There are some meetings you never forget, and this meeting with a very well known Silicon Valley VC fund was one of them.
We were just starting to raise our Series B funding, and, the fund we were meeting with had the CEO of a former portfolio company sit in on the meeting. The meeting was going well until we got to our go to market strategy.
I confidently said that we were focusing on the Tier 2 and Tier 3 customers that made up over 80% of the market. That’s when the former CEO erupted.
He said, “If I was on your board, I’d force you to get your ass in front of Apple and Samsung.”
I was surprised, but not shocked, at his response. The strategy his company followed was the classic moonshot strategy of hoping to win one big design. The CEO’s company, after 15 years of barely surviving, hit the mother-load winning a big deal with Samsung. They leveraged that one deal into a pretty decent exit.
I hated that moonshot strategy. It just seemed like such a crapshoot. Besides, we didn’t have 15 years to hope for a moonshot because there was no way investors would fund us for that long.
Instead, we would build our business piece by piece, one customer at a time. Our strategy was working really well. We were adding an increasing number of new customers every month.
Then a funny thing happened: The big OEMs started coming to us.
As I said, we were focused on the smaller customers because they played to our strengths. So it was a somewhat of a surprise when we started seeing Apple, Samsung, Microsoft, and other big OEMs show up as customers.
These big OEMs were coming to us because we had products that we were so unique and different that they couldn’t get the performance we were offering anywhere else. That’s a thing of beauty when you’re a startup.
Rule Number 1: You need to have a significant competitive advantage to win big deals as a startup.
Our first set of products were maybe 2X better than our competitors. That’s not enough of an advantage to sway large OEMs to buy from you.
However, the new products we were introducing were significantly better than our larger competitors. As time went on, our products were 10X to 100X better than our larger competitors.
Rule Number 2: You need to be ready for the knife fight.
In an ideal world, it’s great when you can have a strategy that doesn’t depend upon the big OEMs. Then you have walkaway power, so you don’t have to win the deal.
Let’s face it, big OEMs drive hard bargains. You can easily get pushed into a deal that is low margin or no margin.
There were some of the big OEM engagements we had that turned into knife fights. You have a significant competitive advantage if you’re going to win the knife fight.
Let me give you an example of one of a big OEM deal we had with Nest. Again, just like with the others, Nest came to us, except they were interested in a product where we didn’t have a significant advantage.
Rule Number 3: You need to overwhelm your customers with support.
Because it was Nest, we offered to give them technical assistance. In the Analog IC world, we would usually have more technical knowledge about how to build the analog portion of the hardware than our customers.
So we assigned Martin, our most senior applications engineer, to work with his counterpart at Nest. We ended up doing the front end design for Nest.
We were in. Or so we thought.
We got the initial order for the first pre production build. Then mysteriously we didn’t receive the follow on order from their subcontractor when we thought we would.
Our salesperson followed up with the buyer at Nest. We were told we were designed out.
One of our board members had a relationship with Nest’s CEO, Tony Fadell, so we used that relationship to see if we could get back in. It worked.
Nest used us in their third pre-production build. We thought we were definitely going to be in the final production build.
Nest again designed us out in favor of the same larger competitor. We again used the relationship our board member had with Tony Fadell.
This time we were told their decision was final. The reason they went with the larger competitor was they didn’t want to risk their design on a small startup.
The moral of the story is your small startup can win business from large OEMs, but you need every advantage to keep the business.
I know our opportunity with Nest would have been bloody regardless of how much better our product was than our larger competitor. I also know we would have won the deal if we had a significant competitive advantage.
And that’s the lesson you can learn from our experience with Nest.
It’s not enough to be just be better than your competitors, you need to be significantly better.
It’s not enough to be ready to for the knife fight with your competitors, you have to be equipped to win the fight.
And, it’s not enough to just overwhelm your customers with support, you need that significant competitive advantage or your support will fall short.
The point is you need everything going for you as a startup when you’re trying to win big deals; especially a significant competitive advantage.
For more, read: How Can You Differentiate Yourself Even In A Commodity Market