Startups Vs. Big Companies – Mind the Gap

02/28/2011

I’ve been working with a new group of smart, experienced enterprise solution folks that mainly have big company backgrounds. We’ve been talking about how we could enter and innovate in a new market space and it struck me how different the choices are for small companies versus big companies.  The other thing that occurred to me is how little one group knows about how the other group thinks. Here are my observations (and as usual, I’m thinking more about my experience in B2B companies than B2C):

What BIG companies can do:

  1. Develop new solutions that expand on what they have – This is generally how all new things get built in big companies. They are good at making incremental improvements on what they are already good at, to mainly sell to customers that they already have (which leads me to point 2).
  2. Sell pretty much anything (even crap) into accounts where they have an existing relationship – The greatest strength of a large company is the relationship they have with their existing customers.  Most new products are designed to sell more into those accounts. Most of the acquisitions I was involved with when I worked at larger companies were all about finding new products we could sell into our existing accounts.  People who have never worked in large companies often think acquisitions are about “buying a customer base” but I rarely found this to be true because large companies generally don’t shift their target accounts that much (more on this below).

What BIG companies can’t (or rarely) do:

  1. Make investments in new products at the expense of quarterly revenue (if they’re public, which most are) – One of the biggest differences between startups and public companies is the amount of stress that happens around the end of quarter.  Quarterly performance is very important and it’s hard to deliver those numbers.  This is why certain great ideas that would be very profitable in the long term but would dampen revenue in the short term, get shot down at public companies (and why privately held large companies can often out-innovate their public peers).
  2. Sell stuff into accounts where they don’t have sales coverage – if you’ve never worked at a large company you would probably think that they could out-sell a startup in any mid to large sized company on the planet.  The reality is that large companies have named accounts and teams of folks that focus on those named accounts.  And you would be surprised at how few named accounts there are (fewer than 100 for all of the large companies I’ve worked at). The leaves partners or fractional sales reps selling to the other 4800 of the Fortune 5000.  If you are trying to sell head to head in one of those 100 accounts you will lose – but in the other 4800 you have a decent fighting chance, no matter how small you are.

Misperceptions BIG companies have about startups:

  1. They do not believe a startup could out-execute them, even in a niche – I’ve worked at a couple of startups where we’ve been successful in a niche and we always expected the big companies to respond to us much more quickly than they did.  By the time they figured out that we could win against them, we already had traction. Any time I’ve been at a large company, folks generally ignored startups in their space completely (as a potential competitive threat anyway) until they got big enough to put a significant amount of quarterly revenue at risk because frankly, the majority of them failed to thrive.
  2. They do not believe that startup products with far fewer features but a radically improved customer experience can win – An improved experience might be a simpler UI, a simpler install and configuration, an easier sales process, a different set of partners or relationships, a different billing model, or a better support model/experience. Big companies tend to believe that technology and relationships will trump these things.  And they do a lot of the time – except when they don’t. Big companies are always surprised when that happens.

What STARTUPS can do:

  1. Build something where backward compatibility doesn’t matter – Their install base is a big company’s biggest asset but it’s also a weakness.  You can’t just do things differently from release to release to lure in new customers, because it’s way more important to keep your existing customers happy.  Startups on the other hand are free to be as radical as they need to be.
  2. Build things that take advantage of the latest technology/tools/delivery techniques/pricing models/etc. – Startups get to build from a blank slate that unlike products that have been around for years, takes advantage of everything we know right now about how to do it better than we used to.

What STARTUPS can’t (or rarely) do:

  1. Spend money before making money – You can’t build something that requires a large amount of time and people because you can’t afford it. The investment money required just doesn’t exist (there are exceptions to this rule of course but not many).  So small companies have to build things in steps and each of those steps has to be able to stand alone and generate revenue.  Big companies are largely ignorant about the reality of what can and can’t be developed from scratch by a new company.

Misperceptions STARTUPS have about big companies:

  1. That big companies know your startup exists (or care) – They are focused on other big companies and they don’t and won’t really consider a startup a competitive threat until it starts to look like it might become a big company.
  2. That a startup can sell a small deal in a named account and the big company won’t notice – You might be able to sneak a small deal past them once but as soon as they know you are in the account they will ensure you never expand on that footprint. Ever. At one large company I worked at I saw a sales rep. get fired because a small competitor had closed a $50K deal without us knowing about it.  Within 6 months we got the competitor thrown out and they never sold in that account again.
  3. That big companies are interested in partnering with you when you can’t bring them new customers – This is a big one. I’ve seen small companies waste a lot of time and energy trying to partner with large companies because they think the large company will want to bring their cool new technology into a deal to help win it.  This never happens. The sad part is they won’t tell you this but instead will continue to take meetings with you and waste your time for years. Unless you can bring new business to them, (and you know why you would want to do that), it isn’t worth the effort.