Where’s the Instruction Book?
What start-ups need to know about forging commercial deals with big companies
I recently revisited one of my favorite shows from the 1980s, The Greatest American Hero. If you’re under 45, you may never have heard of it, but the rest of you are probably now humming the theme song, “Believe It or Not.” The premise was that aliens gave an average American a suit that endowed him with super powers. The catch was that he lost the instruction manual and had no idea how to operate the suit.
Trying to fly (or land) without instructions is comical. It is also unfortunately similar to many start-up companies’ experiences trying to develop commercial relationships with large companies.
I have seen first-hand the frequent disconnect between how start-ups and large companies approach business development. I spent 8 years leading business development efforts at venture-backed companies in Silicon Valley. I then spent 13 years with Comcast and Liberty Global leading new business ventures before joining Touchdown Ventures. So I have seen these deal-making efforts from both sides of the table. While each side uses the same language of innovation, synergies, and accretive value; their perceptions, motivations, and processes often couldn’t be more different.
How does a start-up best navigate these different worlds? Like our hero Ralph Hinkley, the best place to start is understanding the rules of the game:
Rule 1: Understand the terrain.
When I was at Comcast, I would frequently receive calls from VC friends asking me about a portfolio or target company’s likelihood to close a deal. Almost invariably the company projected its Comcast deal would close in the coming quarter. And almost every time, they hadn’t even reached the real decision makers yet.
If you are pitching a deal to a large company, ask questions to clarify their timing, approval process, and budget cycle. There will be windows in the year when large companies may not be able to sign new deals, and the “decision making unit” may be far more extensive than you think. So answer these questions, and then set a realistic plan for closing the deal.
Rule 2: Recognize that the deal is probably not as important to them as it is to you.
Why do big companies move slower than startups? The deal is most likely just not that important to them. For example, while a $25M new revenue opportunity would be company-making for most start-ups, it usually won’t make a material impact on a large corporation.
Everyone at a big company has goals and metrics by which they are judged, so you need to find a champion who believes in what you bring to their company, is motivated to develop a partnership, and has the influence to shepherd you along. Once you have identified your champion, understand her motivations and what obstacles she will face. Arm her with whatever analyses and proof you can, to show that your deal will make a difference.
Rule 3: Understand what you can and cannot change in the deal structure.
You need to know what the big company’s real constraints are when you negotiate. Some items are almost etched in stone. Unless you have a really good reason, don’t waste time on “third rails” like standard legal terms, procurement requirements, or mutual indemnification. Push for the things you can get.
Sometimes a big company will have more flexibility with capital expenditures compared to operating expenditures, or with up-front payments compared to longer term payments. Structure your proposal creatively around their preferences so you can provide your company with the economics you need, too.
Rule 4: Don’t agree to a bad deal just to be in business with a big company.
An important caveat to rule number 3: don’t roll over on everything.
Don’t agree to deals that will limit your company’s long term prospects. Avoid onerous MFN (most favored nation) clauses, exclusivities or ROFRs (rights of first refusal), as these will stunt your growth and limit your future access to capital.
When you push back on these issues, frame the terms as not being in the larger company’s true best interest either. They will need your company to be successful so that you can continue to invest in your product and be a valuable partner.
Rule 5: Be honest.
It is sad that this rule has to be on the list. But it does.
Significantly overstating capabilities sometimes seems like a fundamental part of Silicon Valley culture. These exaggerations almost always come back to bite you.
If you lose credibility with the company, it is really hard to recover. Hyperbolic statements almost always come to light. In protracted discussions, the big company will watch how you deliver on your promises. And even if you get a deal signed, misguided expectations can cause long term damage to you and to your champion. It is far better to under promise and over deliver.
Rule 6: Work hard to implement the deal you signed and be flexible.
Closing a big deal is nice, but it is only the first step. Invest in making a great long term partnership, and constantly think about how to make the collaboration succeed.
Your partner will undergo changes, as their personnel, strategy and roadmap evolve. You need to embed yourself with multiple leaders in the organization to keep abreast of these changes, and to ensure continuity as your champions change roles or leave the company.
Unfortunately, The Greatest American Hero lasted only 43 episodes. By following these rules, your business development relationships with big companies can last much longer.
Eric Budin is a Venture Partner at Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help leading corporations launch and manage their investment programs.
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