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1M/1M: Alternative Financing For Startups Using A Sales Channel Partner

Posted on Thursday, Jan 27th 2011

In this post, I want to discuss today’s news: 1M/1M Announces Partnership With Persistent; CrowdEngineering First Beneficiary, and explain the thought process behind it. It is a creative sales channel strategy that acts as alternative financing to mitigate some of the severe limitations of early stage startups.

In my experience, building a marketing channel/sales channel is one of the most expensive pieces of a startup P&L, and a notorious contributor to small companies running out of cash and going out of business. Typically, this happens for a number of reasons:

(1) Startups have a hard time recruiting top-notch sales people for unproven products and services. Channel development, therefore, is complex to do in-house in the early stages.

(2) While the sales team is being trained, startups end up paying salaries for salespeople who are not yet producing.

Yet, this is also the time when getting just a handful of strong reference customers is tantamount to massive validation, valuation, and credibility enhancement. Your valuation can, literally, shoot up from $1 million–$2 million pre-money to $10 million–$20 million pre-money if you navigate this phase right.

Thus, my thesis is that in 1M/1M, we want to focus steadily on giving entrepreneurs access to potential channel partners from my Rolodex so that they can turn their energy on building validation by using other people’s sales channels, customer relationships, expertise, and experience, rather than spending money on building their own, until they accumulate at least 6–12 significant reference customers.

These sales channel partnerships are typically revenue sharing deals, and I negotiate them myself on behalf of the entrepreneurs. There are at least 100–200, if not more, CEOs in my network who have invested in building sizable sales channels, and to grow faster, they need adjacent products to push through these channels. Ideally, they do not want to spend the money acquiring companies or investing in long-gestation R&D.

Where appropriate, and as you see in the Persistent-CrowdEngineering-1M/1M deal, we will be working together to build significant revenue momentum for the new product, service, or technology.

All of the valuation upside from these deals remains with the entrepreneur. Neither 1M/1M nor the channel partner eats into any of the valuation upside being created, which is one of the most attractive pieces of this mode of alternative financing: the entrepreneur faces no dilution at all.

I call this alternative financing primarily because it is excruciatingly difficult for tiny startups to get the attention of larger companies and their sales forces. So, if you can recruit such a partner who is willing to invest in training their sales force to sell you product, and is serious about it, I consider them an investor in your business. Not a cash investor, but an in-kind investor. And a non-dilutive investor at that.

In addition, the 1M/1M companies also get all the benefits of a value added reseller with core competency in their industry segment.

In 1M/1M, we are developing some true, differentiated core competency in positioning and negotiating these kinds of channel partnerships. Through 2011, alternative financing using creative channel partnerships will be a key piece of the 1M/1M methodology.

One final point: to raise equity financing, especially venture capital and somewhat less so with angel capital, startups need to be going after a certain level of total available market (TAM). In the case of VCs, this is upward of $500 million. Angels often work with smaller TAM opportunities. This mode of alternative financing using channel partners doesn’t necessarily require huge TAMs and can therefore be made available to a broader audience of entrepreneurs. So, if you have been struggling with equity financing due to TAM limitations, I can start by looking at your business and figuring out alternative financing mechanisms that can enable you to circumvent the bottleneck.

Please note, these opportunities are available only to 1M/1M Premium Members.

This segment is a part in the series : 1M/1M

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I couldn't agree with you more!
The main challenge for young companies is traction/revenue growth, which directly correlates with the quality and level of access to senior executives at companies within their TAM.
I look forward to tracking your success with this model.

Larry Chaityn
Partner, Altus Alliance & President of Keiretsu Forum NY

Larry Chaityn Monday, January 31, 2011 at 5:09 AM PT

This is indeed a great opportunity and can help a lot of startups like us to reach out to our potential customers. Which we sometime find difficult to tap. It will be a great value provided the percentage of revenue shared is such that the startups able to atleast cover the cost or make a small profit from these new businesses.

Typically what percentage of revenue needs to be shared in these kind of deals? Though I do understand that this can vary depending on the service offered and other variables

Niladri Monday, January 31, 2011 at 5:58 AM PT

Hi Niladri,

The terms are confidential. All I can say is that the deals are negotiated as win-wins across the board.

Basil, Nimish, Larry – Thanks for the reactions. Helps to hear it from you guys.

Cheers, Sramana

Sramana Mitra Monday, January 31, 2011 at 8:18 AM PT

Fascinating idea, Sramana. This seems like an extension of the 'affiliate marketing' model. This is another concept where the scale of your 1M/1M network could be a significant benefit to entrepreneurs. I'm looking forward to reading some of the success stories.

basilpeters Monday, January 31, 2011 at 7:35 AM PT

Sramana – great idea! I love it…

Nimish Mehta

Nimish Mehta Monday, January 31, 2011 at 7:43 AM PT

This is a tried and true method, and can work very well. I worked closely with the head of sales of a major food and beverage company that had a large volume regional product and a number of lower volume products that were national. Where they had the high volume regional product, they had their own sales force. Elsewhere they went through food brokers. The vice president of sales maintained that there was no difference in results inherent in the two approaches. He held that"when we have a good sales manager in the region we do very well with each approach, but when we have a sub par sales manager, the results are disappointing with either approach." The point is that you cannot simply turn over sales responsibility; rather you must manage the relationship well. That said, out sourcing sales can, and does work very well as long as you assure that your product gets the right attention.

Carl Jacobson Monday, January 31, 2011 at 9:26 AM PT

This is good, especially for Malaysian 1M/1M premium lounge members. A strong value proposition that MAD Inc believes in as well. This is also a good conduit for Malaysian companies to access the US market.

Andrew Wong Tuesday, February 1, 2011 at 3:55 AM PT