Mitigating Startup Risk
Customers know startups are risky. How do you demonstrate your company is a good risk?
Introduction: How Enterprises View Startups
Business buyers view your startup as inherently riskier than larger competitors. Competitors may plant fear and doubt about your future in customers’ minds. This guide shows you how to reframe this fear into a series of Manageable Risk Factors. You will also learn how to deploy specific Countermeasures to mitigate each Risk Factor with a calming, milestone-based approach that is familiar to your enterprise customers.
It’s All About Process
If you’ve ever worked for a Big Company, you remember how much effort was spent debating with management and other groups, writing plans and performing to objectives. Although in your startup you might want to leave all that behind, those corporate processes are how Big Companies operate. They live and die by defining processes that can be measured and managed. This is the operational heartbeat of most Big Companies.
When Big Company encounters your startup, they immediately recognize:
That your young company has few processes and no track record
That you will likely need funding to accomplish all your goals
That any engagement with you is risky, both operationally and politically
The effective way to mitigate startup risk in this environment is to create manageable processes for project success, with measurable milestones. This guide shows you how to create these risk mitigations and milestones at Big Company customers, to demonstrate that you know how to work in their environment, to their expectations.
You will learn how to:
Mitigate the FUD (fear, uncertainty, doubt) that competitors spread about you
Turn fearful doubts into a factual analysis of actual risk factors
Demonstrate to customers that you are actually LESS risky on the issue they care about most: their success with your product.
Steps to Mitigating Fear of Startups:
Acknowledge that other startups have failed to deliver, or failed completely
Demonstrate superior current understanding of the whole problem space
Deploy Countermeasures based on progressive milestones
Request feedback and acknowledgement of your success at each milestone
Surface problems before the customer recognizes them
Case Study 1: How a Startup Beat IBM
A startup that built tablet apps to empower sales associates at bricks-and-mortar retailers was invited in to pitch a major regional retailer. The incumbent competitor was IBM. The bad news: IBM has been selling retail automation products since the 1880s (yes, 140 years, since before the automobile). This retailer had been purchasing computers and now cloud services from IBM for more than 20 years. The startup had a credibility problem.
The startup team showed up early for their presentation, and watched through the glass windows of the conference room as IBM showed this video:
The video showed a satisfied retailer using IBM’s retail apps in their stores. Helpful sales managers and smiling customers told the story. IBM’s stuff works, and nobody ever got fired for buying from IBM.
The IBM team left. After a short break, all eyes turn to the startup. What did they say?
The Startup Strikes Back
After a brief introduction, the startup CEO looked at the screen. A familiar voice spoke:
The voice was Sally Smith, a director at company who was present in the room. Sally smiled as people
agreed with what she had said. Everybody knows IBM is a leading vendor of “clunky enterprise crap.”
Deploying Countermeasures Against IBM
The startup deployed these Risk Countermeasures:
In the IBM video, the customer described a 3-year development cycle. The startup proposed a 3-month plan, showing they understood the customer’s time pressure.
The IBM video showed web pages on a desktop screen, not the clunky tablet app. The startup handed out tablets to demonstrate that their app was simple and fast.
The startup presented data from other retailers like Sally, demonstrating superior understanding of the industry’s issues, at that moment.
The startup subsequently won the deal, delivered to an aggressive monthly milestone schedule, and completed the project on time.
Inside the Enterprise Buyer’s Mind
Most enterprise buyers have engaged with startups at some time in their careers. Because most startups fail, they have probably had at least one bad experience. An evaluation team may have witnessed many startup failures. Your job is to demonstrate how you are different from those other failures. You do this by turning Fear into Manageable Risk.
What Are Enterprise Buyers Afraid Of?
There are two levels of fear at play here: personal fear, and business fear, AKA “Risk.” These are the personal fears that corporate employees face every day:
There are two levels of fear at play here: personal fear, and business fear, AKA “Risk.” These are the personal fears that corporate employees face every day:
Deploy Countermeasures to Perceived Risks
This chart breaks down the types of risk that enterprises may assign to your startup, and the type of countermeasure that you can deploy.
How to Deploy Countermeasures to Risks #1-3
Write specific milestones that address each customer’s top issues.
Step 1. Wait until the customer raises the success question, something like “How will we know this is working?” or “How do we measure success?” Answer like this: “We structure all of our engagements with very specific success metrics, based on how you measure that process today. Let’s work through each of your current metrics and agree what constitutes a successful outcome.”
Most companies document metrics to manage processes and cost. Some new companies do not yet have metrics, and a few companies don’t measure. Your opportunity is to help them learn how to measure and improve. Make sure this results in a closer partnership and future business!
Step 2. Create milestones that you are confident can achieve. Early in the project, schedule them frequently; once a week is good even if some are minor:
Review wireframes, functional block diagrams and UI plans
Show videos of subassemblies being built or tested
Review raw data like test results, sensor outputs or software build status
The goal is to demonstrate continuous forward progress on measurable milestones, just like every Big Company does internally.
Step 3. Begin each review meeting like this: “Here’s the schedule we agreed to. Last week Milestone #3 was delivered and you accepted it. Today we are going to demonstrate Milestone #4.” Discuss acceptance criteria and schedule if required.
Step 4. Important: Structure payments to milestones. When a milestone triggers a payment, announce, “Great. Everything is on track. Milestone #4 triggers the next invoice, which we have here. Payments are Net 10 as per the contract.” It’s OK to remind everyone that you are not a charity. This will help you get paid on time.
Step 5. Announce the schedule for the next milestone. “We are making good progress on Milestone #5 and expect to demonstrate that to you on schedule, in two weeks.”
Step 6. Important: If you need new information, support or facility access, try to make the request immediately upon successfully delivering a milestone.
As you read the steps above, you will notice a number of implicit messages:
You plan the entire program with them in advance. The message: you understand how enterprises work. The side benefit: you eliminate many nasty surprises.
You deliver to your committed milestones. The message: You are experienced product developers who know how to deliver, and you will be a reliable partner.
When something unexpected came up in Step 6, you demonstrated a milestone before announcing the surprise or request. The message: When surprises do occur, you stay on track while addressing the issue.
If you have ever worked at a big company, you will notice that this sounds like the status meeting for a well-run project. This is no coincidence! You are showing your customer that you know how to work in their environment, to their expectations.
Countermeasure for Risk #4 “You don’t understand our industry”
Be careful with this fear. You can’t learn everything that a company with many years of experience knows. However, you can gain one critical knowledge advantage: understanding of the problems that they and their competitors are struggling with right now, and how those problems are evolving. You can use this information to gain credibility and mitigate Risk #4.
Here’s why: most operational executives do not have time to dig into problems, or to understand the whole problem space across the industry. They can usually be more productive by learning just what they need to know to create a workable solution internally. If your company is developing technology to solve the big picture problem, then you need to learn more about that problem then they are willing to learn, despite their years of experience. They may understand internal issues better, but you can gain a better understanding of what is going on in the industry as a whole, and what your customer can expect in the future.
For example, if you are selling a nanoscale measurement instrument, you can present a workshop comparing emerging new technologies, and discuss why you developed your product. If you are selling SaaS design tools for civil engineers and architects, discuss the full range of problems and solutions available today. Consider these options:
Sponsor a “Lunch and Learn” session (in person or via Zoom)
Help company experts present their own data and solutions
Once you meet early milestones, disseminate those results widely at the account
When describing their industry, try to present actual quotes with audio clips, like the Sally Smith example on page 4. They may doubt you, but they will listen to every word spoken by their peers and competitors.
Countermeasures for Risk #5: You Will Run Out of Money
This is a delicate topic. No startup wants to expose their cap table, burn rate and other financials to a customer. Unfortunately, once you get the request, the more you resist the more it looks like you are low on funds.
As with the previous risk factors, the countermeasure is to show the customer that in any situation, even if you do run out of money, they will not be hurt.
Technique 1: Introduce your investors to your customer
This can be a win-win. Your investor should be prepared to assure the customer that through their intensive due diligence and constant oversight, they are convinced you will be a success. They should also indicate that they are planning to participate in future funding rounds.
A secondary benefit is that both parties will come away with a deeper understanding of what you have accomplished and where you are headed.
Technique 2: Software escrow
It has become common for IP vendors of every description is to deposit their source code with a data escrow firm, to be released if they stop servicing or supporting the code. This is so common that startups sometimes require large vendors to escrow their code, to protect against the larger vendor cancelling or stopping development of a key technology. SaaS changes the equation somewhat, because the code requires cloud infrastructure, although some cloud escrow solutions have emerged.
Smart escrow move #1: As soon as the first customer hints that they might want escrow, deposit your code with Iron Mountain. Ask the Iron Mountain rep for a sample contract. By establishing escrow in advance, you can simply add each new account as a beneficiary, without having to negotiate release criteria and separate contracts for each account. If your terms are fair, new customers are unlikely to demand their own release terms.
Why Iron Mountain? Because they are the oldest and most stable software escrow vendor-no startup risk on their part. Any customer that requires escrow has already approved Iron Mountain as an escrow vendor. By choosing known vendors, you appear familiar and experienced.
Smart escrow move #2: A software startup built commercial tools and IP on top of a popular open source platform. In response to escrow requests, they deposited their code with Iron Mountain. Their escrow release agreement specified that if the company did not release an update every 6 months, the startup’s entire code base would be released as open-source to the community. As a result, customers did not require individual escrow agreements.
Other Tactics to Reduce Risk
Conduct On-Site Training:
Conducting training classes on the customer’s site sounds like a benefit for the customer, but may be even more beneficial for you as the vendor. By training end-users:
You will meet operations staff who may not have been involved with purchase
They may know more, or have a different opinion, about operational issues.
If you consistently demonstrate you are there to make their lives easier, they can become powerful allies.
Make Conservative Commitments
If your technology can deliver 50% improvement, it’s very attempting to start your story there. This is a mistake when trying to establish credibility with enterprise accounts.
The right way is to be conservative: “In case like this, we routinely see 25% or better improvements.” Then anything better than 25% is over-delivering. If they tell you that they want a higher ROI, look them in the eye and say, “We’re a data-driven company. We run on measurements and metrics. Let’s go through your metrics for this process, and we’ll do some analysis.”
The Magic of Metrics
Anytime a customer shows you their metrics, bend over backwards to present the results in the same format: show the same graphs, measuring the same metrics over the same time span. Show a clear contrast in the “before” and “after” in their familiar style. This demonstrates that you how they work. Don’t make them think!
Proof of Concept, Pilot Projects and Prototypes
The strategy behind all of these starter projects is to deliver a quick win on customer premises, in order to reduce risk. Once you deliver, your company transitions from “risky start up” to “proven vendor.”
When designing a Pilot project, use the same milestone approach described earlier. Name the project something memorable, and create a one-page summary of the functions and benefits you will deliver. Even if you will eventually deliver a broad solution, delivering just one small functional component quickly demonstrates that you can build, deploy and support working products. Schedule training and review sessions to surface any issues, and address them promptly. If possible, complete a Pilot within one quarter to synchronize with the customer’s quarterly planning and review cycle.
Monthly or Quarterly Billing (opex vs. capex)
If you can give them a monthly recurring cost, or a project they can expense rather than capitalize (ask your CFO about the difference), you may make the project easier for them to purchase. Operating expenses are examined much less rigorously and by fewer people than even the smallest capital expenditure. This is the fundamental benefit of SaaS.
Easy Cancellation:
Do not try to write complex cancellation clauses into your contract. These are prime targets for any legal review and are unlikely to survive negotiation. Easy cancellation demonstrates confidence and makes the deal appear less risky.
Compliance Audits:
If your target market has developed performance or compliance standards, your company is at a severe disadvantage if it is not fully compliant. For example, enterprises frequently require proof of compliance with:
· Payment Card Industry Data Security Standard (PCI DSS)
· AICPA Service Organization Control 2 (SOC2)
· ISO/IEC 27001:2017 Information technology-security techniques
Innovate on Technology & Customer Benefits, Not on Contract Terms:
Some established companies build their entire business around complex business terms and contracts that are difficult to decipher and harder to cancel. This is game for the big boys; if enterprise customers decide you present both product risk and contract risk, you are unlikely to succeed.
These are the contract terms that typically get pushback:
Long or punitive cancellation clauses. These are prime targets for legal review, unlikely to survive negotiation. Easy cancellation demonstrates confidence.
Unfamiliar jurisdictions. Enterprises are most comfortable working with entities in their own country, and may require that contracts be governed by the law of their jurisdiction. Some company policies forbid working with entities in certain countries.
IP protection. Enterprises have grown increasingly sensitive to IP issues. Expect scrutiny on the origin, ownership and licensing terms of all of your IP.
Open-Source Software: Although open-source is now widely accepted, enterprise accounts may require an audit of the license terms of any open-source code your product uses. Make it a habit to log licensing terms of all downloads.
Taxes on revenue: Although revenue share has become increasingly common, some customers may prefer fixed costs, particularly if that is the customary way of doing business for your product category.
Case Study: The Startup that Missed Every Clue
An inexperienced wireless IOT startup visited a factory that manufactured ammunition for multiple government customers including law enforcement and the US Department of Defense. On the first visit, none of the three team members brought along proof of citizenship, so they were not allowed to enter the facility. Although the customer discussed their lack of understanding of identification and facility access protocols at the weekly operations review meeting, the startup was allowed to schedule a second visit.
For their second attempt, their internal champion made it very clear the importance of security rules. They obtained advance permission to enter the facility with one laptop.
On the second visit, they surrendered their cell phones at the front desk and entered the facility. They started their presentation by showing how easy it was to attach their wireless sensors to machines on the plant floor. When the plant manager asked what security protocols the sensors used, the startup team responded with blank stares. Realizing that just powering up the sensors inside his plant would open multiple video and audio surveillance channels and potential hacker entry points, he immediately made the startup remove the batteries from every sensor in their possession and sent the whole collection of parts and batteries back to the front desk in a duffel bag.
Out of curiosity, the plant manager then asked the startup to demonstrate just the software portion of their product, then briefly left the room. When he returned he discovered the startup had:
Set up a cellular WiFi hotspot device
Started a web conference to begin the demonstration
Displayed sample data the company had provided under strict non-disclosure, over the non-secure web conference
The plant manager slapped the lid of the laptop shut, unplugged the WiFi hotspot and had security escort the startup out of the building.
In their visits to the facility, the startup showed lack of understanding and respect for:
Maintaining proper citizenship records for all personnel
Security of all digital communication channels
Maintenance of confidential information
The failure here was not just ignoring security protocols. The startup:
Failed to recognize and acknowledge the customer’s operational issues
Did not demonstrate any interest in data security
Did not learn from their mistakes
Imagine how much harder the next startup had to work, to make this customer happy!
Summary & Cheat Sheet
Larger competitors may portray your startup as risky, to create fear and doubt in customers’ minds. Your job is to reframe those fears as manageable business risks, then deploy countermeasures to manage those risks with your customer.
Keys to Successful Countermeasures:
Countermeasures reframe fear as simple business risks that can be managed:
Dig deeply into customer data and desired improvement metrics in advance
Create frequent milestones to demonstrate success and collect payment
Surface surprises quickly and simultaneously propose a mitigation plan
Mistakes to Avoid
Your startup team may not enjoy the development discipline required to implement the milestone strategy described herein. Watch out for these traps:
Slipping customer milestones. If your company is not ready to commit to customer milestones, postpone sales to Big Companies.
Delaying discussion of any discovered issues or surprises. Surprises will occur; you will be judged on how you deal with them.
Criticizing obscure or redundant customer processes. Never assume you are invited reinvent what they do; an enterprise customer may require an obsolete process long after its purpose is forgotten. AFTER you show them what they asked for, give them the opportunity to eliminate the redundant process themselves and claim the credit. Everybody wins.