A version of this article previously appeared on Forbes.
Pilot agreements are provisional contracts under which companies can assess the veracity of a potential, long-term relationship. Startups often pursue such arrangements, hoping it will reduce the friction normally encountered during the negotiation process and lead to revenue more quickly. Ironically, the result is often just the opposite.
By their very nature, Pilot agreements implicitly assume both parties are testing a relationship’s efficacy. The “go / no go” structure of such contracts effectively allows big companies to defer their ultimate decision of whether or not they want to work with the startup until after the Pilot is completed. For this reason, startups who perform Pilots have failed the Business Development Idiot Test.
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More Than Syntax
Successful startup selling is largely predicated on velocity. Indecisive prospects diffuse a startup’s focus and slow down its sales velocity. Thus, startups must quickly determine which prospects are most likely to purchase in the near term and focus their energy on delivering these prospective customers an incredible experience. “Maybe” is much worse than a timely “No.” Pilot agreements are an institutionalized “maybe.”
The first step to increasing your company’s sales velocity is to eliminate the word “Pilot” from your salespeople’s lexicon. Instead, encourage them to negotiate phased agreements. Recast Pilots as the first phase of a multi-phased, definitive agreement.
I have seen firsthand how this seemingly subtle change makes a big difference. At DataPop, a Rincon Venture Partners’ portfolio investment, the company’s sales cycle significantly accelerated after it stopped performing Pilots. According to DataPop’s CEO, Jason Lehmbeck, “We were all pleasantly surprised because the concept is counter-intuitive. The reason we previously offered our customers the option of a Pilot was to secure their business more quickly. However, we found that we consistently had to re-sell our value prop in order to convert pilot relationships into definitive agreements.”
Land, Expand And Dominate
During my many years as a startup executive, I typically proposed three phases in my business development and enterprise sales contracts.
Land – Prove to your partner you can deliver the value you promised when you wooed them. The key to accelerating revenue generation in a phased agreement is to document the success metrics of the landing phase. If the minimum thresholds are met or surpassed, then the signed agreement should automatically advance to the next phase.
Ensure that such metrics are measurable by you (not solely by your partner) and are to the greatest extent possible, under your control. In this way, you can eliminate debate as to whether or not both parties move beyond the initial phase.
I justified this approach by reminding my partner that, as a startup, my resources were particularly limited and my opportunity costs were significant. As such, I could ill afford to meet our pre-defined goals and not be assured that I would achieve a return on my efforts as our relationship matured. When properly conveyed, partners understand that you are “in demand” and thus will want to work with you all the more.
If possible, the Landing phase should be conscribed to maximize your chances of success (i.e., product, geography, customer segment, etc.). In this way, mistakes made during this phase will be minimized and won’t damage your ability to later expand the relationship.
Expand – Develop a roadmap for moving into additional divisions, countries and/or product lines. Act presumptively and leverage the momentum established during the Landing stage to seamlessly increase the scope of your relationship.
Dominate – Maximize the value of the agreement by becoming the partner’s company-wide, de facto solution. Such pervasive usage will make it difficult for a potential competitor to dislodge you.
Pay To Play
Despite the reduced risk and costs of a phased approach, some large companies will still ask you to perform the Landing phase for free. Unfortunately, most startups cannot afford the opportunity cost of executing a project that does not generate near-term revenue.
Absorbing all of your the Landing costs might result in a faster initial close. However, doing so will likely impede progression to the Expansion stage. Some of the reasons relationships in which both parties expend resources upfront have a higher probability of success include:
Skin In The Game – If your potential partner does have a financial incentive to ensure the relationship’s success, it is highly likely your Landing phase will be overtaken by other priorities and you will never have a chance to Expand.
Deciding Now – Forcing the other side to pay a meaningful upfront fee requires them to determine the merit of the potential relationship at the outset – before either party invests time or money.
Mitigate Your Opportunity Costs – Whenever a startup applies its resources to a particular project, it is implicitly deciding to not pursue dozens of alternative activities. Thus, some compensation to offset your out-of-pocket and non-cash opportunity costs is reasonable. If necessary to obtain a Landing phase fee, agree to credit a portion of the up-front money toward the future revenue generated during the subsequent phases.
R-E-S-P-E-C-T – Insisting on compensation for your company’s time helps elicit the necessary respect from the big company. By demanding a payment that is meaningful to you, yet nominal to your partner, you will convey that you do not have to give away your time or technology in order to entice big companies to work with you.
Adequate sales velocity is one of the most important aspects of operating a successful startup. When the sales cycle is too long, companies either fail or are forced to raise additional capital to achieve sustainability. Replacing Pilots with multi-stage, metrics driven agreements will increase your startup’s sales velocity while simultaneously increasing the likelihood that such arrangements will mature into mutually beneficial, long-term relationships.
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