Sales channels often disappoint

I often find myself advising entrepreneurs to be cautious when predicting sales volumes through distribution partners or sales channels, so I thought I would reproduce my thoughts here. In my experience these distribution deals where small company does deal with big company to sell small company’s product disappoint more often than they deliver. This morning I found myself saying that in my experience nine out of ten deals end up not being worth it. I haven’t run the numbers or seen any stats but that feels about right. This experience covers deals with value added resellers in the tech space, deals with major tech vendors, deals with systems integrators, deals with companies that operate large salesforces selling to SMEs and consumer brands.

There are of course examples of these sorts of relationships working out very well for startups. Siebel’s relationship with Accenture is one famous example and Buddymedia’s relationship with WPP is a more recent example, but these examples of success coming through a partnership are far fewer in number than examples of success coming through more direct sales. In fact, I can’t think of a successful investment we’ve made that won because of a channel or distribution deal.

I’m not saying don’t do these deals – they can be transformative, but be careful, qualify them hard and be realistic about their real potential. Most of all, avoid getting seduced by promises from potential partners and neglecting other areas of the business. Big partners are notorious for over-promising and under-delivering.

I’m going to finish with three pieces of advice:

  • When doing a distribution deal pay as much attention to what happens after signature as the terms, getting answers to questions like: how will your product get distributed? who at the partner will be responsible?, and how will they be compensated?
  • Don’t believe your partner believes in the minimum sales projections unless they have real cash behind them, including if failing to hit the minimum causes exclusivity to fall away.
  • Commitments to marketing spend often fail to materialise.

Remember that cash is the great qualifier. If you are at all unsure about the commitment of your partner then ask them for money.