Why Big Customers Resist Doing Business With Start-Ups

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Expert Author Cynthia Kocialski

Most technology start-ups believe their technology is terrific; its value should be obvious to everyone. If a start-up meets resistance, then the solution is often to just offer the product or service for free – the try it, you’ll like it approach. But sometimes, even free isn’t enough of a compelling reason to try the product. Why? In business transactions, the draw is often far more than the technology or even the price.

The Corporate Life Cycle

Every start-up wants to make a deal with a large, reputable Fortune 500 company. But does the large company want to do business with the start-up? When start-ups negotiate a purchase or partnership deal, they often encounter a lot more resistance and objections than an established company would under the same circumstances. It comes down to the risk of doing business with an unknown, untested company that could be here today and gone tomorrow.

Corporations are like people and can be categorized by their life-cycle stage. There are ten defined stages. As a corporation matures, it becomes more bureaucratic and more inwardly focused. Corporations want to buy from and partner with other corporations that are within one or two life stages from where they are in their life cycle. If governments were corporations, they would be in the late bureaucratic stage (stage 9), and who do governments do business with? Established companies like AT&T, IBM, and Lockheed.

Start-ups (stage 1 or 2) are more likely to get a deal with a young company that has recently gone public. About ten years ago, Cisco Systems lost a bid to install a national network for a European government; the loss was due to the government’s view that Cisco was an upstart. Cisco didn’t have the financial might to stand behind the project if it didn’t go near according to plan, and Cisco didn’t have a track record with such large-scale projects. Yet, Cisco was the darling of Wall Street and had an extremely large market cap.

If a start-up wants to do business with a larger, late stage company, it’s often easier to go through a middleman. A current start-up that produces gunshot detection equipment was having difficulty selling its product to the government despite the overwhelming interest by several government agencies. Its solution was to partner with an established government vendor, who in turn sold the equipment to the government, thereby making the start-up’s product far less risky in the customer’s eyes. Why? Because the government believes the middleman will assume responsibility for the product should something go wrong with the start-up company.

The Corporate Champion

Potential large customers are often negative when it comes to start-up companies and technologies. A typical employee of a Fortune 500 company is risk averse. A start-up and its technology are risk inclined. A start-up needs to seek out a champion in these corporations, someone who really wants to do business with them. Office politics play a large role in progressing one’s career in a large corporation, and the champion will be concerned about bringing in and fighting for a start-up that may adversely affect them personally. If your champion can see past the risk, the next consideration is glory. From a career perspective, there may be far more glory in developing a partnership with another Fortune 500 company than with a start-up.

At IBM, I dealt with a corporate manager who approved a technology because his technical advisor was certain it wouldn’t work out. This failure could then be used to discredit the internal champion who, in his mind, was likely to compete against him for a promotion in the near-term. As a result of this failure, the internal champion eventually resigned because his career stagnated with the company.

Late Market Entrant

Large companies know that their widely recognized brand is enticing to customers. They represent the familiarity and safety of a known supplier. These giants have extensive sales and distribution channels that can propel a product or service into widespread usage. Large companies don’t want to be the first to develop revolutionary technology. They do not need the first mover advantage. It’s too risky, too expensive to develop, and has far too little additional return. They can play a wait-and-see game. Let the smaller companies develop the revolutionary technology and prove initial customer acceptance. They have the financial might to then acquire or develop the technology themselves, and use their industry clout to quickly dominate the market even as a late entrant.

Tested, Proven Technology

Another question that often comes up is how the prospective partner knows the technology works. The prospect always wants tested, proven technology. Some start-ups try to convince the prospect of the rigors of their internal testing procedures. But these customers want to know about independent evaluations that prove the worthiness of the technology. The next line of questions will include who tested it and whether they are industry leaders. Large corporations test their products more extensively than start-ups; they have to meet or exceed their customers’ expectations of quality, have much more stringent requirements on backwards compatibility, and their products may apply to multiple market segments and geographies. These are often frustrating questions for a start-up because it knows that the same questions would not be asked of HP or IBM, and it will be assumed with these latter companies that the product will work even though they may not have any expertise or experience with the technology itself. This is the power of branding and reputation.

For a start-up, this means seeking out the subject matter experts, thought leaders, and respected consultants and asking them to evaluate the product and offer their opinions. Sometimes, universities offer testing facilities to evaluate the proper operation of the device. For one start-up, I contacted several Vice Presidents of Engineering and asked them to review a concept plan and, in turn, used their feedback as a reference for establishing validity for the product.

All too often, start-ups are egocentric. They think about why they want to conduct business with a Fortune 500 company, and they neglect to consider the perspective of the larger company.

Cynthia Kocialski has founded three companies and has been actively involved in more than 25 hi-tech start-ups and has served on the advisory boards. Cynthia has seen what works, what doesn’t work, and much of the day-to-day humor that happens in these start-up companies. For more information about entrepreneurship and start up companies, visit Cynthia’s blog at http://www.cynthiakocialski.com/blog/

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