Why startup biz dev deals almost never get done

As the founder of WP Engine, I receive weekly emails from startups proposing a “win-win” deal.  So far, approximately zero have resulted in an successful deal.

Here’s the problem, and how you can change your approach to business development so that it can succeed.

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Distribution is the hardest thing for a young startup, defined as “getting in front of potential customers.” Large companies, on the other hand, have solved the distribution problem (proof: 100,000 paying customers).

“Maybe,” thinks the startup founder, “I can tap that ass. I mean asset.”

But how to gain access? Big companies are surely scrounging around for new excuses to up-sell their customer base. However, big companies are neither adept nor efficient at innovation, thus they lack up-sell materiel. But that’s what startups are good at! Fresh product.

Thus, the startup founder poses a deal in classic micro-econ-101 fashion. Startup is good at innovation but weak at distribution; big company is complementary, thus they should trade. Large company should send a few emails to the customer base, generating easy sales at no cost, and the revenues are split. Free money for all, thus good deal for all. It’s a “win-win,” you might say, if that phrase doesn’t cause a Pavlovian gag-reflex upon contact with your cochlea. (I can’t be the only one.)

However, this win-steeped proposal is never accepted by the big company. The problem is that the amount of revenue is not interesting for the big company, yet it requires the big company to spend something not accounted for in the above equation: reputation.

To see exactly how this works, let’s use an example from my own company, the largest managed WordPress hosting platform. A typical email will be from a WordPress plug-in or theme author, who has a product for $20, $50, or even $200, that they would like to market to our customers. In additional to the calculus above, they point out that a subset of our customers must genuinely desire the functionality of the plugin, and thus this is in fact a service to our customers, not to mention a way for both of us to make easy money.

But now let’s look at the economics. Let’s be extremely optimistic and say 1% of our customer base converts and buys the theme. Let’s also assume that WP Engine will receive $50 per sale, which is higher than the typical offer.

Looking at our pricing, you know our smallest customers give us $29/mo, and many (most?) pay $99/mo or more, so assume an average of $50/mo.  (The true average is higher but this simplifies the example.) So this biz dev proposal means 1% of our customers will give us an extra one months’ revenue. That equates to a 1% revenue boost, for one month. Next month we don’t get that boost. Increasing revenue by 1% for just one month is completely uninteresting to any company of any size — it’s just not enough to even discuss.

To see why, consider that by definition a company earns 1% of their monthly revenue in about 8 hours. Increasing revenue, once, by 8 hours, isn’t material.

And in exchange, you’re essentially asking us to spam our customer base.

A much better approach for business development is as follows:

How can the smaller company make money for the larger company in the manner that the larger company already makes money?

Said another way, how can you grow the larger company in a way that matches their existing business model?

In our working example, the question is: How can you create new hosting customers for WP Engine? For example, when you sell your plug-in or theme you could ask your own customers whether they’d like to purchase hosting as well, maybe for a limited-time discount. If you can generate a couple of dozen new hosting customers per month, that can move the needle for us, not because that’s a huge percentage of our overall growth, but because that growth continues month after month.

With that arrangement in place, it would be easy to justify an announcement to our customers that we have a new partner who is optimized for our hosting platform, both in code and in business, and therefore is a solution they should indeed seriously consider.

If you can bring customers to a big company — even a few — rather than milking existing customers for a sliver of revenue, you’re much more likely to execute a deal that genuinely makes both of you significant money.

  • Bob Snyder

    or you could actively seek out plugin partners offer a daily deal where your customers get the get the plugin at 50% off. Take 1/2 of that and sell 1% * 365 and 365% of monthly revenue which is 20-30% increase in revenue. and make some nice lemonade out of lemons.

    • http://blog.asmartbear.com Jason Cohen

      The math still doesn’t work. 50% off, then splitting the resulting revenue with the plugin author doesn’t leave enough revenue to feed the plugin author. And of course 1% is way too high an estimate, especially if you expect that’s the average for every single day.

      • Dave Watts

        25% of something is still better than 100% of nothing

  • Jody Ballor Burgess

    Great article, Jason. I used to get “win-win” proposals a lot when I was at TechSmith. They never worked out. Nowadays I find myself on the other side of the fence reminding myself not to try it.

  • http://www.purplebit.com/ Edan Maor

    Am I missing something, or are you assuming the plugin is a one-off deal, instead of some type of recurring revenue? E.g. Heroku plugins tend to be paid monthly.

    Does the math make more sense if you’re earning an additional $50 per month? Admittedly, on a small number of customers?

    P.s. Not that I doubt the figure, but do you have a source for the 1% conversion? I haven’t seen stats for conversion rates in these types of scenarios, although I assume e.g. GoDaddy and the likes have done their research on this type of deal?

    • http://blog.asmartbear.com Jason Cohen

      You’re exactly right — if it’s recurring, it probably makes sense. But so far something like one or two out of dozens have been that way. That’s my current experiential bias affecting the content of the argument, so thank you for making that point.

      I don’t have stats on the 1% conversion, no. But as you can imagine, at any given time, most customers are not wanting to switch themes per se, most don’t have a need for an image gallery plugin (if they don’t already have one), etc., so 1% assumes an even higher conversion rate of the subset of customers who would even be interested. If you talk to email marketers or other folks who regularly use announcements to lists of existing customers for purchases, it’s clear that 1% is a generous estimate.

      As an aside, the logic is still true at 5% conversion, unless as you say it’s recurring.

      Also, you might guess (although again I don’t have data to prove it) that the more expensive the add-on, the fewer the number of customers who will convert, so just saying “what about $500 purchases” probably doesn’t change the argument in a material way.

      Thanks for the good discussion.

      • http://www.purplebit.com/ Edan Maor

        Interesting. The only cases I know up-close are cases where it *is* recurring revenue, so I’m somewhat surprised that recurring is less common. In fact, I thought “saas” and other recurring business styles are in general much more common vs. one-off purchase products.

        Anyway, thanks as well for the discussion and the post.

  • Chris Mack

    Have I got a win-win deal for you…. :)

    • http://blog.asmartbear.com Jason Cohen

      ….now I have to go brush my teeth.

  • http://twitter.com/cselland Chris Selland

    All true but it’s not just about money (or reputation). It’s about the time and attention it takes the big company’s sales team to learn how to effectively sell the smaller company’s products and/or services. Not to mention that they need to change the reps’ compensation structure or 99% of them won’t even bother. Made even worse by the fact that the margins on anything a large company would potentially resell generally are far lower than they make on their own offerings.

    And why exactly should the reps spend any time on selling someone else’s product rather than their own?

    The only way to do this is if the smaller company can position their offerings in a way that helps the larger firm sell their OWN offering(s) more effectively – then you’ve got a value proposition worth listening to. I.e. a 1+1 > 2 value proposition for the 2 products together. Very tough to do but that’s the key.

    To truly get Big Co’s attention – and commitment – this deal would need to ‘move the needle’ appreciably. These types of deals seldom do.

  • Ryan

    Good article, and very topical given my current situation is deciding on how to best approach the big business with a ‘win-win’ deal and they came back to me with the very feedback you concluded. Its just not worth it to them. You wrote a lot on the problem, but not much on the solution however, which I was a little disappointed with. What other examples can you discuss for approaching big business with? More strategy around the solution would be good to discuss

    • http://blog.asmartbear.com Jason Cohen

      That’s true, except of course for the main point that the solution needs to increase normal business for the larger company rather than being a tiny add-on.

      “But,” you might say, “what are some ideas for how that can work? I can’t think of anything I could do to substantially add new customers for that big company, because *that* is itself a distribution problem, and that’s my problem!”

      Exactly right, which is why it’s almost impossible to construct this sort of deal. Other commenters here have also made this observation.

      That is the sad reality — there’s probably not something you can do. However, of course if you can get creative and innovative and make it happen, it could mint your company.

  • Jeffrey Fry

    Bingo… the ONLY win-win is the exchange of customers…not just revenues…

  • http://www.eliainsider.com Elia Freedman

    That’s the art of selling, right? In the first example you are really saying these plug-in authors come to you and want something. In the second, it is what the author’s do for WP Engine.

    The art of selling, assuming I’m selling, is really about finding a win for the other guy that also happens to help me.

    • http://one-shore.com/aaron fijiaaron

      Yeah, what exactly is the incentive for the plugin author to upsell their customer to WPEngine?

      In truth, WPEngine charges a premium to customers who don’t want to think about plugins, addons, etc. That’s why it’s not interesting to them.

  • http://burningbushgardens.com/ Ryan Platte

    Alternatively: a farmer selling subscriptions to his weekly produce shares can offer local health-oriented businesses a one-time kickback for referrals. This still works well because the “spamming” is a positive contact in this case (the chiropractor is visibly supporting both the locavore movement and options that are good for her patients’ health).

    So the alignment can vary at different scales and markets. But thanks for spelling this out as you’ve done, very helpful.

  • http://www.mayo615.com/ David Mayes

    This is an important discussion about “push” leveraged business development in startups, but this is not the only model. The author’s point about “reputation risk” is tempered by the fact that the larger partner will never risk it until it is certain that the relationship will not damage the brand. Secondly, not all leveraged BD deals are push oriented. Many are targeted “pull” deals for “flagship direct customers testimonials” that will drive distribution by other means.

  • http://www.prelovac.com/vladimir/ vprelovac

    Very well said Jason. I am tempted to place a link to this post at the top of our contact form.

  • http://lifestoked.com Deacon Bradley

    It makes so much sense to hear it from where you sit Jason. I admit, I may have been guilty of the former line of thinking :). Thanks for demonstrating what’s actually interesting… you know, so I can create win-wins ;)

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  • Gordon Daugherty

    It’s so true that startups and small companies use a backwards approach to securing a business development relationship with a bigger company. Along the same thought as always thinking about how they can help the bigger company make more money, they should go one step further. Don’t even fool with the HQ function to start. Instead, drive value “in the field” in such a way that the strategic partner comes after you. This approach works better in some business models than others but is definitely achievable. I blogged about this recently with some real-life examples: http://wp.me/p2EfeJ-dg

  • Jon Morrow

    Here’s another problem: at a certain point, If the partnership is successful, the large company may decide to knock off your product.

    I have a friend who runs a $100 million per year information product business (a.k.a. large-company) who builds an email autoresponder sequence offering a half-dozen complementary products from smaller companies for each of his own products, creating a type of instant “upsell chain.” On average, he gets a 40% collective take rate, and he triples the 30 day value of each customer.

    Sounds good, right? Well, that’s when “Phase 2″ begins:

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  • kim

    Another way of stating: pursue partnerships where you can demonstrate to your target partner (of any size) that partnering will either appreciably reduce their ops costs or increase net income (directly or indirectly).

  • Nygel Rose

    Nice read! Very informative. Did you know that? Sluggish
    economy puts pressure on SABMiller. Full story here: http://bit.ly/1nLShU0.

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  • http://boutiquejapan.com/ Andres Zuleta

    I actually have a really interesting lose-lose proposition for you…

  • darshu

    Thanks Jason. This is the best piece of advice I’ve read in a long time. Captures our state of mind as entrepreneurs so accurately it’s comic on top of being educational :)

    • http://blog.asmartbear.com Jason Cohen

      I know it so well only because how many years I was that entrepreneur! And then seeing it on the other side of the table causes the pieces of the puzzle to fall into place. Only took me 15 years to figure it out. You know, because I’m such a fast learner. :-)

      • darshu

        Lol. So I have about 8 more years to go :) The best thing is I actually intuitively tried something similar for the first time about a week ago, when approaching a bigger company, and indeed got a yes for the first time when attempting something like this. If it comes through I’ll share.

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  • Storewars News

    Nice
    read! Very informative. Something interesting: Japanese convenience store giant
    eyes Phl. Read it here: http://bit.ly/1kiUUdC.

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  • richardpatey

    Great post, it’s like manufacturing a new physical product in China and picking a factory where you can both grow together.

  • http://igostartup.com/ iGoStartup

    Great post!!!

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  • http://www.wpcurve.com/ Alex McClafferty

    It’s hard for me to admit this… but I… I tried to tap that ass.

    I sent you an email in September ’13, with the bold exclamation that we had a whopping 33 customers. Facepalm.

    Apart from 10x’ing our customer base since then, I’ve learned what you spoke about in this post the hard way. In practice, when I email you again, my new, improved ask will be:

    “Hi Jason, we send WPE between 6 – 10 new customers every month (which we do). We’d love to ramp this up and would also love to chat with you about whether our 24/7 WordPress support service would be useful to your customers.”

    Better? I hope so.

    PS – I presented on this topic and gave your post a shout out in my WordCamp Seattle presentation too: http://wpcurve.com/business-relationships/