Should Your Startup Take on the Big Guns?

I was lucky enough to be part of a startup marketing panel at Startup Weekend Toronto (an awesome event) a few weeks back and someone asked if a startup could be successful going head to head against a larger competitor in an established market.   My response was that startups can compete by focusing on an under-served niche to establish a beach-head and then they can go after adjacent niches.

One of my co-panelists, Mike McDerment, offered his take on it based on his experience as the co-founder of successful Toronto startup Freshbooks.  He reasoned that the existence of a big competitor proves there’s money being spent there and therefore makes it attractive.  Big companies, he argued often become slow and stupid, leaving the door open for smart nimble companies and startups shouldn’t be afraid to take them head-on.   “Find a big competitor and drive straight at them.” was his advice.

We all know the stories of how Apple/Google/Facebook took on big competitors in established markets successfully.   We can also recite lists of companies that have attempted to take on Apple/Google/Facebook head-on and have failed.  The answer to whether your startup should do it is likely the same as the answer to most of life’s difficult questions: it depends.

The reasons why you might not want to do it are obvious (they have more resources, a more feature-rich product, brand recognition, more/better sales channels, etc.), but here are 4 reasons you might want to take the ‘drive straight at them’ approach, based on my experience working at both startups and at larger companies:

1/ Established Products Get Bloated – What once may have been a relatively easy to use solution, can turn into a cumbersome monster as a product moves from release to release.  This opens the door for startups to meet the needs of customers that would happily trade the extra bells and whistles for a more elegant solution.  Ray Ozzie, soon to be former Chief Software Architect at Microsoft, summed this up beautifully in his post this week:

…so long as customer or competitive requirements drive teams to build layers of new function on top of a complex core, ultimately a limit will be reached.  Fragility can grow to constrain agility.  Some deep architectural strengths can become irrelevant – or worse, can become hindrances.

Any startup wanting to get inside the heads of folks at big companies should read that post.  Opportunity is everywhere.

2/ Big Companies Will Rarely Risk Current Revenue for Future Revenue – Everyone’s read The Innovator’s Dilemma so you know this already but it bears repeating.  Big companies are built and run on predictable revenue streams.  Publicly-traded companies in particular are slaves to their quarterly numbers. There will be extreme resistance to supporting a product that might not produce substantial revenue for years at the expense of revenue this quarter.  I ran an internal incubator at Nortel to combat exactly this problem and many other companies are running similar programs.  They simply can’t respond to competitive threats that require them to risk short-term revenue.

3/ Niches are Under-Served by Popular Products – At Janna Systems we were at 40 person startup winning deals against Siebel ($2 billion revenue at the time) by simply serving a particular vertical niche (investment banking) better than they did.  Popular products have to appeal to a broad range of markets which by definition means there will be segments that have needs that aren’t being met.

4/ The Big Guys Suck at Selling to the Mid-Market (and those accounts are much bigger than you think) – The mid-market is tragically under-served by most of the gorillas in IT and yet they account for about 44% of IT spending to the tune of around $800 billion in 2010.  At one large company I worked at we make 80% of our revenue from 90 named accounts (and we’re talking billions here). Nine, zero!!  If you were a startup trying to sell into one of those companies you were doomed – we could throw throw sales bodies at it until the company cried uncle and if that didn’t work we’d happily give the deal away for free to keep you out of our precious named account.  The flip-side of that was that the 4,920 other companies in the Fortune 5,000 were essentially ignored by us.  We called those Small/Medium Business accounts.  Nike, for example was an SMB account for us, covered by 1/12th of a sales rep.  Any startup could have come in and sold under our nose and we would never have noticed.

What do you think? Should startups stick to blue oceans or kick some sand in the big kid’s sandbox?

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30 thoughts on “Should Your Startup Take on the Big Guns?”

  1. Ha! The photo with the article on your home page sums it up perfectly!
    The big guys have missed the boat on everything that’s changed in the past 5 years. If they didn’t go around buying up smart startups there would be no innovation coming from them at all. And if your startup is trying to get acquired, what better way to get their attention than to cause them some pain in their cash cow markets?

    1. Hi Mark,
      Thanks for the comment. If you manage to win against the big companies you will certainly get their attention – the trick is winning. Like I said in the post, there are lots of places where their natural advantages (sales resources, the ability to give product away for free to keep a customer, mature and feature rich products, brand recognition) will make it hard for you to win. Pick your battles carefully however and there is still a lot of opportunity out there.
      April

  2. April,

    It’s all a matter of a) knowing your customer inside and out, b) knowing your explicit value to those customers, c) knowing your competitor’s (the big guys) structure and weaknesses, d) propensity of big guys’ customers to change (or cost to them). Other than that, it’s easy!

    It’s really a matter of segmentation. The startup can’t go after the entire market but can choose to take on the Big Gun either on a pain point segment (those looking for simplicity over feature set, better service, etc.) or vertical segment as you describe.

    Then the startup has to stay realistically agile because the Big Gun can respond in a Big Way if they get too riled up. The startup should have a plan to react or pivot if the sleeping giant wakes up.

    1. Hi Tim,
      I agree about segmentation – at least that’s my opinion. At the event I was at, not everyone agreed with me and there are examples where companies did take on larger competitors (Google is the example everyone talks about) without going after a beach-head niche first.
      On worrying about how the larger player will react I will say that having worked at both large and small companies, small companies worry far too much about that. Big companies often cannot react quickly to any market threat that requires them to do anything more than throw discounts and sales people at the problem. Again, anything that might require them to touch product or strategy doesn’t move quickly. It’s hard to turn a boat that big.
      April

  3. If you are looking to get some outside funding I’d say that even if you think you can take them head-on you might want to find a way to describe it as something else. My experience is that most VC’s won’t touch a startup that’s planning on taking on a big established competitor. (not that VC’s are correct on this, but it is that way it works)

    1. Hey, thanks for the comment. I totally agree with you. The last set of funding pitches I did the most significant hurdle for us to get over was convincing the VC’s that a larger competitor wouldn’t just put us out of business. Interestingly most of the companies I can think of that were successful at doing this, didn’t get a lot of interest from investors until it was clear that they had significant traction in the market. So I guess the lesson is you better figure out a way to do it that doesn’t require a lot of outside capital if you are going to attempt it at all.
      April

  4. Heya – not sure “stupid” was my exact wording, but I do think large companies have challenges when it comes to being clever when it comes to unlocking new opportunities.

    I’ll add that running straight at a big guy may not be the best way to advance. Instead, try to find a new approach to address a market they are working against, or a niche you can address better than them.

    You can’t underestimate the importance of your approach…it’s different than theirs, I promise you.

    1. Hey Mike,
      Yes, I was paraphrasing – stupid was my word, not yours.
      I thought that discussion was the most interesting one of the panel. I’d had a bunch of conversations about it with startup folks afterwords and people tend to fall into 2 camps – you either see opportunity in an existing market with big players or you don’t. The reality I think is that it’s a bit more complicated than that – in some cases it works and in others it doesn’t.
      Thanks for the comment
      April

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