Well, January has come and gone and the year is off to a “shaky” start in case you haven’t been paying attention to what is going on in the global economy.  Some are faring better…some worse.  In the end, we will eventually pull out of it as life goes on.

Enough luke-warm pep talk.  We had a whoppin’ 6 folks show up for January’s OC VC Office Hours, but since I didn’t know 3 of them I’ll keep this going for the time being and see what (if anything) comes of it.  We had an excellent discussion about what is going on in the local, national, and global VC markets and I suspect this dialogue will continue for most of this year as funding continues to be elusive for start-ups.

The next OC VC Office Hours will be February 12th, 9am-11am, at the common area between Pacific Whey and Starbucks in Crystal Cove (between Newport Beach and Laguna Beach on PCH).  Please join us as we continue to discuss the VC markets and local innovation.

Given the every-increading need for start-ups to break-even sooner than planed, I thought I’d pass on some words of wisdom about selling and having the right sales strategy.  A good friend of mine (and former software sales exec and VC), Miles Mahoney, recently posted an article on the VC Journal online and has given me permission to republish it here for my readers.  Hope you enjoy.

Miles Mahoney of Indirect Sales Strategies says a company can expand its market share, maximize revenue per head and decrease its cost of sales by using the right blend of direct and indirect sales strategies

With the economy in recession and liquidity events few and far between, there is no better time for venture capitalists to consider the benefits of indirect sales strategies for their portfolio companies.

By using the right blend of direct and indirect sales strategies—as opposed to an all direct sales model—a company can expand its market share, maximize revenue per head, decrease its cost of sales, and increase its sales productivity. Indirect sales strategies are all about creating the greatest amount of sales and revenue leverage in the shortest amount of time and at the most reasonable cost.

I know this from more than 15 years of leading indirect sales efforts at some of the world’s largest independent software vendors, including SAS Institute.

But don’t take my word for it. Industry analysts like IDC and Gartner have research teams dedicated to working with their clients on channel strategies. Their reviews of software companies for end customers are very critical of those who do not have a “complete” sales strategy that includes both direct and indirect sales channels. Why? Because they do not want their clients buying software from a vendor that could go out of business because of its inability to grow its customer base and control expenses.

My experience has been that many VCs invest in software companies without a clear understanding of one of the most critical elements for those companies’ success or failure: their sales strategy. This is the strategy that will dictate how the portfolio company plans to increase revenue through indirect sales channels vs. direct sales channels; how it will drive market adoption, increase attachment rate of sales and services partners; and whether its product is “channel ready” and has a high probability to be OEMed, resold or distributed.

“Having the right sales strategy is important, but also leveraging the right tools can exponentially add value and real revenue to your strategy,” says David Folk, managing general partner of Jefferson Partners, which has been a client of my company, Indirect Sales Strategies. “In our investments in small and mid-sized companies, we have learned the importance of leveraging indirect sales strategies and how critical they can be for creating real growth for a company and its shareholders.”

Keys for Channel Success

The indirect channels approach has been used by the most successful software vendors to catapult them from an early stage companies to a market leaders. Some of the steps along the way to produce success include:

• Determining markets where indirect sales channels can propel an ISV into existing or new markets.

• Finding several key partners that will work with an ISV on the product requirements of the channel as well as those of end customers.

• Building those requirements into an ISV’s production plans.

• And working with channel partners and several end customers to test the product as delivered by the channel.

The way we like to start in assisting a company in building their strategy is by putting together a solid “segmentation plan.” This takes an ISV’s existing and potential markets and determines the best sales channel to reach them. We may also segment by product as well.

Next, a company needs to determine the top partners in its particular market and product segments. This can be done in several ways, including looking at its competitors’ partners and also at companies with similar channel needs in complimentary or non-competitive markets.

Once a company has lined up qualified partners, it needs to get their input on their product needs, including functionality, installation, training, implementation and support.

Then it’s time to test the “channel-ready” product with a few customers prior to approving the product for general distribution.

The whole process—from ensuring that a product is ready for the channel to product launch can be measured in months if a company has a product that is a good channel fit and was really a finished product from the start. If a company’s time line looks much longer, that may indicate that its product doesn’t have the right “fit” for a particular market or channel. A long time line may also be an indicator that a company’s product isn’t truly complete and that the company needs to invest in finishing it, regardless of the sales channel.

Problems with Direct Sales

Early stage and smaller ISVs are constantly trying to address revenue growth, but they tend to go about it in the wrong way, costing their venture backers money and lowering overall VC returns.

A common mistake in direct sales is to rush to put more “feet on the street.” While additional direct sales resources can have a positive impact on revenue, the cost effectiveness of direct resources can be disproportionate to the actual results. This can negatively impact the balance sheet and diminish market valuation for acquisition.

In many instances, small ISVs rely heavily on direct sales as a way to mask fundamental product inadequacies or a lack of product readiness that is required to generate the volume of sales necessary to grow. Investors would be well advised to ask the fundamental question: “Why are all of your sales coming exclusively through your direct sales organization?”

Is there something about the product or the market that dictates that only a direct sales team can succeed with the solution? I have worked in and with a number of companies where dependence on direct sales insured delivery of products that were continuously customized and therefore never became “market ready.”

While a company must have a market-ready product, as that company matures it may want to extend its product line to develop a larger partner ecosystem that broadens its market coverage and increases revenue. At one business intelligence software vendor, our channel strategy led us to produce both a packaged product that could be used off-the-shelf and sold through distribution and a higher-end product that could be customized by our consultants or consulting partners.

Common Mistakes

Sometimes the need for an indirect sales strategy is recognized by an early stage ISV, but the company doesn’t understand exactly what is required for success. Critical issues such as product stability, training, installation and usage documentation are typically glossed over.

One company I worked with had a high-end product used by major corporations that it also wanted to sell to small and medium businesses. Its strategy was to sell the same product to smaller customers by reducing the price and selling through resellers. While there was some immediate success, the program could not scale because it didn’t address a critical need of small and medium businesses: a product that is easy to install and maintain. This important feedback led to the development of a simpler installation method for smaller customers.

Another common mistake among ISVs using a direct sales approach is to wait too long before product launch to address pricing, promotions and awareness. Often times, initiating those actions within weeks of launch results in delays, missed sales opportunities and last-minute interventions. A better approach is to establish a channel-based work stream that runs parallel to a phased product rollout. It helps to drive key decisions around sources of growth, product position and market timing implications—all key factors to channel success.

Leveraging the indirect sales channel doesn’t just reduce costs for an ISV. It also helps the company get to market with the product that best suits customers’ needs. Top-performing ISVs will ping their top-tier partners during concept phase to answer questions such as, “Can you integrate it with other products?” and “Can you make money selling it?”

By allowing some channel partners to have access to a product prior to channel launch, an ISV can garner important feedback. Also, it allows key channel partners to become “skilled up” on a product before launch and hit the ground running once the product formally hits the market. When channel partners are embraced and made part of the process, they have a vested interest to perform well.

Having a well-formed indirect sales strategy provides a proven way to generate additional revenue and increase your market share, while at the same time keeping an eye on spending and total head count for a better valuation. It is imperative for investors to insure their portfolio companies have the right sales channel strategy in place before capital is spent.

Miles Mahoney is the founder of Indirect Sales Strategies, which is based in Eagle, Idaho. Prior to Indirect Sales Strategies, Mahoney served as VP and GM of Global Alliances and Channels for SAS Institute Inc., the world’s largest privately held software company. Mahoney may be reached at (208) 631-3649 or at mahoneymiles@gmail.com.

By Miles Mahoney, Indirect Sales Strategies

That’s right, Mixergy’s Lunch 2.0 is back in The OC, baby!  Please join Andrew and I at Earth Media Group for lunch tomorrow.  Details and registration can be found here: http://blog.mixergy.com/wp-content/invite/EMG.html

After an overwhelmingly positive response, I’ve decided to give the “office hours” idea a go for the first six months this year and then will make a decision as to whether to continue them.  My hope is that this becomes something that continues without my presence or involvement — a free, no-hassle, relaxed atmosphere for folks in the start-up ecosystem to network over coffee.  I’ve decided the third Thursday of every month is good (at least for me for now), but will rotate between south and north county venues.  So, the first OC VC Office Hours will be Thursday, January 15th from 9am-11am PST Pacific Whey in Ladera Ranch.  If this begins to build a crowd, I’ll use a widget to list the upcoming dates, times, venues, etc. on this blog and will send out updates.

I will send out real-time updates via Twitter if things change.  You can sign up for them at Twitter and rest assured that I’m not a prolific Twitterer.  I look forward to meeting you on the 15th.  I’ll wear be wearing a black hat with the Okapi Venture Capital logo on it to make it easier to find me the first few sessions.

While my free time allocation to blogging has waned of late, I have been spending more time out and about discussing a variety of topics with lots of interesting people.  I’ve enjoyed these meetings and, based on the feedback I have received from a number of folks, think I will make a go of “OC VC Office Hours” in 2009.  So, if your interested in meeting with me to discuss technology, markets, start-up investing, or other such topics, stay tuned for more details.  I will attempt to establish some sort of regular schedule, publish it on this blog, and provide any updates/changes through my Twitter account (so, if you’re interested in attending and haven’t already done so, sign up to receive my updates at http://twitter.com/ocvc).  Perhaps I can now finally get some value out of Twitter.

In the interim, please have a safe and happy holiday season and I’ll catch you next year.

I’ve been toying with the idea of holding regular “office hours” at a set time and place to meet with folks in the community — be they entrepreneurs, service providers, or others — in lieu of some of the traditional networking events and thought I’d throw the thought out to all of you to see whether this is something you would be interested in.  I have ~ 150 subscribers (via email or RSS) and a thousand more readers so I can only assume that some of you are local.  Anyway, let me know your thoughts here.

A friend had to “remind” me that I haven’t blogged in awhile…so that just tells you how busy I’ve been of late.  Fortunately, despite the economic woes the past month or so, all the things I’ve been busy with have been generally good.  I thought I’d take a break to post some thoughts on volunteers.  I volunteer my time on a couple of non-profit boards and am continuously amazed at the passion and commitments that my fellow volunteers have to their organizations.  I’m also on the board of a few for-profit boards and have recently been blown away at the help these companies have received by their advisory boards.  To be sure, this latter category of volunteers are granted stock options in the underlying companies on whose advisory boards they serve, but they are not monetarily compensated in the traditional sense in that they are not paid — they are granted options (essentially a right to buy stock in the underlying company at a future date at, ideally, a cost far below the value).  So, is it just the promise of potential future gain that makes these advisors tick?  I don’t think so.  The advisors that I’ve worked with are very knowledgeable and passionate about the industry in which the companies’ whose advisory boards they serve on operate and seem to genuinely enjoy giving advice and making introductions on behalf of the companies.  So, where am I going with all this?  Well, it seems to me that there will be a number of such qualified folks with more time on their hands in the months to come and start-ups would do well to identify and attract them to their endeavors.  It truly can be a low-cost way to help your companies if you choose wisely.  Until next time, happy venturing.

I spent last week on the couch with some sort of cold or flu bug and so I spent a lot of time thinking about the financial markets and my previous post on Venture Capital being a safe haven… in light of more recent posts about the potential gloom and doom to the the VC industry and was preparing to clarify my thinking with another post when I ran across Brad Feld’s post Let’s Get Practical.  Enough said.  Thanks for reading my mind Brad.

A special thanks to Emily Mendell over at the NVCA, and to the NVCA in general, as the basis of this post is my color commentary on the NVCA’s position on the financial market crises that we are in the midst of.

The venture capital industry is neither directly involved nor immediately impacted by the financial markets crisis and any resulting bailout.

A venture capital investment is a long term (typically more than 5 years) investment in private companies and is not as vulnerable to shorter term market fluctuations in a traditional sense.  While I agree with the NVCA’s position here, I feel compelled to clarify that a venture capital fund’s portfolio companies might be potentially impacted in the short term by:

• constrained lending (for those companies with significant capital expenditure dependencies employing a debt strategy);
• a reduction in corporate information and communication technology spending (for those companies that offer such technology products and services);
• a reduction in ad spending (for those consumer internet companies whose business models are predicated on ad revenue;
• personal dynamics within portfolio companies wherein such people are affected by the financial crises on a personal level (mortgages, laid-off family/friends, etc.)

As most VCs invest only invest in companies having thought through the longer term capital requirements necessary for success and have planned for the possibility of development / market snafus and other such rainy days, such potential impact on their portfolio companies is manageable and a normal part of the company building process.

A venture capital investment does not typically carry a debt component like a buy-out transaction does so the industry, as a whole, is less impacted by the credit crisis.  VCs do not require leverage to do business.  I do, however, worry about the buy-out funds having witnessed debt-to-equity ratios climb from 2:1 up to as high as 12:1 during the past few years.  I also worry about any potential “drag” the buy-out funds will have on the ability of venture capital funds to raise institutional capital within the private equity / alternative asset class given the continuing capital commitments institutions have made to buy-out funds and the lack of shorter term liquidity.  While I’d like to think institutional LPs have utilized contingency planning as part of their investment process, I’m just not sure in today’s broader financial market.

Venture capital risk is very different from the risk which is now being addressed by Congress in that it is much more controllable.  Our risk is not systemic risk; it is typically understood prior to making an investment (see Arbiters of Risk).  While many venture backed companies fail, the simple structure of venture investing – cash and equity used to build a company — is very different than the complex financial instruments backed by the debt-dependent structures employed other industries (e.g. buy-out).

Ironically, in light of the recent failures and challenges in other asset classes, venture capital is being viewed as one of the safer investment alternatives for institutional investors today.  According to Thompson Reuters / NVCA U.S. Private Equity Performance Index (“PEPI”), the numbers are even more attractive (especially early/seed stage venture, ahem…):

The venture capital industry experienced its own crisis in 2000 with the technology bubble burst from which we learned many valuable lessons that are employed today.  While only time will tell, we like to think we have learned from our mistakes and have grown even stronger as an industry.

One of the upsides of the current economic conditions (if there is such a thing), is that valuations for start-ups have come down and continue to decline for most sectors.  As always, good investments are being made and will continue to be made in the months to come.

In light of all this, I am very excited about the prospects of venture capital as an asset class.  More specifically, I think now is an ideal time to be in early-stage venture capital (especially in Southern California) and, in fact, I continue to put my money where my mouth is here and will post more on the specifics of the SoCal venture ecosystem in the months to come.

My partner and I recently attended the NVCA’s 35th Anniversary event up in Mountain View so I thought I’d share a video from that event here as I think it is particularly relevant and timely given that it is an election year…that our public capital markets are currently in an apparent state of “flux”…and we here in The OC’s VC ecosystem recently had yet another outstanding VC in the OC event. For those of you looking to solutions to large, macroeconomic problems, I think you’ll find the answer in a word: Innovation. Support innovation and all that entails and things are bound to improve, in my humble opinion. Until next time, enjoy the video.