Placing The Right Bets: How VC-Funded Companies And The Channel Go Hand-In-Hand

At solution provider Kovarus, staying in the loop on emerging IT vendors has meant putting in some serious extra effort. It's also produced major rewards for the Silicon Valley firm.

Kovarus does everything from trying out scores of emerging products in its own lab, to getting tips directly from venture capitalists, to occasionally partnering with startups even before they have a channel strategy in place, said Erik Melander, executive vice president for solutions at San Ramon, Calif.-based Kovarus.

[Related: 10 Hot Startups That Raised VC Funding In May]

Among the solution provider's partners are venture-backed companies such as container technology pioneers Docker and Mesosphere, IT automation innovator Puppet, and hybrid cloud management platform provider Turbonomic.

"During these really large market transitions it does make sense to get ahead of things a bit," Melander said. "We're not placing bets in hundreds of different [emerging technology areas]. But I think there are some prevailing trends that seem obvious to us."

And the returns from such a strategy can be substantial. Kovarus, No. 105 on the CRN 2017 Solution Provider 500, isn't disclosing details about its revenue results, but the company has been seeing "very significant growth" in recent years thanks to its approach of partnering with emerging vendors, Melander said.

As the disruption of the traditional data center and the push for digital transformation continues within the enterprise, many solution providers are finding that it's a smart move to engage with emerging vendors, particularly those that are funded by venture capital.

There's also a boom in venture funding for channel-friendly companies. Many venture capitalists say that they gravitate toward backing startups that are working with the channel, or have the potential to do so when their product is mature enough.

These VCs like their portfolio companies to work with the channel for a plethora of reasons—such as the ability to scale more quickly and capital-efficiently by working with partners.

"As investors we'd rather see our equity invested in the product, and leverage the channel to get the reach and expand our market share," said Andy Verhalen, general partner at venture firm Matrix Partners.

Matt Murphy, managing director at Menlo Ventures, said that companies with channel-friendly products generally won't have to raise inordinate amounts of funding for sales and marketing.

As an investor, Murphy said, "it's more interesting if you can find a company that has a channel-friendly product, and the channel is actually going to do some of the heavy-lifting."

From the solution provider perspective, funding from a reputable venture capital firm suggests a level of stability for an emerging vendor.

It can be a pivotal factor in deciding to partner, said Jan Rosenberg, CEO of Ashburn, Va.-based managed service provider Datatility. One of the MSP's key partners is Panzura, a cloud storage software firm that's raised $90 million in funding.

"My whole business is based upon long-term relationships," Rosenberg said. "I've got to be careful that I don't pick a company that will go out of business—or that someone will purchase for one part of the technology and close down the other parts. We are pretty cognizant of [vendors'] financial health as best we can be."

At the same time, in order to compete effectively with massive MSPs, Datatility must "be more nimble and out-perform those guys" by working with cutting-edge vendors, Rosenberg said.

"A lot of people want alternatives to the public clouds, for a lot of different reasons," Rosenberg said. "As a smaller company, that doesn't have the reach that the big guys have, we've got to have the best-in-breed technology."

Panzura CEO Patrick Harr said he's witnessed the disruption of the traditional reseller model caused by the cloud--and also seen many channel partners figuring out how to partake in the new models that are emerging. "Hybrid cloud solutions are squarely in the wheelhouse to drive that opportunity set--for resellers just as much for customers," Harr said.

Partners have "significant strength with their customer relationships, but they need solutions to drive that continued relationship," he said.

Many venture capitalists see abundant opportunities to invest around the growing acceptance of the hybrid cloud as the dominant model for enterprises.

"For companies that have massive installed infrastructures, hybrid is going to be the way to operate for the foreseeable future," said Alex Benik, partner at Battery Ventures, who has worked with companies including Nutanix and AppDynamics.

At General Catalyst Partners, managing director Steve Herrod, formerly the chief technology officer at VMware, said hybrid cloud is foremost in his investment strategy. "All of my investments have a heavy focus on assuming a world where there are benefits to having stuff on-prem and benefits to off," ​said Herrod, whose investments have included data protection vendor Datto.

In this environment, VCs say they are encouraging their portfolio companies to invest a portion of their venture capital funding into becoming more channel-friendly.

That can mean offering generous margins and incentives to solution providers, hiring more channel managers, and boosting market development funds—as well as making their product easier for channel partners to integrate and sell.

"Cloud is about speed and agility, so the product and service had better be very customer-friendly and channel-friendly," said Verhalen of Matrix Partners, who has backed emerging IT companies such as Panzura.

Venture-funded innovators such as Docker, Turbonomic and Puppet are among those investing heavily in making their channel programs top-notch.

This past fall, Docker, which has raised $160 million in funding to date, launched a two-tiered program for partners deploying its enterprise container platform. Docker now generates leads and initiates sales that are turned over to top-tier partners, provides sales and technical training and support, and offers discounts based on revenue attainment.

Ben Golub, Docker board member and former CEO, told CRN that nearly 60 percent of sales during the first quarter of the year went through the channel. "Our partner program is a key part of our strategy," Golub said.

Meanwhile, at Turbonomic, backed by $125 million in venture capital funding, the company is working to beef up its channel program following the recent addition of 22-year Microsoft sales veteran Jennifer Heard as channel chief. The company has about 250 partners and did about $40 million in revenue through the channel last year on more than 900 partner transactions.

Turbonomic's offering enables partners "to fulfill that trusted advisor role, and not have an agenda about whether something should run on-premise or off--but also not feel that they lose when it goes off-premise," said CEO Ben Nye. "It keeps both sides of the hybrid cloud world accountable to run efficiently and performantly."

Rene van den Bedem, chief architect and strategist at ​Cincinnati, Ohio-based systems integrator RoundTower Technologies, recently told CRN that Turbonomic has enthusiastically embraced the channel.

"Turbonomic has pivoted their sales model. They've moved to a channel model. They're using our sales reps now to position strategic deals, and it makes a big difference in terms of targeting strategic accounts," van den Bedem said.

At Puppet, which has raised $86 million in funding, the company is rapidly moving toward "partner centricity" in its sales approach and culture, said vice president of global partner sales and programs John Schwan. Puppet is currently seeing less than 35 percent of its sales going through partners, but "our goal is to increase that dramatically this fiscal year," Schwan said.

At the start of Puppet's current fiscal year on Feb. 1, the company introduced a new segmented sales model that designates corporate accounts as partner-only. The firm also recently rolled out a new partner portal with comprehensive information on working with Puppet, online training resources, and improved deal registration.

And Puppet is adding to its channel team, with plans to expand it from four people to 14 by the end of the current fiscal year.

"I always prefer working with a channel partner," said Puppet CEO Sanjay Mirchandani, who formerly held executive positions at VMware and Microsoft. "In my experience over 30 years, it's a more-leveraged, smarter way to work."

Chicago-based Ahead, No. 100 on the CRN 2017 SP500, is one of the solution providers in Puppet's Platinum partner tier. Puppet has "really seen the value [of channel partnerships] and really pushed a lot of resources and cooperation our way," said Dan Wittenberg, senior technical architect at Ahead.

"Not only do our sales guys get extra help in the field, but for any of the emerging new technologies, they help us develop proof-of-concepts and work with us and our customers," Wittenberg said. "We act as an extension of their company—they're not just having us go out on their behalf."

At Kovarus, another Puppet Platinum partner, Melander said that Puppet's IT automation offering is a "critical enabling technology" for digital transformation at end customers. "It's a tool that customers can use to become more like a software company," he said.

Puppet is just one of the many emerging technologies that Kovarus has vetted within its lab in San Ramon.

"It feels kind of like the Cambrian explosion of technology," Melander said of the current wave of technologies coming out, referring to the time in Earth's history when life forms became more varied and plentiful. "In our lab environment, we've got a team of people that are just constantly churning through this stuff, and seeing where the good technology is."

Melander said Kovarus has even gone so far as to advise some startups—which hadn't gotten to the point of working with the channel—about successful channel models.

And, Melander said he's spoken with venture capitalists as part of keeping abreast of promising new startups, and some of those conversations have led to new vendor partnerships for Kovarus.

"We've got the pulse on things—we're looking to be that gateway for customers to evaluate these technologies," Melander said. "Companies we're working with are increasingly looking for disruptive and innovative technologies. We've definitely seen a shift over the last 18 months in the level of inquiry and kinds of conversations we're having."