Can you make it less risky for large corporates to do business with your B2B startup?

Robert P. Mollen, Counsel at Fried, Frank, Harris, Shriver & Jacobson (London) LLP.

A key issue for any business-to-business startup is figuring out how to build credibility for your business.

An executive at a large corporate is taking a big chance in deciding to do business with you.  She is likely to be criticized if your B2B startup fails to deliver or goes out of business, and her personal exposure on both fronts is much greater than it would be if your company was an established incumbent.

Consequently, no matter how innovative your product, and no matter what advantages it has over existing solutions, you are likely to face significant obstacles in getting large corporates to contract with you.

What are the best ways to address this?

Build your track record and show financial stability. While you can start to work on getting larger contracts, you are likely first to have more success in getting small and medium-sized businesses to work with you, and in any case their contracting cycles are much shorter because there are fewer people who needed to be persuaded.  Starting with small to medium-sized businesses helps to put your business on a stable finance base, which in turn gives larger corporates the comfort that you are not reliant on further investment to stay afloat. The smaller businesses also make it possible for your business to stay alive while you deal with the longer (a minimum of 12 – 18 months is typical) time that it takes to persuade a large corporate to do business with you.

Aim small. Try to address a small problem first, or structure a trial that significantly limits the corporate incumbent’s risk. It takes much more courage for a corporate incumbent to put system critical tasks in your hands than to trust you initially to deal with a smaller problem or context and prove your worth.  If you succeed in that, you are more likely to be trusted with bigger problems over time.

Associate with the right people. Your board members and advisory board members can enhance your credibility.  This generally is not a question of adding big "figurehead" names to your board or advisory board. Rather, adding suitable board or advisory board members who have relevant substantive expertise and experience can help to persuade large corporates of your own substance, since those individuals are putting their own reputations at risk in working with you.   Perhaps more importantly, of course, your business will benefit from the guidance and advice that your board and advisory board members can bring to your business.  Of course, if your senior executive team includes individuals with an impressive track record, so much the better.

Associate with the right incumbent corporations. Appropriate corporate partnerships and corporate venture investment can significantly increase your credibility.  Potential customers will take comfort from the fact that significant corporate incumbents are prepared to link their reputations to yours, whether as partners, resellers or investors.  Of course, your choice of corporate partners is critical.  Your potential customers are more likely to be impressed by corporates in their industry that they see as thought leaders in their space (unless they are such close competitors that this is a problem, like Coke and Pepsi), or by relationships with key suppliers of theirs, such as leading tech companies.

Choose the right investors. Taking investment from leading venture capital firms and industry-respected business angels also builds your credibility. You have to consider a number of different factors in assessing whether or not to take venture capital and angel investment and, if so, from which firm/s or angels. As I have written previously, the VC or angel that offers you the highest valuation is not necessarily the best VC or angel for you, and there are a number of other factors that you need to consider.   http://bit.ly/TenFundingFallacies One of these factors, however, is the reputation and credibility of your VC or angel investor.  This may affect not only your ability to secure further rounds of investment (however, note the possible risks in respect of VC investors if that VC does not choose to invest in your next round), but also your reputation with corporate incumbents that may know that VC or angel.

Secure appropriate endorsements. Favorable comments about your business or product from sources respected by your counterparties will make it easier for them to do business with you.  First, the endorsements will help their executives to get over any doubts about the value of your innovation.  Second, such endorsements may provide ammunition for these executives to persuade their superiors that their company should contract with you.

Accelerate wisely. The accelerator program or programs in which you participate may also have a reputational effect.  http://bit.ly/AcceleratorValue Certain programs have achieved a significant reputation of filtering quality companies, and adding value to them.  Some of these are operated by accelerator groups, and others by or for corporates.  While the value that they add can vary, this is certainly a factor to consider in determining whether or not to join such a program.  Additionally, the programs run or sponsored by corporates may provide an enhanced opportunity to secure a contract with those corporates, and it is always easier to get a contract from a second corporate incumbent if a major corporate has already worked with you. Some mentors are sceptical about the value of such programs, or the benefits of participating in more than one program. I think it is unlikely to make sense to participate in more than one program that takes a equity investment, but that (generally later) non-equity-based programs that help you to scale up and meet relevant potential corporate customers can be very useful.

Secure the first key contract.  Finally, of course, that first contract with a corporate incumbent is critical.  Being a pioneer is dangerous, and conservative businesses don’t like to be first. It is easier to get a contract with a second corporate incumbent once you have the first one, especially if your first contract is with an industry leader.

In short, dealing with you is a big risk for the executives in your incumbent corporate counterparty.  Look at the problem from their standpoint.  Anything that you can do to manage their risk will make it more likely that they will contract with you.

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This discussion is not intended to provide legal advice, and no legal or business decision should be based on its contents. If you have any questions or comments, feel free to contact [email protected].

You will find a listing of Bob’s weekly startup blogs on US and international expansion and early stage financing here: http://bit.ly/StartupGuidesIndex