The Loop: We have heard many times that the best way to start a company is to get someone to pay in advance for your product. How do you approach potential customers to propose that they pay to help develop your product? How are these people different from alpha or beta customers, if at all?

Gina Dubbé (GD): It is a wonderful occasion when a customer will 'pre-buy' a product. But, realistically, you need to have a concept and product design prior to even discussing a customer purchase. Usually, a 'pre-buy' will only occur when there is a prior relationship with the customer. In reality, the customer is buying you! The trust that you have will allow the customer to take a leap of faith that you will deliver what you promised. You must be really careful that the intellectual property is protected in this instance. The customer must know that you 'own' the product. The consulting agreement/purchase order must read correctly, or else the customer may 'own' the software that you developed instead of you owning the software.

      More common is the instance in which an entrepreneur puts 'sweat equity' into a product and there is at least an alpha that a customer can see. The project is then refining or enhancing the alpha code. In this age, it is unrealistic to expect customers to purchase 'vaporware.' My personal feeling is that if you feel strongly about an idea, then get the code to a stage where the customer is modifying or customizing the product.

The Loop: What else do such customers typically expect in exchange for their time and money in helping you develop your product? Are there standard terms and agreements that are negotiated in such an arrangement?

GD: Early customers have the expectation that their requirements will lead the direction of the product. Expect that they will consider their needs the priority in development. They will usually expect that their new ideas will migrate into the product with no additional costs. Be clear in the Statement of Work what is included and what is not. A Statement of Work is essential. There will likely be a Purchase Order for the product and then a Statement of Work for the consulting. However, expect some 'creep' of the statement of work to accommodate customer enhancements. The fine line of working with a customer is to meet their requirements without totally changing the direction of your product.

The Loop: We've also heard that these early customers can sometimes cause problems later because they demand special treatment or take you off track from your core market. How do you balance initial customers with developing a product that can be sold "out of the box" to a broad market?

GD: A hard problem. First, the further along your product is, the better chance you have of maintaining the purity of your direction. But, realistically, first customers demand and get special treatment. They are your references, your benchmark and where you make your mistakes. They will take the benefits and the pain of the relationship. They are likely your first bit of revenue. They deserve some special treatment. The really difficult line to maintain is where the product is mainstream and where the changes only benefit the first customer. I try to stick to the 80/20 rule. As long as 80% of the customizations take the company toward a sellable product, the 'cost' of getting the first customer is that last 20%.

The Loop: What is a sales model and what are the attributes of a successful sales model?

GD: A sales model is your 'best guess' at the market. A successful sales model 'learns' from your experience. I do not mean to imply that you need a complicated piece of software to monitor and maintain the 'model.' You need common sense. You can manage a startup successfully with Excel. The key is to factor in what you know.

      For example, in your business plan you assume that the average sales price is $100K, but in the first three deals it is $30K. Re-factor the model. Whatever you choose as your time to close a deal, add three months. If the model still makes sense with the longer sales cycles, wonderful! If not, figure out how to get more in the pipeline. Right now, everything is taking longer to close. Be realistic; the model is only as good as the data.

The Loop: Once you're ready to tackle a broad and definable market, what goes into developing an effective sales and distribution model? Are there typical questions to ask yourself either at the business plan stage or later?

GD: Ask yourself questions at all stages. First, get a couple of quality customers regardless of your distribution model. You will need the customers to get resellers or as references for direct sales. The first customers are your responsibility regardless of the distribution strategy or model. The basic question for how to distribute is the broad market applicability of your product. There are some products which are just to complicated to send through distribution. Realize that you need to train the channel even better than you need to train a direct sales force. Sound crazy? Think about it. Your direct salesman can walk down the hall and get an answer to a question, a channel sales force can't. If they can't get an answer, they won't sell, so you’d better have ways for them to get educated and respond to their questions. If you have a complex product, think hard about how to make it easy. If you just can't make it easy, go direct until you can figure it out.

The Loop: In the early days, founders are doing most, if not all, of the selling. What are the key factors to developing a replicable sales model so the company can begin to think about hiring additional sales professionals? When should you start thinking about hiring the first salespeople?  

GD: The key factors in developing a replicable sales model are the ABCs: Automate, Boilerplate, Clone. Know what works and what doesn't. and teach people that! Every question that you answer, write it down. The next time that it is asked, you won't need a salesman to take valuable pre-sales time by answering it again. In addition, the capture of the data is key to a repository for the channel and a great way to know what problems customers are having. When you get an objection, take note. If you hear it again, then fix the issue.

      Know that there is a craft to sales. Some folks seem to think that 'build it and they will come' or 'anyone can sell.' Times have proven otherwise. Your best asset is a 'hunter' that wants to close business. For early stage companies, my recommendation is to hire folks who are not used to working in large infrastructures. Folks (many, but not all) who come from large companies are used to having resources or knowing where to go to get them. In a startup, they need to create what they need, share with others, and know that they are the pioneers and it will not be readily available. I have seen a fair share of salespeople, who migrated from large companies get really frustrated by the differences in a startup culture.

The Loop: Is there a typical process for hiring a sales organization? For example, should you hire a VP of Sales first and let that person build the sales team, or should you hire sales professionals as driven by new business opportunities?

GD: It depends. If you know that you have the budget for the sales organization, I prefer to hire the top person first and let them build the team. However, in these days, it usually doesn't happen like that. Usually, a company will hire one or a small cadre of folks who are independent. Be clear that you will be building the organization and hiring above them at some time—and hire 'guns'. Give them the autonomy to sell. Make everyone accountable for a number. I do not advocate 'business development.' In early stage numbers count.

The Loop: How does a company at the earliest stages of development with limited resources attract and compensate quality sales talent?

GD: You must find people who believe in you, in themselves and in the idea. Early stage companies succeed by a combination of perseverance and perspiration. People going to an early stage company must realize (or they are not the right hire) that there is a trade off between salary and equity, between risk and reward. If they don't get the tradeoffs, they are likely not the right hire. On a practical note, the best sales people will want to know that you are well-funded or will want more equity to offset funding risk. You find folks like this through your attorneys, accountants, and the network!

The Loop: As a company grows in terms of customer base, revenue, and number of employees, what are the key factors for developing a successful sales organization? How does the sales organization integrate into the company as a whole?

GD: The company culture must advocate that sales is key to everyone's success. The sales organization will be on a peer level with engineering. There will be “discussions”—many loud and long—about deals, and both organizations should have equal voice. The company must realize that everyone is in sales: there are 'closers' in sales, there are 'minders' in customer support, there are developers in engineering, but everyone sells.

Gene Gartner: What do you think of the idea of a perpetual license for those early customers that are going to fund the development of your product?

GD: Most all software licenses are perpetual licenses. The customer owns the version of the product that they have paid for. They only get enhancements if they pay maintenance fees. The other type of license is a 'time based' license.....but this is not very common.

Dan Voss: I am interested in finding out the best way to garner new clients. We have wonderful client retention but I want new clients. My sales efforts have included emailing to extensive lists, direct mail, networking events and small business groups. At one meeting we joked about placing signs on telephone poles at intersections. In your experience, is one better than another?

GD: Finding new clients is always a challenge. Start with your best resource......your existing clients. First, ask your customer base for references to new clients. Anyone that closes, pay a 'bonus' in the form of additional product or service to the company that refers a new client. So they benefit and you benefit!

      Second, ask individuals you have worked with for leads. If they close, thank people with an appropriate gift. (All the disclaimers apply here: only in applicable situations, not for the Government, etc.)

      Third, look at your existing client base. Who do they work with? Who are their competitors. Make a list, then begin cold calling from there. At the center of the page is your client. Cold call all around them and provide them as a reference.

      Nothing beats perspiration. I have always believed that if you make 100 calls per week, you will generate sales. Sound hard? Naaaaah. That is only about 20 calls per day, two or so an hour. You can do that. The difference between successful and unsuccessful sales people is targeting who you call, so begin with your strength, your customers. Go from there!

Bill Schell: I am the Vice President and founder of a company that was started in Sept of 2000. The company was in the business of developing a Revenue Forecasting product. Unfortunately, due to economic conditions, the company had to terminate the majority of employees and enter "Garage Shop" mode in late 2001. There is a now a possibility that I will find myself as the President/CEO of the company and in that role it would be my intent to shift the focus of the company away from "A Revenue Forecasting product company" and more towards: "A software product and professional services company that has invented a new proprietary software technology. The technology takes development out of the hands of "techies" and puts it into the hands of Business Analysts. Unlike any other software technology available today, it allows a Business Analyst to define, store, recall, and re-define information in a manner which more closely resembles the methods used by the human mind."

      Obviously, this is a significant departure from the original company direction. Will such a dramatic shift in direction appear so radical that the company will immediately be cast in a negative light and should we just start over as a new company, new name, etc.? We have about an 8-12 month head start with this technology. The time required to start over as a new company would cut into our window so my preference is to keep the name the same.

GD: I don't think that changing the name is material. Regardless of the name, the history of the company and the product will remain. Any customer references will be tied to the name. Many companies are starting over with new focus. Good Luck!

Dan Voss: Is there an established or studied percentage of a companies wealth that should be dedicated to marketing and sales tools, events, and materials? Several companies I have worked with didn't put any money into this important side of their business. These firms have since folded or soon will.

GD: There are many metrics out there. My personal rule of thumb is about 20% of the budget should go for sales and marketing (including personnel) in the early years. After a company has an established run rate and customer base, then the numbers can migrate down to 12-15%. (They stay here because, even with an established customer base, you must increase market share.) Keep in mind that all the percentages are heavily dependant on sector and market. You can find up-to-date metrics on the Net.

Ben Martin: While preparing for tomorrow's Coffee & DoughNets discussion: "A Question Of Scale: Growing (Into) Your Customer Base," I asked our panel of experts for recommendations on resources that the audience might find useful. Our friend and guest on tomorrow's panel, Cory Marsan of ServiceBench, suggested a few resources to which she often refers, including the following books: Spin Selling by Neil Rackham, Solution Selling by Michael Bosworth, and The New Strategic Selling by Stephen Heiman. She also recommends the Miller Heiman website and the following magazines: Selling Power, Inc., Entrepreneur, and Fast Company.

Howard Freidman: Having used it in both product and service technology sales, I'd strongly second the Bosworth book, Solution Selling, not just for sales people but anyone who is customer-facing. (Even better for those who can invest the time and dollars is his BOSS training). It works.

William Jordan: I’m with MelaNet, an Internet solutions company that does a lot of work with small businesses and public agencies. I have always been curious why many VC firms did not take the strategy of developing portfolios that funded whole or near whole segments of an entire business sales channels? For example in one portfolio company that develops wireless technology, companies that build wireless applications, companies that sell and integrate wireless services, and companies that do post-sales support. Even if all companies in the portfolio were not viewed as home run companies, it seems startup companies, especially, would be being asked to do too much or spend too much time headed down wrong paths. Although by viewing companies portfolios I did see this in some ways, but it seemed either too haphazard or too controlling like some incubators.

      Do you believe this type of approach will have legs when there is a tech recovery, or is this approach not what VC funds do? Who funds the building of such channels? I did not see my company as VC fundable, but often thought we would have been an important part of such food chains, although I did not see a lot of channel funding available in dot.com/Internet related channels.

GD: VC funds raise money much like startups. When you raise money for a fund, you commit to an investment strategy for your investors (Limited Partners). Most of the time, investors (Limited Partners) prefer funds which are diversified.

      There are instances (largely within telecommunication and pharmaceuticals) where funds are sector-based, but, I have not seen a sector-focused early stage fund. I would imagine it is largely due to investor desires and fund commitments.

Ben Martin: I'd like to thank our friend Gina Dubbé for joining us in The Loop, especially, given the fact that she was kind enough to check her email and respond so quickly to our questions while traveling to Pittsburgh. Thanks again, Gina!!!

      This online discussion with Gina was a “prequel” to our July 24, 2002, Coffee & DoughNets session, “A Question of Scale: Growing (Into) Your Customer Base.” The summary, video, and transcript of that event are available in the Netpreneur Event Archive. Following the meeting, our panelists answered additional questions in The Loop about growing your customer base, along with additional conversation by group members.

      At another Netpreneur Coffee & DoughNets session held September 20, 2001, Gina Dubbé was also part of a panel discussing “Driving the Top Line: Selling the Vision and Closing the Deals." The summary, video, and transcript and of that event are also available. And for related material, visit the summary, transcript, and video of “When the Top Line Meets the Bottom Line,” an exploration of channel distribution issues and other revenue strategies with John Burton of Updata Capital.