AKA THE STARTUP VS THE CORPORATION
Over the weekend, I was reading Seth Godin’s book, The Bootstrapper’s Bible, and came across a chapter that clearly outlines the difference between a startup and a corporation, from a perspective of the advantages that a startup has over a big organization.
The companies we read about in the media have thousands of employees, systems, business modeling and cash-flow. Ergo, many startups earnestly make great efforts towards incorporating these same methods in their business. They think Big.
It is easy to imagine that the only way to run a business is with secretaries and annual reports, but this is not true.
Traditional companies succeed for various reasons, but they capitalize on five key points for leverage.
- DISTRIBUTION- This is about getting the product in front of the customer. No matter the quality or price of product, if it does not get to market, one is doomed. Big business can afford to hire lots of salespeople and spread advertising costs across numerous products and offer retailers an efficient way to fill their stores with goods. The startup cannot.
- ACCESS TO CAPITAL- Big Business Borrow Big. Corporations can afford to borrow millions of dollars in industries which are asset intensive, which require deep R & D and have high marketing costs. The losses they take in the present through lines of credit and stocks raised from the market are short term, their focus is building on profits a decade or two from now. Big business can do this. The Startup cannot.
- BRAND EQUITY- Need I say Nike? Coca Cola? Big business invests billions in the brand to build consumer trust. One can make a similar product, but great power lies in the brand. Corporations can make this investment.The startup cannot.
- CUSTOMER RELATIONSHIPS- For companies in the business to business world, access to customers and trusted suppliers is a great advantage. when launching new products, they have the pick of existing customers and trusted, qualified suppliers. They already made mistakes and found their footing. The startup cannot.
- GREAT EMPLOYEES- The world’s greatest inventors, designers,marketers,salespeople, developers are drawn to companies with a great reputation, stability and of course, pay well. The startup cannot.
THINK SMALL: ID SOFTWARE CASE STUDY
Think small. Take advantage of your size, you are quick and nimble on your feet and can do things a large behemoth would take eons to respond to.
ID Software took advantage of being small and used seven factors to their advantage to make millions.
ID Software redefined the computer game market and made millions. ID makes violent games that run on home computers. Software is developed by two to ten people, then published by a big company like Electronic Arts. ( EA Sports. Its In The Game 🙂 )
In the software gaming industry, it costs more than a million dollars to make a new product, but amazingly, as little as 50 cents to make one more copy. The classic business model was spend in R & D, production, media and marketing,distribution in shelf space in the software stores and malls. THEN pray that you sell lots of copies.
ID are famous for the game Castle Wolfenstein. They decided to play by their own rules when they created Doom.
STAGE ONE: They broke rule 1: they gave Doom away for free. Millions downloaded it and it became the computer game of the year. There was no distribution cost, but they did not make any money off it too.
STAGE TWO: They offered a deluxe version of Doom: More Levels, More Monsters, More Gibb, more everything. Partnering with a big corporation, GT Interactive, it got the software into stores all over America and also sold it by direct mail order.
With a user base of millions, they (ID ) called the shots instead of being at the mercy of distributors, who courted them instead. They redefined business and won, trouncing companies valued at more than half a billion dollars.
- NOTHING TO LOSE- This is a startup’s biggest advantage. Big established companies have a huge stake in maintaining the status quo.Did the big railroad companies enter the airline business? No. They were busy protecting their turf. A startup can invest in new markets and adopt new strategies. A corporation Cannot. ID chose to give the game for free. the big boys would never have pioneered this concept.
- HAPPY WITH SMALL FISH- Disney cannot be happy with a $40 Million Movie. A startup is delighted with $100,000. $40 Million is 400 times 100,000. There is room for four hundred small businesses under the radar of a giant. Find a niche, not a nation. ID did not spend on advertising and developed the game in house- they would have been happy with sales of $30,000.
- PRESIDENTIAL INPUT- In Big business, the president is far removed from the action and rarely gets to change the whole company, thousands of people under him run their own agendas. A startup’s leader can have attention to intricate detail, still has interaction with customers and since he or she makes policy, will never lose a customer due to a silly bureaucratic regulation. In this way, a startup can flexibly adapt to customer demands. ID’s game was designed, marketed,licensed and managed by four people. No misconceptions.
- RAPID R & D- You cannot hire nine women to work really hard as a team and produce one baby in one month. small focused teams give better results. Selecting such a team is risky and hard to pick. Most modern innovations were made by small teams, thereafter bought out by bigger organizations. That is why you often see great ideas come out of tiny companies; they are faster and are focused. ID’s Doom had no budget committees,marketing schedules,organization charts, and complex strategies In the way. It is also good to note that the sequel took a longer time to release due to its semi bureaucratic structure.
- THE UNDERDOG- Big companies are charged more, offer layers of paperwork and bureaucracy,lawyers and insurance policies. As a result they tend to be impersonal and people also respond in kind. A startup can get away with a lot and respond faster, better and in a more attuned manner to a client. Consumers rooted for the underdog hippies at ID, and due to cult following, more games were bought and not pirated.
- LOW OVERHEAD- A startup can work out of a house, with a simple communication system, volunteer labor and very little overheads.If a startup cannot make it cheaper than the big guys, it is dealing in the wrong product or going about it the wrong way. A startup can almost always undercut the big boys. High overheads would have wiped ID out.
- TIME- Big business do not have freedom in how they deal with time. With bankers, stock markets, financial quarters and complex product schedules, there is little flexibility to do things on the customers schedule. You have the power and flexibility to make yourself irresistible to demanding customers.ID controlled time and shipped whenever they wanted to and felt was right, not by shareholder or stock demands.
Given the choice between building a thriving profitable business with a niche in a boring product like toothbrushes and putting your life savings in an intensely competitive business where you are likely to fail but the product is cool and you are in love with the idea, the wise businessman picks the former every time.
Lastly, great ideas and lots of energy do not always triumph. As a startup, do not waste years and tons of money fighting the bad guys in their turf.