By Russ Wilcox, Partner at Pillar. As seen in Built In.
After you launch your new company, you may be surprised at how swiftly big companies come knocking on your door. Is that an opportunity or a threat?
Large companies care about startups, even on day one, because startups drive change, and change inspires both fear and greed. The Fortune 500 has evolved innovation departments who buy and analyze demos of your technology, corporate VCs who want to invest so they can steer your future, ecosystem managers trying to attract you as a future reseller or developer, product managers seeking marketing alliances, and business development officers seeking new strategic capabilities. If the discussions lead anywhere, the big company may propose forming a deeper strategic alliance.
As the founder of an unknown and small business, it can feel seductive to imagine a strategic deal will suddenly put you on the map. And there certainly is a moment when deals will create value for you. But avoid making strategic alliances while you are at seed stage!
Big company relationships take a long time to build and require enormous care and feeding to sustain. You need to meet repeatedly with different people from multiple groups, you need to attend their supplier demo days, and you usually need to run custom pilots so they can kick the tires, and that’s well before you can discuss an actual order. To move from the outer ring of casual engagement to a deal that actually drives revenue will require you to adapt your product and business processes to comply with their detailed corporate standards. And once you finally comply, they will use the carrot of a big order to make further last-minute demands: exclusivity, most-favored pricing, supply preferences, and stock warrants. Each of these steps is a hurdle that can trip you up and distract you from executing on your core business.
That is why most attempts at partnering this early will fail painfully. The big company can absorb a hiccup, but for your business, it can be a major setback! A setback with a strategic partner can even be a survival threat for the CEO, if you have been telling your board for the past 18 months how the BigCo deal would lead to riches and fame.
Be especially leery of any corporate venture capital attached to intellectual property rights or product or channel exclusivity. Seed stage is too early to make that kind of binding commitment. For all you know, you may need to pivot the company into a completely new direction six months from now.
Also, be careful about taking corporate venture money from future major customers. If your business does succeed and grow, they will be watching how much profit you earn, and they can demand better prices accordingly. If you start working with their competitors, they will quickly know.
The ultimate kiss of death as a startup is to take investment from a big company who is your most obvious acquirer. After they invest, they will see all your warts and will offer only a sober price, rather than top dollar. Meanwhile, their competitors will not bother to bid for your company because they know a rival already has an inside edge. You may end up with no auction, and no alternatives, and might have to sell cheap.
Does an early strategic deal ever make sense? Yes in these narrow conditions:
- Agreeing to co-develop products or run pilots with big companies so you can understand their pain points. Make sure this is with the operating units who have real-world problems and actual future purchase needs. If they agree to pay for some costs, make sure not to grant exclusives or concessions on intellectual property.
- You could sign a non-exclusive marketing and distribution deal, provided that they will resell your main product and not create distraction with an alternate version. Make sure all distribution deals describe concrete actions they will take, set mutually agreed sales targets (even if non-binding), and allow you to cancel later.
- A corporate VC can be a wonderful investor if the big company is in a space adjacent to yours and wants to build its ecosystem, but does not expect to buy you or to compete with you. For my startup E Ink, we received this kind of investment from Intel Capital — they didn’t have any interest in making their own electronic paper displays; they just wanted to promote mobile devices in general.
Overall, corporate partnering at seed stage is a minefield that can distract you and even permanently lower the arc of your trajectory. It is best to delay strategic alliances until after you achieve product-market fit, which usually means Series A or later. By then, your strategy will be more stable so you can make wiser deals, and your team is better resourced to sustain the massive effort required to achieve meaningful benefits from an alliance with a major global corporation.