When a big company enters your startup’s space, it’s a good thing | Tech Industry
As the CEO of a robot startup (and, in the past, a smart home/energy startup), I've heard words to that effect whenever news breaks about this or that large company making plays in our segment.
After all, the whole point of a startup is to successfully bring a product to market in a space the big companies don't yet own. But if you're right about your startup being viable, it's nearly guaranteed that, sooner or later, those big companies will enter your market segment, too.
You may not know it yet, but if you're a startup in a fairly young market segment, it's good for everyone when big companies enter your space. So when asked, I just say: “Nope. No worries here.”
Whatever your niche as a startup, don't be afraid when the big players come knocking. Instead, relish it and use every ounce of the opportunity. It's about to get much less expensive to reach your goals. Here's why…
Big companies create consumer acceptance
When a small, unknown company is the only player in a segment, its credibility is small. The mass market craves safety, security, assurances, guarantees. So the entry of a big company into the market signals to the mass market that safety has arrived for the category. The patina of this arrival actually increases the shine of the startup.
When Honeywell entered the smart thermostat market after Nest, interest and volume for Nest picked up. It happened again when First Alert entered the smart smoke detector market. Not only did those big companies signal more safety to consumers, but Honeywell and First Alert signaled more safety to retailers and other channel partners who were being asked to stock smart thermostats and smart detectors.
Big companies generate awareness
One of the foundational problems for any startup is the high cost of creating market awareness for its products. Often customer acquisition costs will swamp any notion of gross margin, and the startup will be selling its wares below cost.
The primary reason customer acquisition costs are so high is simple: Creating awareness is expensive. This is why big company efforts are so incredibly valuable. Their announcements, press activity, and marketing dollars create awareness for the category.Sure, they're generating far more awareness for their own efforts, but three powerful things for the startup inevitably happen, as well:
- Consumer search results — prompted by big company marketing — generate results that include the startup.
- The press doesn't want to just be a shill for the big company, so they comment on the startup's activities too.
- Savvy consumers always evaluate more than one alternative, so they seek out the startups offerings to compare to the big company's.
Big companies generate motivation
Not only is the mass market afraid of risk, but so are lots of employees at startups. They're plagued by questions like “Are we doing the right thing?” and “Does anybody care about our offering?” Which quickly lead to “Is my family secure?”
Plus, the energy of working in a startup when the overall product category is unknown is skittish — it's not hard-charging, confident, focused. It's always got this small, nagging sense of fear. And successful organizations don't ever have wild success with fear present (healthy paranoia, yes; but fear, no).
A big company's entry can introduce more fear into the employee population, for the same reason conventional wisdom assumes that Goliath always wins. But when leadership explains the benefits, that energy shifts to one of motivation, focus, and drive.
Big companies drive down supply chain costs
For companies that produce widgets, supply chain costs are a huge factor in success or failure. Look at all of the smart home startups whose successes were at least partially dependent on the falling costs of cell phone processors. The price of sufficiently powerful processors was a blocker to innovation in many segments for a long time, but it was the volume of big-company purchasing that finally drove it down. Thus smart devices could be both powerful and affordable, while generating enough healthy gross margin that they could sustain a business.
Bottom line: The higher volume of the overall industry, the better the gross margin picture is for everyone in the industry.
Big companies calm investors
Investors are no different than consumers — they're driven by core basic emotions: fear and hunger. Startups that walk in with a pitch that's in a completely unknown, unproven category face very strong fear headwinds. Not only must that startup overcome the particular headwinds related to their story (team, product offering capabilities, pricing, margin, etc.), they must overcome the larger (and often unspoken) headwinds about the viability of the segment as a whole.
While a big company's entry into a product category can introduce surface fear for the investor, when a leader explains the benefits of their entry into the market, the larger subterranean fear disappears, and the startup can be judged solely on the merits of its story.
Big companies stir acquisition interest
This last one is a pretty subtle benefit, but I've lived through it. Very few markets are ever won by one and only one company, and big companies know this. We've all seen the academic studies and data that show there are at a minimum at least three major participants in every meaningful product category.
When one big company signals entry into a product category in which other large and natural competitors are not active, every one of them takes notice. “Big company X must know/see something we don't. Crap; we're way behind the eight ball. How do we catch up?”
Acquisitions rarely happen when a big company believes they have time to place an offering in the market, because acquisitions are almost always more expensive than building something internally. By contrast, when time to market gaps are large enough that sizeable revenues are being forfeited, the acquisition calculus shifts rapidly in the opposite direction.
I witnessed this firsthand as Head of Company at Revolv. After Google acquired Nest for $3.2 billion, Samsung starting scrambling for a partner and bought SmartThings. Apple announced it had build its own solution (HomeKit) , calculating that it had plenty of time to market flexibility. About 10 other large companies also looked at partners, many of them taking a serious look at Revolv, which was ultimately acquired by Google/Nest.
It's all part of the plan
So the next time someone waves a headline at you about your idea or startup being crushed by a giant company, just smile and thank them. You might consider also enlightening them about what an awesome thing this is. But the key is that you know everything is simply going according to plan.
Tim Enwall is CEO of Misty Robotics. He was previously CEO of smart home company Revolv, which was acquired by Nest in 2016.