A Startup’s Guide to Working With Large Corporations

Large corporations and early stage startups need each other. While many in the startup and defense tech ecosystem love to criticize traditional defense primes and other large corporations (often for good reason), ultimately corporations serve a crucial role for American national security, managing massive, multi-billion dollar projects responsible for developing exquisite, cutting-edge, mission critical platforms with little room for failure. Today, startups simply do not have the engineering teams, clearances, and manufacturing capacity to build systems like nuclear submarines, aircraft carriers, and supersonic strike fighters. Defense primes employ armies of engineers and scientists with top secret security clearances, maintain large manufacturing facilities, cultivate deep relationships with government acquisitions organizations and key legislative decision makers, invest billions of dollars annually into cutting edge research and development, and more. Likewise, large commercial corporations have the scale and capacity to produce the high volumes of products and infrastructure essential to modern society while meeting stringent safety and reliability standards that are often beyond the capabilities of a startup.

While many startups ultimately aim to become prime contractors and secure government programs of record or large commercial market shares of their own, partnering with established defense primes and commercial corporations as subcontractors, vendors, or suppliers can provide an important bridge in the early years. These relationships can create the order volumes needed to scale production, reduce unit costs, and help startups cross the proverbial “valley of death” on the path to mass production.

Last summer, Shield Capital operating partner Pat O’Reilly and I wrote an article “demystifying” defense corporation sales for startups. This summer, we decided to update that piece with additional lessons learned over the past year. Pat has over four decades of experience working as a customer, consultant, and executive within the Aerospace and Defense (A&D) industry, and he works closely with startup CEOs selling to A&D and large commercial corporations. In his experience, it is critical for startups to understand how defense primes and other large corporations make purchasing and partnership decisions as they craft their Go-To-Market (GTM) strategies and work to efficiently allocate a startup’s limited resources. This article shares Pat’s insights into increasing the probability of overcoming a large corporation’s sales hurdles.

Demystifying Defense Corporation Sales: Insights for Startup Founders

There are many lucrative opportunities for startups to work with large corporations. Many internal software and hardware tools are legacy and inefficient, existing suppliers are expensive and slow, and many corporations’ engineering teams lack enough strong software, AI, and robotics talent needed to deliver on new contract opportunities.

However, corporations also tend to have slow, deliberate, and proprietary decision processes for adopting new technologies, or services, creating a significant and often opaque barrier that can feel impenetrable for startups seeking to navigate the organization and secure sales. Corporations’ procurement decisions are often intertwined with non-disclosable but enforceable agreements with existing suppliers, and many corporations view their procurement process as a differentiating factor in competitive solicitations. Additionally, they want to limit disclosure to government agencies that they may have to negotiate contracts with in the future.

Unlike small or mid-sized companies where a few individuals can rapidly make procurement decisions with transparent rationale, large corporations’ decision processes typically take 9 months or more due to the large number of stakeholders and disaggregated functional staffs involved. Recent earnings reports (scrutinized by Wall Street analysts which put a premium on cash on hand), on-going proposals, the general economy, and the success or failure of recent solicitation pursuits can all impact corporate decision-making. Additionally, corporations need to balance competing technology investment opportunities with capital and Internal Research and Development (IR&D) budgets. Furthermore, they do not want to expose themselves to the scrutiny of why one startup’s technology was chosen over another’s.

Regardless of the industry, successful startup engagements with large corporations typically follow a pattern of eight sequential steps:

1. Identify and Engage the Target Customer

2. Introduce the Technology and Demonstrate its Capabilities

3. Engage the Business Unit and Secure Agreement for a Pilot

4. Plan and Execute the Pilot

5. Validate Pilot Results, Support Building the Business Case, and Secure Budget Approval

6. Negotiate and Finalize the Purchase Order or Contract

7. Manufacture and Prepare the Product for Delivery

8. Deliver the Product and Receive Payment

While the scope of each step may vary, the pattern of engagement steps is common across large corporations and industries. Typically, each step has different corporate stakeholders, influencers, and decision makers participating; therefore, success in one step does not necessarily indicate success in the following step. A key to success is identifying and cultivating a “champion” within the target corporation who can provide early guidance and help the startup navigate the company’s technology adoption and procurement processes.

Understanding Corporate Customers’ Perspectives

Before attempting to sell to a large corporation, startups must first understand corporate customers’ perspectives and incentives, which often differ significantly from their own. While startups tend to be focused on improving quality, lowering cost, or maximizing performance, corporations are primarily motivated by achieving announced profitability forecasts that are updated in quarterly earnings calls.

Startups and large corporations differ significantly in their tolerance for risk. Traditional startup guidance is to deliver a “Minimum Value Product (MVP)” that can be improved over time by feedback and collaboration with their customers. Unlike selling to businesses that can accommodate incremental, ongoing improvements to the product or take part in an R&D effort, A&D corporations need products to be delivered with proven reliability and performance and in their final configuration, so as not to jeopardize the quality or brand of their products. Corporations’ production contracts do not allow for time or resources to incrementally improve their sub-contractors’ products once delivered.

Corporations place a premium on winning large competitive contracts and then complying with the terms, conditions, and scope of those contracts with the minimum execution cost and risk. Therefore, A&D corporations have little incentive to introduce a new supplier or technology to a contract if it increases the risk, modestly reduces costs, or exceeds the performance of an already compliant contract execution plan. Since most corporations’ business units manage portfolios of multiple ongoing contracts, resources and expenses are allocated, and often re-allocated, to optimize the collective profitability of all contracts reported quarterly by that business unit instead of optimizing the performance of an individual contract. Similarly, due to cross-contract teaming agreements, it is unlikely that a supplier will be replaced on a contract or proposal team if they are also participating on other contracts and proposals in that business unit. Therefore, simply exceeding a contract’s performance requirements usually does not provide sufficient motivation to disrupt the execution of an existing contract or on-going proposal, particularly for cost-plus contracts which do not incentivize contractor efficiency. Likewise, if a corporation is confident in their Probability of winning (Pwin) a solicitation, they are not incentivized to add a new entrant onto a proposal team even if it improves their products, if they deem it could introduce additional, unnecessary risk to the project. Finally, A&D corporations may be unable to adopt new technologies without first securing end-customer approval when introducing new major subcontractors or changes to established systems.

Startups often underestimate a corporation’s cost of evaluating, much less adopting, a new technology.

Evaluating and adopting a new technology can be costly and time-consuming, requiring employees across multiple functions to test, evaluate, and integrate the product, often while the organization is under pressure to keep its workforce focused on production. Management may also be reluctant to involve the unions or labor groups that would ultimately use the product, even though their participation may be critical to successful adoption.

Given the negative incentives for a corporation to adopt new technologies and services, when would a startup’s product have a high likelihood of being adopted? Our experience indicates there are three cases when a corporation would be driven to adopt a startup’s new technology:

1. It solves a serious problem causing a large loss of revenue (ex: one of our portfolio companies is working with a large corporation to help solve quality assurance problems that can cost the customer millions of dollars each year in product recalls, fines, etc.)

2. It significantly reduces operations expenses, or Cost of Goods Sold, on the order of 10X (ex: Apex Space builds satellite buses an order of magnitude cheaper and faster than its legacy competitors, and as such has won contracts with a number of defense primes)

3. Their largest customers, or competitors, force them to adopt the technology (ex: many U.S. military programs are now requiring contractors to translate millions of lines of legacy code into memory safe coding languages, which has driven some defense primes to adopt AI code translation tools like Code Metal)

Thus, startups should prioritize developing and selling products to corporate customers where one or more of these situations apply. Developing a solution that is only slightly better is not enough to break through corporate customers’ buying cycles.

Step 1. Identify and Engage the Target Customer

Startups should invest the time and energy upfront to identify corporate customers with a compelling and urgent need for their product. Focusing on highly motivated buyers increases the likelihood of a successful sale and prevents scarce time and resources from being wasted on prospects with little urgency to act.

The corporate information required to determine a customer’s level of need for a product is often confidential. Despite this, insights into a corporation’s problems and needs can be gained through open-source research and “probing” engagements. For public corporations, quarterly earnings reports, press announcements, speeches and articles by corporate leaders, and annual 10-K reports are good open sources for research. For private companies, public information is more limited, but startups can still glean relevant information from press releases and interviews. In our experience, ultimately the most effective approach to identify a corporation’s level of need for a product is through repeated in-person engagements.

When evaluating potential corporate customers, it is important to consider timing. Government Requests for Proposals (RFPs), corporate annual budget cycles, and SEC earnings reports drive corporate decision schedules. Startups should track major RFPs that are relevant to their technology and engage a corporation soon after the RFP has been released by the government, as early outreach creates more time to establish a teaming relationship and shape a competitive joint proposal.

Recently announced startup-defense prime partnerships and contracts also illustrate the importance of aligning with urgent administration priorities. For example, earlier this month, GrayMatter Robotics and Path Robotics announced a $900M contract with HII to automate Navy shipbuilding, a major priority for this administration. Similarly, Northrop Grumman and Apex Space announced a partnership to develop space-based interceptors, a novel space platform critical to the administration’s “Golden Dome” plans. Picogrid and Northrop Grumman announced a partnership to develop software for air and drone defense, as did General Dynamics and Anduril, another major government priority in the face of the conflicts in Iran and Ukraine. Likewise, manufacturing startups including Hadrian, Deterrence, and Machina Labs have partnered with major defense primes to expand production of missiles, artillery, and other munitions as recent conflicts have exposed critical shortages across U.S. weapons inventories.

Unlike the U.S. government, most publicly owned corporations’ fiscal years run from January to January. Because of their size and complex governance structures, corporations often develop and approve annual budgets well before funds are deployed, which can create a significant lag between procurement approval and actual spending. For example, if a startup’s product is considered a capital expense, decisions to budget for that capital procurement often occur in the summer before the following year’s budget. Thus, if a successful pilot leads to a purchase decision in September, the funds to execute that procurement may not be allocated until the following January. Privately owned corporations generally do not adhere as strictly to annual budget cycles and, therefore, are more agile to react to opportunities to adopt new technologies throughout a year.

The timing of capital programs is also important. For example, if a corporation just purchased a license for a suite of engineering tools on a three-year contract with multiple two-year contract extensions, it is highly unlikely they would be receptive to a pitch on new engineering tools, regardless of how much money it would save or its level of performance. Most corporations have a “refresh rate” for replacing and upgrading tools and capital expenditures, so, during an introduction session, startups should ask when their “window of sales opportunity” is open to identify the best time to follow up and engage a customer on a new product. Additionally, corporations often have manufacturing and tool upgrade cycles tied to large program pursuits, so startups should track potential customers’ published awards to know when it is best to engage with them on new technologies.

Unless a founder has a pre-existing relationship with a corporation’s employee, founders should begin their outreach through groups that are positioned to evaluate emerging technologies, such as a corporate venture capital (CVC) team,¹ the offices of the Chief Technology Officer (CTO) or Chief Information Officer (CIO), or a Manufacturing Technology (MANTECH) organization. Often CVC teams can connect startups with relevant business units or technology evaluation organizations within a corporation. However, not all CVCs are created equal – while some CVC teams have excellent connectivity into relevant stakeholders in the parent organization and a demonstrated ability to transition new technologies into business units, others amount to little more than “innovation theater.” Before engaging, founders should examine a CVC’s track record of successful technology adoption and speak with its portfolio companies to assess whether the team can provide meaningful access and support. For some organizations, it may be more effective to work directly with the business units and technology organizations themselves.

Step 2. Introduce the Technology and Demonstrate its Capabilities

Often, a startup’s first engagement with a corporation is not with the persons who ultimately determine whether the organization will adopt its technology. Thus, a startup’s introductory chart decks should simply and clearly describe the technology and its specific, quantifiable, value proposition (ex: lowers execution time and cost by 10x, decreases defect rate by 5x, etc.), so that the meeting participants can easily repeat the main points to other corporate stakeholders. Unlike an investment pitch, corporation employees are keenly aware of their own problems, so it is recommended that no more than one chart address the need for solving a problem. Instead, the presentation should focus on how the startup proposes to solve a problem and benefit a customer.

If the initial corporate contacts identify a strong fit within a particular business unit or use case, the startup will need to deliver a second presentation to the relevant stakeholders who will ultimately champion the startup’s products. These champions connect startups with the managers and operators who will use the product and help navigate the corporation’s evaluation, budgeting, and procurement processes. After this second call, startups should offer to conduct an in-person product demonstration at the corporate customer’s facilities. In-person product demonstrations often attract a broader group of stakeholders, generate more substantive feedback, elicit comparisons with competing products, and reveal the personnel, approvals, and remaining steps involved in the corporation’s procurement process.

Step 3. Engage the Business Unit and Secure Agreement for a Pilot

Demonstrating a product to a corporate-level technology group, such as the CTO’s office, is important to build internal support and identify potential champions within a corporation. However, the ultimate evaluation and justification of a specific use case often rests with the MANTECH, technology, or software teams embedded within a relevant business unit. In addition to a demonstration, these groups typically require a pilot program ranging from a few days to several months to validate a product’s performance in an active production environment.

Pilots are an expensive undertaking for a corporation given the time needed for managers, engineers, and operators to learn how to deploy the product. Further, pilots can introduce risks, as unsuccessful pilots can cause quality problems or diminish production rates. Therefore, securing corporate approval for a pilot often requires additional demonstrations and planning sessions with the relevant business units and functional stakeholders.

Step 4. Plan and Execute the Pilot

Once an agreement is reached to conduct a pilot, startups should actively participate in the planning of the pilot. When planning a pilot, corporate champions will survey production managers, operators, and other key stakeholders to establish evaluation metrics that support the business case needed to request capital budget allocation to ultimately purchase the product. Additionally, it is important to work with production planners to determine when a production process can host a pilot with minimum disruption and risk to their production quotas.

To prepare for a pilot, startups should spend time observing their potential customer’s current operations to ensure they fully understand how their product will be used and how evaluation metrics will be measured and recorded during the pilot. Because corporations already bear the internal costs of running a pilot, startups should not expect to receive funding to loan their products or to participate in a pilot; however, when it is offered, it signals a genuine commitment to evaluating the product. When funding is offered by a customer, startups should consider offering deeply discounted prices for pilot projects in exchange for the customer’s comprehensive feedback and testimonials if the pilot is successful.

Startups should avoid “blind pilots,” in which products are tested without their direct participation, whenever possible. Offering complimentary training and on-site support usually allows the startup to ensure proper product use, gather accurate feedback, and verify that performance and cost data are measured correctly.

Given pilots are often executed on an active production line, startups should be prepared for contingencies such as supply chain delays, union strikes, customer order changes, and other exigencies to significantly delay pilots at the last minute.

Once the pilot’s scope, objectives, and measurement parameters are agreed to, the burden is on the startup to ensure the final configuration of their product is completed on time. Startups should view a pilot as a single opportunity to prove the maturity and production readiness of the technology. Thus, startups should invest significant resources in product quality control and testing before the pilot and thoroughly rehearse any required training materials.

In order to accelerate the initial product procurements after a pilot, when possible, startups should request a very small Purchase Order (PO) associated with the pilot. Even a “no-cost” PO can initiate supplier registration early and reduce onboarding delays after a decision is made to procure a product, as it allows the corporation to perform early due diligence on the financial, government compliance, and legal criteria required by a corporation’s policies to purchase goods from the startup. It also provides the startup with transparency around payment terms, which helps with revenue planning.

During the execution of a pilot, especially in the early days, startups should endeavor to have on-site support personnel present when products are operated. Backup resources should be available to support repairs or recalibration of a product without disrupting production. If the pilot is going well, champions should highlight its progress and results to the decision-makers responsible for ultimately approving the purchase. If the pilot is not going well, the startup should pause execution to address product issues rather than complete the pilot with conclusive negative results.

Step 5. Validate Pilot Results, Support Building the Business Case, and Secure Budget Approval

Once a pilot is complete, startups should offer to provide technical support while a corporation analyzes the results to ensure performance data is interpreted correctly. Large corporations often outsource the analysis that informs procurement decisions, particularly decisions that require specific expertise, to business or engineering consulting firms like Deloitte, Boston Consulting Group, and McKinsey. Ensuring these consulting firms understand the product and pilot data collected is critical for the accurate analysis of a pilot’s results.

The ultimate decision to procure a new product is based on the product’s performance, reliability, ability to solve a severe problem, and the magnitude of the Return On Investment (ROI). In general, a new technology must offer the potential for a 10x ROI to justify the management attention, organizational effort, and risk required to adopt it. Clear ROI is particularly important when selling to P&L leaders at public companies, where quarterly earnings face close scrutiny from equity analysts and executives are incentivized to preserve free cash reserves by minimizing capital expenditures.

When conducting this business case analysis for a product’s ROI, corporations include both the cost of technology adoption and the long-term cost of ownership of the new product. This includes the cost of:

1. The product’s selling price (whether it is a product, service fee, or license)

2. Maintenance and future upgrades to the product

3. Cancelling contracts early with incumbent suppliers

4. Training employees to use a new product (including the resistance to learning a new tool)

5. Disposing current assets that a new product will displace

6. Disruption to existing programs and revenue streams

7. Impacts on other services or products provided by terminated suppliers

8. Qualifying components to meet customer specifications, reliability, and compliances with statutes, regulations, and customer policies

9. Meeting government cyber security, environmental, safety, quality, or other regulatory requirements

10. Acquiring data rights from the customer’s 3rd party vendors (e.g. the data from a customer’s 3rd party digitally controlled manufacturing machines)

Once the sponsoring organization within a corporation develops the business case, it submits a budget request proposal to procure a startup’s product for financial review and presents it to the relevant P&L leader. The P&L leader then compares it with competing capital expenditure requests (most of which the startup will never know about) and determines which projects will receive funding in the following fiscal year. Until corporate leadership approves a final, corporate-wide, capital budget (which requires multiple management layer reviews and board approval), the decision to procure a new product or service is not guaranteed. P&L leaders may decide to approve a different purchase quantity than the sponsoring organization requested or allocate Internal Research and Development (IR&D) funds for a limited purchase to continue evaluating the product during the next fiscal year.

Each quarter, business units assess the status of their finances, and if they are exceeding profit expectations, or if other capital expenses are delayed, there are occasionally opportunities to accelerate capital expenditures into the current fiscal year. Securing additional funds typically requires approval from senior management, which may instead reallocate the excess funds to a business unit with a more urgent need. Thus, staying closely connected to champions in a corporation is important even after a P&L has made a capital budget allocation decision on a startup’s product.

Step 6. Negotiate and Finalize the Purchase Order or Contract

After securing funding for a new project, startups must negotiate a PO with the corporation, a potentially time consuming process that can delay startups’ ability to quickly deliver to customers. Unfortunately, corporations often have many backlogged procurement actions at the start of each quarter, so even though funding may be approved and available, it can take more than a month before a PO is issued to a startup. Finally, startups must clearly understand delivery terms, marking and packaging requirements, inspection criteria, and warranty obligations to avoid costly surprises that can significantly reduce the anticipated profit from a large corporate sale. As stated earlier, when possible, to reduce the negotiating time to execute a PO, startups should begin the process to register as a corporation’s certified supplier during a pilot through a small PO or a “no cost” PO.

When selling to an A&D corporation, PO negotiations can be delayed if the startup’s legal counsel is not familiar with U.S. government Defense Federal Acquisition Regulation Supplement (DFARS) T&Cs mandated by congressional appropriations and authorizations. Startups can avoid paying hourly for their legal counsel’s education if they select legal counsel that is already familiar with DFARS mandates and with waivers to DFARS T&Cs such as much less onerous Other Transactional Authorities (OTAs).

Step 7. Manufacture and Prepare the Product for Delivery

While selling to large corporations is a great achievement for generating revenue, it also is a significant opportunity for startups to establish a reputation for quality and on time delivery with other large corporations. Thus, once a corporation approves the capital budget, the startup should begin planning workforce expansion, quality assurance, configuration management, cybersecurity support, and other long-lead activities required to scale production after receiving the purchase order. When scaling production, startups frequently encounter new, unexpected supplier delays and quality issues. Therefore, when possible, startups should secure potentially long-lead-time items early by establishing working capital or exploring debt options, while negotiating exclusive supplier agreements based on anticipated future order volumes to gain higher priority order status with suppliers.

After landing an initial division as a customer within a corporation, startups should prioritize expanding into adjacent divisions with similar use cases, as growing within an existing corporate account typically accelerates revenue more quickly than pursuing entirely new corporate customers. Testimonials for on-time, high quality production performance greatly accelerates sales to other business units and corporations.

Step 8. Deliver the Product and Receive Payment

Startups should witness in-person the receipt of the initial delivery and operation of their product for large POs, as feedback from the handling of products often informs more efficient transportation and packaging that can reduce a startup’s future operating expense.

The T&C of the PO will dictate the payment timing for a product. Typically, payment is made 30 days after the receipt of the product.

Conclusions

The intent of this article is to shed light on the pattern of activities and decisions encountered when selling a new product, technology, or service to a large corporation. Understanding a corporation’s motivations and procurement process enables founders to develop informed Go-To-Market plans and business strategies. Success first requires research to find a potential corporate customer with either a large problem, need to dramatically reduce costs, or comply with ultimate customer or government mandates that the startup’s product can solve. Then a startup must commit time and resources to endure a prolonged corporate procurement process prior to consuming their available cash, or runway. Despite these hurdles, successful sales to a corporation can provide a stable and sufficiently large revenue stream to propel a startup over the “valley of death” and into mass production.

As always, please reach out if you or anyone you know is building at the intersection of technology and national security. And please let us know what you think and how this analysis compares with your own experiences working with large corporations and startups.

1. Hint: CVC contact information can be found by searching the internet for the name of the corporation followed by the word “Ventures” (e.g. Lockheed Martin Ventures, RTX Ventures, Oshkosh Ventures, General Motors Ventures, etc.)

Note: The opinions and views expressed in this article are solely our own and do not reflect the views, policies, or position of our employer or any other organization or individual with which we are affiliated.