April 10, 2017

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:

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:

*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: 

It is important to agree on this framework early in the discussions, and never to waver. And by the way, I have personally negotiated a number of deals with just that dynamic — the other party thought they had a natural right to work-for-hire, but were agreeable to a substitute set of licensing rights instead.

Later in the deal negotiation, most customers will try to use the obvious power imbalance to recapture control from you. If you handled the IP discussion successfully, they will likely revisit it briefly, and then pivot to an alternative way of controlling the IP after all — a suggestion that they buy you outright, or else get an option to buy you later on. My thoughts on this approach start:

In both cases, recall some maxims of negotiation theory:

Understanding the decision-making structure of your prospect is crucial; doing so is one sales skill you absolutely have to learn. And it won’t be easy. You start with all the standard issues for big enterprise sales, including:

Things will be even more complicated in the case of innovatively sponsored development, because:

The whole thing will surely tax your ability to navigate an enterprise deal.

And finally, there’s a class of scenarios that overlaps with those we’ve been discussing, namely those in which the customer is looking at their deal with you as the first example of a new way of doing business. For example:

I’ve seen a number of such situations, some involving sponsored development and some not. They don’t typically go well, because it usually turns out that whoever is driving the new initiative doesn’t really have corporate buy-in and reliable backing to the extent that they need. If you’re selling into such a situation, ask to meet somebody very senior in the company, very early in the sales cycle. When you do, check whether they seem to actually understand what it is that they’re supposedly committed to. If you can’t get to see them at all, or if they don’t seem to have seriously thought things through (yet), be very wary about committing much more time or energy to the relationship.

But despite all my concerns and warnings, I still believe that customer-funded development should be a bigger part of software innovation than it currently is. And it could be the ticket to realizing your entrepreneurial dream.

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