Which sales channels to use for startups? Part 3 of 3: OEM, when tech licensing makes sense

Licensing your technology to third parties, when done correctly, can make a lot of sense to a budding startup that has the right IP (intellectual property) and know-how but does not have the sales force to get the market traction it needs. In part 3 of this 3-part series we will focus on OEM-ing – licensing your technology. We will address some myths surrounding licensing and also some of the key factors that go on behind the scenes but have a paramount effect on your OEM success.

But let’s get the vocab right first

Before we do move on let’s just quickly touch on and clarify the terminology that is used around OEM and make sure we are clear on the actual business model. There are multiple buzz words out there but the business model is based on your enterprise licensing its technology, depending on the terms and conditions, to a third party so that they, the third party, can commercialize your technology in some shape or form. This could be in a more direct form, that is to say they could Brand your tech, use it as is but with their company’s logos, contact details, links to tech support etc. This could also be in a more indirect manner in that a third party would use your tech as a piece of their solution not as a product in itself.

Does OEM / licensing reduce your bands value?

There are many ways to look at this issue. I have come across people in the tech industry that are adamant that OEM-ing places you at the bottom of the stack in regards to value from where you are limited to play only a volume game to hit your revenue goals. But that point of view only measures your value within the stack. That does prevent you from creating your own stack in parallel and push your own brand, product and value also. So, if you have put all your eggs into the OEM basket, yes, your value is at the bottom of the stack. If, however you are building your brand and value in parallel there is no conflicting interests, although I know the marketing academics in the class will raise their hands quickly to contest that last comment:-)

OEM is rarely a case of if or. It is a distribution strategy and can be a very profitable one at that. That revenue can help you finance the fleshing out of your own sales and marketing teams and grow your own presence, brand and value internationally. Growing your direct and indirect channels can be a costly business and OEM-ing is a profitable way of covering those costs.

But you will become a cannibal!

If you are selling your core IP to vendors that you will eventually compete with you will create a scenario where you will be creating your own competition and cannibalism. This is truly a difficult thing to manage both for the company that OEM the tech and the partner that has integrated the OEM tech into their solution, I have lived the challenges of both of these scenarios and I would be hard pushed to say which was harder.

In the first scenario, you can create internal rivalries within your enterprise as the people working on direct sales will be antagonized by their colleagues who are selling the tech to OEM partners that are taking business away from them. So, what do you do? Four main points to take into consideration here.

  1. The road is long, don’t say no to OEM to avoid this problem, if you don’t get the revenue from OEM you may never have the finances to get to this problem
  2. It’s a good problem to have, you are growing rapidly on both fronts, well done and a pat on the back to all!
  3. All problems can be managed when the time comes. A critical point is to ensure that there is one person that is responsible for both OEM and Direct and do not have them as rival silos within your company
  4. There is also the possibility to license your technology to an companies who think will not be competitors in the future, there is a crystal ball aspect as tech changes too quick to get to far ahead of yourself but…

With some of the myths out of the way let’s look at some of the key factors in making it happen.

KISS. Make the initial tech steps simple

Tech flexibility and adaptable is key. I have worked at vendors where they really fell down on this piece. In those cases, OEM was just another side project and they did not dedicate tech people specifically to them, they had no one focused on the third parties needs and problems. Helping to integrate tech quickly if only in a sniff test context is critical. If you manage to generate interest from a potential OEM Partner and you give them tech that is complicated to integrate you can forget about it. If you make it hard on their tech teams their tech teams will make impossible for you.

If on the other hand you make it A, B C simple they will love you for it. Make sure that it as simple as possible for an initial test. Remember, if a third party has decided to go down the OEM road, they will go there with you or with a competitor and this early tech evaluation is really where a lot of the competition fail time and time again.

For the same reason, it is always great to have an OEM partner champion within your team. Somebody that sees the world from the partners point of view, from the partner’s tech team’s perspective. This guy or gal will be all about what the partners tech team needs and not on what you need. This focus will help you get you the right mindset and right tech fit. This will also help get your partners tech team onboard as they know they have a Champion, who doesn’t love a champ? come on…. This in turn will help your sales team get the deals across the line quicker.

But never forget the golden rule

We mentioned in part 1 of this 3-part series the Golden rule is; “don’t try to get others to sell something you have not been able to sell yourself”. You need to be able to show that there is an appetite for your tech. You will need to be able to demonstrate that appetite both to the indirect channel and also the OEM channel.

Finally, what to do about the bottom line? Adapt to their business model not yours

How do you actually license the tech and figure out pricing? If this is a straight forward rebranding deal the commercials should be straight forward as the business model is most likely going to be similar to what you use to commercialize your branded version.

If, however, your tech is only part of a bigger puzzle. In this case, you need to be cognizant of that fact and remember that for you to get traction as part of that puzzle’s sales success the puzzle has to be sold, not just your tech. Ipso facto, it makes sense to be flexible and try adapt to the partner’s business model. Whether that is an annual license, a monthly subscription or a pay as you go model it is in your interest to adapt to it. This shows, straight off the bat, that you get them! You understand their challenges and you will make an effort; your partner will apricate that. It is also a huge competitive advantage.

Don’t be a bolt on, be a plug in.

Put yourself in your partner’s shoes. She has a solution ready to go to market and wants to add another piece of tech to make it complete. If you insist on a yearly license model and they work off a monthly subscription you will quickly find yourself out of the main contenders as it would mean a whole load of additional headaches and internal admin to bolt on your business model to theirs. Don’t be a bolt on, be a plug in.

So in regards to business models and from my experience it is in your companies’ interest that you are flexible here and that you keep focused on the bigger picture. You should keep the CFO on a tighter leash than usual, if at all possible, and let the sales guys have a little bit more freedom of movement.
You don’t have to be big but do have to be good

It is a given today that due to low financial barriers to entry there are startup springing up, you might even call them springups?, with amazing technology that is not only good but could be game changing. So, the new business mindset can handle the fact you are not big but it will require you to be good. You will, however, need to prove it.

One of the best ways of demonstrating you are good is by getting somebody else to do it for you. For the same reason, independent evaluations are highly valued by possible technological partner. When I was working in the licensing space within Security companies like AVTest and AV Comparatives where the industry standards in ascertaining who had the best tech. Industry analysts are also highly regarded. Within the Security space Gartner was the go to analyst and large enterprises valued there read on any given vendor. So, figure out who are the evaluators and analyst in your space and figure out how you can influence them.

Nothing succeeds like success

The old maxim “nothing succeeds like success” holds through for direct sales as it does for OEM sales. If you can show that your tech has already been integrated by an industry renowned player you gain instant credibility, tried and trusted by….

Finally, if you are good and you know your space get out there and let it be known. Shine the light into the darkness, be the thought leader, make a stand and let your opinion be known. Don’t get all obsessed with the internal mechanisms of your industry, figure out where your target partners are in regards to industry knowledge and help them to the next step of enlightenment.

Just as indirect sales should never be the be all of your company neither should OEM, especially in the infancy stages of your company it is usually best to do OEM as part of an overall go-to-market strategy.