by Aaron Harris3/1/2018
There are few things more dangerous to startups than Big Deals. These are different from the deals that enterprise companies sign. They’re the deals upon which the entire life/death/success of the company rely. Founders lie to themselves by believing that catching a single Big Deal will automatically create a huge company. I’ve seen this belief kill a large number of startups.
The possibility of a Big Deal helps founders avoid dealing with other, more pressing issues. When you convince yourself that all that matters is signing one Big Deal, talking to other customers seems less important. Those customers can’t possibly be important on a relative scale, so they are ignored. At the same time, founders can justify slow progress on product by claiming that it wouldn’t make sense to spend much time on the product without the Big Deal in place, because that would change everything at once.
Many investors exacerbate this problem by telling founders that they’d absolutely fund them with a huge round, just so long as the Big Deal was in place. This is a no fault move by the investor because they don’t have to take any capital risk and, in a situation in which the founder does actually land the Big Deal, the investor gets to say “Told you you could do it! Here’s money!”
One of my favorite examples of how a founder avoided relying on a Big Deal while simultaneously benefiting from a number of them, is how Zach Perret at Plaid used developers as a revenue base while working on large contracts with big banks. He knew that Plaid would eventually need to have direct agreements with Banks. He also knew that those deals would never happen inside of 18-24 months with a small startup. A number of companies I’ve worked with have turned these bank contracts into the only thing that mattered, and ignored everything else about their businesses to get them done.
Zach took a different approach. To solve the problem, he started conversations with the banks and simultaneously built a product that developers would pay for to gain access to bank account information. He used growth and revenue from the developer side to start building a company that could raise enough money to last long enough to sign his Big Deals. This works well.
Most founders chasing Big Deals don’t do what Zach did. Instead, they ignore incremental revenue or smaller pieces of progress because it looks insignificant relative to what they believe they will get. What they miss is that progress is relative. When a company is just starting out, any and all progress is impressive. If that progress is good enough, the company starts to build momentum which then allows it the time and space to pursue meaningful deals. One of these deals may even be a Big Deal, but these don’t even look that big once they’re put into context with the rest of a company’s progress.
One company with which I spent a significant amount of time always seemed to be on the verge of closing its Big Deal. All the right pieces seemed to be in place, but the final close was always just a bit out of reach. We were all able to trick ourselves, again and again, into thinking that success was on its way.
Finally, after a year of negotiating, the deal got signed. We thought this was victory, and then discovered something entirely new. In order to actually deploy the contract there was a whole new set of requirements that were impossible for the company to meet. The Deal appeared to be done, but in reality, it never had a shot.
In analyzing what went wrong with this and other Big Deals I’ve seen fail, a few things become apparent as to why they did not work. Fundamentally, there is a mismatch between large companies and small startups that reduce the likelihood of Big Deals to nearly zero.
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.
Second, large companies have significant processes around doing deals. These processes generally involves an ever expanding number of parties in different departments, each of which want different things. This can mean that, as a deal progresses, the startup is forced to convince brand new parties, and build new products to their specifications. Without a counterbalance, this leads to ever more customization that cannot be re-used which has taken time and money to build. While the big company can afford to wait, the startup cannot.
I regularly have to remind myself of this logic, because it’s something I’ve bet on incorrectly before, and fear I’ll keep doing. It’s so easy to trick yourself into believing that Big Deals are about to happen because the ends would seem to justify the means.
The only other way I know of consistently landing Big Deals while still a startup is to have some kind of larger unfair advantage. Founders who have the ability to raise 10s or 100s of millions of dollars off their track record are a good example of this. Most founders know if this applies to them. If it doesn’t apply to you, then you shouldn’t bet on it.
I much prefer when founders understand what their real advantages are, and use those advantages to effectively build a company to the point where a Big Deal is possible. This allows founders to control their own destiny without relying on outside forces to magically make them huge. Founders should want to be in as much control as possible, and when they give that control up to chase fantasies, it usually ends badly.
Thanks to Craig Cannon, Dalton Caldwell, Zach Perret, Kaz Nejatian, and Geoff Ralston for helping me write this.
Aaron was a Group Partner at YC and a cofounder of Tutorspree, which was funded by YC in 2011. Before Tutorspree he worked at Bridgewater Associates, where he managed product and operations.