7 Keys to a Successful Distributor - Tech Startup Partnership
Examples from Ferguson, MSC and others.
As profitability moves to overtake growth in the current economic environment, more and more tech startups are turning to distribution to forge partnerships. We've written before about how distributors should be using technology partners as a customer to digitize their legacy value propositions. Now, we’re focusing on how distributors can partner with tech startups and bring those solutions to their respective customer and/or suppliers.
When done right, a partnership between distributor and tech startup can increase growth, profitability and stickiness with customers or suppliers. With that in mind, we’ve compiled a list of 7 key criteria distributors should be paying attention to when evaluating a potential tech partner. We’ve also highlighted a handful of tech partnership examples with Beacon Roofing, MSC Industrial, Ferguson, US Foods and - a bonus example from Home Depot.
1. Does the startup's technology actually work and can it sell itself? ⚙
Before venturing into a partnership, it's imperative to verify a tech partner’s product viability. One of the key elements a distributor brings to a strategic partnership is scale and the customer or supplier base. But, distributors need to vet that a startup has been able to sell this product on their own and achieve some level of PMF (product market fit). Have you talked to real users and customers?
We’ve all seen headlines about tech companies not being as they appear. Pick up the phone and talk to some people using the tech that you’re considering. You don’t even need to ask the startup for references - usually, their partners/customers are already listed on their site!
Even better, talk with some former employees. Is there a positive company culture and do the people making this technology take pride in what they’re building and the industries they’re serving?
2. Can the startup be trusted? Are they a friend to distribution? 🤝
Let’s face it, there’s a lot of tech companies that want to take advantage of distributors. They see you as a middleman that can be cut out. Who’s actually a friend to distribution?
A couple years ago, when VC money was falling from the sky, we were seeing tech companies who were much more adversarial with distribution - now those same tech startups are running out of cash and changing their tune. What’s a full proof way to determine a tech company’s loyalties? Follow the money.
How do they monetize? Who are their investors? Are they planning to become a marketplace? What’s to prevent that marketplace from becoming competitive and coming after a distributor’s margin once the marketplace achieves critical mass?
3. Alignment with strategic goals 🥅
Determine how the startup's product aligns with your strategic objectives. Ask yourself–is this prospective technology going to make a meaningful impact in an area that’s a priority for your organization?
Whether it's expanding your footprint in the value chain, boosting customer retention, expanding your product line, or entering new markets, clarity on these alignment points is crucial. If there’s long-term alignment with a strategic goal, then the next step is to align incentives internally. This includes compensation. If the organization’s strategy is benefited by the prospective tech partnership - then it should be appropriate that compensation be tied to the success of the partnership.
4. Commitment to success 🥇
Who will own success? On your side and on theirs? We recommend having a dedicated point person within your organization, whose personal success is tied to the partnership's performance and ensuring accountability. This point person should have a direct line to the tech partner’s CEO and to the distributor CEO and executive team.
Distributors don’t do tech partnerships often - this is different and requires flexibility from the top down if going to be successful… and that applies to both sides. Mutual commitment between distributor and tech partner fosters a cooperative and goal-oriented atmosphere.
5. Crawl, walk, run 🏃
Clearly define how the startup's product will be promoted, marketed, and sold. The last thing you want to do is alienate your hard-earned customer base with a half baked offering but at some point you may need to take a leap of faith.
To lessen potential downsides, why not first run a pilot in a select region or product category? Maybe the distributor can do a no-code or low-code test without having to integrate the startup into its technical infrastructure. And, if the pilot goes well, then more resources can be allocated for a technical integration.
It’s always good to clearly define what success looks like going into each phase. And align success against specific KPIs. This will make it clear to all parties what to focus on and hopefully reduce scope creep.
6. Have you aligned economics, on both sides? 💵
When you’re looking at partnerships with early-stage technology partners, it’s also necessary to validate that the startup is capitalized properly and structured in a way in which the founders have the right resources to back up their commitment to success. If your partnership wasn’t already part of the startup’s strategic plan and factored into their prior fundraise, then the startup is pulling budget from another initiative or potentially cutting corners on the rollout of the partnership.
Lastly, think about what value your scale brings to the startup. A large distributor is most likely underestimating the value you can create, assuming you can execute effectively - which is not easy to do.
7. Embrace Failure - Communicate Clearly 📞
Not every partnership works. And, some of your customers or suppliers that partook in a pilot program, could be impacted if the partnership is terminated.
It’s important to clearly communicate the risks up-front. Yes, there’s plenty of upside and opportunity if the partnership and technology works. But, it’s important to not sugarcoat the risk of failure to a distributor’s customers and/or suppliers who are considering participating in a trial or pilot program.
Distribution Examples:
MSC Industrial Supply
MSC and MachningCloud, a machine tools marketplace and data provider, inked a deal in which MSC will be the exclusive distributor on all eCommerce sales. MSC will fulfill orders from its own inventory if available, or send orders to suppliers for direct-shipping. MSC stated that it sees its partnership with MachiningCloud as an opportunity to assist customers in enhancing their productivity.
