The “Pre-Chasm” Opportunity for Corporates to Stay in the Lead
Geoffrey Moore’s classic marketing guidebook Crossing the Chasm is widely recognized as best practice for entrepreneurs aspiring to build successful ventures. Like two sides of the same coin, it also serves as an excellent guidebook for corporates who want to stay at the forefront of innovation.
Crossing the Chasm explains why a startup’s transition from a market of visionary early adopters to the mainstream market is one of the hardest, if not the hardest challenge the startup needs to overcome. It is hard because early adopters and mainstream customers have diverging, almost orthogonal needs.
Early adopters have a vision for what the startup’s solution could do for them once it matures, and they foresee the value this would generate. So they are trying to gain a competitive advantage by getting their hands on the solution early. In exchange for getting to be one of the first to use it, they are forgiving if the solution is not yet fully rounded, and either live with, or build workarounds for, its initial insufficiencies. They are willing to put in the effort and take the financial and operational risk because they believe that the outcome will reward them handsomely.
Mainstream customers, on the other hand, are followers who do not want to take a risk, neither financially nor operationally. They will adopt the startup’s solution when it is well-rounded, reliable, and easy to deploy without workarounds.
Startups that fail to reach the mainstream market will plateau out prematurely once they have saturated the much smaller market of early adopters. In Geoffrey Moore’s words, they fail to “cross the chasm.”
To avoid such failure, it is essential to be laser-focused on a well-defined, often niche use case, and to collaborate closely with a small base of early adopters to sharpen that use case and develop a compelling solution for it. Once a solution exists that is materially better than its next-best alternative, that is well-rounded, reliable, and easy to deploy without special technical expertise, the startup can expand beyond its early adopters and into the mainstream market.
Typically, Crossing the Chasm is being thought of as advice for early-stage startups. This makes sense because, as has been shown again and again, heeding or ignoring the advice in the book can make the difference between early failure and long-term success for a startup.
But the corporate-startup partnership that forms the foundation of this advice is a perfectly bidirectional win-win, and so the book could just as well be thought of as best practice for corporates. In fact, we believe that every corporate looking to keep a competitive edge in a dynamic marketplace should develop a capability around startup partnerships. They should identify a small set of high-potential use cases, find strong, early-stage startups addressing those use cases, and take the role of the early adopter for these startups as explained in the book.
Let us be more specific on why this makes sense. It is obvious why an early-stage startup would want to team up with a corporate: It is the desire to understand the use case they are building a solution for as intimately as their customers do, and the need for timely and continuous feedback as the solution emerges. Why would a corporate want to team up with a startup at such early stage? It is the goal to gain a competitive advantage by getting their hands on the startup’s solution earlier than anyone else and gathering experience in the process.
The exact nature of the competitive advantage a corporate can gain from partnering with an early-stage startup depends on the type of the partnership:
There are also more subtle benefits for the corporate. First, because the corporate acts as a sparring partner of the startup during much of the development of the startup’s solution, it typically has the unique opportunity to shape the solution, perhaps even get the startup to tailor it to its exact needs. Second, well before the solution is deployed at scale at the corporate, the corporate develops valuable experience with it. This gives it a significant head-start over any competitor who only gets their feet wet at a later point. Third, the hands-on collaboration of corporate employees and startup teams provides a natural environment for the former to learn the more agile ways of working that are characteristic of the startup scene. Many traditional corporates want their employees to develop these skills to be faster in situations of increased uncertainty. Partnerships with strong startups provide this training more effectively than any seminar or workshop could do.
So, could the corporate not just launch a venture arm and gain the same advantages without the distraction of working hands-on with startups? In a prior article, we explained why corporate-startup partnerships generally require less money, are less risky, and offer faster time to impact compared to corporate venturing.
Less money is required because a corporate that partners with a startup pays for a project, not for equity. Equity is expensive, especially for strong startups, while a project costs much less. What is more, strong startups who are well-funded depend less on project income and may be able to offer the same project for less than not-so-strong startups can.
Corporate-startup partnerships are less risky than corporate venturing partly because less money is at stake, partly because the money that does get spent can be linked to project milestones, and partnerships that do not perform well can be discontinued early.
Less time to impact is needed for corporate-startup partnerships relative to corporate venturing because impact is made with each project, not just when the startup makes an exit. Even considering the insights obtained by investing in a startup and taking a board seat, impact is generated only when these insights are turned into action.
Of course, this does not mean that corporate venturing is inferior to corporate-startup partnerships across the board. For example, only corporate venturing can hedge against disruptive trends. Corporate-startup partnerships cannot accomplish this. So corporate-startup partnerships should be viewed as a complement to, not a substitute for, corporate venturing.
Because Geoffrey Moore wrote Crossing the Chasm to help startups reach the mainstream market, the corporate-startup partnership that underpins the recommendations of the book naturally takes place “pre-chasm.” There is no well-rounded, reliable, easy-to-deploy solution at the beginning of the partnership, but, thanks to the partnership, there is one at the end of it. The corporate in this case often is not just an early adopter, it might even be a first adopter.
If we look “post-chasm,” the startup’s situation has changed dramatically. It now has a well-rounded, reliable, easy-to-deploy solution, and it is selling it into the mainstream market. It may still work with a few early adopters, but most of its energy now goes into satisfying demand rather than tailoring the solution. Still, whether they are product-focused, portfolio-focused, or productivity-focused, corporate-startup partnerships create value not just pre-chasm, but also post-chasm. The objectives on both sides of the table are slightly different for post-chasm partnerships, however.
For a startup, a post-chasm partnership with a corporate is valuable as the corporate is yet another customer committed to the solution and willing to provide feedback on it. For a corporate, a post-chasm partnership is a way to create a competitive advantage by adopting the startup’s solution early. The corporate may no longer be able to become a first adopter as it is in the case of a pre-chasm partnership, but it can still be a fast follower. The competitive advantage that can be achieved is smaller compared to a pre-chasm partnership, but the time invested and operational risk taken is lower as well. Pre-chasm and post-chasm partnerships are therefore both attractive win-win opportunities for startups and corporates.
One final remark. Crossing the Chasm states that only a minority, typically about one-sixth, of corporates are early adopters of any particular solution. This implies that startups need to work hard to find those corporates as the majority of corporates will initially lack interest in their early solution. What it does not imply is that corporate-startup partnerships, pre-chasm or post-chasm, are something only one-sixth of corporates can do. A given startup with a given solution will likely only be able to address one-sixth of its addressable market until it has developed a solution that appeals to the mainstream. A given corporate, though, likely has plenty of use case it could use help on. We recommend that it pick some of these use cases, find high-potential, early-stage startups building solutions for those use cases, and help those startups help them.
The “Pre-Chasm” Opportunity for Corporates to Stay in the Lead
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