Each day as I talk with promising new startups and the founders of my 35 or so portfolio companies, I ask myself, “What else do they need to know?” This month’s recurring topic has been business development.
I often hear the terms “sales” and “business development” used interchangeably. This is a clear indication that the person I’m working with does not understand what biz dev is all about. I’ve come to regret not having a chapter in my book specifically on this hat. Hopefully I can remedy some of that mistake with this article.
Sales vs Business Development
Sales is the art of articulating a case for why someone may want to buy your product or service. It involves statements of fact and their related benefits to potential customers. A seasoned sales manager will provide his or her reps with a proven repeatable process and all of the sales collateral they need, such as testimonials, case studies, competitive analysis, presentation material, objection handling, call scripts, leads, pricing, contracts, etc.
Sales reps generally don’t create the pitch or process but they are experts at utilizing that proven rut for success. They skillfully utilize the process and arsenal they have been given to build and close a book of business. They are the machine that is constantly stamping out the cookies.
Although business development involves sales skills, it has no such set pattern to follow. A great biz dev executive is on the hunt for ways to harness the resources of a potential business partner.
Experienced biz dev professionals begin by figuring out your industry’s ecosystem, mapping the space and estimating which stakeholders might be able to leverage your offering. They spend their days exploring potential custom relationships with companies with which a mutually beneficial relationship might be derived. They are always trying to understand the goals and strategies of potential partners to see if they can come up with a custom relationship that will benefit his or her company’s metrics.
A biz dev executive asks, “how can I harness and leverage another company’s marketing budget, customer base or salesforce?” What can we offer said company in return that will make it want to partner with us in this way? Unlike sales, business development is the art of writing a custom business plan with a potential partner. It is not following a pattern but rather creating one for each unique partner.
The Importance of Business Development
I consider direct sales and marketing to be trench warfare. It is necessary to prove that your offering has merit and that you can obtain and retain customers, but organic sales are typically painfully incremental and expensive. Business development leap frogs this process.
For example, at plan, your early model might call for hiring one new salesperson every month. A biz dev person would be looking for a way to get 100 new sales reps (that someone else is paying for) to carry a quota on your product via a revenue share agreement. They might also try to find a way to get your product integrated with a partner’s product so that whenever one is sold the other is automatically sold as well. These deals can dramatically affect your forecast.
Closing Business Development Deals
In order to close a biz dev deal you have to demonstrate to potential partners how the proposed relationship is going to help accomplish their stated goals or strategy. For example, let’s say a well-established business has 100,000 existing customers that fit the prospect profile for your product or service. You’d like your potential business partner to launch a marketing campaign to this customer base on your behalf. But why would they do that?
You will need to demonstrate how your product will help your potential partner drive more margin, differentiate itself from competitors, increase customer retention, etc.
Revenue share deals tend to live on a continuum ranging from 5% of revenue for a simple referral arrangement all the way up to 30% or so for a partner who is going to commit a budget to your initiative and require quotas of its salesforce. The stronger a partner’s commitment to your program, the more revenue share they should garner. There are several proven techniques for moving a potential partner along this continuum.
There are many issues that will come up and must be negotiated in a biz dev deal. Your partner may want to private label your product or may demand exclusivity. I have always encouraged my biz dev team to try to say “yes, if” rather than “no, because”.
Your best biz dev executive is going to be personable and creative, an expert at building win-win relationships. For example, rather than saying, “we can’t do an exclusive deal” he or she would explore why that partner wants this type of relationship—perhaps you can achieve this in other ways. Limited exclusivity can often be given if confined to a geography, specific vertical, pre-existing customers, for a limited time-frame or only if certain minimums are maintained. There is almost always a way to get a deal done if you are creative, flexible and truly understand your potential partners’ goals.
When to Engage in Business Development
Business development deals can be company making especially for an early-stage company. But remember that you must have a repeatable sales process and reference-able customers before any potential partner is going to take you seriously.
Be prepared to launch a serious effort. Proven biz dev executives are expensive and it takes on average six to 18 months for them to put together their first deal. In general, it is a waste of time doing deals with other early-stage companies. You want to target market leaders with large customer footprints, national sales teams and big marketing budgets.
There is one final reason to allot some of your precious early-stage resources to a biz dev effort. Many organizations use biz dev relationships as a vetting process to evaluate companies they may want to acquire. Most of my seven exits as an entrepreneur were to an existing biz dev partner.
The right business development deals can not only be company making, they can also significantly increase your chances of exiting to a less price sensitive strategic acquirer.