When big companies come calling, startups should beware

[Editor: While I always enjoy covering stories, I can’t overstate the value of firsthand accounts. That’s why we’re running the series from TresPlace. And why we’re honored to share this insight from entrepreneur Ken Westin.]

I remember the first time a well-known consumer computer security company contacted me.

They were interested in our unique product and approach to solving the issue of device and data protection while respecting user privacy. They said they were interested in a licensing deal, so we signed the mutual NDAs and they tested the product out. We shared more information with them regarding how things worked. I even flew to their headquarters at their request to meet their product managers and engineers.

They asked a lot of questions about how things worked and said they were very interested in licensing our product and started discussing next steps. I naively believed that they could be trusted and was quite open with them.

In hindsight, too open.

Then suddenly, they went dark. I reached out to the head product manager several times. After a month of no replies, I finally got a response. They had “made internal resources available” to replicate our product themselves.

I was furious. Not at them, but at myself.

How could I be so stupid? I went into the situation believing naively that our intellectual property was safe. Surely this publicly traded company is ethical, right? And our patents and the NDA protect us right?

Unfortunately not so much. And here comes the first lesson: intellectual property is only as defensible as the financial resources you have to put towards protecting it.

On a positive note, it ended up taking them over a year and a half to replicate our product. When it was launched, the offering only covered half of the features ours did. We even beat them when it came to product reviews. They also lacked the knowledge of the service side of things. As a result, they failed to provide assistance to their customers and law enforcement.

Innovation is difficult in larger companies. I believe this is because innovation is about taking risks. Large companies are—by nature—usually risk averse. The culture is usually more focused on predictable returns than game-changing innovations.

Unless of course that risky innovation is already proven in the marketplace by a startup with a proven sales model.

Big companies have one key ingredient that startups don’t have, a large existing customer base, giving them the ability to scale rapidly. Which brings us to our second lesson: a good idea doesn’t mean anything unless you have marketshare along with it. So instead of focusing energy on trying to sell ideas to a larger company, focus on selling it to their customers or potential customers.

When a large company approaches you, be proud. That is the first step in market validation.

But tread carefully.

The one advantage startups have over large companies is speed and flexibility. Carefully consider why they might be interested in you. (Trust me, it isn’t your charming personality). Are they looking to sell your product stand alone, or as an add-on to an existing product? They are using this as an opportunity to learn about how your product works, you should use it to figure out why they are interested in it and how it can influence your business plan and possibly open new sales channels you had not considered.

Beware.

(Image courtesy Shutterstock. Used with permission.)

  1. M. Edward Borasky (@znmeb) January 8, 2013 at 3:44 pm

    Always Be Closing 😉

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