The Distribution Model for Startup EDA Companies is Fundamentally Flawed

At some stage in every start-up EDA company's life, decisions must be made with regard to handling sales in foreign countries. In Europe and North America, the tendency has been to use direct sales for tools with a high ASP (average selling price) and indirect channels for less expensive labels. By comparison, irrespective of the price of the label, tools from smaller EDA companies have traditionally been sold through distributors in Asian markets.

Several trends are emerging to disrupt this traditional distribution model. On the one hand, the increasing complexity associated with today's electronic designs has spawned a growing number of small EDA vendors and their tools. Most distributors are limited to the number of products they can successfully support, so the competition to sign up the better known distributors has become intense.

Paradoxically, even though the demand for their service is increasing, the relative number of distributors is shrinking due to inherent flaws in the traditional indirect sales channel model. From the distributor’s perspective, EDA tools require a significant amount of support and have a long gestation period. In the case of a physical design tool, for example, it may take several years before sufficient orders begin to produce a return on investment in time and money. One factor that complicates the issue is that it is not uncommon for a young EDA startup to be acquired by one of the larger EDA vendors with its own direct sales channels, which results in the distributor being left out in the cold. Another common scenario is for a distributor to help grow the sales channel, only to have the EDA vendor sever the relationship and go direct once things have reached a critical mass (typically $10M or more in revenue from that territory).

The bottom line is that the traditional distribution model is fundamentally flawed. After years of hard work on the EDA vendor's behalf, the distributor is faced with a limited number of possibilities: (a) the vendor fails and goes out of business, (b) the vendor succeeds and decides to establish a direct sales channel, (c) the vendor is acquired by a larger company, which no longer requires the distributor's services, or (d) the vendor neither fails or succeeds, but merely limps along.

Does this sound overly pessimistic? If so, you may be interested in the experiences of Jim Su, the president of EE Solutions. As one of the most respected distributors in Taiwan, EE Solutions was much sought after by both startup and established EDA companies. EE Solutions represented Cadabra and Stanza (both were acquired by Synopsys), 0-In (acquired by Mentor Graphics), Simplex and Antrim (acquired by Cadence) and Magma and Apache (who – after years of investment in time and resources by Jim Su's company – became successful and decided to establish their own direct sales channels). And these are just a few examples. After twenty years in the business, Jim Su decided to quit being a distributor, and to focus his company on its design services business instead.

Many distributors like EE Solutions are simply giving up, thereby leaving emerging EDA startups with a smaller pool of distributors to pick from, insufficient expertise and resources to build direct sales channels, and insufficient economies of scale to represent themselves. Thus, a growing issue revolves around how to develop a vendor-distributor relationship such that success for the EDA vendor also results in a win-win situation for the distributor.

In order to address this issue, a new business model is emerging in which the distributor adopts much more of a partnership role with the EDA vendor. The idea is that instead of providing an indirect channel in the traditional sense, the distributor instead acts as the EDA vendor's "offshore representative and partner." There are two key aspects to this new model:
  1. At the beginning, startups need access to prospect contacts and help with language and follow-through. They may also need good field application engineers (FAEs), but may not initially be in a position to support the infrastructure needed to hire and train these engineers, or to deal with the local legal ramifications associated with paying salaries and social benefits. In this case, the offshore representative (distributor) can provide office space and help the vendor to hire suitable FAEs, who would be focused on the vendor's products (as opposed to handling tools from multiple EDA companies). The offshore representative will be compensated for these services, and it will also be recompensed for providing account strategy, sales leads, introductions, follow-through, and – ultimately – any sales.

  2. A major consideration as the relationship progresses is that the offshore representative is provided with incentives (perhaps in the form of stock grants) in addition to the commissions on ongoing revenue to help ensure the success of the EDA vendor, irrespective of whether the latter is eventually sold or decides to form its own direct sales channel. For example, the combination of stock in the vendor's company coupled with some ongoing percentage of any future sales (albeit smaller as time goes by) should be sufficient incentive for the offshore representative to actively aid the vendor in opening its own direct subsidiary once revenues reach a suitable level. The vendor-representative relationship may persist for several months or years after this transition, with compensation in the form of stock and/or sales commission providing the offshore representative with a good business reason to act in an advisory role and cultivate the customer relationships they have helped form.
But is this all "pie in the sky," or does it actually work? One company which has pioneered this model is Premier Technologies Inc (PTI) of Japan, under the leadership Koichi Suzuki and longtime EDA veteran Larry Yoshida.

Although I am familiar with an increasing number of companies who are already engaged in this new model, I am only at liberty to discuss one: my own company, Pyxis Technology. We understand that if a startup EDA company has difficulty finding and paying for a foreign distributor, then they lose. Alternatively, if a startup gets acquired or "goes direct" after considerable effort by a distributor to make them successful under the traditional business model, then the distributor loses.

By comparison, if startups and distributors engage in the new business model presented here, the result is a win-win situation that will open the market for more EDA startups and create true international partnerships. The only question now is whether those companies who have adopted this new model should talk about it, or whether we should continue to keep it to ourselves in order to maintain our competitive advantage…

by Naeem Zafar, president and CEO, Pyxis Technology
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Review Article
  • Terrible person August 07, 2007
    Reviewed by 'LETWOEK'
    I've met [censored]. What a terrible person. He should die.

      One person found this review helpful.

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  • Also look at IT Farm January 09, 2007
    Reviewed by 'John McGehee'
    [censored] got this just right. Premier Technologies has the right business model for today's environment.
    On my recent trips to Japan, I found that things are really starting to pick up there. EDA companies with the right product can do very well in Japan now.
    I also recommend that EDA companies talk to IT Farm, They offer excellent flexibility and business models. Morio Kurosaki or Takashi Mukaibayashi can help you.
    John McGehee
    Voom, Inc.

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