Organic vs inorganic revenue growth
TL;DR Why strategic partnerships should be considered as a key driver of growth
There are two ways to grow your revenue:
1)The organic route of scaling out a sales and sales engineering team, delivering POCs and converting those to payed deployments. As your product stabilises you’re able to test pricing sensitivity from multiple clients and length of sales cycle.
At this point you can start to make assumptions on fully-loaded sales resources and expectations on pay-back periods for new sales heads. You hire your first few sales reps. As you close reference customers this helps validate the solution within a specific segment or vertical which hopefully lowers the length of sales cycle and therefore increases your revenue MoM growth.
This organic growth is mainly linear until there is enough momentum for you to either raise a new round of funding to accelerate sales resource hiring or (hopefully) you turn profitable and decide to reinvest profits into sales resources to continue growth.
Jason Lemkin has a great talk (with transcript) which outlines many of the challenges you will face in this organic sales growth path en route to the mythical $100m ARR. A key one being how you scale that early customers into a number of them and then “go upmarket.”
“[A mistake] is not going upmarket faster. The simple fact of the matter is, it’s basically the same amount of work to close any customer at the end of the day. So if you can close a customer for $100,000 a year,it’s better than a customer that is $10,000 a year.
In some cases it’s less work, the bigger the customer gets, because they often have people to do the implementation, and they often know how to ask the right questions.” Jason Lemkin
2) The second path to accelerated growth is inorganic, what some may call Partnerships or Business Development or Channel or VAR/OEM relationships. These center on establishing commercial relationships with others in the ecosystem who could help accelerate your revenue growth (usually for some form of revenue split).
In the late 90’s I was doing sales engineering for a data analytics company (MicroStrategy) specifically focused on channel partners. We had a fantastic analytical “engine” but at our scale, lacked the vertical expertise and penetration to go after large customers in pharma or FinTech. My team’s job was to jointly build a packaged offering with key players in these various verticals to then have their salesforce (which was often significantly bigger than our) take it to market.
The “investment” from MicroStrategy was high in terms of resources (me and a small number of integration engineers) but actually relatively low when measured against the accelerated penetration these partnerships could provide. The revenue share split with these partners was easily overcome by the accelerated path to market, and by the trojan horse of our analytical engine now being baked into these large clients to then use as internal references for cross-selling into other areas of the enterprise.
I, therefore, continue to be a big believer in “inorganic” growth in sales via Value Added Reseller or OEM partnerships or joint go-to-market programs with the large consulting firms.
I know of a specific case where a large consulting company is bringing in a technology company into all of their big customers with zero revenue share primarily because they know that by selling their software the consulting firm will gain revenue and longer-term engagement with the client.
In another case, one of our portfolio companies has a loosely defined co-marketing partnership in which its much, much larger partner’s sales force is all incentivized to upsell their solution because they have noticed that their product plus my portfolio company’s product increases the number of seats for their offering inside new clients.
In yet another example, a European SaaS player was approached by a group who wanted to leverage their IP for a completely different vertical. The company actually made an offer for a significant lump-sum payment (along with a non-compete in their respective verticals) to build a new product on top of the core IP.
Another form of inorganic growth partnership is a geographic one, where you identify a local partner (as one of our portfolio companies has done for Japan, Korea and Latam) to bring you to market. You are effectively “buying” a local salesforce with knowledge of local players and nuances long before you have the ability to staff up a remote sales team in those countries.
When VCs talk about “inorganic” growth, they are usually referring to M&A transactions in which there is a consolidation of players in a segment. In this particular case, I wanted to use the term to define non-linear commercial partnerships which have the potential to have a step-change impact on your revenue acceleration. I’m a big fan, and wish more entrepreneurs considered this in their breadth of options to scale the business.
______________________________________
Christian Hernandez is the co-founder and Managing Partner of White Star Capital, an early-stage Venture Capital fund backing exceptional entrepreneurs with global ambitions. www.whitestarvc.com
