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The Killer of Early Stage Startups

 

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As venture capital investment dollars become more guarded and less deals are happening, avoiding some of the most common mistakes and pitfalls becomes even more important.  One of those pitfalls is the illusive pursuit of the big logo.   The companies that we have advised and supported here at Sand Hill East that are successful are the ones who strategically time their engagements with big logo companies at a point in their development when the startup has earned leverage through already achieving smaller successes.

Every startup wants to prominently highlight in their slide decks the logo(s) of big, blue chip customers. Proudly claiming success at JP Morgan or Bank of America, a big technology company like Cisco or Intel, or a consumer products company like Johnson & Johnson are offered up as a badge of product value. The thinking goes that if a big brand name stalwart likes the product and is willing to pay for it, then it’s a resounding show of support that the product has passed the most extensive tests.

Almost every startup follows the plan to a certain degree. Through an advisor or an investor who has a contact at a large company, the startup gets an introduction and then a meeting on the calendar. Unfortunately, from my experience, this can be the beginning of what I think of as the “Startup Death March”.

Step 1: Preparation

In preparation for the big meeting, all members of the startup meet to brainstorm ideas on how to fit their solution into the blue chip company (Hereafter referred to as BCC). They then put together a pitch deck. All in, the preparation takes the core team away from their day-to-day responsibilities.

Step 2: Initial Meeting

The “big day” comes and the meeting takes place and the startup members walk away viewing it as a “success”. The criteria for this euphoria is a perceived interest from the BCC and the suggestion that the startup return in a few weeks for another meeting with more members of the team.

Step 3: Second Meeting

The second meeting consists of a more detailed exchange on features and benefits and a plan of action to engage in a proof of concept. A “POC” is defined by Collins dictionary as: “the stage during the development of a product when it is established that the product will function as intended”.

Step 4: The POC

The POC gets the greenlight and requires the dedicated energy of a core team – usually the CTO of the startup, a couple of engineers and salesperson if there are any.  More meetings with the BCC’s team in their lab ensue.  The startup team proceeds to show in the lab that the product does what they claim it will. The process has probably taken the better part of six months from initial contact to the POC being in production and a waiting game begins.  Even if the startup makes it through the POC, the realities of negotiating final contracts in large companies will string out the waiting game some more at a time when burn rates never sleep.

Why is This Pattern Such a Trap?

The POC is almost always an unpaid engagement which means it’s viewed by the BCC as little more than a science project.

No clear documented and shared view of what defines success – most startups enter POCs with no agreed upon verdict that if the POC proves the product performs as they claim that the BCC will in turn move ahead with a purchase order of a certain size.

Assessing the Opportunity Costs

The six months of investment in the BCC POC sometimes yields results for the startup but there is significant risk in the gamble with the precious cycles the POC consumes.  Startups cannot afford to ignore the opportunity costs of placing this bet.   Alternatively, the time could be spent finding smaller, more nimble customers who can make purchase decisions without going to a committee. Startups simply can’t afford to ignore the opportunity cost of the core team taking valuable time away from further product iteration in order to service the BCC.

Understanding the Power and Consequences of Leverage

When startups engage with BCC’s, the balance of leverage lies nearly 100% with the BCC.

  • If I am the point of contact at JP Morgan or Johnson & Johnson, I have startups calling me ad nausea to meet me and show me how their technology will help my business.
  • Timing is on my side at a BCC. I get a solid paycheck and I can only get in trouble by pushing for an early stage startup’s technology to be implemented before it is thoroughly tested.
  • It is in the best interest of the BCC contact to thoroughly perform due diligence of any and all early stage products. It’s not worth it to them to champion a company that could run out of money, or lose the CTO brains behind the product, or introduce a critical bug into a production environment.  The BCC contact knows what any of those things could mean for them – They will get fired.

Strategy is nothing more than the allocation of scarce resources to achieve an objective.  Successful startup companies are frequently the most adept at allocating their scarce resources to putting chips into the “leverage” bucket by first building success cases with smaller customers, ones who can be nimble and make decisions quickly. Large companies want data. With success at 5 to 10 smaller companies, you are in a position to quantify the benefits you have already demonstrated. The quantified data will allow the champion at the BCC to present a strong case to the ultimate decision makers. Playing the long and protracted waiting game that is typical of the BCC empowered by leverage can be one of the riskiest moves an early stage company makes.

Advice

My advice to early stage startups is not to be dissuaded from pursuing the BCC’s; rather to do so with your eyes wide open and clarity around the opportunity costs you will likely incur.  Think about where you place your bets to gain that precious early stage leverage — which is key to your success.


Image credit: CC by Robert Dewar

About the author: Josh Burwick

Josh Burwick is a Managing Partner and CoFounder of Sand Hill East Ventures. From 1998-2002 Josh worked at Goldman Sachs in the technology sector for the Investment Research and Institutional Research Sales departments. In 2002, Josh made the move to the buy side joining Moore Capital to help run a technology portfolio. At the portfolio’s peak, Josh managed a $1 billion long/short technology portfolio. Josh also managed technology portfolios at Pia Capital and Glg Partners. At Sand Hill East, Josh leads the investment effort and partnership with early stage transformative technology companies.

Josh graduated Phi Beta Kappa, Magna Cum Laude with a Finance degree from Lehigh University.

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