The Accidental Entrepreneur: My Crazy Roller Coaster Ride As A Clueless First Time Founder
Part 2: Blue Birds In Strip Clubs
In the last three years of nineties, I spent a lot of time in strip clubs.
Like, “Hey Todd, how have you been?” amount of time.
By the tenth time of playing Nick Pappagorgio, from Yuma…Arizona, I was over it. It had lost any appeal that my teenage self had assigned to it. You become numb to what’s going on.
I became far more interested in asking the women questions about how they made money and the economics of the club than watching them dance. I was fascinated by all the tricks that they used to separate their customers from their money and was constantly peppering them with questions.
But it was a part of the game. Do you know how some people close big business deals on the golf course? In the late 90s, we were closing a ridiculous amount of deals in strip clubs.
Especially when it came to blue bird deals. Those almost always came from strip clubs.
And blue birds were basically free money.
Here is what happened: There is an interesting dynamic for software companies that utilize resellers (or channels). Companies will use resellers to broaden their sales reach by outsourcing a portion of their sales to a bunch of commission-only salespeople. While this is great for geographic reach and increased coverage by getting feet on the street, it can also lead to something “channel conflict”.
Channel conflict is what happens when a direct sales rep and a reseller are both trying to sell into the same account. This is bad because the sales rep and the reseller end up competing for the business, which often results in increased discounts or more favorable terms being given.
That’s not good if you are in the software company’s shoes.
It’s also not good for the corporate sales rep. Because the software company is already paying a commission to the reseller, so when they close a deal, they don’t want to then pay the corporate sales rep commission on top of that. That would be double-dipping. So the reps often don’t get paid at all or get paid a lot less.
To say it’s “uncooperative” would be putting it too lightly. I’ve seen everything from slander to sabotage when it comes to people trying to protect, “their account”.
Some companies solve for this by saying the channel can only go after the smaller companies and leave the larger enterprise opportunities for the corporate sales reps. Others have a system where a reseller must “name” the account with the software company before engaging to see if it is already in a corporate reps sales pipeline and if so, it would not be eligible for the reseller.
Both of these systems have significant drawbacks. For the first, what if the reseller has a salesperson who is the brother of the CEO of a company that is a major opportunity? You have a much better chance with him than with a random corporate salesperson.
With the second scenario where the reseller has to request accounts, what will often happen is that a corporate sales rep will list almost every company in their territory as a lead, making it ineligible for the reseller to go after, effectively crippling them.
On the surface that may seem childish, but if 70% of your income came through your commissions, you’d figure out all the angles to protect the payment on your new BMW too.
The way this software company handled it was to create a policy that said that corporate sales reps would be paid 100% commission on deals that came through a reseller. They would basically pay both in full. It was designed to encourage reps to use the resellers as resources and to cooperate, rather than compete on accounts.
While this seems straight forward on the surface, it created a dynamic in which my new business partners have been exploiting for years.
And I was about to get lessons on what they called “not looking a gift horse in the mouth”.
It was common for us to bring our prospects to the software company’s headquarters in Texas for a “Customer Briefing”. It would basically be a day-long dog-and-pony show of the software and all the bad-ass things it could do, followed by a night of joint wining and dining the prospect. It was a great way to close deals that were on the fence, especially if the night ended up at a strip club, which they often did.
We would book our trips so that we stay a second night there. On that second night, we would take one of the sales rep in our territory out. Just the three of us plus the rep. We would do whatever the rep was into. If they wanted the best steaks in town, we made reservations. If they were into wine, we knew all the places had the really expensive stuff they liked. If they wanted to go all-out at the strip club, we’d rent out the entire VIP area. It was not uncommon for us to spend $1k-$5k on a single night out with just four people.
At first, I thought my business partners just liked to go HAM when they were away from their wives.
But I still remember one of these nights out with a new sales rep, let’s call him Jim. We were sitting in the VIP of a strip club with about a $3k tab and Jim had two naked women sitting on his lap making out with each other.
My business partner leaned over at that moment and said, “Listen, you get paid the same if we are in a deal or not. If you are going to close a deal we’re not in on, just give the customer our fax number for the order. We’ll process the order and take our cut. It’s absolutely no additional work for you. If you do that, we can do this every time we can come into town.”
Ahhhh, so that was the game. The closest thing to a kick-back without being illegal. It was the first time I had heard one of them be open and explicit about it. I now understood how the reseller had grown so quickly.
While these reps had fairly deep expense accounts to wine-and-dine their own customers, they were only out in their territory a few times a year, so they only got to “play” every once in a while. We were offering them a chance to have an epic night more often and without the scrutiny of a boss or some random person in accounting questioning their expense reports.
And it worked.
Three days later when we were back in the office we were having our sales review meeting when the fax started beeping. That beeping either meant spam or an order. One of our sales guys ran over the fax and read it.
“Any of you guys working with Widget Corp?”
We all looked at each other, shaking our heads. “Nope. Never heard of them.”
“Well, we just got an order for $150k in software and $50k in professional services. BLUE BIRD!”
That was $50,000 in software commissions and another $25,000 in margin for consulting from a company we had never spoken to.
In unison: “THANKS JIM!”
These types of faxes came fairly regularly.
I’m not going to debate the ethics of what they/we did. We never outright gave a rep money, we would just provide some entertainment, which was a perfectly acceptable practice. I’m sure some people consider that tactic “over the line” while others consider it playing the game within the rules that were outlined. I’m a Patriots fan, you figure out where I stand on the topic.
Don’t hate the player. Hate the game.
But seriously, if given then a similar opportunity to exploit blue bird deals in the same way again, would I do it? No, I wouldn’t.
But when I found out what was going on, did I raise even the slightest concern or protest the practice? No, I didn’t. I went along with it. It is what it is.
Ultimately my point is that blue birds or not, there are absolutely significantly sized opportunities in business to create products or services around a much larger company, rather than taking something to market directly.
Finding a way to extend or fill in the gaps to other companies products or services can be multi-million dollar opportunities and can give you a significant head-start when it comes to entering the market.
In the end, it becomes about the relationships you have with that larger company. The person who had set up my consulting deal or the team that outsourced us projects. The sales reps that could either work with us or against on deals.
Managing those relationships was as important to us as closing our own deals.
To be fair, we weren’t completely living off the tit of the software company. While a portion of our revenue was derived as a direct result of our relationships at the software company, we still closed a lot of deals.
Many of our relationships had nothing to do with blue birds but were simply there because we were good at what we did and a sales rep could trust us to get a deal over the finish line or the professional services team could trust us to do a great job at implementing their software.
Blue birds, were the icing on the cake.
I didn’t realize how great our situation was until years later when I was trying to launch a new company that didn’t have these built-in “advantages” and discovered how important they are.
You have to have your ego in check. It’s not quite as sexy to tell people that you have a startup that delivers someone else’s solution than it is to show off your own cool thing.
But the revenue and profits can be substantial.
The risk, which I discuss in Part 3 — That Press Release Stole My Free Viper, is that you end up having more direct and powerful “market forces” that you must notice and adjust to, or you run the risk of being out of business in the blink of an eye.