Customer-funded development — structuring a deal
This is the second post of a short series about what I think is an underused business model among software entrepreneurs, namely sponsored (i.e. customer-funded) development. Key points of the first post included:
- If you have an invention you can’t fund yourself, having your first customer(s) pay for development may be the key to realizing your dreams.
- Likely prospects are companies that:
- Are sufficiently hard-core technically to value your bleeding-edge ideas …
- … and to be willing to invest in projects with obviously high risks of failure.
- Are sufficiently limited technically to believe that your team is significantly stronger than what they could hire and deploy themselves.
This post covers the nitty-gritty of sponsored-development deal-making.
As per the previous post in this series, suppose you are fortunate enough to identify the right customer for a sponsored-development relationship. Then the deal process is likely* to go something like this:
- You start as you would in any other unproven-vendor sales cycle.
- You politely turn down the inevitable offer to simply hire you and your team onto their payroll.
- You explain that you have to keep the intellectual property yourself. This is crucial. If they don’t firmly agree, walk away from the sales cycle at that point.
- You ascertain whether there’s really a deal to be done. This is harder than it is in other kinds of sales cycle.
- You get to the neighborhood of “Yes”.
- You politely reject the first offer they make to fund you, because one of terms will be that, if all goes well, they can buy your company at a price in the range of 3-5X what they will be investing. That’s not nearly enough upside for you.
- You do a win-win deal.
*Actually, the deal process is likely to fail. Most deal processes do. But if it does succeed, it’s likely to look like what I just outlined.
Two of the bullets above allude to challenges in agreeing on deal terms. The first concerns IP ownership. The structure you should insist on is: Read more
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Customer-funded development — overview
This is the first post of a short series about what I think is an underused business model among software entrepreneurs, namely sponsored (i.e. customer-funded) development. Key points include:
- If you have an invention you can’t fund yourself, having your first customer(s) pay for development may be the key to realizing your dreams.
- Likely prospects are companies that:
- Are sufficiently hard-core technically to value your bleeding-edge ideas …
- … and to be willing to invest in projects with obviously high risks of failure.
- Are sufficiently limited technically to believe that your team is significantly stronger than what they could hire and deploy themselves.
The second post in the series discusses the substantial complexities that an actual sponsored-development deal might entail.
Suppose you have a great idea for a software product that you want to develop and sell. How do you get initial funding? In some cases the answer is straightforward.
- Companies with ongoing software businesses might fund new development as normal R&D.
- A conventionally-wonderful-seeming team, possessing both business and technical credentials, might raise venture capital in the usual way.
- Individuals who made a lot of money in previous start-ups might fund a new venture themselves.
Even better, the product might be fast and cheap enough to bring to market that even a non-wealthy person might be able to self-fund. Examples include:
- A lot of things sold at consumer kinds of prices.
- A number of data center tools during the mainframe era.
If you’re in such a situation yourself, congratulations — you’re in a great situation for successful entrepreneurship.
Suppose however that you’re an inventive engineer, with:
- A strong track record in developing great software.
- Limited business skills.
- An idea that requires more person-years to bring to fruition than you can self-fund.
- No obvious choice for “business-y” co-founder.
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Stoking a fear and promising a fix
I’ve been insistent that everybody needs to pay attention to politics now, which is being conducted with greater cynicism than technology marketing ever could be. But in this particular post, political and technology marketing (among other kinds) are compared on a more even basis.
Donald Trump:
- Articulated voters’ fears.
- Stoked those fears relentlessly.
- Claimed that he “alone” could fix things.
- Won the US presidency.
This is actually a time-honored pattern, pursued by (among others):
- Many other demagogues and authoritarian leaders.
- IBM in its industry-dominant heyday.
- Consumer marketing companies over many decades.
- Several of the world’s great religions.
While fear-and-fix is a powerful strategy, it’s not easy to pull off, because it involves establishing both sides of a partial contradiction:
- There is a terrible danger that is very hard to prevent.
- I can in fact prevent it.
Approaches to resolving this paradox typically fall into one or more of three buckets:
- Overstating (or entirely fabricating) the danger.
- Overstating (or entirely fabricating) the fix.
- Understating (or just downplaying) the costs of the solution.
Let’s consider some examples. Read more
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Donald Trump’s politics in one song
Donald Trump’s favorite musical is said to be Evita, the story of the fascist/populist couple Juan and Eva Peron, who guided Argentina from status as a rich country to being pretty much of a third-world wreck.* Isaac Butler wrote about that back in November, but he missed a key point. More precisely, he missed a key song, whose lyrics I shall copy below. (I think this is one of the rare cases in which printing a song’s entire lyrics is clearly fair use.) Emphasis added.
*In real life, Juan Peron was vastly more influential on his country than his second wife Eva, not least because he lived much longer. But the musical portrays them as more equal partners, giving her great credit for his original ascension to power.
Art of the Possible Read more
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How to influence legislators
A group of former congressional staffers has put out a great-looking, short guide on how to influence legislators. Their angles include:
- They’re Democrats, focused on resisting the Trump/Bannon Administration.
- They base their views heavily on the successes of the Tea Party in the Obama years.
- As might be inferred from the name they chose — “Indivisible” — they’re focused on protecting-the-threatened kinds of issues, such as religious discrimination, sexual discrimination, or health care for the poor.
- They’re focused on Congress — House and Senate — rather than state legislatures.
I’ll quote the summary in its entirety: Read more
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Selling is complicated
It’s time for another of my quick primers on the enterprise IT business. This one is about sales. First I’ll run through some generalities; then I’ll link you to some previous posts; after that I’ll close with a collection of practical tips.
This is, to put it mildly, an important subject. In particular, there are only two kinds of enterprise IT CEOs:
- Those who need to understand sales because they don’t have anybody else to do it for them.
- Those who need to understand sales because they do have people to do it, who need to be managed and helped.
Every enterprise IT CEO needs to be heavily involved in sales.
Of course, a few tips do not a salesperson make. Selling is a complex process, with many steps. Worse, it’s tough for somebody to explain to you what the process is, in part because there’s a kind of recursion involved — a big part of what you do in the sales process is establish what the process is.
And that’s in both senses of “establish”, namely “figure out” and “bring into being”.
Other inherent difficulties in selling include:
- Selling involves getting money from people. People don’t like to part with money.
- Buying from you often involves a lot more commitment — and foreclosure of other options — than merely writing you a check.
- Usually, a sale involves getting agreement from multiple people. These people often have different views, biases, and motivations.
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Telling multiple stories
Much of this blog gives advice about how to tell a story. But that’s actually an oversimplification. In fact, you’re almost always in the situation where you want to tell multiple stories at once. The main messages of this post are:
- Figure out which stories you are telling (the complete list, if you please).
- Make sure that you’re telling each of them well.
Reasons the multiple-stories situation is so common include:
- Products are, unavoidably, positioned along many attributes each. If you’re trying to get a prospect or influencer to think well of a product, you may need to address multiple important concerns.
- A product release typically introduces multiple new features in a product.
- People only pay attention to you sporadically. Thus:
- When you’re pitching them about something new, you generally also should reinforce the belief that your product in fact has been great all along, because your historical greatness may not be at the top of their minds.
- Similarly, they may need to be reminded — i.e. informed — of your evidence for company momentum.
- Customer momentum stories typically include quotes as to why the customers so liked your product. Product feature stories often include customer momentum validation.
- The layered messaging model inherently calls for several linked stories. What’s more, there are several kinds of support on its bottom tier, and you may not restrict yourself to just one.
The first way to deal with all this is via modularization. In some cases, that’s easy. (E.g. websites can make different points on different pages.) Sometimes it’s harder, but worth doing anyway. E.g., in my recent post on influencer pitches, I said: Read more
PR (or AR) pitch emails
I believe:
- When attempting to impress influencers, press and analysts alike, pitch emails are much more important than actual press releases. By that I mean, among other things:
- The old cliché that your first few seconds of impression-making are much more important than all the rest applies in this case.
- Unless the pitch email succeeds, your press release won’t even be looked at.
- Unless the pitch email succeeds, you won’t get to have a verbal conversation with the influencer.
- Pitch emails can, just by themselves, harm somebody’s impression of you, in two overlapping ways:
- They can damage your credibility.
- They can insult the recipient, by giving the impression that you think he’s dumb enough to be fooled.
- Few companies act as if this is true.
My support for these views includes:
- My own reactions as an influencer.
- My conversations with other influencers.
- My knowledge of how PR and AR work get done.
- Common sense.
My top tip for pitch emails is: Approve the pitch emails a PR firm writes before they are sent out!!!! There are two big reasons for this: Read more
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Why pitching ability matters
Engineers used to wonder what the point of sales and marketing people was. If a product was good, wouldn’t customers make the correct decision to buy it?
Nobody I know seems that naive anymore, but I did just get a similar question, which may be paraphrased as:
Why do investors judge a startup on the CEO’s pitching ability? Shouldn’t they focus instead on the actual merits of the company?
Most of my answer boiled down to:
Investors’ top concern is management’s ability to execute, and pitching is — or simulates — a large part of execution.
In particular (and now I’m quoting my own email directly):
- A CEO is a company’s chief salesman in one-on-one (or one-on-few) selling situations.
- A CEO is a company’s chief promoter in public forums, or in one-on-one influencer marketing situations.
- A CEO is a company’s chief recruiter.
- A CEO needs to align a company behind a shared vision, and specifically a shared understanding of the vision.
- A CEO needs to persuade employees to do things they don’t feel like doing.
I finished with one other point that didn’t fit the template, namely:
If you can’t articulate a good pitch, why should we believe there’s a good story in there at all?
I think the entrepreneur who asked me the question was convinced.
Related link(s)
- I’ve posted a lot about how to pitch.
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Third-party quotes in press releases
I’m generally a skeptic about the value of press releases. However:
- The IT trade press is increasingly understaffed, and hence press releases can in some cases serve as a draft of the article you hope folks will write. (Whether articles of that form have any influence or credibility is a whole other matter.)
- Press releases are collateral support for whatever higher-class outreach you do.
So my current opinion is:
- You should write press releases primarily for a general online audience, but …
- … secondarily for the reporters at whom they are ostensibly aimed.
That fits with my general view that press releases:
- Should tell your story.
- Should read well.
- Shouldn’t do anything to actively embarrass you.
That brings me to the subject of this post: third-party press release quotes. For starters, I think the following are pretty obvious: Read more
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