Section 5: Large Companies as Scaling Leverage for Early-Stage Companies: Navigating through the Pitfalls
Large companies are an important part of early-stage companies’ ecosystems. While large companies can be and often are growth accelerators, they can be important inhibitors as well. This section covers the findings of the relationship between large and early-stage companies. The survey highlights the important role of large companies in the entrepreneurial ecosystem, and seven areas where large companies play a supporting role. Their roles as customers and licensors of technologies provide significant revenues to start scaling early-stage companies. Large companies provide credibility when most needed in the early stages. In addition, they can become strategic investors – their decisions have important consequences for the cash needs of early-stage companies, and they act as mentors and provide learning that can help identify new aspects of the business model. Large companies also offer go-to-market support and can speed initiatives for operational effectiveness at early-stage companies.
However, large companies can also inhibit growth. The survey data indicates seven potential pitfalls that can trap early-stage companies. Large companies can demand too much attention and divert an early-stage company, which compromises the best use of latter’s limited resources. Due to their processes and structures, large companies are slower to act and respond, and relationships can become frustrating. Excessive value appropriation can occur when large companies use their often extremely strong bargaining power, and they can impose transaction and litigation costs that could bring down early-stage companies. Finally, large companies often have impact on governments and regulators, and shape regulatory-influenced value capture to the detriment of an early-stage company.
5.1 Illustrating the Multiple Roles of Large Companies in the Entrepreneurial Ecosystem9
Large companies can have a crucial role in entrepreneurial ecosystems. The upside of an effective working relationship between an early-stage and a large company is potentially sizeable and can occur in multiple areas. Exhibit 5-1 illustrates how the partnership between the Mexican start-up and paint-applicator company, Brochas y Productos (BYP), and its large retail partner, The Home Depot, was instrumental to the start-up’s growth.
Exhibits 5-2 and 5-3 present the results from the entrepreneurial ecosystem survey summarized in Sections 2 and 3. Exhibit 5-2 shows the percentage of respondents for the accessible markets pillar indicating the ready availability of its component customer groups. On average across the six continents, 69% of respondents cited the ready availability in their domestic markets of large-company customers to early-stage companies, while 78% indicated ready availability of small to medium-sized company customers. For foreign markets, 43% of respondents saw large company customers and 36% indicated small to medium-sized company customers as readily available.
Exhibit 5-3 shows the relative importance attributed by entrepreneurs to the customer components of the accessible markets pillar. An average of 55% of respondents across the six continents considered large company customers as most important to early-stage company growth for the domestic market, while 65% on average indicated small to medium-sized company customers as most important. For foreign markets, large company customers average 24% in importance, with small to medium-sized company customers averaging 25%.
Clearly both large and small to medium-sized companies are important customer groups to early-stage companies. This section highlights how large companies, in addition to their role as customers, can bring a broader set of benefits to an early-stage company. However, the relationship between the two can be relatively complex, with potential and sizeable upsides and downsides.
5.2 Opportunities for Early-stage Companies Working with Large Companies
Large companies can play various roles in the development of early-stage companies. Seven categories of roles have been developed based on analysis of the survey’s qualitative responses, quotations from the executive case studies in this report’s Appendix, and prior research:
Categories of Roles: Opportunities for Productive Early-stage Company – Large Company Relationships
- Customer engagement – early customers to accelerate growth
- Credibility enhancement – “lighthouse”/”tentpole” customers, brand display, references
- Strategic investors and financing partners – an increase in financial resource capacity
- Mentorship and advice – eye-opener to new markets and industry structure
- Go-to-market partners – distributors and resellers, access to outlets, logistics
- Operating capability enhancement – manufacturing, software, technology, know-how
- Licensing leverage – licensing of start-up technology to enter a new market
5.2.1 The upside from customer engagement
The survey identified large companies as playing significant roles as customers in both domestic and foreign markets – see Exhibits 5-2 and 5-3. A large customer provides important revenues for an early-stage company, as well as credibility when seeking out other customers such as Small and Medium-sized Enterprises (SMEs) and governments. Large companies can also enhance their revenue bases by collaborating with start-ups, for example by incorporating the start-up’s product into their own product portfolios. This in turn will broaden and scale up the start-up’s customer reach. These activities demonstrate how the large company’s marketing prowess promotes the start-up’s sales. Large companies can also provide customer financing through attractive payment deals and, although being customers of start-ups, they can even acquire them. Exhibit 5-4 provides quotations from the survey illustrating some of these diverse customer-engagement roles.
5.2.2 The upside from credibility enhancement
Start-ups can suffer from negative perceptions of being new – a lack of history can mean a lack of credibility. To correct this, they can take initiatives that include bringing in investors, advisers and board members highly regarded in the industry, as well as hiring people with backgrounds legitimizing the company. Often an effective way to gain credibility is to be associated with large, visible companies that are either highly respected or have well-recognized brands. Often labelled “lighthouse” or “tentpole” customers, these companies create associations for potential customers, suppliers, investors, partners and hires to develop trust in the start-up. The risk that other companies see in working with a start-up decreases substantially if a large lighthouse company is willing to collaborate with it. Exhibit 5-5 has quotations from the survey illustrating this point. The executive case studies have multiple examples of large companies fulfilling this role:
- Galaxy Desserts (USA) — producer of baked goods and all-natural desserts:
“Building our croissant business with Williams-Sonoma has been great for both sides. We certainly couldn’t have done it without them. They found the best croissants in the US, and we gained access to their millions of loyal customers. In fact, Oprah [Winfrey] discovered our croissants in the Williams-Sonoma catalogue. We were fortunate that the orders resulting from our Oprah [TV] appearances all came through the Williams-Sonoma infrastructure (call centre, website, order processing system, etc.). We would have had an incredibly hard time trying to handle that type of volume ourselves.”
- 9F Group (China) — financial services company:
“Most of our clients are large State-owned Enterprises (SOEs) – the Chinese banks. Our very first client was the Agricultural Bank of China (ABC). It was our lighthouse customer. Landing that contract had a monumental impact on company growth because we were able to subsequently attract many more businesses by capitalizing on ABC’s brand name. Large companies are typically very cautious in choosing small companies as their business partners because small companies typically lack credibility, lack a proven track record and have high exposure to bankruptcy risk.”
5.2.3 The upside from large companies as strategic investors and financing partners
Large companies are becoming increasingly aware of start-ups in their innovation process, taking an active role working with early-stage companies, becoming active investors and providing important value added services to start-ups. The role of corporate venture capital is not restricted to getting financial returns from start-up investments. For example, large companies can stimulate ecosystem development for the start-up’s products and take real options in new emerging innovations. While a start-up investment may not pay off on its own, it could enhance the overall market for the company’s products and be a profitable investment in this broader context. As investors, large companies can contribute access to knowledge, commercial channels, R&D, manufacturing and other assets of potentially significant value to an early-stage company. Exhibit 5-6 provides survey quotations that illustrate large companies as strategic investors and the benefits often associated with them.
5.2.4 The upside from large-company mentorship and advice
Insightful advice can be valuable to an early-stage company. Employees of large companies often have a broader and deeper perspective on their industry than others; entrepreneurs can gain important insights from this, identifying new opportunities, new applications for their products or new ways to build their business model. Exhibit 5-7 provides quotations illustrating how entrepreneurs have found such positive new insights from interaction with large companies.
5.2.5 The upside from large companies as go-to-market partners
Check Point Software Technologies Ltd (Check Point), a major Israeli success story in the security business, had a major breakthrough in revenues and stature when Sun Microsystems, in its early years, incorporated the company’s software into its product sales. Sun Microsystems became an important go-to-market partner and gave Check Point access to a global market well beyond its own capacity as a small Israeli start-up. In the first three years, Sun Microsystems contributed over 50% of Check Point’s total revenues.
Reaching the market is one of the most expensive undertakings for a new company. Large companies already have market presence, a large number of customers and traffic to their distribution channels. They also have efficient logistics and people on the ground offering technical support and after-sales service. Start-ups can scale very quickly if they are able to offer such large companies a win-win deal. Exhibit 5-8 highlights this role through several quotations from the survey, and executive case studies help to illustrate this further.
- TaKaDu (Israel) — provider of software promoting efficient water usage:
“A different channel that helps us address those challenges is our global network of partners. TaKaDu partners with a range of well-recognized resellers (from local professional companies to large international corporates) that represent us internationally, reducing the level of reluctance from the customer side. The most significant partnership is with TaKaDu’s strategic partner ABB, which also led a US$ 6 million funding round in TaKaDu in April 2012. The partnership with ABB, as well as other resellers of TaKaDu selling network measurement instrumentation, brings prospects to the level where they are technically ready for TaKaDu, therefore increasing the company’s addressable market.”
- Wildfire (USA) — social media marketing platform:
“We were somewhat lucky and were able to benefit from the Facebook and social media wave. Initially, our sales were predominantly from the United States and, when Facebook took off internationally, our sales followed. We were also able to leverage the strong relationships we had at Facebook. When their sales team would sell ads, their clients would often ask, ‘What can we do beyond ads?’, and Facebook would respond with, ‘Use Wildfire’. We received a lot of business through this avenue.”
- ViiCare (China) — provider of information technology solutions for hospitals:
“We have established partnerships with large companies in the area of marketing and sales. These partners, including Accenture, Digital China and Enjoyor, have helped us land large hospital contracts. In addition, some of our clients are large hospitals, including Shanghai Xinhua Hospital and the General Hospital of Armed Police Forces.”
5.2.6 The upside from large companies enhancing operational capability
By working with large companies, start-ups have access to assets that would otherwise be too expensive, including commercial support, credibility and knowledge (intangible assets). Additional examples include access to R&D, manufacturing and technical support. Exhibit 5-9 provides some examples from the survey.
Large companies typically have very stringent supplier requirements; the consequences of any mistakes can run as high as the value of the company. Large companies are often more careful in managing risks than many early-stage companies and, as a result, are much more demanding in their processes and systems. Start-ups can learn from such demanding requirements and quickly demonstrate how they offer as just as much in quality and efficiency. Exhibit 5-9 illustrates this role using quotations from the survey.
5.2.7 The upside from licensing leverage with large companies
“Licensing out” and “licensing in” are two aspects of dealing with large companies. Licensing out to large companies is often an efficient way to access large-scale testing, manufacturing and distribution, for example of pharmaceutical or biotechnological products. Licensing in allows start-ups to access technology that has already been developed, belongs to a large company and is often the basis for technology under development at the start-up. Exhibit 5-10 shows the use of licensing through quotations from the survey.
5.2.8. The upside from broad-based leveraging with large companies
While the seven-part categorization is used to show the roles large companies play in creating productive relationships with early-stage companies during their development, in many cases two or more of these roles can occur simultaneously. Exhibit 5-11 provides a vivid example from the early-stage company Octel Communications and its highly productive relationship with much larger General Electric (GE). This example reinforces the multifaceted benefits outlined in Exhibit 5-1 for BYP and its partnership with The Home Depot.
5.3 Large-company Pitfalls: Having “Eyes Wide Open” to the Challenges and Drawbacks of Start-ups Working with Large Companies
Start-ups face important challenges when working with large companies. Importantly, start-ups should have an “eyes wide open” mindset when faced with some of the large-company pitfalls, not the least of which is that large companies are for-profit businesses and often seek to maximize their own returns (sometimes short-sightedly). They can push their partnership with an early-stage company to the limit and beyond.
This part of Section 5 describes seven challenges that start-up managers and managers in large companies should take into account when negotiating a partnership and executing on it:
Challenges in Early-stage Company – Large Company Relationships
- Attracting attention – getting noticed by large companies
- Productively working together – maintaining coordination with and commitment from the large company
- Value appropriation – dealing with challenges associated with value creation and value capture
- Maintaining focus – start-up companies losing focus, having their attention and skills diverted
- Imposed not-so-hidden costs – imposing direct and opportunity costs on start-ups
- Predatory contracting and litigation – lawyers/lawsuits undermining a start-up’s progress
- Regulatory capture by large companies – creating an uneven playing field
5.3.1 Attracting attention – the challenge of getting on the large-company radar
The first hurdle for start-ups working with large companies is attracting their attention. Among the thousands of employees at large companies, it can be difficult to find those with interest in a start-up and the power to introduce and support one. Most large companies do not have a department focused on working with start-ups; to establish a relationship, finding the right person is often the first challenge. Even when a key person is identified and convinced, this person may have neither the right network nor the power to create the right win-win situation internally. Moreover, that person may change position or leave the company. Survey evidence in Exhibit 5-12 illustrates some early-stage company frustrations and downsides in this area.
5.3.2 Productively working together – the challenge of maintaining effective coordination and commitment
Relationships between start-ups and large companies can be difficult, especially as the two types of organizations work with different priorities and models. Start-ups are often characterized by speed and focus, while large companies are more known for minimizing risk (often at the expense of speed) and managing a complex network of people, processes, products and markets. The relationship between these two often starkly contrasting types of companies is not simple and can be easily derailed. To adapt a frequently used expression, “large companies are from Mars, start-ups are from Venus”. A clear value proposition from the start-up is often not enough to attract large companies; in fact, a champion within the large company is often required to support the start-up and mobilize resources internally that will leverage the relationship. Exhibit 5-13 covers examples of early-stage and large companies facing such relationship support and commitment challenges.
5.3.3 Value appropriation – challenges associated with value creation and capture
Collaboration between early-stage and large companies typically occurs because both partners benefit from the relationship. While significant value is often created, the majority of it is frequently captured by the large company, thanks to its experienced negotiators and greater bargaining power. A contract that can make or break a start-up typically will not have such consequences for a large company, and closing a deal is invariably more urgent for the start-up. An extreme form of value capture can occur when the large company adopts predatory behaviour to acquire the early-stage company at a below-market or even “fire-sale” price. Early-stage company frustrations in this area are illustrated in Exhibit 5-14 and in executive case studies in this report’s Appendix. Interesting examples include:
- Aemetis (USA, India) — renewable fuels and biochemical company:
“The key missing component of the ecosystem was a lack of access to markets without interference by oil companies, who have direct conflicts of interest with renewable fuel producers. Since oil companies own oil fields and refine oil into gasoline, and often provide fuel distribution and retail sales, oil companies control the sales channel for fuels. The resulting inability of biofuel companies to sell on an even playing field with oil-based gasoline resulted in low margins and reduced market size.”
- ViiCare (China) — provider of information technology solutions for hospitals:
“It is not easy to establish partnerships with large companies. They would typically require a lengthy and intensive due diligence process before signing the MOU [memorandum of understanding] with us. Also, they would require a proven track record to ensure that we are a reliable partner. Moreover, large companies typically possess greater bargaining power. We have come across situations where potential partners ask us to share the source code and other intellectual property with them for free. The decision process at large companies sometimes is too long, and we may have already missed the market opportunity when the consensus is finally reached.”
5.3.4 Maintaining focus – the challenge for start-ups with diverted attention and skills
Large companies often require a start-up to tailor a product or service to meet their own demanding requirements. What starts out as a series of small, “required adaptations” from the large company can take excessive resources and time from the start-up’s product design and engineering teams, among others. When several large companies simultaneously demand “unique adaptations”, a start-up can quickly find itself stretched in too many directions and focus is lost on developing the right, general product for a much larger market. Start-ups can also lose focus when large company negotiations become lengthy and lack closure with outcomes. While the potential upside may warrant sizeable investment of time, resources and mindshare, often the small company overcommits and is unwilling to pull the plug when the situation warrants. When no contract is agreed after long negotiations, serious loss of morale and loss of focus at the start-up can result.
At large companies, lack of expertise and understanding in how to work with start-ups can lead to frustrations surfacing at early-stage companies. In part, this can arise from large-company policies born out of negative experiences (in some cases systematic, and in others anecdotal). For example, large companies may require potential vendors to have a minimum number of years’ experience or a minimum size, with companies not meeting requirements being excluded from partnerships. In fact, very young and excluded early-stage companies may have a product or service of high relevance to the larger company that would keep its product line at a competitive edge. Corporate rules including minimum number of years’ existence and size make it administratively easy to narrow down the list of qualified candidates. The downside, however, is that the large company never gets to build its expertise in identifying and working effectively with those start-ups that don’t necessarily meet its eligibility criteria.
The diverse aspects of this challenge are reflected in survey examples shown in Exhibit 5-15. The executive case studies include discussions from executives about this area, as well as steps taken to reduce its potentially negative impact:
- Wildfire (USA) — social media marketing platform:
“We had some difficulty pushing away large companies. When it comes to product engineering, these companies pay you a lot of money and expect you to cater your product to their specific needs. We have always had the philosophy that we are building a platform of products where all customers can benefit from the same set of features. It was tough having to tell large companies, ‘we cannot do that’, or ‘we will not do this’. We have had to push away a good amount of business because of this philosophy. This proved especially challenging when we developed an enterprise sales force. Enterprise salespeople tend to want to sell the deal, and if product engineering says that they cannot, or will not, do something then it sometimes can create tension… Even when we were really small, we said no to several large companies who approached us to provide them with specially tailored products. Because of this philosophy, we won some deals and lost some deals. Ultimately, we were fortunate to have enough deals in the pipeline that turning down certain companies was not too devastating to our financials. Our discipline also made us less reliant on a small group of large clients. We had a very large customer base with no one customer representing a huge percentage of our revenue. This provided us with a tremendous amount of freedom and flexibility to build the product the way we felt best.”
- Cupola (UAE) — credit-card processing company:
“Our biggest disappointment was the collapse of a potential joint venture in Saudi Arabia. We spent over 18 months (2010–2011) identifying, nurturing and negotiating with a potential partner to set up an integrated card personalization centre and a contact centre. The failure was caused by two factors. The JV [joint venture] partner had promised to provide business from their own businesses and their clout in the market. This value added was never quantified or agreed upon explicitly. The second factor was the restriction on visas for foreign workers imposed by the authorities for our type of service industry.”
5.3.5 Imposed not-so-hidden costs – the challenge of facing imposed direct and opportunity costs
Large companies can impose costs on start-ups that threaten their survival. These costs are often opportunity costs. One example is a large company not making payments to the start-up on the agreed- upon timing, forcing the start-up to incur bridging finance costs. Start-ups do not always recognize that other companies may not make investments in them because those companies consider other, large companies with pre-existing stakes in the start-ups as competitors. And, fewer investors are willing to bid on subsequent rounds of financing, resulting in higher financing costs and lower valuations in those rounds. Companies that consider a thinly resourced start-up as a competitive threat can adopt an aggressive pricing strategy to try slowing the start-up’s progress or, in some cases, putting it out of business (predatory pricing laws notwithstanding). Another not-so-hidden cost is lethargy among a start-up’s employees and in its organization, associated with frustrations in dealing with large-company bureaucracies. Exhibit 5-16 presents examples illustrating this challenge.
5.3.6 Predatory contracting and litigation – legal challenges undermining a start-up’s progress
Predatory use of lawsuits by a large company can impose a number of costs on a start-up, which may not have the capacity to engage in an extended legal fight with the larger, well-resourced company. Allegations of intellectual property theft, patent violation and violations of employee non-compete agreements are three frequently observed examples. Exhibit 5-17 illustrates this challenge. An example from the executive case studies is:
- OpenDNS (USA) — leading provider of cloud-delivered Web security services:
“We’ve rarely found large companies to be helpful to our growth, but they often get in the way. Large companies can distract you with competitive offerings that are fast followers backed by more financial resources, and they can distract you with legal challenges in the form of patent assertions and lawsuits.”
5.3.7 Regulatory capture by large companies – the challenge of an uneven playing field
Government regulations can play an important role in how level the playing field is among competitors. In some cases, regulators will prefer to support domestic companies, creating problems for foreign entrants. Examples include high-tariff barriers on imports and preferred support for government-related companies.
In some countries, large companies can have preferred access to government officials and regulatory bodies. This is often based on multiple factors such as: personal relationships; prior support of an election campaign; payments to well-connected lobbyists; and implied lucrative job opportunities for influential officials leaving government service. Regulations may be written to favour large companies; as a result, early-stage companies face challenges as competitors, or when negotiating a partnership with a large company. This has been called “regulatory capture”. Exhibit 5-18 provides quotations from the survey relating to such challenges.
Large companies often play an important role in the growth of early-stage companies. Yet, working with the former can be challenging for start-ups, and the level of maturity across geographies in how to structure these relationships varies significantly. This section has identified seven opportunities and seven challenges that early-stage companies may experience in such relationships. As the landscape is varied, start-ups should always adopt an “eyes wide open” approach when negotiating with large companies. At one extreme, there are highly productive partnerships characterized by mutual success. At the other, “scorched-earth” outcomes result when early-stage companies end up in markedly worse positions from their engagements with the large companies.
Exhibit 5-1: BYP Rides the Wave of The Home Depot’s Growth in the Mexican Market
BYP (Mexico) — paint applicator company:
“One of the most important factors that fuelled BYP’s growth was the relationship with some key customers. One of our first clients was Sherwin-Williams (the US-headquartered Fortune 500 company that sells paints and general building materials), and we also started receiving orders from several major distributors early in the company’s history. We understood the significance of securing the key clients in the market including, of course, The Home Depot (THD), the largest US retailer of home improvement and construction products. We had been trying to sell to THD since they started operating in Mexico. After many attempts, we finally got a chance when their then supplier failed to deliver orders on time. The acquisition of a big customer like this is a game changer for a small company like ours.
Of course, sales growth is the great benefit of having a big company as a client. In our case, The Home Depot is one clear example of these key customers. We have grown with them, as the number of their stores has almost tripled during the years we have been serving them. In some aspects, we have structured the company around their needs and we were proud to receive a “Vendor of the Year” award in 2009, a recognition given to only one supplier each year.
But there are also other great benefits of having a large client. Higher requirements in product quality (both level and consistency), image and packaging, logistics and service force us to become a better company. It raises the bar for all our operations at every level. For new products, having a certain guaranteed volume allows us to introduce a new product line with a lower risk, and then offer it to other customers.
Surely, it also poses some challenges and problems. Big companies have strict policies and mistakes are not easily forgiven. Moreover, there is a risk in having a large share of sales in one client, as investments are made over the years to serve it better, and the health of the company – at least in the short run – could be at risk if we were to lose the client for some reason.”
Exhibit 5-4: The Upside from Customer Engagement
“We were able to secure a contract with a US$ 50 billion chemical company that needed access to capacity in short order. We had the only equipment that could successfully meet their needs. This resulted in a substantial contract (greater than 50% of our initial business) during the first year of our operation. We were able to negotiate favourable payment terms. As they wanted to enhance their throughput, the chemical company entered into an agreement to help finance the new equipment for us. It allowed us to approach banks with a guarantee from the chemical company. Good for the bank, good for us.”
“We were one of the first aluminium can manufacturers in sub-Saharan Africa. When we came on stream with our first plant, our growth was greatly facilitated by large companies as our customers. Heineken, Diageo, SABMiller and Coca-Cola were all enthusiastic early supporters. Their interest was in having domestic supply to simplify their supply chain and reduce their supply risk, even with pricing at import parity.”
“A large European telco (largest in its original geography and active in other geographies) adopted our solution and concept so deeply that it forced all its affiliates and then its roaming partners to use it to interface effectively with their systems. Needless to say, this was great for the growth of our company.”
“A huge high-tech company integrated our solution into their suite of solutions. While this involved some integration and development from our technical group, which took a while, the result was that our sales really took off.”
Exhibit 5-5: The Upside from Credibility Enhancement (with Lighthouse/Tentpole Customers)
“As small companies often lack brand power and credibility, it is quite helpful to be able to use the actual sales history relating to an existing reputable large customer.”
“Cisco will help showcase young companies with leading-edge technology. Its CEO, John Chambers, had a group that would look for innovative technologies that used VoIP [Voice over Internet Protocol]. He even incorporated our company into his speeches.”
“When Nordstrom started to carry our products in stores, it gave instant credibility to our company with other retailers, investors, customers and the press.”
“Getting this deal done with Disney was not easy, but was important for two main reasons. First, we were creating a marketplace for art. It was like having the world’s best customer testimonial when speaking to independent artists and designers when we could show them Disney on our site. Second, it was a huge boon when we needed to raise money. We had bootstrapped the company up to this point and it helped tremendously when we sat down with VCs [venture capitalists]. Ironically, revenue and profit were not the biggest reasons for the Disney deal. We first and foremost wanted their brand’s halo effect.”
Exhibit 5-6: The Upside from Large Companies as Strategic Investors and Financing Partners
“Seven Energy is one of Nigeria’s leading indigenous oil & gas companies. ABC Contract Services, the UK-listed oilfield-services company, has been a minority investor and technical partner at Seven for the last several years. ABC seconded many professional staff to the Niger Delta to support the construction of Seven’s gas-pipeline infrastructure, which was extremely helpful. ABC also supplied strategic and commercial guidance in other parts of the business system.”
“Company XYZ (disguised name) saw its vendors, like us, as business partners. They offered us very favourable transaction terms, such as closing trades on the 15th of the month and making the month’s payment at the month end. These transaction terms helped solve one of our weakest points of cash flow.”
“We were a cosmetics e-commerce company in Germany with a large addressable market but relatively low margins. A major growth point was leveraging one of the largest media groups in the country. The agreement enabled our e-commerce company to use the media group’s unsold media space. This became an in-kind form of equity investment. The media group capitalized our media spend (at very low prices) as an equity investment at the last-round valuation. We were able to have access to over US$ 5 million in media in our first 18 months and were able to scale the business to over US$ 2 million per month in sales (with a 28% gross margin).”
“Company RST (disguised name) was a good partner for my start-up. Not only did it make an equity investment, it also provided some technical expertise and business introductions which led to various customer and partner relationships.”
Exhibit 5-7: The Upside from Large-Company Mentorship and Advice
“Before even launching my start-up, while I was still at the early stage of researching the market, I was able to contact a senior officer at the largest company in the industry. She was very helpful in giving me a broad understanding of the industry. She also directed me to people in her company and in regulatory bodies who were able to answer more specific questions.”
“My Internet company was focusing on attracting a consumer audience. We were approached by a large corporate travel agency who thought our product could be relevant to its customer/user base. This broadened our thinking about the relevant market for our products and helped us grow into business applications in addition to our original consumer target. The line of business-focused features and partnerships that we eventually developed as a result of this revelation ultimately attracted a large player in the corporate travel business who offered to acquire us. We accepted the offer, which was a very successful financial outcome for the founders and our investors.”
Exhibit 5-8: The Upside from Large Companies as Go-to-Market Partners
“A large company offered its commercial network to my start-up: logistics and technical assistance through its own sales force worldwide, in particular in the after-sales and service areas. This was a game changer for us.”
“The bank did a great job of bringing in other value-chain partners including an early-stage company that had a desktop software product with growing market share. The bank enabled the product to be fast-tracked to a larger set of customers. The sponsoring manager within the bank had the sense to act more like a venture capitalist than an operator, whose large-firm policies and procedures normally would have stifled innovation/speed to market.”
“Our company worked with a very large retail pharmacy chain to launch private-label frozen meals. We were able to pair our ability to move very quickly as a small company with their many outlets. This resulted in a relationship that grew to over US$ 3 million of annual revenue in four months. Payment terms were arranged to allow for a limited working capital impact. The overhead costs and transportation charges that we would have had to incur to do this on our own would have made the business either unprofitable or too expensive to the customer.”
“Our beverages are distributed in the mass-market channels by a large player in the category. It sees our products as a great complement to its portfolio. Parallel to that, the large company has taken some equity in our company.”
Exhibit 5-9: The Upside from Large Companies Enhancing Operational Capability
“An area where working with a large company helped was information security. We entered into a partnership with a large, well-known financial services company to offer my start-up’s products to its customer base. To get the deal done, we had to comply with the larger company’s very stringent requirements around data protection and technical security. While that was a hassle for a small company like ours, I do believe it ultimately helped our business. As a result of the partnership, we had very strong data protection and technical security that protected our entire user base. This enhancement helped us get new deals with other large companies with similar security requirements. It even helped us deal with the press when they made some inquiries about our security practices – and perhaps helped us avoid any bad publicity had those journalists found gaps in our security measures.”
“In my first company, I got a partnership with a large company that was not going to play in our domain and marketplace. We were developing a microprocessor for a market different from that of the large company that was in graphics – consumer electronics. We licensed our technology to them for a limited field of use. In return, we got a manufacturing partnership and an investment. This was mutually beneficial. We were able to quickly hire and to avoid needing any VC [venture capital] money for our start-up. The large company not only got access to leading-edge technology; they also got access to our methodology and start-up speed-of-working that they implemented in a couple of their design groups.”
Exhibit 5-10: The Upside from Licensing Leverage with Large Companies
“A Japanese early-stage company’s growth was accelerated by a large Korean conglomerate negotiating a licence to develop the drug for the Korean market. It provided upfront money and generated clinical data that could also be used in Japan. Another large Japanese pharmaceutical company also licensed from the start-up to develop a drug for the Japanese market, paying upfront fees and developing both preclinical and clinical data.”
“Some of our customers weigh creating their own internal software tools versus licensing commercial products like the ones we produce. In rare instances, these customers choose a hybrid product approach – they select our commercial product and then have it customized to meet their specific needs. After a period of time, our licensing agreements allow us to sell that customized product on the commercial market. In all of these scenarios, the customers that drive this customized product development and subsequent marketing are large companies or government entities.”
Exhibit 5-11: The Upside from Broad-based Leveraging with Large Companies – Octel Communications Gets Leverage from General Electric (GE)
“The product is voicemail systems in the mid-80s. When Octel Communications started, only a small handful of companies were using voicemail. E-mail did not exist. We made a huge effort to get a few large companies as key accounts. The first was GE which was difficult because they were already using a competitive product. Multiple benefits accrued to Octel. First, we had GE as a customer because they believed we had a superior product. Second, we were able to get GE Ventures as an investor. Third, we set up a national accounts sales force with professionals for selling to major accounts like GE. Fourth, with GE’s help, we got Jack Welch interested in the product and were able to show him how much voicemail would help GE. The latter was used carefully because getting someone too high up can cause antibodies to form at lower levels. In the end, our product became the standard at GE and one of our largest accounts. It was enormous work for Octel to build the capability across GE, which would have normally discouraged many small companies. However, GE’s endorsement of the product so widely in their company was very helpful in encouraging other large accounts to purchase our product. GE was the start of what became a huge market-share success. When we were acquired, Octel had a 66% share of major accounts in the free world.“
Exhibit 5-12: The Challenge of Attracting Attention – Getting Noticed by Large Companies
“Without specific large joint-customer opportunities, small companies waste astounding amounts of energy trying to gain their attention.”
“I believe large companies are indifferent to start-ups, even to the point of not recognizing them as potential market competitors, and therefore, have little or no role in early-stage firms. The reason is simple: working with or against a start-up simply cannot move the quarterly EPS [earnings per share] needle.”
“Early-stage companies are not part of the core business of the large company, and therefore, not first priority. Large companies introduce very bureaucratic procedures and processes that are going to slow down the early-stage company development. You can end up with a situation of almost zero interest and focus.”
“Some large construction companies/homebuilders are hesitant or very slow to start a business relationship with a new mortgage company. Some think that banks may remove funding lines from them for future projects if they work with us. Also, it is just easier for homebuilders to work with the banks as they have always done, and it seems hard to show them how a new loan origination approach can add value to them and provide them with better business options in the future.”
“As a start-up, even though we were able to develop a product that was attractive to the large company, we could not qualify as a vendor because we had not been in business three years and did not meet their minimum revenue requirements.”
Exhibit 5-13: The Challenge of Productively Working Together – Maintaining Coordination with and Commitment from the Large Company
“The relationship started off well, but as the larger company got more involved and started to deploy its sales resources in place of the start-up’s sales efforts, a codependence resulted, and like a game of doubles tennis where the ball lands between two players, each depended on the other to hit the ball and unfortunately neither did, and they lost a few points.”
“We were about to undertake a significant subsurface mapping project in Colorado as a partner with a large Houston-based resources company. Unfortunately, a group of PhD Gatekeepers who sit in Houston thousands of miles from the asset to be imaged, intervened at the eleventh hour. They claimed to have ‘technical concerns’. We believed the real reason was a perceived threat to their authority and the career vitality of these gatekeepers should a new, software-enabled technology platform from us be widely used by the Houston company.”
“For all the good that came out of the (large company) relationship, they were incredibly slow to move on contracts (87 drafts!). Their poor marketing relationship with another company ultimately became an impediment to distribution and expansion of the product we produced for them.”
“I have had many bad experiences with big companies when it comes to technically implementing a partnership. My small start-up with 10 engineers can run circles around the over 500 engineers at most big companies. We tend to have higher-quality people who can get things done efficiently, whereas the big company has bloated processes, inefficient project administration, too many cooks in the kitchen, sometimes conflicting corporate policies and ridiculous requirements. We’ve seen integrations that should take one to two months drag on for a year when working with big companies. And sometimes the integrations completely fall apart because, in that year of effort, the company reorganizes and there’s now a new leader overseeing our project, and that person chooses to kill it or redeploy resources to some other pet project, etc.”
Exhibit 5-14: The Challenge of Value Appropriation – Dealing with Value Creation and Value Capture
“I was headhunted to join a two-year-old plant sciences biotech company as the VP of Marketing and a board member with the view to becoming CEO. We aimed at significantly reducing the traditional means of product development while significantly improving yields. We were having considerable success with this. We had support from a Fortune 500 company through two rounds of financing as well as support of our R&D projects. This support was positive and enabled the company to develop to the point where we needed a third round of financing. We started looking for partners who were traditional commercial producers to provide major field trials and be candidates for acquisition. At this point it became apparent that our prime investor was interested in us failing so it could take us over. They wanted our technology! This was made clear by their refusing to renew and expand our R&D projects unless we gave them complete access to our laboratory notebooks, and by their not providing more than lip service to our third-round financing efforts. They orchestrated the removal of our young, inexperienced president, gave me the title of Chairman of the Executive Committee, and shortly after eased me out. They then appointed their own person as CEO, who engineered a complete buyout in favour of the prime investor, and the financing round was dropped. The other minor investors were paid out for the cost of their initial shares.”
“I watched a large company almost bankrupt a small fabless semiconductor company. The small company had the only solution to a very big problem of the company. The large company wanted to dramatically reduce the margin that the small company earned on the contract. The large company acted as if it had huge negotiating power. Unfortunately the smaller company wasn’t good at walking away from the deal, in part due to a weak sales organization. The larger company was using the naivety of the smaller company to its advantage. The growth potential of the smaller company was negatively affected.”
“Some large companies think they provide so much value that the start-up should pay them well beyond what an established company would pay. Also, sometimes after taking their cut (as the channel), they hold on to the money for months before passing it to the start-up. This can kill the start-up’s cash flow. In the telco/mobile infrastructure sector, there are some vendors like that.”
Exhibit 5-15: The Challenge of Maintaining Focus – Start-up Companies Having Their Attention and Skills Diverted
“While there may be cases where individuals within a large company have been agents of good or evil for start-ups, the large companies naturally focus on running their beast with too little understanding of their smaller-firm partners.”
“Company X [disguised name] is a very demanding customer. It frequently requires start-ups to do ‘custom development’ which diverts resources and attention away from core projects.”
“We spent over two years dancing around with one of the world’s largest commercial banks. They wanted our flagship product customized/tailored just for them. But their never-ending requirements and lack of agreement on who would pay for this product customization resulted in no sale. Lots of marketing dollars and effort down the toilet.”
“A small start-up software company struck a partnership with a large software company to jointly develop a product that would carry the large company brand. The demands of the large company during the development process absorbed nearly 100% of the resources of the small company. It effectively killed the small company when the large company delayed the implementation of the new product.”
Exhibit 5-16: The Challenge of Imposed Not-So-Hidden Costs – Direct and Opportunity Costs Imposed on Start-ups
“Large companies in different sectors push payment terms far beyond what may be reasonable. Regardless of what they agree on, such as 30 days, it is very typical they will pay 90 to 120 days. Apart from the obvious stress on cash, the amount of extra management time and controls needed for cash-flow management are significant, especially when management is thin. You waste valuable time that could have been used to develop new products, focus on efficiency, motivate and coach your team and so on.”
“In a company that we were large investors in, we decided to bring an investment in from a strategic player. Having the strategic investor early on was valuable from the point of view of getting knowledge. But due to the governance and priority-rights demanded by them, it scared any other investor away. No other company was willing to finance the business unless some of these rights were waived. The company (being capital intensive) was therefore not able to access capital to grow. Our investment was strongly damaged by not getting the right funding at the right time.”
“A large direct-to-consumer marketing company partnered with us to deliver products. They agreed to provide an advance of receivables to fund a CAPEX [capital expenditure] project that would boost efficiency and lower costs. The bureaucracy of the marketing company (a very large public company) put the project off schedule and invalidated a large amount of the assumptions that drove the agreement. Further, to run the CAPEX project, they imposed a third-party project manager who did a poor (in some cases illegal) job. In the end, the arrangement was based on assumptions that were far too aggressive.”
“A large company was to partner with a financial-planning-related start-up with excellent technology capability. The discussions, due to the company’s bureaucracy, lasted for six to nine months. The start-up attended dozens of meetings with dozens of people and even started to build specific features into the software for the company. But at the eleventh hour, the large company pulled out and left the start-up in a terrible state. An important part of the deal was a significant equity investment (disguised as software subscription revenue) that did not eventuate.”
“An early-stage company licensed out drugs in Phase-1 testing to a large company. Everyone was happy but then internal politics and a ‘not-invented-here’ obstructive culture prevented the development of the drug. Under pressure from senior management, development began but at a snail’s pace. The large company wanted more data. This went on for a long time, thus demoralizing the start-up.”
Exhibit 5-17: The Challenge of Predatory Contracting and Litigation – Lawyers/Lawsuits Undermining a Start-up’s Progress
“Legal bullying. When you are an early-stage company, big companies will impose all their terms. In some cases it is absurd liabilities and indemnities, or enormous guarantees, or asymmetric clauses (they can terminate anytime, you cannot terminate it early; they can reduce scope anytime and you can’t; they can add any additional environmental or safety requirement, you can’t charge them for it; or they can work with any of your competitors, but you should give them exclusivity). Almost always their legal department will come with the ‘worldwide standard contract’ line and not even read your comments to their proposed abusive contracts.”
“Some larger companies have teams of lawyers who seem to have nothing better to do than add endless appendices of obscure requirements that bog down the whole process. They have onerous terms that are very one-sided simply because they assume the larger company gets to call the shots. They have onerous terms that are very one-sided simply because they assume the larger company gets to call the shots. I believe that 99% of the ‘big-company contractual fluff’ they introduce is of no value for either party, but just serves to significantly lengthen the time it takes to get a deal done, and runs up our legal bills.”
“In general, the issue is that intellectual property [IP] protections are useless for small early-stage companies. At a cost of US$ 1 million and several years of time to even start litigation on IP issues, a start-up will be dead or gone if it attempts to pursue it.”
“I had more than one company start due diligence on my start-up, extract all the information about the product and technology, and then say they were going to go build it themselves instead. The process of due diligence was a huge distraction for the start-up, very costly in terms of time and resources, and, in the end, only produced a stronger competitor to our product as our technology became more easily copied with the information extracted. These were clearly IP violations, both of our pending patents and of our mutual legal agreements between companies. The problem is that pursuing a legal case against a large and well-funded company was impossible.”
“A resource-rich division of a large company has sued every competitor making significant progress in this field in an apparent effort to divert critical resources, both financial and managerial, from investment in the business to supporting the litigation effort. The litigation has generally been of the unfair competition-fishing-expedition variety and has driven most competitors out of business.”
Exhibit 5-18: The Challenge of Regulatory Capture by Large Companies – The Creation of an Uneven Playing Field
“In Country A [disguised country], the state-owned airline X [disguised name] has competed predatorily with low-cost domestic competitors, driving several of them out of business down through the years. X’s operating losses are heavily funded by the government, and it cross-subsidizes its low-cost domestic competitor whenever necessary from its monopoly long-haul routes. The pricing pattern is well established: have a price war on the competed domestic routes until the lowest-cost recent entrant folds, and then significantly increase prices with the reduced supply.”
“In Country B [disguised company], certain companies (cement, sugar, until recently flour) have sought and received significant government protection from imports. This protection has come in the form of tariff and non-tariff barriers (e.g. technical specifications on sugar). This behaviour clearly impedes competition from new and young entrants.”
“Three years into our promising start in a new Country C [disguised market], we had a tax investigation by Country C tax authorities. This lasted a year. While we “won” (no extra taxes to be paid), the cost in time, stress, management and lawyers was high.”
“Our creative industry has been growing really fast in recent years. But now we have the elected public representatives threatening the government regulatory officials. These elected representatives are using implied threats to cut or redirect government departmental budgets to force the officials to give resources and opportunities to those organizations controlled by, or related to, those elected public representatives. Those elected public representatives are using public resources to enable the established players to monopolize the market. This is a very ironic situation. The same elected representatives who are preaching the need for innovation and entrepreneurship in their country are targeting the very young companies that have great potential to deliver on innovation and entrepreneurship.“
Percentage of Responses by Continent/Region
Percentage of Responses by Continent/Region