Tullman: How to Protect Yourself Against the Big Guys

By 1871 CEO Howard A. Tullman. To view the original blog, visit: http://www.inc.com/howard-tullman/protect-your-startup-from-big-competitors.html

The big corporations may have lots of cash, but they are slow and lumbering, like elephants. Here’s how to make sure you don’t get crushed.

I have a pretty simple test for determining whether whatever you’re doing has the makings of a real business–or whether it’s just an expensive hobby or a solution in search of a problem. If you can’t quickly show me how you’re saving me time, saving me money, or increasing my productivity, I’m going to be showing you the door. Not because I’m rude, but because the first step in the long road to getting paid is identifying real pain points and creating practical solutions that someone’s willing to pay you to provide.

Now, I understand that this is more of a modest Midwestern approach than you might find on the Left Coast, but I’m good with that, because I’m not looking for the next billion dollar baby. There are way too many easier ways to go and a lot more low-hanging fruit. I prefer business plans that demonstrate great returns for investors on exits of $100 million (or thereabouts), to moonshot stories about billions to be made on some crazy bionic baby food.

Once you’ve identified the problem and are on your way to solving it for your target customers, you’ve got to make sure that you’re in the “need to have” and not the “nice to have” category, or you’ll be wasting a lot of time and money. As often as not, the biggest hurdle isn’t even coming up with an elegant and cost-effective solution; it’s getting people to accept the prospect of change and to adopt your answer to the problem. Sometimes even serious savings won’t overcome the comfort and security that comes from staying with the same old solution.

Lately, I’ve found that even the mission-critical business ideas that make it through my first set of filters have to address another elephant in the room: the question of whether this startup is building something that’s going to become a free-standing and independent business or whether it’s developing a great feature that is going to be swallowed up, ripped off, or rolled over by one of the big guys in their space in the near future. Here’s the truth: all the bells and whistles in the world won’t save a partial solution. You need to ask yourself the hard questions now so that you can get busy and figure out how to position your business on the strategic roadmap with the big guys–without ending up as road kill.

And, in case you were wondering, this isn’t a new problem or question. And some of the players to watch out for are the same big guys from 10 or 20 years ago (Microsoft, Oracle, AT&T, etc.) who are the long-entrenched stakeholders and “powers-who-be” in your space–not because they’re great innovators or disruptors, but because: (a) they’re increasingly well-informed about who’s doing what very well (damn those demo days); (b) they’re fairly fast followers with great gobs of money; and (c) they have the people, resources, and patience to hang around and keep buying and trying until they eventually get things right in the long run.

The only good news about the big guys is that there is another group of them (think AOL and Yahoo for starters) who are so lost, so behind the curve, and so desperate to deliver something for their shareholders that they are constantly running around and throwing money at the shiniest new things in a panic. And–if you can stand the short term pain and the forced smiles (until you take your money and leave to start your next business), you should think about taking a bunch of their money to build your own war chest before they wake up and smell the coffee and are replaced by the next savior CEO.

On the other hand, if you’re interested in staying the course, there are a few things to keep in mind in building your business among the big guys.

1. Be like a black box.

Due diligence can be a double-edged sword, and you have to be very careful about over-educating your potential acquirers who are also your likely competitors. This is a very slippery area, and it reminds me of the disappointment and disillusionment people feel when they learn how a magic trick was done. You never say: “Wow, what a wonder that they were able to fool us so completely.” You say: “Aw, that’s so easy anyone could do it.” The same thing happens when you pull back the curtain too soon and let the seekers see your secrets. The most typical reaction is for these folks to conclude that–with the right amount of time and money–they could readily rip off your ideas and do it themselves. The good news is that they are generally wrong about that, but the bad news is that it often kills the deal before they learn that very few things are as easy to do as they are to talk about.

2. Be so good that they can’t ignore you.

The bar today in big companies for implementing even modest innovations is pretty low. By and large, these guys are moved by external demands far more often than any internal movements for change. They’re still stuck in the mode of trying to save their way to success. They typically react (slowly at best) to three outside drivers: (a) their competition brings a new offering to market, and they need a quick competitive response; (b) their customers see and begin to adopt new processes and solutions, and the customers demand that their products and services conform to the new ways of doing business; or (c) they see a new tool, product, or service in the market offered by a new player and they quickly determine that this is a game-changer which they need to own (rather than try to build themselves) because they lack the internal capacity to do otherwise. If you’ve built something that good, there’s no better place to be.

3. Be so cheap that they can’t bear to build it themselves.

I’m not a big fan of the whole lean startup thing or even minimum viable products (MVPs) unless they’ve been previously market-validated, but there is a clear virtue in representing an initial solution which a company can quickly buy and bring to market–even if it’s not comprehensive, industrial strength or the whole enchilada on Day One. Because you’re being compared to the substantial internal costs and additional headcount (which will likely be a multiple of what you’ve spent or hired) which any acquirer would have to incur in order to replicate your product or service, even if they are already essentially in your space or business. They know it’s a painful process today to add people to any business, and they also know that the only thing worse than making a headcount request is to try to tell their internal development team leaders that they have to add a new project. By and large, the big companies today are so bound up in trying to address enterprise concerns and fix legacy issues that they have very little time for new projects and products. That’s why buying a startup (as long as the entrepreneur isn’t a pig on valuation) is so much better for them in many cases. Just one head’s up, though, if you’re the guys being bought: Keep your bags packed, because once you’re inside the place, you’ll quickly find that you’ll have no more ability to command additional resources than the guys who were there in the first place. Worse yet–they may try to use your team and whatever resources you do have to solve their other problems instead of building your business.

4. Be so fast and agile that they can’t keep up.

Like elephants, big businesses have long memories. But, because they’re totally consumed in the process of keeping themselves fed every day, they have little interest or ability to look or think ahead–and virtually no appetite for changing the status quo. Today, however, speed and agility are everything and their sheer size is often an albatross that these companies have to drag forward as well as an impediment to course corrections and competitive responses. The one virtue of startups that these big companies do seem to value and appreciate above all (and one that makes acquisitions so attractive rather than internal R&D efforts) is the freedom we have to embrace rapid change, the ability to adapt and pivot, and the understanding that things may never be perfect at the start, but that you’ll never get started at all if you wait until they are.

5. Be so spread out that you can’t be easily swatted.

I don’t really believe that any startup should get so far out ahead of themselves that they’re “a mile wide and an inch deep,” because there are huge execution risks in terms of support and maintaining effective connections to your customers. That said, there are exceptions to any rule and–in the case of presenting your business to the big guys–because they bring their old attitudes and ways of doing business to the bargaining table with them–it can be a big deal to look a lot bigger and broader than your business really is. This is because they still think of geographic expansion as a costly “bricks and mortar” kind of roll-out process, and they just don’t get the cloud and the fact that there are very modest costs to distributing almost anything digital today to everywhere in the world. So to them the fact that you’re 5 minutes old and already in 50 countries seems like a substantial and valuable accomplishment (which they do know would cost them a bundle in their own organization to duplicate) whereas, to your team, it’s just a fact of digital life.