Thanks to  Cynthia Kocialski for her guest post today; “Why Big Customers Resist Doing Business with Start-Ups”. When we find a symbiotic author with the business acumen, we like to share her wisdom in hopes it helps our clients and readers attain their goals more easily.

It’s long, but most worthwhile. Here’s what I do: Print it out and take it to the gym to read during your warmup!

CYNTHIA WILL BE STOPPING BY HERE ON HER BOOK TOUR 9/5/11. You can leave her a question or comment below.

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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.

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.  Many other aspects will be considered such as customer service, on-time delivery, warranties, and the survival of the start-up.

The Corporate Life Cycle Effect

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?  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. 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.

Small Team Size

Investors love small teams; they satisfy the current desire for capital efficiency, but customers have a different point of view. One of the issues that start-ups often face is the size of their team. If the start-up only has around 10-15 people and has developed some interesting technology, the small size of the start-up is a factor.  A question that a larger corporation will consider is whether they can develop similar technology. In large companies, projects are always ending and they often have teams waiting for new assignments. Assigning a few people to reproduce the technology will be considered as an option – particularly if the start-up’s development team is small. When confronted with external technology, in-house development teams are always quick to respond that they could do that too, so why bother paying an outsider? Start-ups are about four times more efficient than large corporations.

The obvious start-up response is to patent the technology, but unless the start-up is well funded, it’s not likely to spend the large funds needed for a patent.  And not everything is patentable or should be patented either – infringement must be easy to demonstrate. Patents are only worth as much as one’s willingness to enforce them, which may be too costly for a small company, as well as a very lengthy procedure. Patents work best if the start-up’s technology is something that can be incorporated into the larger company’s shippable product. If the technology is software to improve their invoicing, then the IT department may be able to whip up something similar for their own internal use. A proposition is attractive to a large company when time is a factor, expertise is a consideration, or a problem can’t be solved without it.  Team size can be a difficult objection to overcome. Often the best approach is to only deal with someone at a director or vice-president level.  The lower levels are more concerned about an outsider infringing upon their territory, or making them look bad before their superiors. The more senior people are interested in meeting schedules or larger business issues, which are ultimately what they will be judged upon.

One of my software start-ups had this exact scenario. The Vice-President of Engineering contacted the start-up and invited them to give his team a product presentation.  The team was resistant to using the software. Conceptually, it seemed simple, so why not just develop it themselves? This is the DIY attitude of many engineering teams. The VP was thinking about meeting schedules. He knew it would take a lot longer to develop than the team thought, and he didn’t have available resources either; hence, the company licensed the software.  When the field application engineer was sent to help them install the software and get them started with its use, the field application engineer (FAE) got an earful from the staff. The IT people didn’t like being told to install software that they hadn’t approved and didn’t want. They didn’t want to work with a start-up, and they only wanted to deal with software from large, established companies.  And every time the engineering team couldn’t get something to work – instead of referring to the users’ guide or asking the on-site FAE – they just complained that the software didn’t work.

At another start-ups, a customer insisted the start-up have people in different functional areas respond to their needs.  This was a small start-up and it didn’t have an organization chart that looked like a hundred year old oak tree. The start-up knew it could meet the customer’s needs without all these extra people, so the start-up created employees. It’s very easy to do with email and voice mail. As long as John Doe responded via email, the customer was happy.

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 quality 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. 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 these latter companies are likely to have just gone out and hired a team of recent college graduates and interns.  They may not have any expertise or experience with the technology itself.  This is the power of branding.

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.

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 a start-up technology 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.

False Positives and Hedges

Every company wants to be a supplier to a Fortune 500 company and so every company contacts them and tries to get their products into these companies.  As such, the Fortune 500 companies can just sit back and wait to see who and what knocks on their door. To alleviate the risk of a new supplier or vendor, it’s not unusual for them to work with more than one company.  None of these companies know the others exist and, at some point, the large company will decide who will be the final choice.

A fabless semiconductor start-up was developing the next generation component, and one of the biggest players in the industry was working closely with them to develop this product.  At the same time, the player was also working with a 20-year old mid-sized company to develop the same component, but it wasn’t guaranteed that the project at the mid-sized company would ever reach its conclusion.

A false positive occurs when the start-up makes a sale or develops a partnership, but for the wrong reasons. In one case, a software start-up made a sale not because of their product and its technology, but because the project needed to spend its budget by a certain date or lose it.

Transaction Cycle

Regardless of whether it’s a partnership arrangement or a sales agreement, there’s always a lengthy cycle time through a large corporation. This is particularly true in down time because the control on expenses becomes more stringent.  In a large corporation, it requires multiple signatures and groups to approve a transaction. Each of these groups has its own perspective.  Each time the start-up thinks it has handled all the objections and concerns, they get handed another list and yet one more list beyond that one.  It’s not a speedy process.

One start-up’s funding hinged upon closing a deal with a large corporation. The start-up had spent more than six months on the deal, when their champion resigned to take a job with another company. As a result, the start-up’s deal was reset and they had to begin the process all over again. The start-up eventually signed an agreement, but it took another twelve months.

Late Market Entrant

Large companies know that their widely recognized brand is enticing to customers. It represents 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. It’s too risky, too expensive to develop, and has far too little 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.

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.

About the Author

Cynthia Kocialski is the founder of three tech start-ups companies. In the past 15 years, she has been involved in dozens of start-ups. Cynthia writes the Start-up Entrepreneurs’ Blog and has written the book, “Startup From The Ground Up – Practical Insights for Entrepreneurs, How to Go from an Idea to New Business”.