How corporates can work better with startups
How long does it typically take you to reply to an email?
No… be honest.
Now imagine the person who’s emailed you only has six months to live. Would you reply faster?
Well, if the person emailing you is a startup, then their company probably does.
Startups don’t have time
Many corporates want to engage with startups. After all, get it right and you get bright people, new technology and lower costs.
But it often doesn’t work out.
Part of the reason is that corporate timelines simply do not work for the vast majority of startups.
Corporate budgets often take nine months to set. Expenditure can suddenly be frozen in response to a change in circumstances. Internal restructures can put normal business on hold for months at a time. Feeding the corporate machine creates unexpected distractionss. All these are existential risks to a startup that has baked into its business plan that it’s going to work with you.
What corporate managers often don’t realise is that the industry convention in startupland is for startups to raise in chunks of cash to last for 18 months. This time is known as “runway”. The reason it’s known as “runway” is because a startup raises 18 months’ worth of cash and then has to move as fast as it possibly can in that time so that, by the end of the runway, it’s flying. If it’s not flying by the end of its runway, it will crash.
When you raise 18 months of runway, you are already planning your next funding round. It typically takes around 6 months to close a funding round, so you need to start that round 12 months after closing the previous raise. When you open that round, you will need the previous 6 month’s data to be stellar. That means that whatever project you need to have completed to make that data stellar needs to be completed 6 months before you go out to investors. Which means you’ve got 6 months from the close of the previous raise to complete the project.
Now let’s imagine you’re a B2B startup. You’ve been keeping a potential corporate client warm while you raised your previous funding round. You couldn’t actually take them on as a client at that point because you needed the funding to hire the team to deliver the project. But you’ve now got the cash and can go.
At that point, the corporate introduces a spending freeze, implements a restructure or simply becomes introspective.
If you don’t finish the project with that corporate within the six months, you will miss the deadline for getting results. If you miss the deadline, you don’t have the data. If you don’t have the data, you can’t raise the next round. And if you can’t raise the round, you’re dead.
The problem is that a few months’ delay here and there in corporateland is often so routine as to not even be noticed. A project that was due to start in February actually starting in May is almost not noticed. But you’ve just used 50% of the six month window available to your startup partner.
Corporates that want to make it work with startups need to have policies that exempt startups from spending freezes (contract values are typically much lower) and need to prioritise startup projects at the time agreed.
Building a relationship as a great partner can result in innovation and lower costs: but dependability is the price to pay.
Startups don’t have money
One of the biggest killers of the startup-corporate relationship can be payment terms. Many corporates have policies to pay in arrears, and often substantially in arrears. These can make life tough for startups but, equally, known terms can be budgeted.
But sometimes corporates will unilaterally change payment terms in response to an internal problem. If this year’s numbers are looking a bit ropey, an FD will decide to withhold payments for a couple of months to shore up the cash. The problem is that the cash problem the corporate had was that it was likely to miss a cash target, whereas the startup will literally run out of cash.
Before I spent five years running a startup, I worked in the corporate world. I confess, looking back, I was not always nearly empathetic enough with the startups I worked with. When you work for an organisation that just isn’t going to run out of money, it’s really hard to appreciate that the one across the table really might. I hope the various startups I worked with at Chiltern Railways wouldn’t say that I behaved badly, but did I always chase down finance to make absolutely certain that startup invoices were always paid on time. No, it didn’t occur to me.
If you want startups to thrive in your corporate eco-system, have a dedicated policy for how they’re paid and stick to it come what may. If your organisation isn’t so far-sighted, then take personal responsibility for chasing down every payment.
Startups don’t have resources
WeWork raised so much money that they had a private jet and a private school.
Most startups don’t.
Instead, startups generally have the people they need, assuming everything goes well. So onerous procurement policies can be really tough. Procurement guidelines are often written to ensure that the corporate doesn’t spend millions on a company with dodgy finances that might not deliver.
But the thing is - all startups do have dodgy finances. So if you’ve decided to work with a startup, you’ve already decided to take that risk. At which point, there’s no point making them jump through the hoops to prove something you already know.
Instead, work out what the worst that can happen is, flag that clearly in the internal paper recommending the startup engagement and then get going.
Mars and Venus
Startupland has much to offer the corporate world in the form of new ideas, new technology and lower costs. The corporate world has much to offer startupland, in the form of reliable contracts and growth opportunities. But potentially beneficial relationships often fail as a result of mutual incomprehension.
