INSUBCONTINENT EXCLUSIVE:
David FrankelContributor
David Frankel is a managing partner at Founder Collective. More posts by this contributorYou earn a million
dollars a year and can&t get fundedDear auto entrepreneurs, please think outside the gearboxA top-four tech company recently approached the
CEO of one of our B2B portfolio companies with a tremendous offer
This company, with buy-in from its world-famous CEO, believes the startup core technology could help it catch up to a rival in an incredibly
important space and wanted to discuss a $20 million investment on extremely favorable terms
This partnership would allow the startup to grow 10X in a year and would provide invaluable validation.The founder was elated
This kind of deal is a classic &whalehunt,& and most of the startups that engage in them are doomed to end up like Captain Ahab.While it
immensely gratifying to receive this kind of validation from a market leader, the startup is at an early and important developmental stage
I&ve seen many promising startups blown up by ill-advised business development deals that swelled teams in a bout of euphoria only to see
them wither if interest and focus from their partner wanes.In my experience, arrangements that pair a behemoth megacorp with a seed/Series
A-stage startup have a success rate well below 50 percent
I didn&t tell the founder to decline the offer outright, but I did suggest that the management team consider a few questions before pursuing
it.How much MRR will it add to your business The project with the large company is in line with the startup long-term vision, but it a
departure from their current focus
A $20 million investment is very nice indeed, but once that money is spent, what will the ongoing revenue be And what is the opportunity
cost of not supporting the current business plan What discount rate will you apply to compensate for the small probability of this deal
working out My advice was that if he couldn&t satisfactorily answer those questions, it was probably the right move to turn down the deal
Even if the deal was structured as $20 million in revenue rather than equity, I&d hesitate.How, in detail, will this project help your core
business There an argument for entering into an agreement like this even if the immediate revenue contribution is low
If the project will allow the startup to speed up the development of a core technology that is generally applicable to other customers, it
would seem far more worthy of consideration — but beware our human ability to rationalize (first and foremost to ourselves).These projects
more often end up as bespoke development engagements where, despite the initial intention, the startup is producing a custom application for
Founders will rationalize the deviations from their product road map, but ultimately sell out their future for a long-shot opportunity to
integrate with a worldwide leader.My advice is to not think magically about product/market fit, and instead, to try pre-selling it to other
customers as a form of market development
If you can sell the product, great! If not, you&re probably using venture capital to subsidize the RD budget of a company worth hundreds of
billions of dollars.What happens if this doesn&t work out It easy to visualize success, but what happens if the deal doesn&t lead anywhere
In this scenario, imagine the big tech company decides to change its priorities and abandons the initiative
SaaS startups face a similar failure mode when they go to great lengths to impress big companies during pilot programs only to see their
project die due to lack of interest
When considering a high-risk, high-reward partnership, founders need to spend time envisioning a gruesome demise.What will your pitch be for
a bridge round of financing when you have no revenue and you just came up short during a prolonged engagement with the best possible
customer in your industryHow will you reassure your most talented team members that you know what you&re doing when the deal fails and
capital is running shortHow quickly can you reorient the company to focus on other customers and how quickly will you start generating
revenue from themImage courtesy of Flickr/Felipe CamposHow well do you understand the Big Company Founders with little exposure to big
companies are susceptible to misreading cues
My partner Eric Paley wrote about how entrepreneurs regularly misread their likelihood of getting funding from VCs, and the pattern is
similar with this kind of business development deal.When I started an ISP in South Africa in the 1990s, I had the chance to pitch the
executive team at the country equivalent to Walmart
We were talking about the upcoming Olympic Games, which they were sponsoring
I asked if they were bringing their biggest customers to the events
One of the VPs looked at me, bewildered, and said: &Your mother may well be our biggest customer.&I instantly realized they didn&t have big
customers; they were a big customer
Their suppliers took them to the Games and fancy dinners
I felt silly at the moment, but learned a valuable lesson about B2B power dynamics
Here are some other dynamics to be cautious of.Are you aware of the work pace differentialStartups measure their survival quarter to
quarter, while big companies plan in five-year increments
It often shocking how slowly big company partners move on everything from email to product roll-outs
Decisions made by gut feel at startups have to navigate a maze of meetings and committees at a big company
Startups often drown in the number of process leviathans require to make the smallest of improvements.Who are the internal
championsPromising projects can die on the vine because the internal champion gets reassigned or leaves the company
Successful partnerships will involve multiple high-level people from the larger organization
They also typically involve the startup being paid a fair market rate or are paired with a strategic investment to help defray the burden of
If not, beware.Most sponsors will say their project is critical to the company, but it the startup CEO job to check that out
Founders should reference the opportunity in the same way they would reference an investor
This kind of deal is often an all or nothing bet on your company; don&t make it too blithely.Is the project a priority for the
CXO/VPPartnerships between startups and big companies work best when it solves the problem of a VP or CXO-level executive
Below that level, we&ve seen startups spend large sums and risk their future on what amounts to a proof of concept project for a mid-level
director with no real juice.This is especially common with startups who sell to retailers
Theoretically, the brick and mortar shops need a bulwark against Amazon, but in reality, we&ve seen many of them default to be more focused
on protecting their physical retail turf rather than truly investing in online sales
They&ll run pilots to assure investors that they have their eye on the future when in reality the efforts are more PR than a business
plan.Do you understand big-company logicA $20 million investment to a small startup is a massive deal
For a big company, it essentially the size of an acqui-hire and can be shut down with no repercussions
In the context of a half-billion-dollar company, $20 million bets actually fail far more than a startup may appreciate.Are you competing
with another startupIs this project a &bake-off,& where multiple companies are competing The most dangerous kind of whalehunting is when a
startup is competing with one or more competitors to win a large book of business
Founders considering this kind of arrangement should give serious thought to skipping the process and building out a less concentrated
revenue base with fewer impediments while your competitors fight to the death.Do you have a deep bench of vetted candidates ready to be
hired Founders often underestimate the challenge of growing 3-5X in short order
Every successful startup has to do this, but it usually happens more organically over time
The kind of business development deal our portfolio CEO is considering will change the company overnight.Entrepreneurs need to ask if they
have a long list of former co-workers, peers or vetted candidates eager to join their company If not, massively scaling the company to meet
the demands of a major partner will likely lead to sub-par hires to fill an urgent need while slowly poisoning the company culture
Money is rarely the most challenging part of hiring
Hiring fast when you control your destiny is hard enough; doing so in an uncertain arrangement can be very detrimental.Beyond hiring, it
important to view a partnership through the lens of Activity Based Costing.How much time will this take up Fifty percent Eighty percent More
Will you have to drop existing customers or products to make the project work Are you still able to grow the business outside of this
partnership or is it genuinely all-consumingAre you ready for the huntIf you can answer these questions confidently, then you may be ready
When these projects work, they can be the first domino in a cascade that leads to growth and good places
More often, it results in a startup spending a year and a large chunk of its capital on a high-risk business development deal that more
Chart your course accordingly.
