Friday, September 18, 2009

Hey Early Growth Stage Companies, Any Idea What You're Doing?

The Spine Blogger was talking to a few of his industry sources, when the topic of early-growth stage companies came up. How inexperienced and unrealistic are some of these companies, when it comes down to negotiating distribution agreements.

Early-growth stage companies have trouble distinguishing between a direct sales force versus an independent distribution model. A direct sales force is accountable to the company. By today's standards, most direct sales people are not allowed to market and sell competitive products, even though there are many salespeople that do this at the risk of being terminated. Now let's look at an Independent Distributor. An ID is responsible for themselves and their employees, incur all ancillary expenses associated with running the business (expenses and health insurance if they are legit), and are not legally bound to any one distribution agreement. Very different if you ask me!

Let's look at quotas. First and foremost, most of these companies are not in a position to demand establishing a quota if they have no or limited market penetration. The distributor has to get "their surgeon" to agree to use the product, and then, they need to develop a history of utilization before a determination can be made of the potential revenue stream. In some cases, that will take two to three months. Sometimes, even established distributors must go in front of a product evaluation committee. I could hear some VC or CEO stating that I don't know what I am talking about. Let's look at the facts. What type of distributor are you appealing to? The organization that generates $1-$5 million in sales, or, the $250-$500K distributor? Unless you have 'breakthrough technology," and I am not talking Blackstone/Orthofix here, most large distributors are not interested in reinventing the wheel. Their business has continuity and stability. Of course, unless you are willing to pay 50% on the dollar and your product is competitive there may be a consideration. Unfortunately, many early-growth stage companies believe that their baby is beautiful, even if it is a "me-too" product.

The whole purpose behind a quota is to have a target or objective. The objective is to generate sales. If the surgeon has not seen the product, nor has used it, how can the company expect immediate revenue? What happens if your product has flaws in its design, or the instruments do not work? If any of these "boy wonders" ever sold in our industry, they would understand that there is a ramping up period. Unfortunately, many people have forgotten what it was like to carry a bag. Besides, most of the time a bonus is attached to a quota. How many companies in our industry actually pay bonuses based on sales? How many early-growth stage companies give their distributors exclusivity in their territory?

Most of these small companies that are classified as "The Others" by our industry are so desperate for revenues, that they have unrealistic expectations. So the next time someone provides you with a distribution agreement, take your time, read through it, and don't be afraid to negotiate. And remember, if you don't understand something, go to an attorney. The $300 per hour fee is well worth your time. The Spine Blogger wants to know what experiences its readers have had? Let your voice be heard!

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