
How Big Deals Kill Companies - craigcannon
https://blog.ycombinator.com/big-deals/
======
deckard1
> First off, large companies have different priorities in pursuing these deals
> than small startups. The large company might be interested in the service
> offered because it will generate revenue or improve efficiency. On the other
> hand, the execs might be trying to figure out if your company is any good so
> that they can buy it. In most cases, the startups see this Deal as the only
> thing that matters. That creates mismatched expectations and goals that
> can’t be bridged.

I'd also point out that this can be a massive benefit for a startup. Consider
this: Microsoft would not be where they are today if they didn't take
advantage of IBM not caring about exclusive rights to MS-DOS. Microsoft
correctly banked on the idea (whether they fully knew it or not, I don't
recall) that IBM did not have a firm grasp on their technology, and that IBM
clone PCs would soon take over the world.

Another example. George Lucas was able to convince 20th Century Fox to give up
merchandising rights to Star Wars. 20th Century Fox and IBM both had different
priorities at the time, allowing the small player to win big.

The trick, it seems, is to make a deal that seems like a Small Deal with the
corporation (they will readily agree with it) that is actually a Big Deal if
the startup has a way to leverage it.

~~~
gcb0
both microsoft a george lucas had connections to the boards of ibm and fox.

it's hardly examples applicable to the real world, and both of those most
likely involved some sort of insider winning something on the side. one have
to be very naive to attribute this to good negotiations.

~~~
icebraining
What was the connection between MS and IBM?

~~~
TAForObvReasons
Bill Gates Mother:
[https://en.wikipedia.org/wiki/Mary_Maxwell_Gates](https://en.wikipedia.org/wiki/Mary_Maxwell_Gates)

> Beyond the Seattle area, Gates was appointed to the board of directors of
> the national United Way in 1980, becoming the first woman to lead it in
> 1983. Her tenure on the national board's executive committee is believed to
> have helped Microsoft, based in Seattle, at a crucial time. In 1980, she
> discussed her son's company with John Opel, a fellow committee member and
> the chairman of International Business Machines Corporation (IBM). Opel, by
> some accounts, mentioned Mrs. Gates to other IBM executives. A few weeks
> later, IBM took a chance by hiring Microsoft, then a small software firm, to
> develop an operating system for its first personal computer.

~~~
cwyers
So she was in position to make an introduction. She wasn't even on IBM's
board, not like it was nepotism or something. Yes, having connections helps.
There's many ways to get them (and if you're a startup taking VC, your
investors likely can make those kinds of introductions). You still have to
make a good impression once you're introduced.

~~~
owens99
She was on another board with the chairman of IBM. And it's her son. Most VCs
DO NOT have that kind of influence and they have to balance the needs of 8+
different startup boards they sit on plus the needs of other portfolio
companies.

------
baybal2
A real life story.

Once upon a time, in a far far Canada, there was a "Smart LED lighting module"
startup. They had plan A and plan B: A - find a freaking huge buyer for the
product, and forego all normal sales and marketing till late stage, B - start
building up sales from scratch through a regular marketing/sales push.

At the start, both plans were given go. Sales through plan B were going up,
but a "big name salesman" from plan A camp also scored a kill - one of the
biggest lighting supplies distributor in USA. Upon hearing that, happy C
levels completely wrapped up all further product development/marketing/bd and
waited for them to obediently sign a cheque.

But, not so easy! That sale was just for their trial run, which would've taken
few month, and they wanted changes, and the company simply can't pull out half
million units from a Chinese contractor on a minute notice.

They eagerly put a bond for goods and dished out some cash for company's
equity.

Half a year later, they come and say: "Ah we have kinda lost interest in that
experimental thingy, and since we are in a financial crisis now, we have to
wrap up all nonessential developments." They paid the bond, got their goods,
and threw them into garbage and to liquidators. C-levels, investors, and the
big distributor co. are still suing each other since 2014.

Morale of the story - all eggs in one basket is bad.

~~~
bradknowles
Then there’s the even more perverse situations - big companies holding out the
fruit of a Big Deal to a small company that they consider to be a possible
threat, with the express intention of getting the small company to do things
that will end up killing them.

Been there, seen that.

------
DoreenMichele
Really glad to see this here. I have seen so many stories about small
companies being destroyed by a large company that they feel they must close a
deal with.

I would love to see a lot more articles about the pitfalls of a new company
investing too much in landing a big client and all that can go wrong with it.
I regularly see questions on HN where a small company is basically under the
thumb of a larger one and asking for advice on how to be even more of a
doormat. They imagine they can't say _no._ They imagine if they are
sufficiently cooperative they will finally have it made in the shade. The
reality is they are often well on their way to going from frying pan to fire.

I think this is a huge, huge pitfall that small companies face. There needs to
be a great deal more education, not only about the fact that this is a serious
problem, but also about how to cope more effectively with large clients while
you are still a small fry. So many new companies feel thrilled and flattered
when a large company takes interest in them when they really ought to be much
more concerned about the ways this can go badly for them.

There is an African saying: _When elephants fight, it is the grass that gets
trampled._ Far too many small companies fail to recognize that behemoth
companies are threatening to trample them under foot. It is the business
version of "winning the lottery."

------
guelo
Another trap that I've seen with the Big Deal is that it can easily turn your
company into a non-scalable consulting company with the one exclusive
customer. This is especially easy to fall into if the money is really good.

------
drawkbox
The large client/deal syndrome is common even with contractors besides small
businesses and startups. If you change too much fundamentally when going all
in on a large client, you might miss out on the growing small/medium clients
that are not as bound to your business that you may mutually benefit more from
and control it more, or the ideals/mission you are going for. Large clients
and deals can change the personality of a company or contractor.

The large company or large client you choose has the ability to completely
wreck everything so the smaller fish bends over backwards to do everything to
keep the big deal. If you are lucky with timing and a good large client it can
be massively good, and that is the attraction to that, but ultimately it can
also fundamentally change your mission or ability to get and handle other
large deal/clients.

This is similar to the service/contracting industry where you have a handful
of large clients or go product development where you have many small
customers, the latter always seems to have more lasting power because the loss
of a handful of customers in a sea of them is less than the handful or one
large client that controls your destiny. The product company that is selling
as a service or subscription doesn't need to constantly make sure the large
client is happy, just most of their customers. Both types pull you in
directions and change you but products with many smaller customers have more
stable market support, however the latter takes more time to build.

------
aaavl2821
I think this happens a decent amount in healthcare with startups trying to
sell to health systems. Startups fight for 12-18 months to get a pilot, but
hospitals / health systems don't want to partner with the startup on terms the
startup would like. Unfortunately, these terms aren't unveiled until after a
pilot, when a hospital has had a chance to see whether the startups product is
useful. The Big Client has all the advantage, and is interested in
disintermediating the startup to gain more access to data, patients or
physicians. The startup has bet it all on this deal, and ended up with a
Sophie's choice of giving up the golden egg or staring from square one

------
weisser
You need to look at yourself and identify if you have the skills and
experience to balance immediates needs (early customer revenue, product
development) alongside big deals that need seeds to be planted and watered
over a longer period of time. If you can handle both, god bless. If not, best
to focus on building a base of smaller customers.

Self-awareness is critical here.

------
hinkley
Another aspect of this is that signing a deal with a big customer when there
are only a handful of big fish in your niche locks in a price at a time when
you have no power and little information.

One place I worked at locked in over half of the big fish in the NA market and
never made money off them. We would have been much better scaling up on
smaller contracts.

------
mjewkes
Veeva is a notable counter example. They raised their A round (their only
round) once they had a pilot deal in place with Genentech.

Though, at that point at least, Veeva was basically a salesforce reseller.

~~~
akharris
I love finding the counter examples because they keep me optimistic about what
is actually possible, even if it isn't likely.

~~~
mdda
Hmm. There are weekly similar counterexamples among lottery-ticket purchasers.
However, don't invest your life savings in the lottery - the optimism factor
is a killer. Better to invest your savings / future in something more
rational.

------
fab1an
It's easy to read this and agree, but quite a bit more difficult to then turn
down discussions with Big Co once you've quoted them 1M ACV and they didn't
flinch.

If you feel you must pursue such a deal against this advice, one way to
counteract the negative effects is to bake in a break up fee in the
evaluation/trial phase (don't call it that, though).

Most 'Big Deals' will come with such a trial / prototype phase. One way to
structure a 'break up fee' is to say: the trial will cost 10% of the final
annual contract value - if we close, this will be counted as a rebate against
the final price, if we fail to close, startup will keep the 10% to cover their
costs of the phase.

~~~
apatters
I think the advice in this article is good advice from a VC's perspective
relative to that VC's returns in the companies he invests in. Is it just as
good for the company founders? That depends on whether their true goals align.

The article is correct in that doing a deal with a big customer will largely
make you beholden to that customer. You'll probably become what is basically a
service company.

But if the price tag is high enough, and you're the majority owner, who cares?
Maybe you end up selling your company to your customer a few years down the
road for a sum that's small to a VC but big to you. We live long lives, if you
enjoyed the journey you can then go start another company. Even if you don't
get an exit, you can still make nice money just servicing the contract for
years.

For a founder who'd be happy to have $1M or $10M in the bank and doesn't
necessarily need to make $100M or $1B (yet....), doing a big deal (or
preferably a few) and focusing your company on them is a lower risk strategy
than trying to be the next Dropbox, and it can still yield great rewards.

If the only outcomes that will make you happy are a huge company or a huge
exit, though, then Aaron's advice is right on the money. I also agree that you
have to be very careful about the terms of the deal and have a way out if
things go south. I don't think an inexperienced founder's first deal should be
a big one--a scenario which worked out well for us was to do several smaller
deals with bigger companies and then grow those relationships over the years.
Once you have a solid internal champion at a company who owes part of their
career success to you, they'll handle most of the politics.

------
jka
Zach & co's business model is: extract private information from individuals
(and potentially from their business partners while they're at it) --
potentially unwittingly -- and charge for the privilege.

I wouldn't be surprised if they aimed for large deals; this may be an excuse
for how they're surviving without them.

That said, surviving without large deals is likely good advice for small
startups; just don't confuse the message with the medium here.

------
tedmiston
Do you feel differently about a big deal if it comes in stages? A big deal is
less of a big deal when it's a shorter term paid pilot, and even in that case
some of the other downsides mentioned like slow process still play a role, but
on the flip side this can be a means of funding product development…

Is it sensible to turn your head at a big deal asking the company for a
smaller one as opposed to avoiding them entirely?

~~~
devmunchies
So the land and expand model? Up-selling seems less risky than going all in up
front.

~~~
tedmiston
Sort of but on a smaller time scale. Like after a demo or proof of concept,
getting a paid pilot that isn't a full deal but enough that you bring in some
$ from it. The pilot is usually one-off or recurring for a few months vs
longterm recurring revenue.

------
jondubois
It's slightly ironic reading this because being accepted into Y Combinator is
itself a perfect example of a 'Big Deal'.

I think that big deals are always a good thing. Any misfortune that people
might encounter after they've won a big deal can only be blamed on themselves.

Most people never get any big deals and have to build a company the hard way.
Just slow painful progress.

~~~
andrewwharton
The phrase that jumps to mind is "Easy come, easy go".

Companies built on slow painful progress inevitably have a broad customer
base, customers that were acquired through slow painful progress (although
they probably have a few whales still). They're less likely to have the loss
of one deal/customer sink the whole ship.

------
zachperret
In the early days, we had a policy that we would not respond to RFP's. The
time required vs. value does not make sense for startups (unless you've
already been told you'll win and the RFP is just a formality).

~~~
kornish
Out of interest, how many times did you faux-offer an RFP, knowing that you
would win?

~~~
zachperret
Just once. We had to fill out the paperwork for their procurement and
compliance teams, but I don't think it was a public RFP.

------
johnmax
couldnt agree more. i have had several big deals in the pipeline, one of which
i closed.

in retrospect the effort wasnt worth it. the deal consumed many months of our
focus and work (plus as a bonus a neverending worry on our minds, because of
continuous small requests), during which we werent able to advance our
product.

at the end of the day, it is all about creating a great product, which will
then sell itself.

in contrast to that, closing a big deal has often more to do with 1-2 senior
people at a big company thinking that they need this product for their
customers. those senior people may be wrong, because they dont have a good
feel about what new technology is attractive to people. and the kicker: no
matter how big the deal, once no benefits materialize for the big company,
they will kill the cooperation quickly (and usually have ensured enough
fineprint to be able to do so).

my summary: there is no free lunch :)

------
logicallee
What size deal is this post talking about, in dollar terms?

~~~
adrianratnapala
Sorry to deliberately offer a non-answer, but I suspect it is "enough dollars
to make you treat the deal as the only thing that matters".

So the article is asking us to work on our own mental habits in order to turn
that number into infinity.

~~~
logicallee
Thanks, but that doesn't quite seem fair. The article also talks about size
mismatches and lists specific things like a number of departments being
brought on board, and so forth. I'm quite sure there was a certain size in
mind here. (Same for all of the author's included anecdotes.)

------
zupreme
Been there! Will never make that mistake again.

------
lquist
Removed.

~~~
timavr
I heard earth is flat.

