Questions

How to incentivise future distribution partners to sign non-binding Letters of Intent for a physical product not yet manufactured, 3-5 y. life cycle?

We are a startup. We developed cool new gaming accessory for tablets, ready for production. $99 RRP; gross margin 42%; Big Box distributor discount ~25%. We are now raising angel investment and want to "gain more traction" by providing LOIs for tens of thousands units for higher company valuation and increased chances of receiving funding. How should we approach distributors with a cold email? **Should we offer exclusive rights and under which conditions? **What discount should we offer and under which conditions? Any other feedback is also appreciated!

3answers

I'd avoid the cold email. The best way to get inside big companies like distributors is to "social engineer" a connection to someone there. Find a 2nd or 3rd degree connection on LinkedIn. Hang out at a restaurant near their HQ and look for people with the right badge on. Ask your potential angel for help connecting you. If they can't, they might not be the right investor for your company at this stage. Their investment should get you more than money, it should come with connections, advice and mentoring.

Basically, there's no easy way to do this and every situation is different but it's going to take a lot more than a cold email or phone call.


Answered 7 years ago

As a general rule of thumb, you want to approach early adopter type folks. They're the ones that are willing to invest the time to understand your product and make early concessions to see it come to reality.

Usually I get them to commit at my cost, but pay up front and if I don't deliver, then give them their money back. Also, make it exclusive, that your only signing X amount of these early adopter agreements.

Give them a reason to take action today.

Again, don't forget to qualify if their early adopters / they're the best kind to get involved - sometimes smaller, but way more engaged and will help you learn faster.


Answered 7 years ago

First, let me answer your top level question. If you are asking future distribution partners to sign non-binding letters of intent, you probably don't really need to offer any incentive. However, I would argue that non-binding letters of intent are not nearly as useful here as they might be in other situations.

If I ask a real estate agent or a small business owner to sign a non-binding LoI, chances are they are going to take it more seriously than the document actually is, which is what makes it useful for validation. However, when you are dealing with a larger company that signs distribution agreements on a more regular basis, they might view signing your LoI as being the same thing as telling you, "Yeah, this is a great idea. Of course I would buy them." even if they never would actually buy any.

I would suggest getting an LoI to put out some test placements in retail stores. It might even make sense to try and get some contracts signed, though my gut is telling me that might not be the best idea.

In the end, a non-binding LoI is already one of the lowest risks way to validate something. I don't think you should be offering long-term benefits to the other party unless they are putting up with some of the risk. Instead, focus on the benefits to them. You might say you will give your first 3 partners an innovation award or something to recognize their forward thinking status in their market and community, etc.


Answered 7 years ago

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