Sales Partnerships- a lean way to scale startups?

12:23 PM    
By Aditya Dhanrajani


Recently we have been discussing the challenges startups face managing sales as they scale. We have covered some of the theory developed by David Skok on the cash flow trough created and the effect that hiring sales people have on it.
In hiring salespeople startups put immense pressure on their business model as returns are delayed if they actually are realized. So is setting partnerships another potential model for startups to ease this pressure? Partnerships as used here refer to startups collaborating with a large corporate which has access to the target customer base through their sales force to sell product. An example of this is how a startup called AppDirect partners with telcos . AppDirect provides cloud service marketplace and management platform for SMBs. In order to reach the fragmented SMB customer space the startup is partnering with telcos and using their sales force to get distribution.
Partnerships (if structured accordingly) can provide startups with some benefits:
  1. Flexible sales force : The distribution network can be scaled up or down based on product evolution and testing different sell pitches 
  2. Reduce risk profile: As mentioned hiring a sales person is risky as it often might not result in product sales. In case of a partnership agreements can be crafted such that there is guaranteed revenue that the startup gets from the corporate (eg for licensing)
  3. Outsource after sales support : The support infrastructure for the startups products can also be handled by the corporate call centers freeing the startup from investing in its own support center  
  4. Potential network effects : If a startup can muster a quorum of partnerships, there is potential for network effects. For example if AppDirect partners with two telcos then the other telcos are incetivised to partner as well to be able to offer the same SMB product offering.
From a lean perspective, a partnership model provides latitude for an entrepreneur to access a large customer base to test hypotheses in parallel amongst a wide variety of customers. These hypotheses can go beyond product to the sales model itself.
At the same time a partnership poses some interesting challenges to a startup :
  1. Securing a partner : There is a catch 22, a corporate would only tie up with a startup after it has reached product market fit and is selling product, while a startup might want to partner when it not yet reached this stage to achieve reach and test product.
  2. Sharing IP : Startups need to share substantial chunks of their IP with their partner who in the long run can decide to create a similar product and eliminate the startup from the value chain
  3. Erode business model : Becoming dependant on a partner can put a startup’s business model at risk as the dominant partner(s) can demand “unreasonable” pivots/changes.
  4. Sales “airtime” : A partners salesperson will be incentivized to sell the partners core product vs the startups add on. As a result there is a scenario where the startup’s product doesn’t get sufficient exposure to customers and therefore yields no revenue.
In my opinion there still are two questions that still need to be explored on this topic. First is cost.  Like David Skok’s model lays out the direct sales model, it would be interesting to compare it to data partnerships to see how the costs and revenue stack up. Second is product. This model requires a startup to have a product that provides a core functionality such that a corporate is incentivized to invest in selling it. In the end however sales partnerships need to be evaluated on a case yb case basis to determine if the marriage can generate value for both the startup and the partner in a given industry structure.