Startup CEO: Chart a Course Out Of Pilot Hell
If you read The 7 Pilots That Will Crash Your Startup, you know all about the pitfalls of a pilot-driven sales / business development process, and you’ve seen a list of tell-tale signals that a proposed pilot stinks. Of course, the bigger question is how to do it right — what is a strategy for successfully navigating B2B business relationships that ends in profitable, win-win customer relationships.
It’s About Alignment
What you want to get out of a given pilot depends on where you are in your product life-cycle. If you’re at an early stage of product development, you want an environment to test things out — a partner that gives you the freedom to try and insightful feedback on your efforts. If you have a product that’s ready for the market, you want a customer, and the pilot should prove that the product is the right fit and delivers the value that justifies the price.
If you try to move forward without alignment, you will fail.
Pre product-market fit, a customer that’s not able to provide you the feedback and the opportunity to iterate, will not help you learn what you need in order to complete your product. The pilot will fail because you will never be able to deliver a product they value.
Post product-market fit a customer that doesn’t know not what it needs or is otherwise not really ready to buy simply won’t— which is the definition of a failed pilot at that stage.
There are three parts to doing this right:
- Being smart about what your company needs.
- Being curious about the partnership and the potential relationship.
- Being disciplined about decision making.
… Be Smart, Curious and Disciplined
It Takes Two To Tango
To get alignment, you have to be able to answer both questions:
- What are you trying to get out of the pilot?
- What are they trying to get out of the pilot?
While the first question seems trivial, very often startups don’t think it through. Knowing implicitly “in the back of your mind” what you’re looking for is not good enough, because this is a business relationship where you have expectations of the other side, and they need to agree to them. If your expectation is to get certain data, certain access to people or equipment, feedback from particular people in a particular format — you have to explicitly state it and agree on it. If your expectation is that a successful pilot will get them to buy the product — you have to agree on that too.
So “knowing” isn’t enough. Being smart requires spending a few hours with your team discussing what you’re trying to achieve, defining what a “good partner” is to you, and committing to your red lines. This is a form of management by objectives which is always the right thing to do. This is Step One — you should do it before the joint discussions bias your thinking.
Being Smart means explicitly stating your goals and expectations
Understanding the other side is harder. In a perfect world, you want to understand their goals and motivations, but also how they operate and their culture. In The 7 Pilots That Will Crash Your Startup I’ve provided some tools to diagnose the customer’s behavior in the process (“dead giveaways”), but the right way to go about it is to learn as much as you can in advance. As hinted to in the previous article:
- The customer may not truly be ready to adopt your tech.
- The customer may not be ready to buy from a startup.
- You may not be negotiating with the real decision makers.
- The decision-makers may be bought in, but the real gatekeepers have a different agenda.
- Everyone is on your side — but they don’t have the process / data to enable success.
So in Step Two you should gather information about the customer, both directly — by asking, and indirectly through third parties. This information should include:
- Why are they interested in your product — what problem does it solve / value it creates. What are their product / process trade-offs.
- What are the relevant competitive, regulatory or other market pressures on them.
- How are they planning to evaluate and make a procurement decision and who is involved?
- How good are they are at working with startups? Will they communicate and share effectively?
- Ethics and perverse incentives — what is the customer’s reputation for how they conduct themselves with partners in general and startups in particular?
Read what you can about the client. Reach out to your network and ask other startups who’ve worked with them. Try to meet their staff one-on-one and ask open questions. Once you’ve learned what you can, try to answer the following questions:
- Why are they interested in running this pilot with you? Why now?
- How likely are they to be a good partner — in the sense you defined in Step One?
Learning to truly listen and being truly curious is critical. What you learn will affect you’re your partnering and your product decisions — but only if you get the signal. Startups in their nature are an act of ego, and the average founder is dancing to their own tune, to the degree that they don’t ask questions, and don’t listen to what they’re told. And that’s a sure-fire recipe for not understanding what’s happening on the other side — and making wrong choices.
… Curiosity entails bleeping listening to the other side
The outcome of this thought process should either be a red light, or a green light — with a list of risks that need to be mitigated.
Align Expectations — Negotiate For What You Need
Negotiating and signing an agreement is not only a formality — in many cases it is part of the mutual exploration and the last opportunity to find out the intricacies of the other side’s intentions and dynamics. This post is not meant to be a primer on negotiations, but here are some specific do’s and don’ts.
Do:
- Explicitly state the objectives you set in Step One to the customer.
- Define what resources, data, access and other support you expect from the customer.
- Listen carefully to what they say, who says it and how.
- Suggest criteria for what defines a successful pilot.
- Get written commitment to what happens after a successful pilot, at least a letter of intent / MoU attesting to that.
Don’t:
- Move forward without a deep understanding of the other side’s goals.
- Jeopardize your intellectual property by not clearly defining that in an agreement.
- Do pilots for free, except in the very specific case outlined below.
The Curse of the Free Pilot
Unwillingness to pay typically means there’s either no real intent to buy, or no authority to buy. Let’s unpack this.
First, let’s set aside the case where your product is complete, the pilot requires negligible effort on your end and the customer expresses an intent to buy. In this case we’re really dealing with a “free trial”, and if your policy is to allow these, just set some limits and apply to all customers — e.g. how long, how many accounts, what level of support. Communicate these to the customer and adhere by them. End of story.
Free trials are not pilots.
Assuming we’re talking about a “real” pilot, where there is a joint effort (that mostly falls on you) to validate a product / technology, don’t let the big company / small company power dynamic deter you from demanding and getting a significant cash compensation. Rule of thumb — not less than $50,000.
Why?
Test of seriousness
If you’re a corporation seriously exploring investing hundreds of thousands of dollars or more in a product that you will use / integrate for years, paying a few percent of that to study it first is not just justified — it’s highly advisable. If they’re not willing to pay for the pilot, they’re not really committed to buying your product. Maybe they haven’t really budgeted it, maybe you’re not talking with a real decision maker (spending $50K in a Fortune 500 doesn’t even require VP approval), or maybe they’re looking at multiple companies in parallel. Bottom line — you’re probably far from “if the pilot succeeds, we will buy”.
Skin in the game
Rational or not, sunk cost affects subsequent decisions. Having spent a meaningful sum increases the likelihood of follow-through. If the pilot succeeds, then at the next budgeting cycle it will look like a waste if the purchase doesn’t go through. If the pilot is not very successful, you’re more likely to get another shot at improving results before they drop it.
Emotionally, that $50K is a down-payment no one feels good about losing.
Signal to investors
In early stage B2B, paid pilots are a strong signal of market intent to purchase once the product is completed. In the words of a prominent corporate venture capitalist: “at the early stage we measure companies by the number of pilots “sold”, and we only count paid pilots of at least $50K… anything below that does not signal a strong intent to eventually buy.”
It’s your insurance policy
Too often the “customer” will push back — “We’re spending so much of our own time and resources, you can see we’re committed”. That may be true, but that effort comes out of an established budget, so it’s not really a meaningful decision for them (those people would have been employed anyway) and is neither a strong signal of commitment nor does it reduce your risk in any tangible way. This push-back should be a red flag.
Discipline. Because Hope Is Not A Strategy
Even under the best circumstances, negotiating win-win relationships requires methodology and discipline. The “startup attempting to sell an established corporation new technology” is not a cakewalk. Too often there is material gap in expectations that makes a win-win impossible.
As the party who has more to lose, you have to be ready to disengage if that is the case. Putting another great logo on your investor presentation is not a good reason to spend months working on a project that won’t go anywhere. Your job is to take the qualified lead and discover through conversations and negotiations whether there’s truly a potential to create enough value in the short time you have.
Your runway is limited. Startup CEOs need to be optimists, but in this case you need a measure of realism. The wrong pilots will crash your company.
Discipline means sometimes you have to say “no” and walk away.
Perspective: What Corporate Innovation Says
Dan Balter is the CEO of Spyre Group, a consulting group that helps enterprises get the most of their innovation efforts. His comments on pilot purgatory provide perspective on the corporate side:
“From the corporation’s perspective, this is also very noticeable and causes great frustration on a number of levels. At the CxO level, it appears that a lot of budget and effort is invested in innovation and working with startups, but tangible outcomes are limited to none. The innovation team’s perspective is that it does everything humanly possible to make a compelling case for the startup technology to be adopted by the corporation including at times, a strong business case but to no avail. At the same time, the business units see innovation teams as pretentious outsiders trying to impose their will on their own decision-making autonomy and preaching solutions and visions of a compelling future they either don’t subscribe to or “we are already doing this thank you very much”.
The comprehensive solution to this PoC hell is what we at Spyre call “internal readiness” where organizations create a network of executives, leaders from within the business units, and the innovation team to create a foundation for the adoption of startup technology. The key is for the business units to be the drivers of startup-based opportunities and innovation teams only acting as facilitators rather than owners and drivers. Only when the business units act as the actual drivers of startup-based innovation opportunities will this PoC hell be avoided and the success ratio can rise. So startup CEOs, when faced with a PoC opportunity -the key is understanding whether the business units are engaged and actively contributing to the POC, its structure, its goals, and your access to internal knowledge and resources. Otherwise, watch your step.”
“…otherwise, watch your step!”
Disclaimer: Sometimes The Color Is Gray
The pilot dilemma is a multi-dimensional problem and those are rarely black and white.
Yes, maybe that extra deal gets you over the hurdle for your next fund-raising, and the short-term value is justified. Maybe signing up this customer is what will get their competitor to take a look, and that’s the extra momentum you really need. And maybe they will never buy from you, but what you really want them is to buy you.
As CEO you have to apply a strategy that works for the long term and sometimes deviate from it to stomp fires in the short term. In the vast majority of cases, a tendency to not think business relationships through, chase shiny objects and be surprised by the outcomes will not only destroy your business, but make it quite apparent whose fault it was when it fails.
Remember — your job is to be smart, curious — and disciplined.
About me: I help startup management teams optimize their likelihood for success by working with them closely on their most strategic challenges, bringing to the table two decades of CEO, advisor and investor experience, deep knowledge and a wide network of relationships.
Further reading:
Get more of the corporate perspective by reading Harvard Business Reviews’ Avoid Pilot Purgatory in 7 Steps.
Get some useful tips on understanding the personae on the customer side in EnjoyTheWork’s Cheat Sheet For Complex Deals.
