by Pete SonsiniJan 12, 2017
In more than 10 years as a VC, I’ve seen just about everything when it comes to strategic partnerships. But experience is often the best teacher, and the advice I give my portfolio companies on biz dev initiatives usually comes straight from my time spent in the trenches, running OEM and strategic alliances for Diane Greene at VMware. The expertise I gained during the company’s early years has helped to shape many of my portfolio companies’ strategies, and I have strong opinions about how best to build and execute the function—and how to avoid missteps.
A key challenge for any young company is to develop leverage in its go-to-market model, and forging strategic alliances with large incumbent players is one of the fastest and most effective ways to do this. Tapping into the salesforce and marketing engines of big players can catapult a start-up to a large market presence and jumpstart a leveraged sales model. But getting these deals done is no small feat, and poorly executed business development can waste resources, create dangerous distractions, and burn lots of cash in the process. But with the right approach and careful execution, you have a good shot at pulling off an impactful strategic deal that can be a linchpin of your company’s long-term success.
If there is one persistent theme, it’s that you need to have a relentless focus on impact to the business. Looking back on all of the strategic deals I led at VMware, the IBM deal stands out as a great example. Practically overnight, the entire IBM salesforce and channel network were educated and highly motivated to sell our product, and the deal was architected so that VMware maintained direct relationships with its customers. But mobilizing the IBM sales juggernaut was only part of the equation—VMware also got support for Microsoft Windows running in a virtual machine environment (IBM had the Windows source code), effectively opening up that entire market to the company.
This deal also underscores the importance of alignment with the partner’s strategy—the partnership was huge for VMware, but in turn, VMware’s technology would enable IBM and other hardware vendors to sell bigger boxes with more CPUs. This is table stakes, but still warrants mention: the better the strategic fit, the better positioned you’ll be to get the best deals on the best terms. Great biz dev deals can change the trajectory of a startup company, and some examples of high-impact deals across my portfolio are included below in this roundup of ‘rules’ I share with CEOs as they build out their business development function.
#1 Don’t Hire a Biz Dev Exec (Yet)
Early-stage companies don’t ink big deals without the CEO’s direct engagement, and hiring a head of BD won’t change that. You’ll still be attending almost every meeting and involved with every decision, big and small. Allocate that headcount to someone who is building the product or selling it to customers directly until your BD activities have enough momentum to necessitate that hire. And remember that in this case one really equals three, because for every biz dev guy you will need at least two deep engineering people to support the engagements. Capital is scarce with startup companies, so plan on doing the really strategic work yourself and hold off on hiring a dedicated BD person as long as you can.
Databricks is having several strategic discussions around its data platform that runs on top of Apache Spark, and CEO Ali Ghodsi is the one meeting with execs at some of the world’s biggest tech companies. He is the one building rapport. And he is going to get a deal done. Apprenda recently announced a strategic partnership with Atos that involved both a corporate deal and a resale arrangement for its PaaS software solution, and CEO Sinclair Schuller did all of the heavy lifting.
#2 When You Do Hire, Find a Multi-Position Player
The most effective biz dev hire a startup can make will have sales skills and product strategy skills within the appropriate domain. When I joined VMware, I had worked as a product manager at HP and had also carried a bag as a sales guy—I was technical enough to talk details during strategic discussions, but I also knew how to build a relationship. I needed both skill sets to get a deal done at a major hardware OEM, especially a deal structured to allow VMware to stand as a big independent company. The person you hire must have sufficient strategic and technical facility to be credible to your potential partner, yet be a good enough salesperson to get the deal done. MBAs who have sales experience may be a good fit—they tend to have the right combination of skills, and can get up to speed quickly in any areas where their experience may fall short.
#3 Don’t Waste (Much) Time on “Barney” Deals
A “barney” deal is a partnership that has little or no real value to the business, usually culminating in a press release or a logo on a website. This ties back to the point about business impact. A startup has limited resources, and those resources should be primarily focused on building the product and selling the product. Displaying your logo on a vendor’s partner page or listing an assortment of “partners” on your website is a fine idea, but it’s not going to drive your sales cycle. Think about the impact, and if a press release or partner listing is going to command more time than it’s worth, skip it. On the other hand, be attuned for ways to turn a barney into something more valuable. For example, a prominent speaking slot at a user conference could have far greater impact than a fourth-paragraph quote in a press release. MapR’s strategic deal with EMC involved CEO John Schroeder speaking at the EMC user group and it was a significant engagement from both a brand visibility and a sales cycle perspective.
#4 Reseller Agreements: Know When (Not) to Make the “Big Ask”
Unless you have mutual customers or squarely address an immediate strategic need, don't even think about leading with the “big ask” of a reseller agreement. Find ways to establish the relationship that won’t drain or constrain your resources; ideally, develop low-friction programs that will create scarcity value and allow you to cultivate additional relationships without extra effort. We created a Certified Hardware Vendor Program at VMware mainly so we could get a toe-hold if a bigger deal couldn’t get done. Next thing we knew, we had people knocking at our door to sign up to our program. It was a great lead generation tool for partnerships, and helped create momentum without expending a lot of resources.
StreamSets managed to generate a ton of demand for its products before they even launched the company by way of the Cloudera and MapR salesforces without needing a reseller agreement. They have managed to do this because of excellent strategic alignment with those products and skillful engagement at the executive levels.
MapR makes the contrarian case to this rule (see above re: hitting a strategic need), bursting onto the Hadoop scene literally overnight through its partnership with EMC that involved a reseller agreement. The deal happened (a) because EMC believed Hadoop to be of great strategic importance, and (b) because John had the guts to ask for it and get it done.
#5 Structure the Deal Right from the Start
Every deal has a long tail of terms, but the ones that need to be structured right from the beginning are those that address channel conflict, sales quota retirement, upsell and discount and exclusivity. It is within these terms that you will be able to control your own destiny to become a big independent company, or not. In VMware’s deals with IBM, for example, each of these terms was negotiated very deliberately with the first deal that we structured, and each subsequent deals followed suit. If any one of those terms had not been conducive to the company’s long-term success, there are very few scenarios in which VMware could have grown into the large, successful standalone company it did.
We addressed the channel conflict issue by requiring that hardware vendors could only sell VMware’s product if it were bundled with hardware. Adding this term was one of my proudest achievements in structuring this deal, as it meant that VMware could still sell product on its own. I will never forget the conversation I had with my counterpart at IBM right after they had gone out and generated a ton of demand for VMware and he realized that they needed to let us fulfill it ourselves unless they could sell it with one of their boxes.
In order for both sales teams to be aligned, you must have quota retirement for the jointly sold products. The hardware vendors that we partnered with were willing to sign up for this and it had a huge impact, and we were able to ensure the VMware reps got paid too, despite some complexity associated with the IBM channel network.
We worked through giving the hardware OEMs a healthy discount because we knew that we would be offering new products down the road that they would not be able to sell. We were seeding the market; if the other products had not been in our pipeline, then we would not have been as aggressive with discounts.
#6 Your Biz Dev and Sales Teams Must Be Aligned (Or Better, Friends)
The relationship between your sales and biz dev teams must be collaborative. It must be a partnership where sales is the customer and biz dev is there to help however they can. Let the sales team be the hero by taking credit for hitting the number. At VMware, Carl Eschenbach and Kirk Bowman became close friends of mine because we realized that, as a team, we could really make a difference at the company. I was willing to put my ego aside and do what was needed to help the sales team. I had spent enough time in sales in my career to understand how they thought, and I was comfortable with my role. Perhaps this quality could be added to the traits needed when making a biz dev hire. But the collaboration between these two teams is important enough of a requirement for partnership success that it gets its own rule.
#7 When you have the “big meeting” don’t wave around caustic threats
If and when you get the “big meeting,” your objective is to build rapport and show the data. A blunt threat that you are going to do a deal with another vendor if they don’t engage quickly will not be well-received. Trust me—these execs at big companies are tired of hearing this from every-other-startup, and it almost always backfires. I’m not saying that you shouldn’t educate them on the various opportunities in front of you. Just play it softly; focus on starting your relationship off on the right foot. The time may come that you may find yourself playing one big vendor off the other, but wait until you’re holding the cards…and in the meantime, don’t be a jerk.
#8 Avoid Taking an Investment, Unless It’s from a Consortium
This is a tough rule because most startups sure could use the money. But when you take an investment you will generally need to give out observation rights. Along with this comes a signal to the industry that the company has special rights and a right of first notice when acquisition offers start coming in. You can achieve independent success while having a strategic investor, but it generally will not be worth it, so avoid it if possible. If you need to do it, try to convince other strategics to invest; this will mitigate any appearance of special rights, while sending a clear signal that you mean business and the industry is paying attention.
#9 Executive Support Is Critical Throughout… So Are Relationships with the People Doing the Work
Every good deal needs to have sponsorship at the executive level AND strong support at the execution and field levels. At VMware, the close relationships Diane had developed with Nick Bowen and Deepak Advani at IBM doubtless played an important role in sealing the deal. I developed strong ties with my counterparts as well, even going on fishing trips together. Without these strong relationships at the executive level, as well as within and between VMware’s alliances and field organizations, it’s unlikely that the partnership could have matured and scaled successfully as it did. It is impossible to underestimate the value of personal relationships to make partnerships successful.
#10 Be Patient
This will be anathema to almost any CEO. You want to do the deal and I’m not saying that you shouldn’t work your tail off to get a deal done. But your energy is best spent on the areas where you have more control over your destiny; building the right product and selling it yourself. These biz dev deals are a longshot so don’t put all your eggs in this basket. Hedge your bets and try and control your own destiny.
A good strategic deal can mean great things for a startup. But you have to go about it the right way, and you have to be mindful of the potential hazards—both in building strategic alliances and in building out your team. Getting biz dev right can feel like a narrow path to walk at times, but if you maintain focus and discipline, these guidelines should help you stay on track.