When (Almost) Every Company Should Invest in Business Development and Partnerships

This is the fourth post in a series focused on the topic of “Business Development”. In my first post – Introducing the Guide to Business Development and Partnerships – I provide a curated list of articles written by “experts” on the topic of Biz Dev.  The first four sections of the guide are focused on the “What, Why, When and How” with regards to Biz Dev.  In my second post, I examine the “What”.  In my third post, I examine the “Why”. In this post, I tackle the “When”. (Note that while most of the ideas in this post are applicable to all companies regardless of industry, this post is geared primarily to B2B SaaS companies.)

Differing opinions

As I have discussed previously, the term “Business Development” is neither well defined nor well understood. If you ask ten people to define “Biz Dev”, you are likely to get ten different responses, ranging in focus from sales and lead generation to M&A. Likewise, people have varying opinions as to when (if ever) a company should invest in Biz Dev. Here is a sample of opinions from some well-known VC’s:

  • Paul Graham from Y Combinator argues that raw start-ups should never pursue partnerships; only when a company is “large” – defined as more than 150 employees – should they consider Biz Dev.
  • Jason Lemkin from Storm Ventures believes that companies should invest in Biz Dev relatively early – meaning $2 million in revenue.
  • David Cowan from Bessemer recommends that companies should hold off on Biz Dev until they hit $10+ million in revenue ($1 million in MRR).
  • OpenView states that $20 million in revenue is the magic number.
  • Neeraj Agrawal at Battery believes that $40 million in revenue is the right number.

And there are plenty of folks who believe that Biz Dev is largely a distraction, and that companies should avoid partnerships altogether.

I have two strong beliefs:

  • Every company should invest in Biz Dev.

AND

  • The “right” time to invest in Biz Dev depends on several factors, including the specific Biz Dev model you are pursuing. But in general, once you have achieved some early “traction” – meaning your company has demonstrated that it can repeatedly build, market, sell, and renew your product on your own – you should consider investing in Biz Dev. (1)

(And yes – I am a big fan of Jason Lemkin and generally believe his word is the gospel, so it is no surprise that I basically agree with him.)

Let me dig into these two ideas further.

Why (Almost) Every Company Should Invest in Biz Dev

In an earlier post, I explain that companies invest in Biz Dev because they recognize that they can’t do it alone. What do I mean by this? For startups specifically, every function (Sales, Marketing, Product, etc.) inside the company is typically resource constrained.  And invariably there are organizations outside of the company’s four walls (potential partners) that are in a position to help.  Smart companies recognize these opportunities and proactively invest in Biz Dev with the goal of securing partnerships that will help each function achieve their respective goals.

I will concede that there are examples of very successful companies who have never partnered with outside organizations. But these are the exception, not the rule. And in B2B SaaS specifically, partnerships are crucial. See Salesforce with the AppExchange. Or as Jason Lemkin puts it, in order to be successful in SaaS, “it takes a village”.

Please note that by encouraging an investment in Biz Dev, I’m not suggesting your company needs to close a bunch of high-profile deals. I would favor quality over quantity. Or to put it another way, “partner infrequently but commit deeply.” In fact, for some companies, the right Biz Dev strategy is to say “thanks but no thanks” and to hold off on inking any deals. What I am recommending is that you make your decision about your company’s partnership strategy equipped with information gleaned from a proactive Biz Dev initiative, which will help you (among other things) best understand where the external opportunities and threats to your company are.

Let’s now examine when in a company’s lifecycle it should invest in Biz Dev. In order to do this, we need to first understand what exactly Biz Dev means.

Defining “Business Development” and the 9 Biz Dev models

In an earlier post, I define “Business Development” as “the function at the company responsible for identifying, securing, and/or managing relationships with organizations outside of the company (excluding customers and suppliers) that helps other key functions at the company achieve their respective goals.” I then identify the nine most common Biz Dev models, which I group into four categories based on which function – 1) Sales, 2) Marketing, 3) Product, 4) CEO – each model is designed to support.

In order to answer the question “When should a company invest in Biz Dev?”, we first need to specify which Biz Dev model we are referring to. Let’s look at the answer as it relates to each of the nine models below:

Model #1: Re-seller

  • Category: Sales
  • Description: Company sells its products to end customers via a third party
  • When: After the company has proven that it can successfully market and sell its product direct to end customers
    • Most of what has been written about Biz Dev is actually about re-seller deals. OpenView literally wrote the book on this topic. One thing most people agree on is that you generally shouldn’t try to build a re-seller channel until you have successfully marketed and sold your product directly to end customers on your own. This milestone is critical for two reasons: 1) potential partners are not going to be interested in working with your company unless you can convince them that they can make a lot of money re-selling your product (i.e., you need to have already closed a bunch of customers on your own), 2) training the Sales and Marketing teams at each partner around your positioning and messaging is going to fall on you (i.e., you need to know how to sell and market your own products). Mark Suster elaborates on these two ideas here.
    • That said, the question of exactly when a company should invest in a re-seller model is open to debate. As I mentioned earlier, five VCs have five different opinions. Personally, I believe that a company should consider building a re-seller channel when: a) it has had success selling direct; and b) it believes that selling via partners will increase the likelihood that it will achieve its goals. Sean Jacobsohn (a VC who happens to be a former Biz Dev professional) basically makes the same point here.
    • Note: If you do decide to build a re-seller channel, you need to go into it with “eyes wide open” (i.e., with an understanding of all of the attendant challenges — see OpenView’s guide for the details).

Model #2: OEM

  • Category: Sales
  • Description: Company licenses its product to a third party, which then bundles it in with its own products for re-sale
  • When: Early
    • Ideally, if a company is trying to sell its product via OEM partners, it does so from the outset in the company’s lifecycle. In my experience, it is very hard (read “impossible”) to modify a product (let alone the Sales, Marketing, and Support infrastructure) for the OEM channel if the product was originally designed to be a standalone product sold directly to end customers.

Model #3: “New” markets

  • Category: Sales
  • Description: Biz Dev takes the lead on opening up new markets – like a new customer segment or a new geography; eventually Biz Dev hands off the execution to Sales
  • When: Depends
    • The decision to open up a “new” market should not be taken lightly. In my experience, companies tend to underestimate the resources required to successfully open up a new market, and start too early and/or under-fund the initiative. (2) Along these lines, if a company has an initial hypothesis that “now” is the time to expand into new markets, it may be more efficient to have the Biz Dev team take the lead and avoid distracting the other teams (Sales, Marketing, Product). Once Biz Dev has done the initial research and (ideally) closed some early customers in the new market, they can then hand off to Sales to execute.

Model #4: Referral

  • Category: Marketing
  • Description: Company develops close relationships with organizations that provide higher-quality leads in exchange for a fee
  • When: After the company has proven that it can successfully market and sell its product direct to end customers
    • In a prior post, I describe the referral and re-seller models as “close cousins”, meaning that companies pursue both of these models with the same high-level goal of improving distribution via partners. And like with re-seller deals, when a company starts to build a referral channel, it should have already hit the same milestone (i.e., have closed a bunch of customers on its own). Referral deals are much easier to execute than re-seller deals because with the former, the company maintains responsibility for Sales, while with the latter, the partner is responsible for Sales (i.e., there are more moving parts with re-seller deals). In my experience, a referral deal can be a great method to both generate leads AND get to know a potential re-seller partner before making a more complex commitment.

Model #5: Affiliate

  • Category: Marketing
  • Description: Company develops arms-length relationships with organizations that provide lower-quality leads in exchange for a fee
  • When: After the company has built a repeatable sales process
    • For some companies, the affiliate model can be a relatively lightweight and inexpensive method to generate more leads, especially when compared to the referral or re-seller models. But as Lincoln Murphy explains, if you haven’t developed a repeatable sales process, you should hold off on investing in building an affiliate channel, because if you can’t close the leads that your affiliates are sending to you, then they will quickly lose interest.

Model #6: Informal

  • Category: Marketing
  • Description: Catch-all to describe variety of informal marketing initiatives that a company can pursue with other organizations; typically no money changes hands
  • When: After the company has built a repeatable sales process
    • Once you’ve built a repeatable sales process, then it may make sense to explore informal marketing initiatives (joint webinars, joint content, etc.) with companies that offer a complementary product. Having said this, if you have a very small audience for your own initiatives, then “high-quality” partners are going to be less inclined to work with you, so it may make more sense to hold off on these initiatives until you have developed an audience (customers, prospects) on your own.

Model #7: Marketplace

  • Category: Product
  • Description: Company creates and manages a program that allows third-party developers to build applications that integrate with the company’s core product / platform
  • When: Once the company has achieved “scale”, defined as a “large” customer base
    • A company builds out an apps marketplace in order to augment their own Product development resources. In this model, you develop an API that allows products built by third-party developers to integrate with your company’s product. However, these third-party developers will not build these integrations unless they are confident that doing so will enable them to sell their own product into your customer base. So your company needs a “large” installed base of customers to really make this work. The definition of “large” is not well defined. One example that I know well is Bullhorn (CRM for the Staffing vertical), which began building out their apps marketplace when they had 2,000+ customers and $20+ million in ARR. Because Bullhorn had a “large” customer base, they were able to recruit partners relatively easily. These partners built apps that integrated with Bullhorn’s platform, which enabled Bullhorn to close more customers (and generate more revenue) than they would have otherwise.

Model #8: Integration

  • Category: Product
  • Description: Company’s business model is predicated on having the company’s product integrate with products offered by third parties, so the company forms partnerships with these parties
  • When: Early
    • For some companies, product integrations are essential, as their business models rely on having their products integrate with those offered by other companies. Examples of this include data integration companies (like Bedrock Data) and analytics companies (like InsightSquared). These companies build out product integrations very early in their lifecycle. For example, InsightSquared built an integration with Bullhorn out of the gate, and this integration (coupled with some joint sales and marketing activities), enabled InsightSquared to close its first 200 customers and raise a Series A.

Model #9: Strategic

  • Category: CEO
  • Description: Company identifies and engages with potential partners who represent future investors in the business and/or acquirers of the business
  • When: Sooner rather than later
    • Per John O’Farrell, the smart CEO invests in strategic Biz Dev in order to ensure his/her company “always knows where the exits are”. His point is that companies must invest the time early on in their lifecycle to map and network their ecosystem with an eye towards either raising capital and/or selling the business. If the company has made this investment, when an opportunity (or a crisis) presents itself, the company will be well positioned to respond. Eric Paley expands on these ideas when he recommends that companies “get to know potential buyers early and often”.

Conclusion

As usual, breaking this down took much longer than I had anticipated. But if you’ve stayed with me all the way to this point, you should now understand why (almost) every company should invest in Biz Dev, and when the right time is to do so.

Notes

(1) A common mistake made by young companies is to pursue Biz Dev too early in their lifecycle. As one start-up founder explains, “you cannot partner your way into traction.”

(2) Bessemer encourages companies to be cautious when expanding internationally when they talk about “avoiding concurrent wars on multiple fronts.”

Thanks to Nick Worswick and Arjun Moorthy for their input on this post.

A version of this article was previously published via OpenView Venture Partners.

  • Blcarey

    James, as usual. Great dissection and analysis of the various stages and responsibilities for Biz Dev. The reality is that in smaller organizations, someone is always filling the Biz Dev chair (usually the CEO or COO) until they can some further traction to hire someone. Sadly, these individuals can’t give the attention that’s necessary to execute successfully because they’ve got other duties. If there was some way they could outsource the key Biz Dev roles they need during various stages, that would be awesome. Have you ever run into such an organization (I mean other than ibankers?)

    • http://www.linkedin.com/in/jamescohane James Cohane

      I have worked with some early-stage companies in a consulting role focused on Biz Dev. And I know a handful of other folks who have also done this. But I don’t know of any sort of company that has done this at scale.

  • Philip Peters

    Nice work James. Prefer BD to Biz Dez, as an aside. BICary is on to something. The coming BD innovation is outsourcing it. Many functions such as sales, PR, marketing, customer care etc are outsourced. We’re currently working on a BD platform to do just that. Key to BD Outsourcing in our framework are:

    1. Standardizing the BD Process flow into Pre-Deal, Dealing and Post Deal

    2. Automating BD through an API process.( companies such as Pinterest, Uber and others are found so). BD API is a kind of USB for accelerating deals. Mashery and Mulesoft are facilitating BD API processes but it’s not standardized – more kind of sandbox enabled.

    3. Buy-side/distribution.
    In the Tech/innovation sector, less than 50 Fortune 500 companies do most of the acquisitions and distributions for growth/startups firm.

    A 2 sided marketplace driven by BD API is the future in our thinking.

    Nb: we’re standardizing economic development (ED) using our BD lens called the Tig Protocol at our CitiQuants.com. Can share the Tig Protocol doc for anyone interested.

    • Fermin Alvarez

      Philip – I like your point(s). I’d appreciate it if you you share the Tig Protocol. Thanks!

  • Jordan Thaeler

    Good write up. One thing to note are the realities around raising capital that make certain approaches favorable. For instance, you need to be at $1M ARR to raise any sort of money from seed/angels, let alone VC. To go from zero to $200k (let’s say your salary), you’d have to work for free for a long time if doing direct sales… or use channels. To go from $200K to $1M, you’re going to need to convince people to work for free (doubtful) or use more channels to grow the business. So without supporting capital, you almost certainly have to use channels for B2B SaaS.

    • http://www.linkedin.com/in/jamescohane James Cohane

      Hey Jordan. Thanks for the comment. Are you saying that very early-stage B2B SaaS companies should focus on selling via partners as opposed to direct? If so, I would disagree, as (per my article), I think early-stage companies should focus on selling direct. I think you may be making a different point?

      • Jordan Thaeler

        I’m saying you’re going to need to do both to grow revenue to cover your costs, but unless you’re willing to leave work and do sales – which are primarily done in the 9-5 working hours – you will need to use a channel so you can keep your day job and thus some income. Investors will not pay you to derisk the business, so it’s up to you to do it all. Some channels are more motivated than others as well, and I would look at what’s happening with margin compression in payments as an example of a channel that’s needing recurring revenue solutions.

  • http://blog.kwiqly.com/ James Ferguson @kWIQly

    Great to see someone challenge the norms of “received wisdom”.

    Our little bootstrapped startup (4 employees) made not only our first, but our second and third sales through different partners. They say do not hunt whales as a startup but our partner one two and three are each at least a Footsie 100 company and in one case a global 30 titan.

    Sometimes it pays to approach things differently

    We have tried but have as yet not made a single sale direct to end-user (usually the end-user is itself a very large enterprise)

    Yes it took literally years to bring in the first deals, and get our product to ma nt a real perceived need but these partners have sales connections that you simply cannot buy. If you want scalability of a heavy touch fied sale than business development for resale is your friend.

    If we had taken the advice of those that eschew re-sales partnerships we would not be in business.

    As we are thinking about a first round of funding (possibly) a major concern is that we know we have to run this baby our way, because the energy industry is rather different from selling downloads of an app from a playstore.

    • http://www.linkedin.com/in/jamescohane James Cohane

      Hey James. Thanks for the comment. It sounds like you have managed to convince some larger partners with connections to pay attention to your start-up. Congrats. I hope that you can turn these relationships into something that is scaleable / repeatable.

      • Jordan Thaeler

        What James is echoing is exactly what I did: they needed income to cover their 1-2 year sales cycle. Investors do not fund that, so they likely kept a job with income and used a channel to do the sale. When they had enough revenue to cover costs, they could start selling direct using customer testimonials, or keep expanding their channels. This is just the reality of today’s financing market: you cannot raise money unless you’re Elon Musk or you’ve derisked the entire business. If the latter, why the hell would you take VC dollars, because if you don’t reach $100M ARR in <5 years the VCs will fire you or ratchet you out of ownership anyhow? The net result is also that very few innovate things are getting built… it took Elon $200M to build his first Tesla (capital for production facilities, etc) and test demand of PMF. If anyone who wasn't Elon Musk wanted to build an electric vehicle (I'm not arguing merits of the electric technology) investors would have said, "hmm… spend $200M of your own money to build a production facility, create marketing demand, and get to sales of tens of millions… then we can talk about how to take a large chunk of a riskless business."