This is the first in a three-part series on strategic investors and startups.
“I have three companies with a billion dollars in revenue interested in investing in my company,” said John, an entrepreneur I am mentoring.
“That’s great,” I said. “So what’s the problem?”
“I am not sure how to evaluate who would be a good partner or if I should try to do a deal with all of them,” he said.
“What do you expect from these companies?” I asked.
“I want money and distribution,” he said without a moment’s hesitation.
“What do they expect?” I asked.
“They will probably buy our company in a couple of years,” he said.
“I don’t think that is going to happen,” I said.
A New Phenomena
Big companies buy or license a product they can plug into their machine. They don’t buy little companies. Startup people don’t fit into their culture.
Big companies need disciplined management in place to make the integration of an acquisition successful. Little companies lack this management infrastructure. This is why big companies only buy big companies and not little companies.
But we are now witnessing a phenomena in the market. Big companies are looking at startups with increased intensity. They are on the prowl.
They want to know what innovation is happening in the startup sector. It is all the rage. They are increasingly involved in startup accelerators and setting up innovation centers in incubators.
It used to be you could never get a big company’s attention. As a long-time entrepreneur friend of mine said, “I used to drive downtown past these behemoth businesses. I would wonder, How can I get an appointment with someone in that building? Who would I call? How can I get them to take a look at what I have?”
Not anymore. The big companies are now calling on startups and here is why.
The Recession’s Impact
When the recession hit in 2008, the big companies restructured to focus on what they did best, which was manufacture product at the lowest cost possible and sell and service product through their distribution network. They got lean and efficient to survive in tough times.
In focusing on their strengths and beating their competition, they cut back on R&D and innovation. It has been four years since the recession ended. The focus on what they do best strategy is played out, and these big companies need innovative products to grow and compete.
With their innovation centers stripped, there is only one place to find innovation. Startups.
Innovation Demand Meets Innovation Supply
The startup is all about innovation. It innovates efficiently with a culture focused on rapid change. And startups innovate at a tiny fraction of the cost of big company innovation.
But the startup lacks the resources of money, brand, distribution and market. The big companies have all these resources.
This is why startups welcome the opportunity to partner with big companies. What one lacks, the other makes up for in spades.
Looking for the Next Billion Dollar Product
Big companies aren’t just looking for new ideas. They are looking for the new product which will move their revenue needle. Whatever the startup’s innovative product, it had better have a big potential impact on the big company’s revenue line.
These are the reasons big companies are on the prowl for innovation. Startups need to understand these reasons so they treat big companies as a buyer first and partner second.
Don’t get blinded by their money and resources. You are there to meet their demand first, not yours. The first step in doing this is to understand why the big company showed up in the first place.
In the next post, I’ll discuss what a startup should expect from partnering with a big company.
Also published on Medium.