The relation of Big Companies to Startups

Startups are a way to address a certain kind of business opportunity, and they work with certain ingredients. They produce certain types of outcomes.

What opportunities?
– Startups find a product-market fit. So a tech and market where PMF is not happening is good for the startup
– If the product-market fit is already known you don’t need a startup, you need an Engineering project to make the product you know already works. (Eg skunkworks)
– If you need new ideas to turn into PMF, you need Research (eg University)
– Large companies run big products across large customer markets, so once there is a startup-driven product that is scaling adoption, large companies can roll them out to huge size

Key ingredients
– Strong founders who are versatile not narrow, heavily invested and strong incentive on company’s success
– Large and growing market space (not large and flat or small and growing)
– Product with defensible benefits that customers recognize
– Financing path – seed, venture, growth and later investor communities are available and interested in the space and company

Pitfalls for big companies
– Corporates don’t motivate their startups “founders” adequately
– They protect them too much (can’t fail)
– They limit them too much (dictate the answer rather than leave to the team to search/pivot to find a PMF
– There is no external input early eg customers, investors, advisors, employees, partners
– There may be some large static markets that are not likely to change or adopt new tech quickly – bad for startups
– The place to start for startups is usually small and odd looking compared to the largest top-down opportunity

Startups create certain outcomes
– ~30% of VC Series A backed companies build a real business of interest and create more equity value than the investment amount. (Eg Intel Capital)
– Most do attract creative, autonomous leaders
– Most do use new tools well and build greenfield tech stacks faster
– Many of these outcomes are surplus benefits, i.e. benefits going to the ecosystem not just the owners of the startup. This is why incubators seem popular (Cap One Labs or Barclays Accelerator with Techstars)