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

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