Startups Versus Big Companies
In large companies we have a series of knowns. By contrast, in a startup, it’s a series of unknowns. There is a lot we don’t understand.
So it turns out there are a couple key differences between what you do in large company and what you do in a startup. What we do in sales in a large company is very different on how we approach sales in a startup. How we think about accounting versus metrics in a startup are different. How we deal with product management, versus customers development, how we deal with business plans versus business models. All of these are different. And let me explain how.
It turns out in large companies we have a series of knowns. In the large companies we know who our customers are, we know who our channel is, we know our competitors, we know our pricing, we know a ton of stuff. And it’s very simple to just get out of the building and ask the existing customers what is the next feature you’d like or what’s the next product. And we could do a pretty good job putting together a business plan for a next‑generation product. So there’s a series of knowns. But in a startup it’s a series of unknowns. We really don’t understand our customers, we don’t have any. We don’t understand pricing. All of these are guesses. And therefore putting together a plan, especially with a five‑year forecast, is again, a faith‑based enterprise. In fact, a five‑year plan on unknowns is incalculable. And so in startups we tend to use business models where we could test hypotheses rather than business plans where we go into execution.
For the last 100 years business schools built all these tools and strategies on execution. That’s what the Masters of Business Administration meant. But we really had no language or no tools for search. In fact, we really didn’t even understand the distinctions strategically between large companies and startups. We kind of understood them when they happened, but we really didn’t understand, you know, how they differed. Let me give you couple of examples. In a large corporation you can’t run a company without knowing accounting, income statement, balance sheet, cash flow. All of those are essential to know. But I remember in a startup, every six weeks my board would ask for income statement, balance sheet and cash flow. And I would fill it out. And for the first board meeting the income statement would say zero. But boy was it formatted correctly. And I would pass it across the table to my investors and they’d nod and look happy. And then we would have another board meeting and income statement would still say zero, but they were happy because it looked correct. We would repeat this for a year and a half until I either had revenue or went out of business. Never once did we perhaps ask that maybe these metrics, accounting metrics, were the wrong metrics to be talking about in a board meeting for an early stage venture. And it turns out that in a startup you don’t want to do accounting, because there’s nothing to account for at first. You want to worry about metrics that matter; you know, what’s the average time to close, what’s the acquisition cost, what’s the lifetime value, what’s the time for a first sale, what’s your average selling price. These are things that ultimately roll up to be accounting numbers. And so we can understand now that accounting in large companies is very different than metrics that matter in the first year or two in a startup.
The other thing I discovered painfully is that titles are maybe the same for operating execs but very different meanings. Let me give you an example. I used to think the world’s best thing you could do in a startup is hire a VP of Sales or VP of Marketing from a large corporation. How great can that be? And in one of my companies I kinda got my wish. I was able to hire a Director of Sales From Oracle, who is the top one percent club, world class guy. In fact, wonderful guy, very smart. In our first couple of months working together we were trying out our new presentation, trying to discover whether customers actually liked what we were talking about. And we were trying to discover a product market fit. We had just got thrown out of the fifth CIO’s office in a row. I mean, it was pouring rain and we were soaked. And we get back into his car and, Jay, my new Director of Sales turns the car key. I go, Jay, where you going. He goes, Steve, you hired me because we have thick skins. We’re world class salespeople. We’re going to go to the next call. And I said, Jay, we’re a startup, what we just did didn’t work five times in row. Don’t you think we ought to change what we’ve been doing. He said no, Steve, we just need to make another call, we’ll just power through this. And so while we’re driving I get out my laptop and I start typing. And Jay goes what are you doing. I go, Jay, I’m changing the presentation. That obviously didn’t work. And the car almost goes off the road. And Jay goes, you can’t do that, I’ve memorized this presentation. Full stop.
That idea that a large company salesperson, their job was to memorize a script and execute that script time and again. But as an entrepreneur I realized that the script wasn’t working and that we needed to iterate or pivot and actually learn from those interactions. That distinction between large company execs knowing how to execute off of known price lists, known data sheets, known customer lists versus entrepreneurs trying to discover what they are from first principles is the distinction between what that title of sales means in a large company and what it means in an early‑stage venture. And also explains why large company executives typically melt down in their first startup. In Silicon Valley the heuristic or the rule is you want to be the second startup to hire someone from a large company. Not because they’re dumb, but they need to relearn all the skills that are necessary in an early‑stage venture.
Some of the other key distinctions between a large company and startup is having to be in engineering. In a large company you historically built the product by having a market requirements document and then you wrote a functional spec and then you gave it to engineering. And then they kind of locked themselves in a room for the next year with, you know, Diet Coke and candies and cookies and, you know, kind of kept going for coding or building the hardware. And you would then go to alpha test, beta test, first customer ship and then finally ship the product and a big party. The problem was, of course, this method for engineering a product called waterfall development meant that you never really got customer feedback until thousands of engineering hours were spent, tons of money and more importantly time has gone on. You would never know whether these features were needed or wanted until you were done. In a startup what we do now is we build a product iteratively and incrementally. And the goal isn’t to ship the product. The goal is to ship the minimum piece called the minimum viable product where we could actually get the most learning at this point in time.
And so the people who can manage large scale engineering projects for execution are very different than the type of people who are comfortable in managing just enough engineering for learning and discovery. Very key distinction between a VP of Engineering who’s going to do waterfall development, have a QA department, tech pubs department from a startup head of development who understands that getting things out quickly matters.
Founders School || Startups || Startups Versus Big Companies || Impact Guide (PDF).
Blank, Steve and Bob Dorf. The Startup Owner’s Manual. The Step-by-Step Guide for Building a Great Company, Pescadero, CA: K&S Ranch, 2012. Chapter 1.
Blank, Steve. “Solving the Innovator’s Dilemma – Customer Development in a Big Company”.
Blank, Steve. “Why Innovation Dies“.
Blank, Steve. “Lean Goes Better with Coke – the Future of Corporate Innovation“.
Blank, Steve. Video: Blow Up The Architecture: How To Turn Corporations Into Innovation Machines
Questions for You
How do I think about metrics in a startup? What metrics are important?
How do I need to think differently about sales?
What should I be doing on the product development front?
Tools and exercises
Business Model Canvas “From Idea to Business” Animated Series.
Blank, Steve. Founders Workbook. A companion to the Startup Owner’s Manual. (Website: Zoomstra.com/foundersworkbook)