You run a startup that is solving a tough problem and the market potential is large. You never had enough money, so the only way to survive was to practice super bootstrapping and to actually make something which customers will pay for. You also had to make sure that your customers are happy with your product / service so that they keep coming back and refer more customers. After some near death experiences you finally managed to become cash flow positive. You had to create stuff in near zero cost, innovate, try a lot of different things and approach the market from a completely fresh perspective. You understand the market now, you have handle on things, sales are growing at a healthy pace, product seems to have reached a certain maturity, hiring is no longer that difficult and your startup is getting good visibility. There may be interest from investors to give you the first Rs.1-2 crore (200K USD) of investment. Overall things are looking up, team is looking forward to next phase of growth and next set of problems that will come with it.
Sometime now you come in contact with a large company. Reason could be any: they have just entered this market or are planning to enter, they have some offering in this space and you can fit in. Because of what you have accomplished so far they are very keen to speak to you and figure out what can be done together. Isn’t that exciting? It seems too good to be true. But you tell yourself – maybe we are really that good.
That is how we felt before the first meeting with a senior guy at one of India’s largest companies, they were planning on entering the same market as madhouse. “Wow – this is our first startup and one of India’s largest company is interesting in talking to us. If we can crack a deal, we will be golden”. There was nothing on the table – no deal / no partnership nothing – it was just a meeting. But we were quite excited, guess it was natural. We had gone thru 2-2.5 yrs of extreme hard work to bring madhouse to that stage, we could bring a lot of value to the large company. If we get acquired for a good price or figure out a good way to partner with them, we can really scale the business. With their size they will bring the money / the network / the leverage and loads of other advantages.
With this mindset we did the first meeting and many meetings after that. They only asked questions / never answered any of our questions. They wanted to know everything about our business and in detail. How do we get customers? How do we manage operations / specially the hard parts? Can we walk them thru our financial model? Who is our SW vendor? Can they get a photocopy of our packaging?
Looking back it is pretty obvious to me that they probably never wanted to do anything with us. But back then they made us believe that they are interested in acquiring / investing and hence want more info. We made a consious decision to open our kimono. Which was a bad decision because the whole thing it was a farce – till the time they wanted to learn from us the relation was warm and after that it just started dragging. They stopped answering calls / wouldn’t reply to emails for days. And the offer to acquire did not come. At a very crucial time for our business we wasted a lot of effort in talking to them – same effort which could have been used constructively to take our business further. They learnt all they could, took all the contacts. They even got our SW vendor to build their website and backend, I learnt this a few years later. So the moral of the story is that the big company just used us and moved on.
What is really happening?
With time I learnt that this is a pretty standard way most of the big (even medium) Indian companies to deal with young / promising startups or smaller organizations
- These guys know that founders have run hard for quite some time without much resources and a possibility of good returns / large sales channel or a large client would be attractive to startups
- They use their big company charm to lure the startups towards them, take whatever advantage they can
- These guys just do not care if the startup lives or dies as long as they can get their stuff dont
- If the discussion is about acquisition – they will just go cold after few calls / meetings
- If the discussion is about partnering – they will make some really unreasonable demands of you just to partner with you (e.g.: we will help you sell if you give us 60% margin on product sales and you own the inventory)
- If the discussion is about them being your client – they will take forever and if they decide to buy from you they will want to negotiate really low prices and make the payments 90 days after acceptance of goods / services (in many such cases they will not sign any contracts and then terminate contracts whenever they feel like)
- If it is about investing – they will want 60% of your company for 20 Lacs
Why I hate such practices?
- I hate these practices not only because they are unfair / unethical
- But mainly because this is one of the major reasons Indian startups have not taken off
- Startups have to co-exist with big/medium companies in the economic eco-system
- They have to deal with big companies at various times in different circumstances
- If big companies continue to follow these practices / they are essentially hampering growth of startups and the overall economy
- The motivations behind such practices are very short term and in most cases such things happen because of the incompetent middle managers / senior managers in these companies who only care about making their bosses happy and their monthly paychecks
- Because in long term partnering with or acquiring a startup with talented resources can bring big benefits to big / medium companies
- Smart companies in US have created lot of value for their shareholders by partnering with or acquiring good startups – but such practice is not common in India
- In India the standard thought process is – we can do a better job than the upstarts, we have lot of money and leverage. Startups do have some head start – but we just have to make one call and these guys will come running and do whatever we ask them for
Make your own rules. Dont follow what BIG companies tell you
- Startups should not stop dealing with big / medium companies (that would be suicidal) but they need to change their ways so that these interactions create long term value for the startup, the big company and the consumers
- Founders need to realize that the big guys need you more than you need them – you are doing something unique that not too many companies can do (including the big company)
- Don’t jump on the offers to talk. Show some attitude – take your time in responding
- Don’t get blinded by the excitement
- Don’t bend over backwards to make them happy
- Don’t accept unreasonable payment terms
- Don’t take loans to full fill big company orders
- Don’t take the next day full price flight to go and meet them
- Don’t be desperate
- Even if you are desperate – don’t show the desperation. They just need one signal to take you out
- Don’t believe the rosy pictures they paint or the big promises they make
- Don’t bend or be extra humble and use terms like “Sir / Kindly / Please / Mr / Honored ” – while communicating with them
- [Updated] Never agree to pay comission / bribe. You will run into folks who will say they can get you the order, if you can give them a kickback – this may work once wont help you in the long run
- Be confident / believe in yourself / your product / your team
- Stand your ground / stick to your guns
- Ask for fair terms. Say that you will deliver the best quality product on time and on cost
- Deliver on promises of time lines & quality standard ( always try to under promise and over deliver)
- If you are making something worthwhile they will deal with you on fair terms if not its better you move on to something else
- Be open to reasonable negotiations / concessions / free trials / prototypes to get in – but do not let it become a norm
- Treat the CEO / Directors / VPs of large companies as your peers and be on first name basis
- Across all the communication with them (meeting / calls / emails etc) – be confident, be cool, be yourself
- Do not start any major work without formal agreements / purchase orders
- Basically big companies have slow / long processes, lots of gatekeepers and very few people who can give the final GO
- The way to get around is first of all stop expecting/ pushing them to make a big decision in your favor within few meetings
- Instead propose a trial engagement which leads to something valuable for them.
- Trial should come at low / no cost to them and it should not have a lot effort on their side
- Do all the work yourself, invest a bit of cash if required and deliver exceptional results
- These results will get them interested in taking the next step, which could be a limited pilot.
- Deliver exceptional results again
- That would lead to bigger engagement and slowly you can have them as a regular client or even get them interested in acquiring you
Finally, I would like to clarify that not all large companies are bad or filled with bad guys, there are loads of good ones. I have had lots of good experiences as well. Sometime since they are big they may look bad but if you follow the process things will work out. But as a startup you need to watch out, do not let over dependence on a big company become reason for the death of your startup.
Thanks to Ankur, Nandini, Ankit, Pankaj, Shashank, Sid and others for reviewing the article