The Peter Pan Syndrome–The Startup to Company Transition

One of the ironies of being a startup is that when you are small no one can put you out of business but you. Paradoxically, as your revenues and market share increase the risk of competitors damaging your company increases.

Often the cause is the inability to grow the startup past the worldview of its founders.

We’re Getting Our Butts Kicked
One of my ex-engineering students helped start a six-year old company headquartered in Los Angeles that sells to government agencies. (They had funded this company themselves after their last networking company got acquired.) While he had designed a good part of the product, he now found himself the titular head of sales and marketing. We usually catch up when he’s in town, but this time he said he was bringing his co-founder.

“We’re trying to solve a puzzle in sales. We’re not sure you know anything about our market but we sure would like to talk it through. We’re suddenly getting our butts kicked in our sales to the government.”

I knew their business fairly well. They were the darlings of the three-letter agencies in Washington. Their equipment was used almost everywhere. And for the last few years they couldn’t make and deliver their product fast enough. Last year they had done over $50 million in sales. Now, over lunch I heard that for the first time sales were getting tougher. It even looked as if they might not make this year’s sales forecast.

“What’s changed?” I asked. “Well things were going great last year, but now we’re competing for larger orders and for the first time we have to go through competitive bids with formal Request For Proposals – RFP’s. Fortune 100 companies who never had a product in this space are saying that they can deliver what we can. We know that’s not true, but we’re getting our butts kicked. They’re also bundling in services and other products we don’t have and can’t offer. We even lost a few orders we didn’t even know were out for bid.”

He’s A Nice Guy
Trying to understand a bit more about their sales process, I asked them to tell me why their sales were so easy for the last few years. My student looked almost blissful when he described the process, “Oh, customers found our product by word of mouth. We solve a really hard and important problem. We’d give a demo, they’d bring their boss over, jaws would drop, and we’d get an order. We’d install the system, more people could see what it would do and then we’d get more orders. Doing all those demos took up a lot of my travel time so I hired someone from one of the customers as our Washington sales person.” Hmm, a hint.

My student had always struck me as very smart, driven, articulate and a “nice guy.” His co-founder seemed to have the same temperament. I ventured a question, “Is your sales head a nice guy?” “Why yes, he fits perfectly into our company culture.”  And he then went into a long soliloquy about their company culture of respect, ethics, compatibility, mission, etc, etc.

“So do your competitors have the same culture?”

The Peter Pan Syndrome
There was a bit of a pause as he thought, and said, “I don’t exactly know, but I’d guess not. They’re mostly multi-billion dollar companies who’ve been around a long time and they seem a lot tougher and willing to do anything to get an order. They even put things in their RFP responses that I bet aren’t true.”

It was about then that I remembered that one of the key reasons that these entrepreneurs had funded the company themselves was that they didn’t want any VC’s on their board. “Our VC’s screwed us in our last company, and now that we could afford it we don’t need them.” So far they hadn’t seemed to suffer. But now I was curious. “Any killer sales people on your board of directors?” They listed a couple of world-class engineering professors and a retired customer who had pointed them to some key early sales. But it dawned on me what they might be missing.

A Killer Sales Culture
“My first observation is that you guys don’t even know what you don’t know,” I suggested. “Large procurements for government agencies are being played out on level you aren’t participating in. There’s a game going on around you that you don’t even know about.” So far they hadn’t got up and left so I continued. “I think the root cause is that you two are “nice guys.” Your company needs to grow up – not in a way that changes your entire company culture, but enough to realize that the world outside your offices doesn’t match your idealistic view of how things should operate. The question is whether you are willing to accept that some part of how you sell may have to change.”

My ex-student asked, “Are you suggesting we hire a new Washington sales person?” “Actually no. Not yet,” I offered. Of all cities, Washington had an abundance of seasoned sales people that could teach them how the game was played. Turning to my student, “I think you need to go to Washington, hire one or more of these grizzled sales veterans as consultants and have them teach you what you need to know. If you are going to compete in Federal procurements, your company is going to have to grow up to play on another level, and eventually you are going to have to hire a team that can play that game.

But first you need to become a domain expert. Spend a year in Washington.”

Lessons Learned

  • When the big guys discover your market you need to recognize their game.
  • You don’t have to play by their rules, but to understand what they are.
  • Then you need to develop a strategy that lets you compete.
  • Otherwise they will eat your lunch.

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8 Responses

  1. “Last year they had done over $50 million in sales.

    “What’s changed?” I asked. “Well things were going great last year, but now we’re competing for larger orders and for the first time we have to go through competitive bids with formal Request For Proposals – RFP’s.

    We’d give a demo, they’d bring their boss over, jaws would drop, and we’d get an order.”

    Ohmigawwwdd!!!!!! Is this how you sell to US Government?? In my native Russia this kind of process was killed in 2003 and ALL sales over ~$3000 MUST BE RFP because this caused 100% corruption in the system and kickbacks of 30% were on just every single deal.

    Pleeese… I must sell to US Government.

  2. […] = 'josephlogan';Steve Blank nails it with this observation about compatibility between a company’s culture and that of its customers: My student had […]

  3. I like this line of closing advice very much: “You don’t have to play by their rules, but to understand what they are.”

    Josh Waitzkin wrote a great book about becoming both a chess grandmaster and tai chi master called “The Art of Learning

    He makes the point that he had to learn in both pursuits how to counter opponents who were breaking the rules without breaking them himself.

    It’s a great book full of practical insights about self-mastery and personal excellence. I blogged about it at http://www.skmurphy.com/blog/2010/03/13/recurring-problems-have-both-technical-and-psychological-roots/

  4. A lot of us start up our own businesses to escape from the dog eat dog world of the big corporations, only to find that when our little startup achieves success and grows up, it needs to play with the big dogs. Any advice on how to isolate the “killer sales culture” that’s needed to compete at this level, yet retain the “nice guy” culture throughout the rest of the organization?

  5. When did your ex-student and entrepreneur move to D.C.? I’d love to hear more about his product and who and what are giving him trouble. As a long time engineer that’s exploring high value applications for consumer web, I’d love to see how startups that move into government sales operate.

  6. Steve, are you going to write more on this topic or the story afterwards?

    We are getting closer to this point in time (in a different industry) and would love more stories and resources that help with the transition. Or if not, it would be great to chat about some of these things via phone/in person.

  7. The story of the nice guys who couldn’t sell against cutthroat competitors is a perfect illustration of the fundamental dilemma most founders eventually face:

    Does the company serve the needs of the founders? Or do the founders serve the needs of the company?

    If you’re lucky to be in business long enough, you’re going to discover that many times, what the business needs and what you’re comfortable doing will often diverge.

    At that point, you have to choose between your own comfort and the company’s success.

    The tough part is that there’s no guarantee that sacrificing your own comfort will work. And that’s especially true if you do something like hire a new VP Sales without learning for yourself how the sales process actually works. Steve’s advice about focusing on learning first is spot on.

    After years in the business, I’ve learned what I can and can’t do. I’ve teamed up with a VP Sales who knows how to sell. And I know when to ask questions, and when to get out of the way and let him go for the kill his way.

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