Why Companies Should Buy From Startups

http://blog.simplelegal.com/top-4-reasons-companies-should-buy-from-startups

by outericky • 12 years ago

53 38 12 years ago

blog.simplelegal.com

CJefferson2• 12 years ago

Point 2 - "A Startup's Only Mission is to Create Value for Your Company". And there was me thinking a startup's only mission is to get noticed by some big company, acqui-hired, and shut down at a moment's notice.

While I realise this is the most cynical comment I could write, it's also my experience with far too many of the startups. This is particularly bad with web startups as (a) it seems to happen more and (b) once the website is gone, so is the product.

nwenzel9• 12 years ago

Post author here. I think that's more common in consumer startups without a clear path to revenue and profitability. I know it happens in the B2B world as well, but I don't believe anyone thinks 42Floors, Cratejoy, AirBnB, Square, or Casetext are on their way to an acqui-hire. It's certainly not our plan.

Buying from startups is not without risk. But buying from large vendors also carries risk. A diverse set of suppliers is a good thing.

duiker101• 12 years ago

On what basis are AirBnB and Square still classified as startups?

CJefferson2• 12 years ago

Out of interest, at what point do you think a company stops being a startup?

Picking the one company from that list I am most familiar with, AirBNB has been going since 2008. AirBNB are now the people acquiring and shutting down / changing other startups!

greenyoda• 12 years ago

Also, even if they sincerely try to do so, a startup may not have the resources to service a large enterprise. For example, a multinational company with offices around the world will require support that's available 24/7 (you can't ask customers in Asia to call you in the middle of their night). And the bandwidth requirements of a large company may swamp the startup's servers.

But the biggest problem is stability: even if the startup's goal is to build a real business rather than being acquihired, most startups fail suddenly (e.g., due to cashflow problems and a lack of a bank credit line), and that would leave their customers scrambling to replace some critical part of their infrastructure. That's why established companies are reluctant to bet their business on a startup.

Anyone who is considering starting a company that markets to other companies needs to think about these issues (which probably accounts for the predominance of startups that sell to consumers rather than businesses).

voidlogic• 12 years ago

If you are a startup offering 24/7 support, then staffing a 24/7 support desk needs to be part of your plan. It basically means cycling or dedicating two of your team members into the two 8 hour shifts that don't overlap with your primary operating hours. If you are getting a number of large enterprise signups, this should be easy to justify. These people could have useful roles (like QA) they are also performing.

Aoyagi• 12 years ago

Isn't the modern thing to do buying the startup themselves?

callmeed3• 12 years ago

Top 4 Reasons Companies Shouldn't Buy from Startups:

1. Startups have a high(er) chance of failure or pivoting into something you didn't buy. ("Fail fast" is a popular mantra [a])

2. If the startup does have an "all-star team" as you say, they're more likely to get acqui-hired by Google/Facebook and the product subsequently shut-down. (I've said before that this is a byproduct of the acqui-hire craze and I still believe it).

3. Many startups (especially those with all tech founders) seem to suck at customer service. They tend to focus on automation and hacking their way to avoiding any type of high-touch service (the exception seems to be companies that make support tools). Do you prefer phone support from your software vendors? Don't choose a startup.

4. Their pricing doesn't fit your buying model. Many government and educational institutions must buy using a PO process. Large companies don't want the "small team plan" for $29/month.

FYI I'm not posting this comment to be a prick–rather it's a thought exercise. If you want companies to purchase from startups more often, stop trying to convince them why they should and start addressing the reasons why they don't.

[a] http://www.feld.com/wp/archives/2009/04/the-best-entrepreneu...

lifeisstillgood• 12 years ago

Counter-points

1. Pivoting away from revenue is pretty stupid thing to do. If you are buying from me, and so is Tom Dick and Harry, I am getting a strong market signal.

2. The team is so good they might get acqui-hired and you are worried your multinational company is now relying on them - well there is a solution to stop another company acqui-hiring them....

3. Customer service sucks most places. Some use it as a differentiator (Rackspace), but a lot of the time customer service should be automated (lost your password?). And "on-boarding" new customers by hand - this is gold that some startups are learning about

4. I will happily send you an invoice and set up a monthly billing run. It just won't be for 29 dollars a month :-)

But yes - I agree with your main thrust - we should make it easy and simple to get a yes turned into a paid invoice from a corporate budget holder.

callmeed3• 12 years ago

Regarding 3: I agree many CS functions should be automated (lost password is a good example). However, for foreseeable future a lot of people want to talk to a human. This is especially true for services that touch sensitive or mission-critical data (money, infrastructure).

As an example: I love Stripe as much as anyone, but I find it extremely odd that a company that touches up to 100% of another company's revenue doesn't have a phone number on their support page [a]

Maybe I'm old-fashioned but I think there's more to it. At my company, at least, great customer service has been a cornerstone for us and a reason people refer us and don't leave us.

[a] https://support.stripe.com/

notahacker• 12 years ago

With regards to 1 and 2, if I'm in charge of buying a SaaS app to run a small but important part of my big company's operations, I really don't want to deal with the risk you might change your mind if Tom, Dick and Harry turn you down, still less have to contemplate acqui-hiring your developers at $1m per head in future to ensure you actually honour the three year contract and SLA I asked for....

vvvVVVvvv2• 12 years ago

Regarding the customer service part, I'm not sure to understand what's the logic behind such a thought process.

When you're a giant corp, you can afford to be slacking on CS. But when you're a small structure with a limited amount of stability and cash flow, why would you take the risk to screw your PR ?

I'm biaised, I'm doing specialised tech support for a Giant so I it's obvious to me.

I've been looking to move to a smaller company (Ie a startup) and I found not so many positions, most being standard CS and nothing technical which is surprising. Might be because I'm in Europe though.

nwenzel9• 12 years ago

Don't buy from bad startups.

1. Startups have a high(er) chance of pivoting out of something you don't want. They aren't stuck selling you the same bloated database (or whatever).

2. Don't buy from startups that don't have a path to monetization and growth. If the path leads to no where. That's not a company, that's a resume bullet point.

3. Don't buy from a startup just because they're a startup. If they suck at service, they're not worth your time and money.

4. Yes, startups should fit to customer expectations. But if a big company's or govt's buying model prevents them from buying a superior product, then maybe something is wrong with the buying model. Govt buying decisions led to a $300M webapp. Marc Benioff offered to build and host it for free for 5 years.

http://www.washingtonpost.com/national/health-science/health... "A White House official said the administration could not have accepted the offer, because it ran afoul of federal contracting rules."

callmeed3• 12 years ago

OF COURSE something is wrong with the govt/edu buying model (I worked at a college for 5 years). But I still think it's worth playing the game if that's within your target market.

Are you saying don't sell to them on principle?

mbesto• 12 years ago

"Don't buy from bad startups."

Do you have a resource that can definitively tell which startups are bad and which ones are good?

mathattack• 12 years ago

All very true. This is why I find that companies tend to do best buying from companies of relatively similar size. GM and GE struggle with buying from startups for these reasons. The pace of change is too much. But they will buy from the startup after IBM has bought them. Startups are better off finding more nimble initial customers. Crossing the Chasm [1] is the best resource I've found on describing the challenges of startups servicing large companies.

The exception to this is parts of the company that are either specifically geared towards hunting new technologies, or subsidiaries/departments with lots of autonomy and shorter timeframes. Basically folks who are tasked with experimenting and moving on. Even then, it's a better fit with services (boutique ad agencies and investment banks supporting large firms) than products with lock-in.

[1] http://en.wikipedia.org/wiki/Crossing_the_Chasm

sz4kerto• 12 years ago

"Large vendors can't follow an idea just to see where it leads. Startup vendors bring innovation to you so you can succeed."

Well, large vendors are exactly the ones who can just follow an idea an see where it leads. Startups need to focus. See Google, see Microsoft Research, see IBM, etc. It's another story why they don't do it enough and why the results often do not reach production, but the statement is definitely false.

nwenzel9• 12 years ago

Agree that large vendors "can" but don't alway "do." Not sure Google is the typical large company though. Microsoft Research is a great example though. As is Walmart Labs and any other division built on the Skunkworks model.

Though, IBM is selling off what were core assets because they don't deliver the growth and margins that Wall St require. It's either a great move to move towards the future, or a sign that they aren't able to serve customer's needs. Kudos to their leadership for seeing it no matter which one it turns out to be. I'd love to hear Clayton Christensen's thoughts on IBM's recent moves.

bdunbar• 12 years ago

I work at a startup. But I've got mixed feelings about this.

My last gig was at a mid-sized manufacturer. We bought a reasonably expensive product from a startup. We bought installation, and support.

Worked for me: I didn't have to think about it much, except as a bit of hardware in a rack.

18 months later they folded. The day _after_ that I got a call from my boss: 'you now own X'. Go forth and support.

It was a constant PITA from that point until we got rid of it, two years later.

And it really soured the company on 'startups'.

steven2012• 12 years ago

I think over the last year or two, the culture of Silicon Valley startups is to leave their customers high and dry when they basically get tired of running a startup and get acqu-hired, or when they pivot because they don't make enough money.

It's this lack of true conviction in what they are working on, and the culture of chasing the juiciest, low-hanging fruit to enrich themselves rather than serve their customers that would make me never, ever purchase from a startup until they are much bigger. This idea of "fail fast and fuck over your current customers" is probably the thing that would most endanger the startup culture of Silicon Valley at this point, if this keeps happening at the rate that it has been.

nwenzel9• 12 years ago

Post author here. Absolutely agree that any company transition, whether an acqui-hire or divestiture or acquisition or shutdown or product version sunset, that hurts customers is a a horrible thing. That said, the acqui-hires and shutdowns get a lot more of the press than the companies that serve their customers quietly.

Customers are investors. They invest their time, people, and budget into your product. That's true whether you're the newest NoSQL database to hit the market or Oracle.

When you sell to a customer, you're making them a promise.

Silhouette2• 12 years ago

When you sell to a customer, you're making them a promise.

Unfortunately, it is a promise that has no value. With the kinds of exit we're talking about, the promise is readily broken, and with little or no adverse consequences for the start-up.

Meanwhile, there may be strong incentives for a small business to pivot away to a different strategy or to take a lucrative exit, even at the expensive of existing customers. This situation is magnified dramatically as soon as any serious outside investment is involved.

You said it yourself, right at the end, if you just consider something you wrote from the other side of the fence:

Large vendors succeed by executing to a known plan.

Large organisations in general like executing to known plans, and relying on a start-up almost inevitably brings a much higher risk of having to change those plans than relying on more stable, established suppliers.

And while small organisations might be more nimble when it comes to changing plans, stability in the supply chain is possibly even more valuable in that context, because you have limited resources. Integrating with any external dependency takes work, and if you're going to do it, you really only want to do it once and then not worry about it.

The kind of lean, MVP-producing, pivot-happy, investor-funded, five-minute-old B2B tech startups we often discuss on HN are the antithesis of that stability. The really good ones offer enough advantage over doing things another way that using them is still justified, but most simply don't and it's hardly surprising that a lot of potential customers shy away from them and head for more stable ground even if it comes at a somewhat higher price.

beat2• 12 years ago

The flip side of this, and more interesting to me, is "How B2B startups can find customers willing to buy from them." Look at the list of objections to buying from your startup, and have straightforward and honest answers to address those objections.

nwenzel9• 12 years ago

Great idea for a post! http://saastr.com/ is a great source for startups in the SaaS space, but more so for growing in general than specifically addressing your point.

Though, I think you summarize it pretty well. Straightforward and honest answers to address objections.

beat2• 12 years ago

Yeah, I love SaaStr and read it regularly! And I'd love to see a SaaStr post on directly addressing customer objections about buying from startups, for startups trying to sell to cautious SMBs and especially enterprise.

I've certainly rolled this concern right into my own startup. It is more or less a monitoring tool, and provided as SaaS, so if the startup should go out of business for some reason, the customers would no longer have service, but they'd no longer be paying for it either - they'd be no worse off than they were before they started using my product.

vinceguidry2• 12 years ago

This is some pretty brazen bullshit. If switching away from their service after they fold or get aqui-hired will cost any more than 0 dollars and 0 hours, and you still go with a startup, you are begging, not asking, for that bullet in the foot you're going to get.

nwenzel9• 12 years ago

Post author here: I appreciate all the comments. Even the negative comments because it's important to know all reasons for opposition. I'll point you to another HN story today, ZenPayroll raises $20M [0].

They're not on a path to acqui-hire, they're not trying to pivot away from something you rely on, they have fantastic support (but more importantly a product that's so clear and easy to use you don't really need support).

We (SimpleLegal) are ZenPayroll customers and love it. They are the exact reason your company should seek out startups as vendors.

[0] https://news.ycombinator.com/item?id=7264844

EpicEng• 12 years ago

That's one example, but more often than not, startups fail. I'm not betting some portion of my business on a, what, 1 in 10 chance that they'll succeed? The value proposition would have to outweigh the possible downside.

georgemcbay• 12 years ago

I'm fine with the idea of buying from startups, but when it comes to *aaS services from startups that suddenly become useless if the company folds, I've seen way too many articles with the title:

"The Future of XYZ"

where the gist is "The Future of XYZ... doesn't exist".

RandallBrown• 12 years ago

My girlfriend is a medical assistant at a new internal medicine clinic. They are trying to do what is called "direct primary care" where you pay a monthly fee to see your doctor rather than getting hit with huge bills when you have something go wrong.

The thing about direct primary care is that there is no easy way for a small health clinic to do the billing. Existing systems like Epic are very much stuck in the old way of doing things.

So a startup approaches my girlfriend and the doctor at a conference with a solution to direct primary care billing. They decided to give it a try. She says it's been fantastic. They've asked for features and had them implemented in days. They can just call up the CEO on the phone and ask for help if they need it (obviously that won't scale well, but for now it's awesome).

Try doing any of that with a solution from an established company.

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