Wednesday, July 08, 2015

How Big Companies Accidentally Kill Startups

How Big Companies Accidentally Kill Startups

Posted by  on July 7, 2015 at 12:40 pm

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Lennie’s lip quivered and tears started in his eyes. ‘Aw, Lennie!’ George put his hand on Lennie’s shoulder. ‘I ain’t takin’ it away jus’ for meanness. That mouse ain’t fresh, Lennie; and besides, you’ve broke it pettin’ it. You get another mouse that’s fresh and I’ll let you keep it a little while.‘”
Having spent years at the biggest of corporate behemoths (IBM) and now running a startup that works with lots of Fortune 500 clients, I’ve seen way too many large companies with the best intentions play the role of Lennie. It usually looks like this:
  • BigCo decides it wants more innovation and holds an innovation day, sources startups from local incubators/accelerators/consultants, etc. BigCo may be an end customer or an agency working with customers.
  • Startup solves a problem BigCo has – there’s mutual interest in working together. Both are eager to get started.
  • Startup reallocates resources from other areas to develop collateral, enhance the product, or otherwise increase appeal.
  • BigCo schedules meeting after meeting, often separated by weeks or months to integrate a sufficient number of stakeholders and build consensus. Startup scrambles to meet the needs as cash dwindles. The startup must be absolutely positive not to show desperation, but as time passes the startup increasingly tries to move BigCo from “extremely interested” to “closed.”
  • Momentum stalls –BigCo becomes frustrated because their procurement process is optimized on how to protect internal corporate resources (for instance fight like crazy on questions of IP ownership or insurance ratings), rather than partnering with disruptive technology.
  • Eventually BigCo sponsors stop scheduling the meetings and returning calls to Startup – or – Startup devotes so many resources to BigCo that by the time they are ready to sign, Startup is out of business having run out of cash before that critical deal could be done.
In the best possible situation, it’s often times 12+ months from introduction to payment being transferred. Most startups have about 12 months of cash on hand.
Innovative startups come up with a new way of doing things. That method is often faster/cheaper/better than the status quo – the startup simply needs sufficient customer traction to validate the innovation for investors to earn the capital they need to grow. Startups are always starved for cash and customers are an amazing asset because not only do they give the company cash but their validation also makes it possible to raise additional investment dollars. If done right, that money is invested in creating a better product and experience for the client, creating a virtuous cycle that provides increasingly innovative products/services for the corporate client and cash/validation for the startup.
Unfortunately – like poor Lennie from Steinbeck’s classic – large organizations oftentimes kill startups despite having the best intentions. They are often unable to set expectations about when a deal can get done and the barriers that inhibit internal innovation similarly conspire against procuring new disruptive solutions.
What are best practices in finding ways to work together? There are a few key things:
  1. Start small. Allocate some amount of budget that can be lost without devastating consequences for the organization. Use this to build momentum and trust between companies. Above all, do this fast. Startups will move mountains for large clients who give them some amount of budget.
  2. Tell the startup exactly what you want and what you can offer. “I will give you $50,000 and I expect you to do x, y, z. If you accomplish this, I will be a reference for you and will champion a larger deal.” You’ll probably be shocked at how often they will simply respond, “sold.”
  3. Postpone procurement bottlenecks until post pilot. So long as the pilot is sufficiently small and self-contained, you shouldn’t have to argue about IP ownership, exclusivity or other long-term strategic issues.
What this boils down to is give the company a chance to show you how they can add value to your team, don’t get them mired in talking about how they can add value. You’ll find that some don’t live up to their billing – those should be mercilessly culled. But – the ones who live up to their promises will be worth their weight in gold to you.
 Note: This article was originally written by Erik Severinghaus, posted by Dell, and re-posted by SimpleRelevance. 

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