I was lucky enough to be part of a startup marketing panel at Startup Weekend Toronto (an awesome event) a few weeks back and someone asked if a startup could be successful going head to head against a larger competitor in an established market.   My response was that startups can compete by focusing on an under-served niche to establish a beach-head and then they can go after adjacent niches.

One of my co-panelists, Mike McDerment, offered his take on it based on his experience as the co-founder of successful Toronto startup Freshbooks.  He reasoned that the existence of a big competitor proves there’s money being spent there and therefore makes it attractive.  Big companies, he argued often become slow and stupid, leaving the door open for smart nimble companies and startups shouldn’t be afraid to take them head-on.   “Find a big competitor and drive straight at them.” was his advice.

We all know the stories of how Apple/Google/Facebook took on big competitors in established markets successfully.   We can also recite lists of companies that have attempted to take on Apple/Google/Facebook head-on and have failed.  The answer to whether your startup should do it is likely the same as the answer to most of life’s difficult questions: it depends.

The reasons why you might not want to do it are obvious (they have more resources, a more feature-rich product, brand recognition, more/better sales channels, etc.), but here are 4 reasons you might want to take the ‘drive straight at them’ approach, based on my experience working at both startups and at larger companies:

1/ Established Products Get Bloated – What once may have been a relatively easy to use solution, can turn into a cumbersome monster as a product moves from release to release.  This opens the door for startups to meet the needs of customers that would happily trade the extra bells and whistles for a more elegant solution.  Ray Ozzie, soon to be former Chief Software Architect at Microsoft, summed this up beautifully in his post this week:

…so long as customer or competitive requirements drive teams to build layers of new function on top of a complex core, ultimately a limit will be reached.  Fragility can grow to constrain agility.  Some deep architectural strengths can become irrelevant – or worse, can become hindrances.

Any startup wanting to get inside the heads of folks at big companies should read that post.  Opportunity is everywhere.

2/ Big Companies Will Rarely Risk Current Revenue for Future Revenue – Everyone’s read The Innovator’s Dilemma so you know this already but it bears repeating.  Big companies are built and run on predictable revenue streams.  Publicly-traded companies in particular are slaves to their quarterly numbers. There will be extreme resistance to supporting a product that might not produce substantial revenue for years at the expense of revenue this quarter.  I ran an internal incubator at Nortel to combat exactly this problem and many other companies are running similar programs.  They simply can’t respond to competitive threats that require them to risk short-term revenue.

3/ Niches are Under-Served by Popular Products – At Janna Systems we were at 40 person startup winning deals against Siebel ($2 billion revenue at the time) by simply serving a particular vertical niche (investment banking) better than they did.  Popular products have to appeal to a broad range of markets which by definition means there will be segments that have needs that aren’t being met.

4/ The Big Guys Suck at Selling to the Mid-Market (and those accounts are much bigger than you think) – The mid-market is tragically under-served by most of the gorillas in IT and yet they account for about 44% of IT spending to the tune of around $800 billion in 2010.  At one large company I worked at we make 80% of our revenue from 90 named accounts (and we’re talking billions here). Nine, zero!!  If you were a startup trying to sell into one of those companies you were doomed – we could throw throw sales bodies at it until the company cried uncle and if that didn’t work we’d happily give the deal away for free to keep you out of our precious named account.  The flip-side of that was that the 4,920 other companies in the Fortune 5,000 were essentially ignored by us.  We called those Small/Medium Business accounts.  Nike, for example was an SMB account for us, covered by 1/12th of a sales rep.  Any startup could have come in and sold under our nose and we would never have noticed.

What do you think? Should startups stick to blue oceans or kick some sand in the big kid’s sandbox?

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