Why You Should Invest Early In Business Development

Business Development

FEB 06, 2018 - Josh Scherman

Revenue is everything to a startup. It’s hardly surprising that founders tend to focus on the obvious ways to improve revenue. Every dollar spent on direct sales, marketing, and demand generation will, if handled correctly, yield a consistent return. On the surface, this approach makes a lot of sense. Why invest in something that’s less predictable, like business development, when you can generate a reliable ROI for the same money?

The problem with this line of thinking is that it’s more short sighted than you may realize. If you want long-term success for your company — particularly if it’s an SMB focused SaaS startup — you need to be investing in business development from the start.

The real value of business development isn’t always easy to see, particularly in the early stages of a company’s life cycle. Hiring a new salesperson, for instance, provides the benefit of generating more sales. What exactly is the benefit of a business development person — never mind an entire biz dev team — when you’re still trying to win customers, establish your brand, and improve your products? Most founders don’t really see why business development is a smart investment in the near-term, and they would usually rather take that same money and spend it on more sales hires and marketing dollars.

Here’s the thing: Every month that you aren’t investing in business development, you’re really just delaying your own success. It’s another month without thinking strategically about the kinds of partnerships you will need as your business grows. It’s another month where you’re not establishing and developing those key relationships. It’s another month where you’re not learning about what kinds of partnerships will work best for your organization over the long run.

As your company grows, the lack of business development is going to start setting you back in ways that you might not realize at first. For instance, when you start to fundraise, your potential investors are going to want to know how you acquire your customers. While they definitely care about your direct acquisition channels, they will also want to know about the other ways you plan to acquire customers, as the direct side gets expensive over time.

Partnerships Matter

If you’re an SMB focused SaaS startup, few things will be as valuable to you as a direct partnership with a larger tech company. Distribution is the biggest challenge in SMB. You can’t grow big without channels. By making your product available to them, they make their customers available to you. It’s a classic business development-driven relationship.

A good example of this would be a company I once worked for, Constant Contact, which has thousands of reseller and deeply integrated partnerships. It took years for Constant Contact to develop those relationships, and the long-term benefits weren’t always clear. As our direct channel growth started to slow, however, we began to rely on these indirect (i.e. partner) channels to boost our revenue. When I left back in 2015, those indirect channels accounted for about 30% of Constant Contact’s revenue.

Consider this: The cost to acquire an SMB customer directly is always more expensive than it is to acquire them through a partner. Sometimes, the cost of acquiring a customer through a partner can be next to zero. If you can establish a great partnership, and invest in the product and the marketing, you can acquire hundreds of customers every year — maybe even every quarter — for almost nothing. Trying to acquire those same customers via Direct Sales, it might cost you $500 to $1000 each. If you want to keep your costs low, it’s a necessity in SMB SaaS to develop partner channels.

Preventing Internal Inertia

The longer you punt on these investments, the harder it becomes to switch the organization’s mindset towards making business development a priority. It’s not just about sales. Supporting a channel partner requires internal resources from other parts of the company, particularly the product, marketing and engineering teams. Even if you’re just creating simple reseller relationships, those partners are going to need basic tools to help them be successful.

The last thing you want is to miss these opportunities, with other departments dragging their feet because they don’t see the value in them. The earlier you invest in creating these relationships, tools, and strategies, the easier it is to get everyone within the organization bought in.

Partnerships also require commitment from both sides. If the other side is going to invest their time, money, and resources in a deal, they need to know that you’re going to hold up your end of the bargain. Without a business development person who’s accountable to its success, those deals can quickly fall apart.

To be clear, signing and launching a partnership can be relatively easy. It’s the post-launch management where deals go to live or die. Without a dedicated resource to stay in front of the partner and ensure they stick to their commitment and you stick to yours, most deals will end up not going anywhere. It’s already hard enough to get a channel going, and without active management of it, your chances are pretty slim.

This is particularly true if you’re looking to partner with a larger tech company. At a minimum, you will need to invest marketing resources in the deal, but you may also need to invest some engineering resources. This could mean integrations if they have an API, or even direct access to tech stack. Those partnerships simply don’t happen if a company doesn’t have a relationship with you, not to mention a certain degree of trust.

BD Investment As An Exit Strategy

There’s also one final danger to not investing early in business development: It could limit your optionality and make an eventual exit far more challenging.

Most businesses are bought — not sold — and most often they are bought by companies that they already have strong relationships with. If your potential acquirers aren’t already in a partnership with you, chances are that they won’t feel comfortable enough to even consider buying you.

We see a lot of this here at SurePath. Since I started, it’s become even more clear to me how important existing relationships are in an M&A process. As a former BD leader, I rarely included that angle when discussing partner opportunities with my CEO and/or fellow exec team. I should have more often.

If you’re not creating relationships with your most natural acquirers early on, and actively building on those as you grow, finding a buyer is going to be a real challenge. With those relationships, you will be far more likely to generate inbound interest when you feel like it’s time to exit.

If and when you are fortunate enough to land an offer, other potential acquirers may not be as motivated to counter as there isn’t a strong enough relationship in place. Look at this from a potential buyer’s perspective: If you don’t already have an established and mutually beneficial relationship with them, why would they have any interest in buying your company?

Here at SurePath, we often use this analogy: Buying a company is like getting married. You’re probably not going to marry someone who you haven’t dated.

When discussing potential exit options with our clients, our first question is almost always “Tell us about your best partner relationships.” It gives us a starting point to better understand how far along they are. We’re happy to help develop those relationships even further, but it takes time. If time is not something you have, it can make the process more challenging. The earlier you invest in business development, the easier it becomes.

Josh Scherman
Written By:
Josh Scherman is the Vice President of SurePath Capital Partners. He draws from his experience on Wall Street as well as his successful work with early stage startups in San Francisco and New York to help lead every aspect of putting our clients in the best position to match with the right buyer at the right valuation.

About SurePath Capital

Based in Toronto and San Francisco, SurePath Capital Partners is the only investment bank focused exclusively on the global SMB software market. We work with sellers in this market to ensure they are funded for growth and positioned for meaningful exits. In addition, we work with buyers in this market to help shape their strategy and execute acquisitions.

Follow us on LinkedIn and Twitter for regular updates on deals and trends and in the SMB software market. Say hello: info@surepathcapital.com

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