Negotiation · Pilot

How a bootstrapped startup can negotiate a pilot opportunity with a Fortune 500 company?

Greg Lipinski Patent Examiner at USPTO

July 19th, 2016

My startup has been testing on a limited scale, but it's attracted the interest of a Fortune 500 company. We're talking with their venture arm about becoming our lead investor, but those talks will definitely take a while. Meanwhile, the core company has an opportunity for a pilot with a client of theirs, and they thought we might be good fit to conduct it.  Is it appropriate for us to set a price for doing this pilot, or do these guys get to dictate all the terms? Does them being a Fortune 500 company mean we'll get the resources we need/want within reason, or are they gonna make us work on scraps? Also wondering how we can use this pilot to facilitate a convo with the venture arm, if they're not already involved. 

David Rueter Empowering businesses to improve and get lean through technology and best practices.

July 19th, 2016

This kind of pilot can be very beneficial. I have some experience with this, and will share some thoughts:

Treat the pilot as a stand-alone business opportunity. I understand the excitement of the possible venture funding tie-in, the benefit of being able to reference a big company, etc. But each of these is a separate facet of the relationship that should be thought about (and negotiated, and agreed to) separately.

With respect to the specific pilot, you say that it is a pilot with a client of the Fortune 500. Especially if they are reselling your product, but even if they are just referring the client to you, they will be concerned that that you and your product doesn't jeopardize their relationship with their client. Be sensitive to that, and take whatever steps you can to mitigate that concern (such as collaboration on deployment, regular status updates back to the Fortune 500, etc.)

I would aim not to discount your pricing for the pilot unless demanded of you--and even then, would consider carefully before agreeing to discounts. Besides piloting your solution, you want to also pilot your pricing, your terms and conditions, your client on-boarding, your deployment, etc.

If the client or the Fortune 500 tries to suggest that you should discount because the product is new, is unproven, etc. I'd try to find other ways to mitigate those concerns: reduced pricing doesn't really mitigate those concerns, and in fact can reduce your viability (because you need money). Instead, I'd communicate that you want to professionally support the client in a way that exceeds expectations, and that while you are excited about possible future synergies, you need to do what is in the best interest of your business so that you can be sure that you have the resources you need to provide excellent services. Reasonable clients / partners will want to see you be successful. And you don't need / can't afford unreasonable clients / partners--no matter what their name is.

You should not consider working for scraps, as that will jeopardize your ability to successfully meet and exceed expectations. It is in no one's interest that you fail. If your pricing is reasonable, nobody should object. If your pricing is not reasonable, then you have a systemic problem with your business plan that you need to address immediately. If needed, offer up other incentives besides reducing price: Pay full price, lock in this pricing for the future. Or get X hours of priority support at no charge. Or at worst, buy now, get year 2 at 50% off, etc.

The best way to use the pilot to further dialog with the venture arm is to succeed in the pilot. Go do the pilot, be successful with it, and then go to the venture arm with that gold star in hand.

All of that need to earnestly consider whether you and your product are ready for the pilot--apart from any funding considerations. You don't want / can't afford to fail in delivering what you are promising. If you have any doubts about your ability to deliver right now, defer the pilot until you are ready. But be transparent about that--because perhaps the client or the Fortune 500 can help: "We want to hold off on the pilot until we have our new server infrastructure in place, and we are currently raising funding for that."...might lead to discussions about ways to run on their servers, etc. (just as a hypothetical example).

Also, remember that supporting the pilot will require time and resources--that will compete for time and resources needed by the rest of your business (raising capital, continuing with development, etc.) Besides reinforcing what I said above about the pilot needing to be a "real" revenue-producing deal, be sure you have the resources in place to be successful. But just as important, be sure that the pilot deal is not a distraction.

What I mean is: if you're product is aimed at small-to-mid businesses, supporting the Fortune 500 may not really be a stepping stone to long-term success, and may actually slow down your progress. Or, at least taking on this pilot may force you to alter course.

All that to say: treat the pilot like a real business deal on its own, and plan accordingly.

Virl Hill Director, Business Development and Strategic Partnerships‬ at Microsoft

July 19th, 2016

Deals with large companies can be transformative for startups when they work. But analyze carefully and make sure it's a strong strategic fit before you sign. Large companies will take up scarce resources and time. Does the opportunity fit naturally into your product strategy? Or would your team have to do one-off work to meet their needs? Consider the former. Run away from the latter unless you're paid handsomely for the diversion and decide it's worth delaying or altering your roadmap for the cash or strategic win. Do not enter into a pilot with a "client of theirs" solely for the hope it opens doors to their venture arm. Often large companies' venture teams and product teams have different objectives. From your last sentence, it sounds like your conversations with their venture arm are not as advanced as you indicated at the start. I provide this advice from two perspectives: a) as an investor in a startup who did a pilot for a large company and pretty much put the majority of their team into the effort, only to see the large company shift product strategy at the last minute and leave the startup in a difficult spot and b) as an exec at a large company who recently negotiated a couple transformative deals with startups, both after 3 month pilots where the startups were paid. Those deals are thriving because both sides took the time to make sure all the pieces strategically fit and that the economics were fair enough to the startup to ensure they had the means to continually invest in the partnership after the close. Good luck!

Ken Anderson Director, Entrepreneurial and Small Business Development, Delaware Economic Development Office

July 19th, 2016

I pretty much agree with David. This can be a great opportunity if you can get your deal. Treat the pilot like a deliverable contract for services. Negotiate a regular payment schedule during the performance period of the effort. Ensure that agreement preserves your IP. In a perfect well, this will generate operational revenues for your early stage firm, allow you to get customer based feedback to further develop your MVP, and give your offering further visibility with the VC.

Rob G

July 19th, 2016

there's no magic formula, but you don't get what you don't ask for.  you likely don't have much leverage, but they want you to succeed too, especially if the end customer is a customer of theirs - they want to look good which means they need you to be successful.  If that means you need $$ to make them look good then let them know.  There's a million details we don't know, but in general i'd present this as you helping them be successful with their customer which means you need some $$ and you need x, y and z resources.  Make sure you put the effort into developing champions inside this F-500 so you are not running blind - more than 1 champion.  in fact i would put a lot of effort into developing a champion or 2 before i put forth any proposal so i could get inside help with the proposal. Among other things, a champion can help you understand what leverage you have and don't have.  remember when companies get that size (F500) politics plays a significant roll so have your champions help you navigate.   
If you don't already have one on your team i would strongly advise you to find a strategic sales person who has experience selling to F500's and especially this one.  You can find advisors, consultants, lawyers, etc, but what you are trying to do is sell yourselves to this customer so find someone who has lots of experience with high-level sales to F500s, preferably in your market and preferably to this company (and, no, i'm not looking for the job).  Even in an advisory capacity you can avoid years of mistakes and build/execute a strategic plan that might take you years to learn on your own.   obviously if this pilot is successful you can ask for a referral into the venture arm.  Be explicit about what the pilot will do and won't do and what success looks like.

Martin Omansky Independent Venture Capital & Private Equity Professional

July 19th, 2016

It is appropriate for you to set a price. Just don't quote them a price above comparable market value. Sent from my iPhone

Jolyon Platts Director at Collectec Ltd

July 20th, 2016

Hello Greg
I agree with David and I think there is some great advice above! 
Good Luck!