Small Firms Beware
Big companies naturally step on small ones
Mark your calendars: This Monday, May 1, Tim B. Lee of Full Stack Economics will join our Zoom for paid subscribers at 8 PM New York Time to talk about his new Substack, Understanding AI. Then on May 8 Bryan Caplan will join us to talk about his latest collection of essays, Voters as Mad Scientists.
A WSJ story looks at an entrepreneur whose small firm was milked by Apple.
“When Apple takes an interest in a company, it’s the kiss of death,” said Mr. Kiani. “First, you get all excited. Then you realize that the long-term plan is to do it themselves and take it all.”
Mr. Kiani is one of more than two dozen executives, inventors, investors and lawyers who described similar encounters with Apple. First, they said, came discussions about potential partnerships or integration of their technology into Apple products. Then, they said, talks stopped and Apple launched its own similar features.
It’s not just Apple. Wal-Mart will do that to you. If you are a small firm with a new idea, any big company may step on you. It is not necessarily a deliberate plan. More often it is a natural outcome of the big company’s decision-making process.
Over twenty years ago, in my business book Under the Radar, I pointed out the perils for a small innovative company in trying to sell to a large one. Big companies have bureaucracies that are poised to absorb information and evaluate alternatives. As a small company, you can have a lot of resources soaked up by big companies as they are doing their evaluation.
Having a big company that is “interested” in a small company’s offering can be the worst thing that could happen to you. You think you are making a sales presentation. You are actually just giving away knowledge. You don’t want “interest.” You want revenue.
As a small company, you cannot afford to waste time in endless meetings with the big corporate bureaucracy trying to make a sale. It costs them nothing to hold those meetings. You have to change that.
You need to charge big companies for the time they absorb meeting with you. Instead of calling these meetings “presentations,” call them “readiness assessments” or “consulting engagements” or “market intelligence.” Charge for them. Charge a lot. The more they pay, the more they will feel invested in the relationship.
Just because you offer capabilities that you believe the big company could use, don’t just assume that you can make a deal. Don’t blame the big company for its slow process of studying the problem and looking at alternative solutions. Don’t blame them for stringing you along and then building the capability in-house or with a more experienced vendor. That is how big companies make decisions. Blame yourself if you satisfy their need for information without asking them to pay for it.
This essay is part of a series on human interdependence.
My dad tells a brutal story about this. An acquaintance of his during the 70’s oil crisis discovered that there was a tanker full of oil stuck in port because of financing problems. Inability to pay for the fuel or something. Paying the fuel supplier would basically give whoever paid for it ownership of the shipment, because of some kind of maritime lien. The guy didn’t have the cash, so he went to a Swiss bank. The banker listened to the story, worked through the math and the proposal, the. Turned around and started making phone calls -- in German of course. Finally, he turns back around and says, “You’re out.”
Lawyer lesson: get a good non-use and non-disclosure agreement before talking! Sure some companies routinely ignore them. But others don’t and there’s at least some settlement value there.
Big real estate developers will do similar stuff to small contractors, too. Or even merely choose NOT to pay for services agreed to, or sort of agreed to (orally, not written). Handshake trust works more often between more equal folk.
This power differential is exactly how small companies get raped by Big Boys. And a good reason for those who favor market capitalism to prefer more smaller and medium sized firms - none with more than 5% of the market. For banks, more than 2% is too much.