When founders strike out to build the next great company, most assume they’ll adopt a direct sales model. But it’s worth thinking about partnerships and channels, too.
Utilizing partnerships and channels can enable effective go-to-market activity. It can also improve your product’s scalability, increase customer engagement and ultimately provide the highest levels of service. Channels exist across all verticals in our economy — channel companies take a cut of revenues in exchange for providing smaller companies with a route to market.
Whether you’re in the early innings of your startup journey, defining a brand-new market, or strategically scaling up the S-curve towards an IPO, you should stay mindful of the critical points to developing the right partner and channel motions. As the diagram below indicates, companies in the early “ferment” stage benefit most from base-level technical partnerships/integrations. At the “takeoff” stage, companies should move to co-selling with technical partners. At the “maturity” stage, the team and product are likely ready for broader go-to-market partnerships with solutions-integration (SI) providers, information-technology outsourcing (ITO) and distributors (disti for short). We’ll define these terms more below.
Two Reason Cloud Startups Should Engage With Channels
With the transition to cloud-based software, the world of technology channels is being turned upside down. Channels are hungrier than ever to engage with promising startups. The value to startups in return isn’t always obvious, but there are two big reasons to engage channels:
- Efficient scale. No matter how easy your product is to consume, large corporate accounts will transition into an enterprise sale. To manage sales costs, it’s frequently beneficial to work with a channel organization that has long, trusted relationships.
- Entering new markets. As the company expands to new geographies or verticals such as the federal government, channels can provide specialized knowledge (regulatory, accounting, etc.) and access that would take quarters to hire for (or years to build).
What are Channels? An Overview
Channels come in four broad categories, each with their own characteristics and sub-categories:
- Marketplaces: An online storefront used to distribute and bill cloud-based software, like Salesforce Marketplace. Primarily these services serve as fulfillment platforms (vs. discovery). Marketplaces offer a good way to achieve scale in combination with high velocity or traditional enterprise sales motions.
- Partnerships: An agreement between two or more organizations to reach the market together, either through technical integration or leveraging for solution completeness (solutions integration, or SI for short). Examples of channel partners include Accenture, Deloitte, or smaller design or development agencies.
- Resellers: A purpose-built sales organization(s) focused on third-party products. Resellers tend to be regional or national champions that focus on specific technology practice areas, e.g. security. Instead of a vendor building the relationship and trust, they work through these organizations with established enterprise relationships. A few examples of Value-Added Resellers (VARs) include Trace3, Evotek and Ahead.One layer removed is a distributor, or disti. Distributors sell a third-party technology through a proprietary network of hundreds or thousands of VARs. An example is Ingram Micro.
- ITOs / MSPs: Information technology outsourcing (ITOs) and managed-service providers (MSPs) run technology on an enterprise’s behalf. For example, instead of running a security-operation center it is common for enterprises to hire an MSP. They buy/build a platform, handle staffing, etc. so that the enterprise doesn’t have to. Under this model, the MSP or ITO selects the underlying technologies to deliver the service. As the diagram below illustrates, the tech company sells to the MSP (who is their customer), and the MSP runs the software on behalf of the enterprise.
A key to success across the partner landscape is understanding the current landscape of vendors and the gap(s) you can fill. It will keep you from chasing the wrong partners.
Choose Your Channel Sales Path Wisely — But Also Know You Don’t Have to Choose Exclusively
As companies transition into scaling (vs. proving themselves), many routes to market make sense. The three channels described above are non-exclusive. For example, a reseller may do all the legwork to sell the technology and the enterprise receives it through a cloud marketplace.
That said, beware of one downside of a channel: You become one or more steps removed from customers and their feedback. For that reason, early-stage companies should focus on channels that allow them to hear how the customer is using the product, if there are product features and requirements that are not being met, and other forms of competitive intelligence.
Building a Sustainable Channel Program
Before starting down the engagement path, it’s critical to understand how the channel functions. Channel companies are first and foremost fulfillment engines. They take a cut of the revenue, which means they don’t get paid for looking busy. To start building these relationships, sales organizations need to feed the partners deals. Said another way, channels are not market makers in your startup’s early days. As they see a path to repeatable revenue, they will invest in training your team. The magic is when the balance shifts, the relationship becomes self-supporting and mutually reinforcing, and deals start feeding themselves.
Building a successful channel program happens in four steps:
- Selecting a partner
- Bringing deals to the table, which incentivizes the channel to build a program
- Innovating on deal structure
- Sustaining the relationship
It’s tempting for startups to approach integration and solutions partners with only their own perspective in mind: “We offer an incredible new SaaS solution that disrupts X or enhances Y. Why not use it?” The reality from a partner’s point-of-view is very different. Channel partners have ingrained processes and solutions. Operating in markets that necessitate growth and retention of business, they repeat known solutions and have trained hundreds or thousands of people on how to sell, integrate, or sell the vision of specific solutions. They’re not going to disrupt a working sales process lightly.
Six Pointers for Building Successful Channel Sales Programs
- “No” is the 2nd best answer. Beware of “happy ears” – hearing what you want to hear when talking to prospective partners or customers. It’s fine to evaluate opportunities honestly and understand if a partnership truly works right now. It will save endless cycles of false starts, and you typically don’t have multiple attempts to get the ball rolling.
- Find that internal case study and champion. Many solutions/integration partners have diverse sales/solutions teams. Find that low-hanging fruit opportunity that will create a clear, decisive win. You can then use that success as your internal case study to expand the partnership.
- Don’t be afraid to walk away or pause. Educating, supporting, and training partners can be cumbersome, and large SIs can eat up endless cycles just in evaluating the value you get. If mutually beneficial projects are already happening between you, slow your efforts and re-engage when you have new internal case studies that enable you to expand.
- Metrics, metrics, metrics. Understand how your partners influence ARR/contracts and tie revenue to partners both direct and indirect. That entails also understanding the metrics for your partners. What’s their contribution margin? Are they getting 2x or 10x your services on your technology? What percent of tech spend does your company represent across other vendors utilized in solutions? Metrics like these help you prove you’re providing meaningful value to SIs, encouraging them to scale your solution. Just as importantly, these metrics provide another lens on how you’re pricing your value to the market.
- Play for a win-win. It’s a cliché but it’s true. You expect your partners to drive business to your startup with new opportunities and expanding existing customers. In turn, your partners need to know you’re providing value back and pulling them into the right discussions. The balance will likely never be 50/50, but it isn’t a healthy relationship if it’s 95/5. If you have the right partners don’t be afraid to leverage them. They provide credibility and can expand your discussions rather than diminish them.
- Stay open to unsexy technical-partner integrations. Don’t just chase the shiny technical integrations; sometimes “unsexy” integrations offer the most meaningful value. It is imperative you understand the “why” driving a particular integration. Say a potential partner wants your product to integrate with Salesforce Marketing Cloud. That’s fantastic, but what’s the intent of the integration? Does it power new personalization experiences, automate email workflows, provide insights on customer data? Each reason can send you down a different path and enable you to start with the right MVP that hits 80% of the right feature points, rather than spending all your time over-designing a solution on day one.
Additional Points to Consider as Your Channel Program Grows
As your channel program grows, make sure you know the goals of your partnership programs. Are you trying to accelerate sales or build strategic value? If partnerships live within the sales organization, you can start to hunt specific partners that satisfy the quota goals a quarter ahead — all while pursuing the strategic opportunities that take more time but can really bring you to the next level.
To scale effectively, think of your partners as customers given they can bring meaningful revenue but might not hold the ARR directly. Ensure you have a path to support their needs with customer success, sales engineers, marketing, and enablement to get the most out of your efforts.
In closing, it’s wise to observe some typical rules of the road with channel relationships. First, choose a sales model (high velocity, direct, etc.) that fits the space you are selling into. Second, consider technical partnerships and cloud marketplaces as a logical place to start, where your early adopters will expect to find solid groundwork. Finally, nail the value-added reseller (VAR) motion before engaging with any 2-tier distribution. You have to walk before you can run.
There’s no right or wrong way to approach the partner and channel landscape, but hopefully this guide will get you started on the partnership journey. The Battery business development team is happy to support you on your way.
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Content obtained from third-party sources, although believed to be reliable, has not been independently verified as to its accuracy or completeness and cannot be guaranteed. Battery Ventures has no obligation to update, modify or amend the content of this post nor notify its readers in the event that any information, opinion, projection, forecast or estimate included, changes or subsequently becomes inaccurate.