Case 2: The reseller relationship you never want

Problem: This software company had seen sales decline for a product that was sold at about $50K - $100K through an exclusive distribution arrangement. The company had developed a promising new product that would sell in the $250K to $1M range. They wanted to raise venture funding and exploit this opportunity but venture capitalists were concerned about the distributor relationship.

Analysis: The commercial terms of the distribution agreement were highly unfavorable for the company. The distributor insisted that they had the rights (under the same terms) to sell the new product. The company needed to take back the exclusive distribution rights and to build their own sales and marketing functions. The challenge would be to get the distributor to renegotiate while not giving them rights to the new product.

Solution: Limited VC funding was secured upfront in two tranches. The first was sufficient to build distribution and to give the company runway to renegotiate the agreement. The second tranche and subsequent rounds were tied to a successful renegotiation.

Results: The distributor agreed to relinquish claims to the new product in exchange for enhanced support on the first one. This enabled the company to secure the second tranche and a subsequent round of funding. The company built world-class marketing, sales, and alliance organizations. While sales of the original product stabilized, sales of the new product took off. Here are the results. Without the additional funding, the growth woudl have been much more modest.

 

 

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