VAD distributor as VC of “the final stage”

Venture capital (VC)? investment and start-ups are very hot topics today, since the money printing presses switched on during COVID, only increasing the interest in what to invest in.?3 years ago I realized that I don't need to go to an investment fund to play in VC, smart money and to make the world better. The IT market provided me with such an opportunity to invest, although not with such Xs as investors in different stages.

After 6 years in software development, I went into the business of sales software and other IT products. For over 20 years I have been working as a Value Added Distributor. The phantom pains of software development did not let me go, and following my heart I have invested in my own IT startup. This is the worst strategy for VC, without portfolio diversification :) Now I can evaluate the work of IT startups from different angles. Both as a founder and as a seller of their products during the fundraising period, and in the “final stage” after their exit.

So the cherished 7-8 years have passed, investment funds have successfully sold the startup and earned their X 's. There are usually not very many Exit options: you can be bought by a giant like Microsoft, Google, IBM, went to an IPO, or bought a mega-fund. It's good if the company's product was not killed and sawed into technology and kept its patents, getting a client base and eliminating the competitors.

If the product is still alive, then the former CEO of a startup, even becoming a VP in a new large company, is very financially motivated to show that the sales trajectory of their brainchild shown earlier in powerpoints is real and aims to scale sales and increase their geography.

The funds raised by an IPO or the resources of the new owner, in addition to the purchases of new assets, are spent on technological and organizational integration. For example, how to sell the product via existing partner channels or how to enter new markets and recruit new partners. This is how regional offices and representatives appear. Now it is up to partners and distributors to understand the proof of the business model, CusDev and Market Fit, giving real Value and ROI to the end customer. This is the “final stage” of investment. Here quick sales will not work as well as networking, when before your mentor's company would buy an immature product from you. There are many products (over the past 10 years, the number of software products has increased 10 times), and there are not enough trained sellers, engineers for implementation and budgets for everyone. The average sales cycle time is 3 quarters. Distributors think about what to invest in and offer to partners (and if VAD, then to customers), and what they don’t believe in and will wait for requests and demand growth.

We regularly receive emails from our vendors that they have bought a startup and soon it will appear in their price list and this is a challenge and how excited they are now. For an ordinary distributor, this is stressful, since you have to deal with the product, test, train salespeople and engineers, localize and create content, arrange digital marketing, do events, organize presentations and PoC, etc. ..?

It is necessary to distinguish between a Startup company and a Startup as a business in a specific area. A huge public company may find itself in a new market or with a new product, a pure start-up - an investment project with high risk and profitability and even without any liquidation preferences like VC.?

Even such giants as Amazon (AWS), Dassault, and Autodesk in some countries were a startup for us at a certain stage. They initially did not open offices or invest in product or business localization, but instead were rather opportunistic.

For example, in Belarus, when we went with Autodesk, the vendor was selling almost zero in the region, and only our investments in the creation of European standards in the field of architecture (analog of BIM) helped us create a market.

Strictly speaking, we started working with startups a long time ago. Once upon a time, Vmware was also a startup. We started selling them in 2006 and became their distributor a year after their IPO. We signed a contract with CyberArk before their IPO, and so on.

When a global Top-10 vendor tells you that you need to push the product, it is understandable and there is solid support, but we went further and became a distributor of startups.

The first time I went to Silicon Valley quite by accident was in 1997 for meetings with my boss, including meetings with VC’s. 20 years later, again in?Palo Alto, I was invited by the CEO of a startup whose products we wanted to sell in the EU. The meeting place was no longer a golf club, as it was before the collapse of the dotcoms, but a small office :)?

After 3 months, another startup, on a tip from this vendor, suggested that we close the topic of business development in this part of the globe on their pitch deck about geographic expansion. So we started to work with startups as systemically as possible, understanding the risks, but also counting on a big prize in the form of high marginality, high flexibility and knowing that we will not miss a new technological trend and will increase our market share and competitiveness in the long term.

Startups began to occupy the majority of our distribution portfolio in terms of quantity and generate more than 30% of our revenue.?Now, from more than 100 vendors in our portfolio, probably 40 are startups that regularly report on their investment rounds, and another 20 are new start-up businesses with big companies.?

What should be shown to investors? Traction, and if it's not the number of users and engagement, then this is usually sales. If it is a startup with a B2B IT product for the Enterprise market, it is looking for a partner channel. When sellers' resources are limited, startups are looking for distributors who will provide them with scalable sales, rapid geographic expansion and the ability to provide new Logos and References from new customers. It is not smart money, but smart sales and money saving.

Silicon Valley can give a startup the right management and advisors, access to technology, ideas, and infrastructure to build marketing, sales, networking and the first customers, but not regional sales (and perhaps regional PR and marketing), as they say, "think global and act local."??

We cannot guarantee an unknown startup’s sales figures in a territory within a product category for which they have not yet invented magical 3-letter abbreviations, and for which Gartner and Forrester have not compiled quadrants. But we can promise to provide a resource for sales, get local technical expertise, recruit key partners, show presentations to clients that fit their profile and can even make Proof of Concept/Value. Sometimes it is possible to close a $50K+ deal in half a year and even get a reference, but only 1 out of 5 vendors succeed.

In the USA, startups usually begin with direct sales, then in the EU and Eastern Europe there is nothing to do in Enterprise sales without a channel partner, although Great Britain is considered as a direct sales market. The Central and Eastern European market is less of an American order, even with the DACH region, but some parallels can be drawn.

There are a lot of analogs between VC and VAD. Our company has a committee that chooses once a quarter which companies we want to take into our portfolio and which we have to refuse. Like VC, there are vendors whom we want to sell, but they do not want to enter our region or they already have another distributor and we have been “courting” them for years.

It's luck for VC if they invest in a serial entrepreneur, we have the same situation. Managers for partners and vendor territories change jobs and look for the best positions and when they need to enter our market they remember how they closed big deals with us. We have several familiar managers in Israel and Great Britain from vendors, with whom we have gone through 3-4 vendors and they sign us up and advise us about when they are moving to new companies.??

VC has a concept of "manifesto" - specialization and strategy. The VAD distributor also has it - companies that sell BI do not sell IT Security, etc. Our manifesto or profile for example - Cyber Security, Clouds and in Central and Eastern Europe.

VCs brag about how many “unicorns” they have raised, i.e. with a capitalization of $1B+? In our VAD vocabulary, this is probably a company that did not dissolve its products by becoming a unicorn and still gives us $3-5M in annual sales. Since we mainly sell subscriptions, this is more than a $2M margin for the product lifecycle for a distributor and investments have already been recouped by more than 10 times and we continue to earn.

The average check of the seeding stage VC is about $100-500K. VAD's new vendor is about $50-200K of initial investment. Usually the money is spent in people and marketing, but sometimes also in demo equipment and development and adaptation.?

The average time for a vendor to enter the market is 2 years, which is 4 times less than the average life of an investment fund.

For a distributor, an M&A deal with a startup, unlike VC, is not always a joy. The buyer sometimes changes the channel and terminates?contracts of legacy distributors. At our stage of development, there are cases where we are already a distributor for the buyer, as in the case of Carbon Black and Vmware. But there may be luck, and suddenly you invest in a startup and receive a contract from a large vendor.

Of course, IT distributors, be it Broadline or VAD, are not the only sales channel, so what I write cannot be applied to every IT start-up, and for some models they are directly contraindicated.

Not all startups could take off in our setup and we have to refuse many of them. We realized that if the turnover of a startup worldwide (usually over 90% in the USA) is less than $5M, in our region we will not be able to make more than 1M UAS in 2 years and we should not get involved. I tried to get my friends’ VC and founders to suggest us for scaling, but more often than not we failed. Usually, it turns out if we are found and wanted, but not vice versa.? We do not take competitors in the same category in any one country (as opposed to VC) in our portfolio.?

On average, we sign 1-2 new contracts per month. The fixed costs for launching a vendor in 15 countries where we have offices are considerable and often our Unit Economics does not work. The margin from product sales will come in 1-2 years, and people need to be hired tomorrow, I'm already thinking of offering startups not just a commission on sales, but also options as payment for our scaling services :) By the way, this is an excellent idea for a startup business model!

Our VC variant in VAD distribution is atypical and it is difficult to repeat this business model.?First, you must have sufficient diversification so as not to burn out, not only because the products did not take off, but also because the contracts in which you invested could be canceled, for example, because of M&A. This diversification is both geographic and in the product category. If you do not have coverage of large markets, there are very few chances of catching a $500K+ deal, which means that the law of large numbers does not work. We have Germany, Poland and Russia in our geography, but here, too, due to political specifics, there are moments. If you do not have broad categories, then large partners do not work with you and through them you do not have access to the largest clients.

Secondly, it is a very specific business in terms of personnel and rhythm. Your employees, launching a new vendor in a new country, spend a lot of energy, they generally do not differ in responsibility from a Country Manager or Business Development Manager for vendors. It is very difficult for a manager when they have made 15 PoCs and have sold them to a large client, but the vendor did not take off or closed the business in that region. You have to be stubborn, like a real startup, so that after 4 failures you have enough strength to stand up and promote the 5th vendor. It is difficult to find, train and retain such personnel, there is a constant flow of new salespeople, engineers and marketers who are interested in new technologies and products for their promotion. We are constantly experimenting with both processes and markets. It's not worth relying on our partners’ sales for the first year. First, VAD should bring them a deal, so that later they will open the door for us to the client.

What the most common problems for startups in sales in the region, and how to solve them, I can’t?tell in one article. Probably the biggest one is patience and lack of attention to the market. You can't just take and sell on the Enterprise market, for example, to a large EU bank in 2 quarters. Even large companies with local offices cannot do that. You cannot say that you do not have an engineer for the PoC for the next month, because he is on the company's Forbes 100 project, small markets require the same attention as large ones. Prioritization and focus, which are pumped in startup accelerators, do not work here.?

A huge problem for startups when expanding geography is ready-made customized sales tools for partners, adapted use-cases, local references, simple affiliate programs, etc. For remote sales in the post-image world, new sales tools are needed - these are the products my startup is working with (i.e. Roi4Presenter ) :)

Our portfolio includes not only startups from the homeland of startups: the U.S.A., and the Mother of Cyber Security: Israel, but also from the UK, the Czech Republic, Ukraine, and Romania. Dozens of new IT technologies have appeared before our eyes, and we were their co-investors and were involved in this progress. Our pipeline of contracts with startups is still growing and in the COVID year we have grown by more than 20 companies and at least the same percentage in terms of turnover, so the business model is confirmed, but pivots are also possible :)