is paying for the product) whereas the BD team often works with the partner who owns the direct customer.  Designing a compensation program for each is tricky – you want to avoid conflict for who gets credit on a deal and provide the right incentive for your long term business.

A variable compensation program will drive performance regardless of BD or sales. If you are not sure you are ready to incentivize a particular type of deal structure (e.g. proving or product offering) it is best to hold back and find a pay plan you and your BD or sales lead can live with for an agreed period of time.

Much of this aligns with the stage of company, if you believe your company is at the Scouting or Testing stage it is likely too early to put a commission or bonus plan in place. These types of plans do well in the scaling stage and a solid sales leader will provide good insight on designing a program and making necessary adjustments along the way.

3 Stages of Commercialization

I have been asked by many founders and CEOs “we need to hire a BD person, do you know anyone?”  Few roles have a more varied job description than business development. It’s no wonder why it is hard to figure out who to hire, what they should do and how to measure success.

Hiring the right person based on the stage of your company may be the single greatest factor in success (or failure) in driving your business.

A person with deep industry knowledge and strong network ready to “do deals” can turn into a disaster if it is too early in a company’s product life-cycle. A product and the team building it go through cycles to establish the product’s identity and a BD person that understands this can be invaluable in shaping an product’s value proposition.

I believe there are three stages in the commercialization process and not everyone is suited for each and every stage.

1) Scouting – the earliest stage of a company, at this point business development is about identifying various routes to market, points of leverage and providing the internal team early market feedback. The ability to work closely with product and engineering teams is key skill. The BD person will spend 60% or more of their time working internally with the team to understand the product, assess the market and begin formulating the first external pitch deck. Closing deals is not a priority, getting market feedback is the primary goal.

2) Testing – once a few paths to market have been identified, it is time to try closing a few deals to test assumptions and provide measurable input before you scale the business. Analytical skills to set up a framework for what to measure and examining the data will determine if and where to scale based on the company’s strengths and vision. Refer to my other post re a framework for assessing opportunities if you need some tips. The time spent internally decreases to 40% to 50% – the feedback loop to product and engineering is critical though so it needs to be a priority.

3) Scaling – after gathering data from early deals and validating a path to achieve your goals, BD is ready to start replicating deals and putting support structure in place.  At this point it may make sense to add to the team and finding people who can take a template and scale. The time spent internally has shifted from the Scouting stage and is primarily and now an external facing role. The time internally facing will drop to 20% – 30% and should remain a priority to communicate changes in the market and partner needs.

As a leader in an early stage company, hiring for the right stage is critical so ask questions during the interview process that relate to experience relevant to the stage of your product.

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Types of Business Development

Job titles can be misleading, a product management role at one company is “program management” at another and “product marketing” at yet another. Business development is no different and maybe more confusing. I believe there are three common types of business development and in an early stage company these roles typically are combined and larger companies will have roles that focus on one particular area.

Sales – for whatever reason, some people seem to feel better about themselves with the title “business development” instead of sales. This is ridiculous. Sales is one of the most crucial roles in any business and the profession is filled with incredibly dynamic, intelligent people that play a key role in shaping the success of a company. If you sell a product or a service and carry a quota and more than 50% of your income is based on commission and you are successful, you are able to do something that only a fraction of the working population can do well. It is sales and that is something to take pride in doing and doing well.

Commercial – focuses on a specific deal type like distribution that in turns creates leverage for a company. A classic example are the toolbar deals that Google and Yahoo did years ago (these have since become less common given market saturation) where the economics and deal terms can be complex and require protracted negotiation. Another example is Coinstar’s gift card partners that create an incentive for consumers to dump jars of coins into machines in exchange for a gift card with Amazon, AMC Theaters and Starbucks.  These deals help an organization scale product distribution, generate direct or indirect revenue, increase market penetration and other business drivers that do not come from a direct sales team. While not all deals are the same, they will have the same goals and success metrics.

Product – this can range from basic technology licensing to integration or joint development deals and require a solid grasp of the technology on both sides. The ability to work well with engineers and product teams is a must, to be successful one must possess the ability to translate technology into commercial language in an agreement and effectively manage cross functional issues (legal, engineering, marketing etc.). Definitely not a procurement role, this involves things that make the product work, reduce time to market and provide scale. Think of the integration Apple, Google and Samsung have with banks and payment platforms to enable consumers to use their mobile device to pay for things at the checkout. This is an incredibly complex deal to structure that involves engineering efforts, security, intellectual property, marketing and dozens of other factors that need to be carefully thought through and negotiated. I have often suggested to individuals seeking to learn more about BD to read through a few different API agreements from different companies to get an understanding of how to successful companies approach their developer/integration programs.

New /Strategic – this combines many skills and requires diverse experience to work closely with company leadership to assess the overall business and identify new areas of growth and/or ways to transform existing business. Executives, product and engineering teams often have to focus on meeting tight deadlines, customer expectations and struggle to get the necessary external market exposure and synthesize trends and data relevant to the future of the business. The ability to both identify and assess opportunity and help a company take action that leads to something meaningful is a rare, and incredibly valuable skill. I stress execution here too, without it, even brilliant ideas are worthless. As Thomas Edison was famous for saying, “vision without execution is hallucination” and telling people about brilliant ideas without a plan to help get there and a willingness to go above and beyond to help get there probably makes you an asshole.

Hopefully this helps clarify some of what various business development people do – or don’t do in some cases.

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