My initial conversations with startup founders discussing a business development engagement usually end in the same place – they expect me to agree to a compensation arrangement that is mainly commission focused. It seems logical – pay for results, right? Not necessarily, as it can misalign incentives and work against the growing company.
Selling Cars: Coin-Operated
A commission-based sales role works well in circumstances where product parameters are well known. For example, a sales rep selling new cars for a car dealership can count on the following:
- Brand reputation – the car maker promotes its brand image heavily in a variety of mediums; further, it backs up the quality of their products with a warranty and a national network of service dealerships.
- Product is available and known – the car for sale is either available on the dealer’s lot or nearby. Product specifications and reviews can be easily obtained.
- Price and overall business model are well established. While there may be a small range available for negotiation, everyone has a rough idea of the selling price, and, in general, the transactions create a profit for the seller.
- Value proposition to the customer is well defined. The customer does not need to be convinced of the usefulness of driving a car.
- Sales data is readily available, i.e. both dealership management and prospective sales reps can determine the average sales performance in a given sales territory.
In this instance, selling is mostly about qualifying which prospective customers are ready to buy, and then quickly resolving the issues that arise during the closing process. Most sales reps at car dealerships are “coin operated”, meaning they get paid only when sales close.
Business Development: Infinite Possibilities (& Potential Traps)
An early stage startup, especially one focused on b2b sales, works nothing like a car dealership. The startup has:
- No brand and no established reputation for being able to deliver on its promises.
- While an early product definition may exist, it will likely require customization to sell to the first set of customers. Often, the product is a “hypothesis”, anticipating a market need that may miss the mark for the targeted set of customers.
- Since there is no standard product to sell, there is no standard pricing. Further, for the first set of customers, the expected project revenue is likely to exceed the costs of delivering on that project. This requires careful vetting of any sales opportunity to ensure it leads to strategic follow-on opportunities that can produce high volume license sales.
- The value proposition is unclear, since the startup product is likely defining a new product category. Thus, the sales cycle will be long as a potential customer management team navigates the process from awareness of your startup, to interest, desire, and finally, action.
- Apart from (unrealistic) revenue projections from the investor pitch deck, no data exists on actual sales, and thus judging achievable sales revenue goals is extremely difficult.
For early stage startups, the business development process is all about finding areas of product/market fit. Customers need to be created, not qualified. The initial business development challenge is not about closing sales, it is about narrowing the infinite variables of possibilities in which a product can be defined and sold.
Using a popular analogy, car dealerships hire “hunters” to greet prospects, qualify them, and quickly close. Early stage startups hire “farmers” that plant a variety of seeds in a variety of landscapes, water the emerging shoots faithfully, and note which plants eventually thrive.
Ambiguity Stage: Some Examples
Early stage business development is all about nurturing ambiguity and running market experiments to verify a hypothesis that a given industry may be the lowest-hanging fruit to drive meaningful revenues. For example, for Lumoback (consumer wearable focused on maintaining proper posture), we postulated that the ergonomics market might be an interesting enterprise play for our early stage startup. At gestigon (gesture control software), we believed that laptop and tablet makers were on the cusp of deploying this technology.
The only way to validate the hypothesis is to establish some brand awareness in our targeted industry (e.g. appear at trade shows like ErgoExpo and CES, write blog articles, get LinkedIn intros) and generate initial conversations with potential buyers and partners. At Lumoback, we learned that enterprise customers such as UPS and Chevron were quite interested in our device, but required heavy modifications. In the end, we were not prepared to invest in making these modifications, as we also had a thriving direct-to-consumer business. At gestigon, we learned that the big PC OEM manufacturers had absolutely no intention to add to their costs by adding a 3D camera to their device. Luckily, we discovered the VR (Virtual Reality) market soon after…
In this stage, there also exists ambiguity surrounding execution. Engineering teams are still small at this stage and thus have only a limited capacity to develop new features and customizations. This capacity would also fluctuate depending on the seasonal demands of our customers. At gestigon, if I brought forth a “learning project” (first customer engagement in a new industry) in January, it was far more likely to be accepted by Engineering, since work load was relatively low. But forget about adding anything to the task list in November – all of our strategic customers were developing their CES demos at this time. At Lumoback, all of our R&D resources were focused on the demands of a growing consumer customer base – there was little time left over for the enterprise market.
In summary, business development in the ambiguity stage is not about closing deals at all costs in order to bag the commission. This attitude will lead to internal staff friction and can hurt the company by committing itself to non-strategic activities. This stage is about working as a team to test and learn new capabilities and carefully discern engagement opportunities, and then executing the strategic ones.
Measuring and Compensating during Ambiguity
How should one measure success in this stage, if not on closed deals? Initial measures should focus on activity, for example:
- Number of industry show appearances (either as guest speaker, exhibitor, or preferably, both).
- Number of follow-up conversations with potential customers (and key takeaways as a result).
- Number of thought-leadership articles or newsletters published.
- Number of startup pitch contests entered, appearances made.
This is the “farmer seed-planting” phase I described earlier. Most of these activities will result in no immediate revenues, but hopefully in some key learnings. After 6 months, a few green shoots should appear in the form of potential customers interested in taking repeat meetings. These prospects should be maintained as they will eventually result in some deals.
So, how should early stage business development be compensated? In the ambiguous stage, I would recommend a fixed fee (i.e. salary or retainer if part-time). As ambiguity is removed and product market fit becomes visible, a portion of the fixed fee should be replaced with “success fees” based on achieving a quarterly revenue target. Initially, the success fee portion may make up a small percentage of the total compensation (<25%), but as more ambiguity is removed from the sales process over time, it can reach 75% or more. Note that early stage business development requires a different skill set than later stage sales generation. In the later stages, you’ll be hiring the “hunters”, while redeploying your “farmers” into the new, adjacent business areas that you are now ready to explore.
For further reading, I recommend “The Sales Learning Curve” by Mark Leslie and Charles Halloway (Harvard Business Review), “Discovery Trumps Planning, So Plan to Discover”, by Bill Barnett, and of course all the wisdom from Steve Blank on this topic, including this short video: https://steveblank.com/2014/07/03/validation-be-sure-your-startup-vision-isnt-a-hallucination-2-minutes-to-see-why/
See my previous blog entries:
- Dec 21, 2018 Subscription Hallucination Dec 21, 2018
- Sep 26, 2018 Scooter Madness Sep 26, 2018
- Jun 8, 2018 Is Innovation Best Suited For the Young? Jun 8, 2018
- Apr 16, 2018 Six Years Inside the Automotive Innovation Pipeline: What I Learned Apr 16, 2018
- Jan 4, 2018 So.. You Want to Launch a Consumer Hardware Startup? Jan 4, 2018
- Sep 30, 2015 Silicon Valley Is Not the Solution to Your Problem Sep 30, 2015
- Aug 11, 2015 The Multi-Dimensional Startup Aug 11, 2015
- Feb 6, 2015 Wearables: What's next? Feb 6, 2015
- Oct 15, 2014 Startup Burn Rate: Simmer or Meteor? Oct 15, 2014
- Aug 27, 2014 5 Surprises About Internet of Things Aug 27, 2014
- Jun 19, 2014 How to Talk to Corporates Jun 19, 2014
- Apr 30, 2014 How to Talk to Startups Apr 30, 2014
- Mar 11, 2014 Avoid the Corporate Disease Mar 11, 2014
- Feb 11, 2014 The Corporate Disease Feb 11, 2014
- Jan 28, 2014 Founders vs. Owners Jan 28, 2014
- Jan 10, 2014 CES at the Fringe Jan 10, 2014
- Jan 3, 2014 Silicon Valley Lite Jan 3, 2014