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when the top line meets the bottom line

in the black

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Mr. Burton: There are a lot of ways to start distribution and sales. Perhaps the most important way to look at it is that you have to have someone in your organization that is capable of that role, whether it’s the technologist or a service provider. One way is to really understand your market, and clearly understand other markets. Say you're selling performance tools into an Oracle aftermarket. I would go after a single Oracle sales manager who knows the market cold, who doesn't need a startup time, and who becomes a founder of your organization or a patron, maybe someone on your strategic advisory council. It’s someone who knows that market and has sold that type of service or product before. Get them into your management team early. If you have a group of technicians and you don't have financing, well, then, you find that one person who helps you in that strategic role and make sure that he or she is going to join you as soon as you have financing. Work through the other vendors. If you're a technologist, you go to someone else who sells to the Oracle sub-market, and say, “Let's start a relationship. Let me leverage on you and I'll give you royalties.”

          I'm not saying that you should have all of this clearly defined and executable and the resources on board right from the beginning, but you should be able to answer the questions and ask the questions in order to say, “When I have money, I'm hiring Harry or Sue” or “I'm going to get my first five people from company X” or “the next five from company Y.” Really, precisely understand.

          The other thing is that you’d better darn well have some sales capacity and people who have sold similar things before. When I hear of someone coming in who has never sold that kind of product before or never sold into that constituency, I get really worried.

Mr. Dearden: Good morning. Hank Dearden with 3D Technologies. This is a brass tacks question. One of my clients has a small eCommerce site. I am going to work with them to completely overhaul it and one of our strategies is taking baby steps into international sales. We'll obviously have to do a lot of modifications along those lines, not the least of which is different languages. What do you think are the first three languages we should tackle?

Mr. Burton: That's a tough question. I'd go back and ask, what are the biggest and most lucrative markets by language? Then I'd compare that against the easiest languages to port to technologically. What you're going to find is that, from a technological standpoint, there are languages that are very easy to convert to, that are almost fully automated with technologies to do it. Then see whether or not that synchronizes with your most lucrative markets. I'd compare those two as a function of reward and cost. French and Spanish are easy to do; Chinese is extraordinarily difficult. If you're talking multi-byte character sets, you’d better know what you're doing and have a lot of money to do it short term. If you’re talking about any of the Anglo languages, they have been done hundreds of times and can be done offshore very, very quickly in places like Russia, India and Israel.

Mr. Nguyen: I’m Kurt Nguyen with Qnexis Marketing. It has been my observation and experience that companies tend to get a little bit too happy with the terms “partners” and “strategy.” They have a laundry list of names on their Web site and in their literature, but maybe only one or two actually end up doing something significant with them. What are the top two or three things that a company needs to know in order to build an effective channel strategy?

Mr. Burton: I would always have a regular review of partners in terms of whether or not they have met the objectives and whether you have met the objectives for them. Make sure it's bilateral. Often the biggest mistake is not judging yourself in terms of whether or not you have met the criteria of the partner. I'd have a quarterly review of each one, and I'd rank them in terms of their importance. I'd cycle them out as quickly as I cycled them in if they're not working. It comes down to cost economics and return in terms of the partnership and the money you're investing.

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Mr. Goldman: Hi. My name is Ira Goldman with Virtual-Plastic Corporation. I was a little confused with your second graph. You started out earlier talking about the importance of distribution and channels, yet on the graph you noted five different things across the bottom with increasing value and effort. Promotion and marketing were the first two, with financial and technology producing a greater value. Could you explain how that fits together?

Mr. Burton: That's a great question. It means you're paying attention. Thank you.

          I have the benefit of looking at it right here, and that last chart was about partnerships and relationships, not necessarily about marketing and promotion as a direct function of your sales effort. If you look at a promotional relationship where you issue a joint press release saying, “I now am compatible with Microsoft 2000,” it's a press release. There is not a lot of effort in doing that and not a lot of differentiation, so the value from it is moderate, although it's nice to have. If you look at a marketing relationship, which is maybe a little bit further along the line, you say that your product is listed in a Microsoft catalogue somewhere. Again, not too terribly differentiated, but is it helpful to you? Yes. Is there a lot of value to that? Well, there is certainly some value to it. Is there a lot of effort to it? It may have been a lot of effort to get yourself certified in the catalogue, but it's not that tremendous. If you go further down the line and Microsoft embeds your product within Windows 2000, that's high value, high effort, high cost and potentially high return, as well as that level of dependence we talked about.

Mr. Weissman: I’m Kip Weissman. I was paying attention, but I'm a lawyer, so I don't get any of this stuff. I do have a couple of questions about initial product rollouts, however. One, how far can you push a product when there are still a few bugs but you want to get it out there? Maybe you feel pressure from your investors. Two, does it help or hurt to do price breaks in the initial stages? Three, when you're in expansion mode and you're burning money, how do you start to get a handle on whether the product is inherently profitable?

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Mr. Burton: Profound questions from a lawyer. The best product that I have ever seen is one that has not been released yet because there are no bugs. I mean that seriously, to some extent. If you have some early stage clients and you are building something that those potential clients really see has value, you'd be surprised at how many of them will embrace what you're doing, help you debug it and help you define the characteristics and capabilities of that product. It's never too early. What's important is disclosure. “Here is where we are; here is where we want to go. I want to work with you collaboratively in order to get there.”

          Now, is that a function of price? Price is certainly relevant if you have somebody who's willing to help you develop the product, debug it with you and provide input. That client may or may not pay full price. In one of my companies, when we were starting we went to John Hancock and explained to them what the product was going to do. They really needed it and paid five times what we anticipated the cost would be. They helped us develop it and gave us computer time to be able to do it. Our deal with them was that we would provide some of that back to them in a royalty stream for a period of time, and they said, “Well, we don't really even care about that.”

          The answer is that if you have a product that has a market need, and if you have a defined user of that particular product or service, they understand that the development cycles are there.

          When you have a venture capitalist pushing you for sales, in some ways he or she is pushing for proof and credibility that the product will sell before they actually want you to generate revenue from that sale. One comes before the other. Venture capitalists will always say, “It doesn't matter. Compress it. I want both credibility, provability and revenue.” If you prove that the clients will, in fact, buy and install it, however, you're validating the market. That's how I'd approach it.

Ms. MacPherson: What are some ways to entice that important first customer to pay for your product or service?

Mr. Burton: The best way to entice a client is to understand that client's objectives and his or her constraints and motivations. If you find somebody with an organization that has a challenge or problem that your product addresses, you may find a strong ally and you may find that there is a budget to get that problem solved.

          I very frequently find that salespeople or business development people don't collaborate to come up with something unique in terms of the relationship. Larger companies, in particular, or companies with a particular problem, have budget money. If you are going to solve that problem, they will let you have access to that money. You may say, “We're going to do this in joint development mode. It's in an early stage. Pay half now and half later.” You may say, “I need this money to satisfy my venture capitalist. Let's make some kind of arrangement.” There are a lot of different ways to entice them, but only if you solve a problem that they both have the need to solve and the economic foundation to solve it with. If it isn't in the budget or if they can't get access to the money, it's going to be much more difficult. The difference is meeting a need versus creating a need. If you understand what your salesperson or business development person has to do, it's easier to approach the problem.

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Mr. Khera: I’m Raj Khera with MoreBusiness.com. I have two quick questions. If you have a relatively low-cost product and you're marketing it largely through channel partners, what's the best way to handle customer support? Should you do it or should you enable your partners to do it? The second question is, what's the typical range of the percentage of sales that you give to a distribution partner to sell your product?

Mr. Burton: The two questions are actually intertwined. Most reselling distribution agreements get broken down into who is doing what to support the client, and who is doing what to get to the client. Who is absorbing what cost? Who is paying for the marketing? Who is paying for the people doing technical support? Who is paying for development? Then you look at the economics. If you understand that a product is going to sell for X and the cost is going to be Y, you and your partner should then break down who is absorbing what costs and share them so that both parties get benefit from it.

          In the early stage, if there is a way to be able to get access to customers which you can leverage over the long term, perhaps by providing support to the customer after somebody else sells to them, I'd say that's a good investment because incremental sales can come from you to the customer. The bottom line is that it's an iterative process that you define early. Then, based on what happens economically, you sit down with that partner and perhaps revise it. It really depends on your strategic objectives and the characteristics of your market.

          As far as ranges go, if you're familiar with Veritas, a very large provider of storage software, they resell other people's products for as low as 10%, meaning that they absorb all the costs and give 10% of the sales back to the product company. If there is a guideline, I would say that for a high-ticket item it ranges from 10% to 50%, no more. If it is a high volume, low-ticket item, it would be on the lower end of the scale, say 5%-20%.

Ms. Weil: Hi, John. I’m Debbie Weil with Wordbiz.com. You made the comment that the Internet is a channel and not a market. In B2B, say, in the higher-end technology products, would you say that the Internet is a sales channel, a marketing channel or both?

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Mr. Burton: I think it's a sales channel, a marketing channel and a platform topology. I look at the Internet and the World Wide Web as nothing more than a new client/server architecture. Essentially it's an IP network, and the great part about that and the Web is that the Web allows you to market by having people look at electronic catalogues, send them information, do interactive demonstrations and compress the sales cycle and the supply chain by getting to them much more effectively. You can do sales across it by email. You can send proposals.  You can send all kinds of things directly to your client base. You can go through someone else's site, you can do banner advertising and you can do sales as well. The most effective salesperson out there is going to use that interactivity to cut down on the number of trips he or she takes and compress the sales cycle, because 20 minutes with the client over the Web is better than 15 phone calls spread over two or three weeks.

          However, I think that the important thing is that you create the demand. If the Web and the Internet happen to be a way to create the demand and explain how your product or service meets their needs, then that's a great use of it and it can be the mechanism by which you order and fulfill the order. You can do all kinds of wonderful things, but, in and of itself, it is not a market. That's really all I was really trying to say earlier.

Mr. King: Hi, my name is Alexis King with Ecocys Technologies. For products that are highly technical but for which the end user doesn't have to know anything about the technology, should you have two different initial sales messages depending upon who you are talking to or just concentrate on the benefits for the end user?

Mr. Burton: If have you a product that is highly technical but very easy to use, I guarantee no one will ever buy it until you both prove that it's easy to use and prove to the technologists that it’s technically viable. You're selling to two people, or even three or more, so the answer is that you have to have an explanation of how and why it works, and another about why it's simple. The person who cares that it's simplified is the one who will grab on to that message. Typically, you'll find that person will then go to someone technical and say, “Okay, prove that this is real. Look under the covers.” The answer is in old sales tactics. There is an initial benefit statement, then a lot of open- and closed-ended questions about what that person does and doesn't care about. Then, in the back of your mind, you know that you’re never going to get anything sold in a large corporation until you satisfy multiple parties and bring down the political barriers between them.

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Mr. Norco: Initially you want to build brand identity, but the whole point is to get the sales and you generally have to prioritize your activities. What's the bare minimum you do in terms of marketing and how much do you prioritize it tied to actually generating sales?

Mr. Burton: That's the long-term, proverbial question about what's more important, marketing or sales? The marketing person will tell you marketing and the salesperson will tell you sales, but he wants all the marketing, too. The answer is that it's iterative. Early stage companies cannot spend a lot of marketing dollars. They don't have the ability to blast marketing out.

          I’ll give you two ends of the spectrum. Lotus 1, 2, 3 was announced back in the early 1980s, I believe, and it had a million dollar advertising budget for the first week. That was unheard of with a startup, venture-backed company. It worked. It was a low-end product and people began to absorb it because a brand was created. At the same time, it created a pull from the marketplace that was, essentially, the consumer. The other end of the spectrum is a company that does not have a lot of marketing dollars and the only marketing they do is, perhaps, one trade show and the ability to advertise in a vendor’s magazine like Oracle's. They may buy a list of 10,000 clients from someone. That's marketing, not sales. You may find that there is one shot in one particular venue of a trade association meeting where your marketing dollars are best placed. The answer is that it is highly dependent and you incrementally build up your marketing dollars. Normally, it is not economically feasible to do the kinds of things that the dot.com companies did in terms of building a huge brand awareness and then generating traffic after the fact. Some of that worked and some of it didn't. It certainly was a lot of wonderful marketing dollars to marketing companies, but not so good dollars to venture capitalists and entrepreneurs.

Mr. Garland: I want to shift to the venture side. Has there been a slowdown in the number of plans that Updata has received and are the plans better? Are venture capitalists shifting their focus to existing investments, or do you have some plans to do deals now?

Mr. Burton: Very good question. We still see a significant number of plans, and we see a significant number of quality plans. What has increased dramatically is the number of plans that we see for later rounds, B and C rounds, because other venture capitalists need to get their companies financed and that money is harder to come by. I would say that venture capitalists are being much more deliberate, taking longer to make decisions and doing much more due diligence. They are retracting somewhat because they are trying to weather the storm. I think a lot of venture firms have a fair amount of money to spend, but we are waiting for the bottom of the market. Venture capitalists like to buy at the bottom, not on the way down. If they buy on the way up, hopefully it’s at the inflection point, not the top of the sin wave.

          The answer is that there is plenty of money out there, but your plan and your concept, if it's early stage, had better be extraordinarily well-defined, particularly from an economic model standpoint, and it better not be just incremental. It should be a significantly different way of doing something that will have a material impact on a market. Those are the ones that are really going to get the attention, and management teams are scrutinized more than ever because they have to manage through difficult and turbulent times in the market.

Ms. MacPherson: Thank you so much, John. I think you've given people a lot of insight to go out there and sell today. Thanks everyone for coming.

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