How Big Companies Accidentally Kill Startups

How Big Companies Accidentally Kill Startups

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

“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. 

Simple Relevance

BREEDING NEW BUSINESS

INCUBATOR AND ACCELERATOR PROGRAMS HELP ALUMNI BRING THEIR BUSINESS IDEAS TO LIFE

By Melanie Coffee

Many dream of starting a new business, hitting it big and making a name for themselves. But the reality is that over the last four years, only 50.5 percent of new companies have survived, according to the U.S. Bureau of Labor Statistics.

However, with the burgeoning of incubators and accelerators, startups now have an immense amount of support they lacked in years past — support that improves their chances for success. “Incubators and accelerators give a business space to test and find the right business model in an environment where they can get additional collaboration, mentorship and discounted services,” says Linda Darragh, executive director of Kellogg’s Levy Institute for Entrepreneurial Practice and the Kellogg Innovation and Entrepreneurship Initiative.

Accelerators, on the other hand, have a specific duration. Participants work with mentors to quickly test their business ideas and figure out how to pivot and find investors. The participants are usually given some seed money and agree to give the accelerator a percentage of equity in the company.Incubators are a bit like that elementary school science project where kids watch eggs turn into peeping tufts of yellow. They give startups a physical home under one roof where businesses can find their footing as well as take advantage of the resources and networks available for growth.

And where a startup ends up — be it an incubator or accelerator — depends on that business’ needs.

Right place, right time

For Erik Severinghaus ’12, 1871 was the perfect spot for his company, SimpleRelevance, which helps online merchants have personal interactions with customers.

He was already working on his startup in Chicago’s Merchandise Mart building, holed up in a grotty space on the 19th floor as part of a self-organized, informal incubator called Fail Cube. Then, word spread about an innovative new space that was coming to the 12th floor, an incubator called 1871 that not only would provide space but also educational and mentoring resources to Chicago’s blossoming technology scene.

Now, 325 startups call 1871 home. Others who have a presence in the 75,000-square-foot office include five venture capitalists and six universities, including Northwestern. The atmosphere at 1871 buzzes with friendly competition and collective wins. If teams struggle with their marketing, development or a myriad of other obstacles, there’s always someone within walking distance who has been there, done that and is willing to help.Severinghaus, 31, thought it made sense to move. “It was clear from the beginning that this was going to be the hottest digital technical community between the coasts,” he says.

“[1871 is] this neat sort of confluence of amazing people from political and social circles and the technology community,” Severinghaus says. “It gives you more chances — luckily or serendipitously — that could really launch your business.”

Build fast or fail

When entrepreneurs haven’t done much more than dream up a business plan, accelerators can help them quickly figure out if that idea will fly.

Take, for example, Jeremy O’Briant ’14. Before attending Kellogg, he was a certified public accountant. To keep his license, he had to take 40 hours of classes each year and found the continuing education process to be quite disjointed.

O’Briant decided to build a better mousetrap and created License Buddy (mylicensebuddy.com), which helps licensed professionals manage their continuing education requirements. He took his idea to Northwestern’s Startup Incinerator last October, a weekend long competition where more than 80 teams pitched their business ideas in an “American Idol”-like contest. In the end, the teams were whittled down until one was left standing: License Buddy.

“That weekend helped the team and me organize the idea, demonstrated that others believed in it and gave us confidence and support to go full speed as entrepreneurs, which was invaluable in retrospect,” says O’Briant, 31. For winning the competition, License Buddy received $10,000 in legal consulting, and O’Briant was given a seat in The Farley Center’s coveted NUvention Web class. During the course, O’Briant worked with students from different disciplines to build his web product. “NUvention gave us a few extra hands on deck with different skill sets that helped turn it into a business,” he says.

Following NUvention, O’Briant was accepted this summer to New York-based DreamIt Ventures, a highly competitive, three month accelerator where participants are given up to $25,000 in seed money. In return, DreamIt receives a 6 percent equity stake in the company.

“All of us were really interested in entrepreneurship, but we had never been through it before in a meaningful way,” he says of his License Buddy team. “The intensity of the programs pushed us along and provided invaluable lessons that just can’t be taught in the classroom.”

In the end, License Buddy emerged a leaner, stronger company, with people continuing to sign up every week. O’Briant still maintains the site, although only part time. O’Briant plans to spend his remaining year at Kellogg working on a media-related startup that came out of his experiences over the last year. “If we hadn’t had the opportunity to participate in these programs, I’d still be on the sideline with ideas in my head,” he says.

Support, support, support

When Severinghaus felt SimpleRelevance was ready, he applied to Techstars Chicago (formerly Excelerate Labs). A satellite of Techstars, it’s one of the largest accelerators on the planet and a pioneer in mentorship-based accelerators. Out of more than 900 startups, SimpleRelevance was among the 10 chosen for the Chicago branch’s annual three-month summer program.

“We have gotten a tremendous amount of value out of [Techstars] as far as messaging the company better, getting sales, getting client interest,” Severinghaus says. “I think it did very much what it was meant to do.”

Having the support to strengthen a new business is what helped inspire the concept of a business incubator. The first one was in 1959 in Batavia, NY, according to the Ohio-based National Business Incubation Association. The idea didn’t catch much fire, and by 1980, there were only a dozen. Today, the association estimates there are more than 1,250 in the United States.

Accelerators came out of the Silicon Valley scene in 2005 after the Boston-based Y Combinator moved out West and started funding companies like Dropbox and Reddit.

Now, experts say, there are more than 1,000 accelerators worldwide. “These mentorship-based accelerators are effective because they help the entrepreneur learn more in a shorter period of time than was ever possible,” says Troy Henikoff, managing director of Techstars Chicago and an adjunct lecturer on entrepreneurship at Kellogg. “They provide the mentors with a way to get meaningfully involved, helping entrepreneurs, seeing the new technologies and getting a great view of the new companies that are potential investment opportunities. All parties are served well.”

The growing trend of incubators and accelerators is changing the face of entrepreneurship. Though many factors obviously contribute to a business succeeding, it’s worth noting that the incubation association says historically 87 percent of businesses that went through an incubation program are still operating nearly 10 years later.

“They have done a great service to entrepreneurs,” Severinghaus says of incubators and accelerators. “It’s lowered the barriers in a lot of ways in getting connected to people who can help you be successful.”

1871 alumni company simple relevance hosts tech leaders and governor rauner at new offices

SIMPLE RELEVANCE CONGRATULATES 1871 ON UBI SELECTION

Thank You Note from Erik S

Friends-

Leaving 1871 almost feels a little like highschool graduation. When I first heard about the idea of 1871 I thought it sounded cool - but was never really a "joiner" by nature and didn't think it would be for me. Needless to say, I'm thankful Kevin changed my mind on that.

When we moved in, I remember talking with Justin & Frank and us betting which of us would be the first to grow and move out. I lost that bet by a longshot.

1871 has meant a tremendous amount to our team as well as me personally. We've met investors, Board members, customers, and employees all through the space. I have personally made a number of friends, and learned an unbelievable amount through connecting with everyone who's associated with the space and the broader movement it has helped catalyze.

A huge thank you to everyone who was so important to turning the vision of 1871 into a reality as well as the people who spent so much time within those walls and made it such a powerful place to be.

We'll continue to be back and spend lots of time in the space, and would love for each of you to come visit our new digs sometime in the Prudential Building (130 E Randolph.)

Thanks!

Erik

1871, TECHSTARS AND SOCIAL CRUNCH INCLUDED IN 3 SEGMENTS OF EPISODE 5 OF CHICAGOLAND

SEGMENT ONE




SEGMENT TWO



SEGMENT THREE

1871 CEO HOWARD TULLMAN SPEAKS AT IBM GLOBAL ENTREPRENEUR DAY - CHICAGO