> First off, large companies have different priorities in pursuing these deals than small startups. The large company might be interested in the service offered because it will generate revenue or improve efficiency. On the other hand, the execs might be trying to figure out if your company is any good so that they can buy it. In most cases, the startups see this Deal as the only thing that matters. That creates mismatched expectations and goals that can’t be bridged.
I'd also point out that this can be a massive benefit for a startup. Consider this: Microsoft would not be where they are today if they didn't take advantage of IBM not caring about exclusive rights to MS-DOS. Microsoft correctly banked on the idea (whether they fully knew it or not, I don't recall) that IBM did not have a firm grasp on their technology, and that IBM clone PCs would soon take over the world.
Another example. George Lucas was able to convince 20th Century Fox to give up merchandising rights to Star Wars. 20th Century Fox and IBM both had different priorities at the time, allowing the small player to win big.
The trick, it seems, is to make a deal that seems like a Small Deal with the corporation (they will readily agree with it) that is actually a Big Deal if the startup has a way to leverage it.
both microsoft a george lucas had connections to the boards of ibm and fox.
it's hardly examples applicable to the real world, and both of those most likely involved some sort of insider winning something on the side. one have to be very naive to attribute this to good negotiations.
> Beyond the Seattle area, Gates was appointed to the board of directors of the national United Way in 1980, becoming the first woman to lead it in 1983. Her tenure on the national board's executive committee is believed to have helped Microsoft, based in Seattle, at a crucial time. In 1980, she discussed her son's company with John Opel, a fellow committee member and the chairman of International Business Machines Corporation (IBM). Opel, by some accounts, mentioned Mrs. Gates to other IBM executives. A few weeks later, IBM took a chance by hiring Microsoft, then a small software firm, to develop an operating system for its first personal computer.
So she was in position to make an introduction. She wasn't even on IBM's board, not like it was nepotism or something. Yes, having connections helps. There's many ways to get them (and if you're a startup taking VC, your investors likely can make those kinds of introductions). You still have to make a good impression once you're introduced.
She was on another board with the chairman of IBM. And it's her son. Most VCs DO NOT have that kind of influence and they have to balance the needs of 8+ different startup boards they sit on plus the needs of other portfolio companies.
Look at a company like Weta Workshop. A New Zealand based effects studio that worked on a couple movies of middling success in the '90s as well as the Xena and Hercules TV shows, otherwise they had no significant reputation in the world. But they had a working relationship with Peter Jackson and he used them during the early 2000s in the making of the Lord of the Rings films. They had to stretch their capabilities and work at a level they never had before, but doing so propelled them onto the national stage. Now everyone knows about Weta and they've worked on dozens of worldwide blockbusters since then. Without that "big deal" they would likely be just an "also ran" local effects studio doing a few movies here and there despite their high levels of technical excellence and innovation.
To bridge that example with how the article is discussing the term: LOTR was a huge deal for Weta, but as per the articles framing, it wasn't "The Big Deal" -- Weta did The Right Thing by creating a valuable productive business in and of itself and letting large deals come later.
Weta was not in a holding pattern ignoring their profitability hunting for a white whale that would make their business make sense. They created a business that made sense, built a reputation, and were then positioned to take on a larger project that catapulted them. Without the large deal they would still be a business, a profitable entity, and their interests would be aligned with their customers.
An apples to apples comparison would be if Weta had ignored Xena because they were flirting with Disney hoping to land an exclusive Star Wars contract.
Once upon a time, in a far far Canada, there was a "Smart LED lighting module" startup. They had plan A and plan B: A - find a freaking huge buyer for the product, and forego all normal sales and marketing till late stage, B - start building up sales from scratch through a regular marketing/sales push.
At the start, both plans were given go. Sales through plan B were going up, but a "big name salesman" from plan A camp also scored a kill - one of the biggest lighting supplies distributor in USA. Upon hearing that, happy C levels completely wrapped up all further product development/marketing/bd and waited for them to obediently sign a cheque.
But, not so easy! That sale was just for their trial run, which would've taken few month, and they wanted changes, and the company simply can't pull out half million units from a Chinese contractor on a minute notice.
They eagerly put a bond for goods and dished out some cash for company's equity.
Half a year later, they come and say: "Ah we have kinda lost interest in that experimental thingy, and since we are in a financial crisis now, we have to wrap up all nonessential developments." They paid the bond, got their goods, and threw them into garbage and to liquidators. C-levels, investors, and the big distributor co. are still suing each other since 2014.
Morale of the story - all eggs in one basket is bad.
Then there’s the even more perverse situations - big companies holding out the fruit of a Big Deal to a small company that they consider to be a possible threat, with the express intention of getting the small company to do things that will end up killing them.
Really glad to see this here. I have seen so many stories about small companies being destroyed by a large company that they feel they must close a deal with.
I would love to see a lot more articles about the pitfalls of a new company investing too much in landing a big client and all that can go wrong with it. I regularly see questions on HN where a small company is basically under the thumb of a larger one and asking for advice on how to be even more of a doormat. They imagine they can't say no. They imagine if they are sufficiently cooperative they will finally have it made in the shade. The reality is they are often well on their way to going from frying pan to fire.
I think this is a huge, huge pitfall that small companies face. There needs to be a great deal more education, not only about the fact that this is a serious problem, but also about how to cope more effectively with large clients while you are still a small fry. So many new companies feel thrilled and flattered when a large company takes interest in them when they really ought to be much more concerned about the ways this can go badly for them.
There is an African saying: When elephants fight, it is the grass that gets trampled. Far too many small companies fail to recognize that behemoth companies are threatening to trample them under foot. It is the business version of "winning the lottery."
Another trap that I've seen with the Big Deal is that it can easily turn your company into a non-scalable consulting company with the one exclusive customer. This is especially easy to fall into if the money is really good.
The large client/deal syndrome is common even with contractors besides small businesses and startups. If you change too much fundamentally when going all in on a large client, you might miss out on the growing small/medium clients that are not as bound to your business that you may mutually benefit more from and control it more, or the ideals/mission you are going for. Large clients and deals can change the personality of a company or contractor.
The large company or large client you choose has the ability to completely wreck everything so the smaller fish bends over backwards to do everything to keep the big deal. If you are lucky with timing and a good large client it can be massively good, and that is the attraction to that, but ultimately it can also fundamentally change your mission or ability to get and handle other large deal/clients.
This is similar to the service/contracting industry where you have a handful of large clients or go product development where you have many small customers, the latter always seems to have more lasting power because the loss of a handful of customers in a sea of them is less than the handful or one large client that controls your destiny. The product company that is selling as a service or subscription doesn't need to constantly make sure the large client is happy, just most of their customers. Both types pull you in directions and change you but products with many smaller customers have more stable market support, however the latter takes more time to build.
I think this happens a decent amount in healthcare with startups trying to sell to health systems. Startups fight for 12-18 months to get a pilot, but hospitals / health systems don't want to partner with the startup on terms the startup would like. Unfortunately, these terms aren't unveiled until after a pilot, when a hospital has had a chance to see whether the startups product is useful. The Big Client has all the advantage, and is interested in disintermediating the startup to gain more access to data, patients or physicians. The startup has bet it all on this deal, and ended up with a Sophie's choice of giving up the golden egg or staring from square one
You need to look at yourself and identify if you have the skills and experience to balance immediates needs (early customer revenue, product development) alongside big deals that need seeds to be planted and watered over a longer period of time. If you can handle both, god bless. If not, best to focus on building a base of smaller customers.
Another aspect of this is that signing a deal with a big customer when there are only a handful of big fish in your niche locks in a price at a time when you have no power and little information.
One place I worked at locked in over half of the big fish in the NA market and never made money off them. We would have been much better scaling up on smaller contracts.
Hmm. There are weekly similar counterexamples among lottery-ticket purchasers. However, don't invest your life savings in the lottery - the optimism factor is a killer. Better to invest your savings / future in something more rational.
It's easy to read this and agree, but quite a bit more difficult to then turn down discussions with Big Co once you've quoted them 1M ACV and they didn't flinch.
If you feel you must pursue such a deal against this advice, one way to counteract the negative effects is to bake in a break up fee in the evaluation/trial phase (don't call it that, though).
Most 'Big Deals' will come with such a trial / prototype phase. One way to structure a 'break up fee' is to say: the trial will cost 10% of the final annual contract value - if we close, this will be counted as a rebate against the final price, if we fail to close, startup will keep the 10% to cover their costs of the phase.
I think the advice in this article is good advice from a VC's perspective relative to that VC's returns in the companies he invests in. Is it just as good for the company founders? That depends on whether their true goals align.
The article is correct in that doing a deal with a big customer will largely make you beholden to that customer. You'll probably become what is basically a service company.
But if the price tag is high enough, and you're the majority owner, who cares? Maybe you end up selling your company to your customer a few years down the road for a sum that's small to a VC but big to you. We live long lives, if you enjoyed the journey you can then go start another company. Even if you don't get an exit, you can still make nice money just servicing the contract for years.
For a founder who'd be happy to have $1M or $10M in the bank and doesn't necessarily need to make $100M or $1B (yet....), doing a big deal (or preferably a few) and focusing your company on them is a lower risk strategy than trying to be the next Dropbox, and it can still yield great rewards.
If the only outcomes that will make you happy are a huge company or a huge exit, though, then Aaron's advice is right on the money. I also agree that you have to be very careful about the terms of the deal and have a way out if things go south. I don't think an inexperienced founder's first deal should be a big one--a scenario which worked out well for us was to do several smaller deals with bigger companies and then grow those relationships over the years. Once you have a solid internal champion at a company who owes part of their career success to you, they'll handle most of the politics.
Zach & co's business model is: extract private information from individuals (and potentially from their business partners while they're at it) -- potentially unwittingly -- and charge for the privilege.
I wouldn't be surprised if they aimed for large deals; this may be an excuse for how they're surviving without them.
That said, surviving without large deals is likely good advice for small startups; just don't confuse the message with the medium here.
Do you feel differently about a big deal if it comes in stages? A big deal is less of a big deal when it's a shorter term paid pilot, and even in that case some of the other downsides mentioned like slow process still play a role, but on the flip side this can be a means of funding product development…
Is it sensible to turn your head at a big deal asking the company for a smaller one as opposed to avoiding them entirely?
Sort of but on a smaller time scale. Like after a demo or proof of concept, getting a paid pilot that isn't a full deal but enough that you bring in some $ from it. The pilot is usually one-off or recurring for a few months vs longterm recurring revenue.
It's slightly ironic reading this because being accepted into Y Combinator is itself a perfect example of a 'Big Deal'.
I think that big deals are always a good thing. Any misfortune that people might encounter after they've won a big deal can only be blamed on themselves.
Most people never get any big deals and have to build a company the hard way. Just slow painful progress.
The phrase that jumps to mind is "Easy come, easy go".
Companies built on slow painful progress inevitably have a broad customer base, customers that were acquired through slow painful progress (although they probably have a few whales still). They're less likely to have the loss of one deal/customer sink the whole ship.
The problem with "big deals" is the shift in focus required to even have a shot at getting one. It's not so much "problems encountered", it's that there's no way to maintain focus or vision before or after the big deal. If your focus itself is big deals, then this doesn't apply.
But most startups have to focus on the product and that's hard to do when dealing with a large company who's priorities are generally misaligned with the broader market's values.
It's not a big deal as described in the article. The effort to apply to YC is nominal, not terribly distracting, and probably a good exercise even if you don't get accepted.
In the early days, we had a policy that we would not respond to RFP's. The time required vs. value does not make sense for startups (unless you've already been told you'll win and the RFP is just a formality).
> The time required vs. value does not make sense for startups (unless you've already been told you'll win and the RFP is just a formality).
That's also true for more-established companies, who often are just column fodder so that the procurement people can say that they've done their due diligence.
couldnt agree more. i have had several big deals in the pipeline, one of which i closed.
in retrospect the effort wasnt worth it. the deal consumed many months of our focus and work (plus as a bonus a neverending worry on our minds, because of continuous small requests), during which we werent able to advance our product.
at the end of the day, it is all about creating a great product, which will then sell itself.
in contrast to that, closing a big deal has often more to do with 1-2 senior people at a big company thinking that they need this product for their customers. those senior people may be wrong, because they dont have a good feel about what new technology is attractive to people. and the kicker: no matter how big the deal, once no benefits materialize for the big company, they will kill the cooperation quickly (and usually have ensured enough fineprint to be able to do so).
Thanks, but that doesn't quite seem fair. The article also talks about size mismatches and lists specific things like a number of departments being brought on board, and so forth. I'm quite sure there was a certain size in mind here. (Same for all of the author's included anecdotes.)
I'd also point out that this can be a massive benefit for a startup. Consider this: Microsoft would not be where they are today if they didn't take advantage of IBM not caring about exclusive rights to MS-DOS. Microsoft correctly banked on the idea (whether they fully knew it or not, I don't recall) that IBM did not have a firm grasp on their technology, and that IBM clone PCs would soon take over the world.
Another example. George Lucas was able to convince 20th Century Fox to give up merchandising rights to Star Wars. 20th Century Fox and IBM both had different priorities at the time, allowing the small player to win big.
The trick, it seems, is to make a deal that seems like a Small Deal with the corporation (they will readily agree with it) that is actually a Big Deal if the startup has a way to leverage it.