Tuesday, January 28, 2014

Forbes: What do Startups not know that Big Companies know?

The Quora editorial team picked out my post on this topic and published it on Forbes.

1. Most startups are afraid of charging real $$$$. 
You can charge $5M for a website with 7 static pages. Annually. For a very public example of this, just take a look at the cost of http://Obamacare.gov and think what you would have charged as a startup? See a difference? That’s called missed opportunity.

Startups think cheaper is better.
  • What if I charged you only for the users that actually use the product? Sounds good in theory, but most CIOs and other buyers want a predictable price so they can budget for it. They don’t want to pay $7.47 one month and $74.80 the next.
  • What if I gave away feature X for free? Well, most likely the corporate buyer will assume your feature X is a mediocre implementation. They have learned this the hard way, and you are not going to be able to convince them otherwise in most cases unless you have really thought this through. There are many counter examples to this, but be careful to not assume this.
  • What if I made my product free and charged a % of transactions? While that sounds like a steal for you – because you are a cash poor startup that wants to pay as you go and as you succeed – the bigger corporations learn that its best for them to use their cash upfront and get their marginal costs down. This means they will often rather pay a high fixed fee than % of x.
2. Cash is NOT always the same as Real Money:
For a lot of young entrepreneurs, you run your startup constrained by just one thing – CASH. You focus and obsess on cash in and cash out. This means you don’t really worry about things like what is a capital expense or not. You don’t worry how you ‘recognize’ revenue. You don’t worry about ‘flushing’ cash so you can spend more money than needed to even out the earnings bump.
In a real big corporation, common sense often goes out the window as things get managed quarter to quarter and are often dressed up for Wall Street. This has a real impact on how much cash can be spent on certain things.
You get seemingly insane behaviors like spending $1 Billion to acquire a startup with 30 employees while denying your internal team X working on same breakthrough $10M to hire 10 employees more and build a small lab.
As a startup, you can understand these motivators and behaviors, and then leverage them.

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