Amid the wave of U.S. initial public offerings this year, it occurred to me that companies going public leave one world and enter another.
Startups come out of nowhere and burn down entire established industries, in part because they are small and scrappy enough that they can take the risk of ignoring rules — long-held conventions, business etiquette, dress code, branding and sometimes even the letter of the law — that their big-company competitors simply cannot.
Yes, the internet enables disruption. And certainly big companies can get complacent and bureaucratic, creating an opportunity for small competitors.
But when you think about it, big companies are just startups that won. There are plenty of hyper-competitive smart people in charge of big companies, backed by massive budgets. If all they needed to compete and win was better technology and more efficient management, they could easily make that happen.
So what’s really going on here? What’s putting big companies at such a disadvantage? If it seems like they are fighting with one hand tied behind their back, it’s because they are.
I would submit Peloton as Exhibit A.
When the stationary-bike maker was still playing David to the fitness industry’s Goliath, it was too small to attract much attention. Now that the company is going public, music publishers are suing Peloton for allegedly playing music in spin classes without paying a license fee. (Peloton objects to the claims of wrongdoing, and it’s countersuing.) It doesn’t matter who’s right here: This is a situation that Peloton probably could have avoided.
Startups are like speedboats blasting through the waves with the singular goal of grabbing market share. That is part of the startup playbook. Uber Technologies UBER, +2.85% didn’t ask for permission, either, and look where it is now — in almost every city and town in America.
By contrast, big companies are like large ocean liners, where the captain follows maritime law to a T. The expectation is a comfortable ride that always arrives on time, so when there is engine trouble or anything other than the pleasant day on the water that’s been promised, it’s news.
Think of it this way: It’s not that surprising that startups can gleefully torpedo big companies on the open seas.
There are four areas where I see this dynamic playing out:
Customer expectations
Large companies’ mass-market customers are unforgiving. At least at the beginning, a startup’s customer base is composed entirely of early adopters, who are willing to trade nearly everything — top-quality service, reliability, etc. — for access to something new and interesting. Surprises are a selling point. Startups get a pass when it comes to standard business rules around service and quirks.
By contrast, large companies’ customers don’t want any surprises.
When Tesla’s TSLA, +0.27% only customers were wealthier car lovers who wanted the newest thing, the cars were beloved, bugs and all. Now that Tesla is a mass manufacturer with mass-market customers who rely on its vehicles for their daily commute, those glitches are a problem.
Brand flexibility
A startup has zero brand equity but endless options for how it presents itself and its products or services. It can change the brand all it wants by changing a name, reworking a website or overhauling the marketing message. Large companies don’t have this flexibility. They have too much invested in their brand to risk a pivot. And that puts them at a disadvantage to smaller companies that can adapt to whatever is trending in the market at any given moment. You can almost chart the growth of a company from startup to entrenched stalwart by how people react to their blunders. Coca-Cola KO, +0.10% wasn’t allowed to tweak its formula without a global brand crisis. But your local organic kombucha maker? She can do whatever she wants.
Technical debt
Most large enterprises are sitting on a tech stack that’s complicated, interconnected and rigid. It’s part of their competitive moat that ends up drowning them instead. Your typical startup, on the other hand, has no legacy systems, meaning it can overhaul everything overnight if need be. That makes startups much more agile, adaptable and better able to take risks. Take what happened at Equifax EFX, +0.33% two years ago when its systems were hacked and the personal data of more than 148 million people was exposed. It was later reported that the company had a patch available two months prior that would have protected that consumer data, but it didn’t react fast enough to get it out to everyone. The result was a nearly 50% drop in Equifax’s share price, a matching rise in the price of its biggest competitor, a lasting stain on the company’s reputation and, perhaps, enough of an opening for an upstart to think it could do the job better.
Legal barriers
Corporations are motivated to construct legal barriers, both to protect their businesses from competition and also to protect their interests in the market. Taxi drivers have their medallions, for instance. But in doing so they often end up constructing their own prison. Those barriers end up giving startups an advantage because they don’t necessarily have to follow those rules. Consider how Uber and Lyft LYFT, +1.46% have upended the taxi industry, or Airbnb the travel sector, simply by working around the regulations that cabbies and hotels had followed for decades. The castle walls they’d constructed were breached not only because startups failed to respect their sovereignty, but because a lack of barriers was also beneficial to consumers.
Those “unfair” advantages make it more difficult for large companies, even those doing the smart, forward-looking thing of investing heavily in innovation. Human nature tilts the field even further, because no one is as motivated to solve a problem as the startup founder they are competing against. And if anyone within a large company happens to come up with a solution and also has the maniacal, singular focus to execute on it, then comes the ultimate kick in the shins: They likely won’t solve the problem at the company itself, but instead find and market the solution at a new startup of their own creation.
Rather than merely waking up to the threat that’s lurking, corporate leaders need to start seeing those same threats as potential opportunities. They need to take a page from the people currently putting money into startups and aim wide and aim often, investing in the nascent competitors and technology that, with or without their help, may one day get big enough to disrupt them.
Culturally, there may be no bigger gap than the one between the people piloting boats and the pirates trying to ram them. That is why it is important to start the relationship long before there’s a hole in your hull.
Toby Krout is co-founder and CEO of Boomtown Accelerators.