The Three Lessons Startups can Learn from Legacy Companies

In the age of ‘fail hard and fail often’ methodology popularized in the late 1990s Silicon Valley, sometimes startups could learn a thing or two (or three) from legacy companies to create sustainable change.

4 months ago   •   6 min read

By Colby Tunick

The landscape of established industries, from logistics to banking, and insurance is changing. Almost every day, a new company seeks to change or ‘disrupt’ this traditional landscape. Startups are crucial to the overall health of an industry. By introducing novel approaches and technology, startups function similarly to sharks in the aquatic ecosystem. By pruning back unhealthy companies, and non-innovators, startups create space for both forward-thinking incumbents and other startups to flourish and better serve customers.

In their push to disrupt established industries, startups do not always do things well. In the age of ‘fail hard and fail often’ methodology popularized in the late 1990s Silicon Valley, sometimes startups could learn a thing or two (or with this article, three) from legacy companies to create sustainable change. Here are three key lessons that startups and emerging businesses can learn from incumbents.

There is no substitute for subject matter expertise

Deep Industry Experience

Having a deep understanding of an industry is both a prerequisite for starting a business venture and a key determinant of success for startups. To understand what happens without this, look no further than Theranos. Theranos was an American privately held health technology corporation. It was initially touted as a breakthrough technology company, with claims of having devised blood tests that required only tiny amounts of blood and could be done rapidly using small automated devices the company had developed. However, these claims were later proven to be false.

Founded in 2003 by 19-year-old Elizabeth Holmes, Theranos was hyped to its investors and in the media as a breakthrough in the blood-testing market, where the U.S. diagnostic-lab industry posts annual sales of over $70 billion. Theranos claimed its technology was revolutionary and that its tests required only about 1/100 to 1/1,000 of the amount of blood that would ordinarily be needed and cost far less than existing tests. Theranos raised more than US$700 million from venture capitalists and private investors, and became the cautionary tale of the 2000s.

What went wrong with Theranos? Other than massive fraud, none of the founders had deep industry experience, or the knowledge to deliver the much ballyhooed product. This is a perennial problem with emerging companies and a place where incumbents serve as an example of how to run a successful business.

What makes incumbents stand out is that to answer a business problem, they can rely on their wealth of internal experience and lessons learned.

Incumbents optimize knowledge acquisition and knowledge distribution. Both are essential to run a successful company at any stage. Not that incumbents are perfect, but knowledge silos form at all companies, regardless of size. What makes incumbents stand out is that to answer a business problem, they can rely on their wealth of internal experience and lessons learned. Startups rarely have this ability because they are so lean. For Theranos, this would have meant either doing more due diligence before starting, or having the founding team replete with clinical and medical diagnostic experience. This subject expertise is something that legacy businesses do well, and an important lesson all upcoming business leaders should learn from.

Customer service is about delighting customers

Customer Service

Startups seek to disrupt existing business models. One of the easiest ways to do this is by making everything self-service. From purchasing a product, to billing, to support, while held up as a model of efficiency, this customer service model makes businesses less sticky and engender less loyalty.

Legacy companies are extremely strong in this area, by prioritizing in-person, or personalized support. One disrupter in the insurance space who can learn a lesson from established companies is Lemonade. Recently IPO’d, Lemonade is the epitome of the self-service model.

Want to buy a new product? Have a question? Need to file a claim? Do it online, in the app, or send an email. Have a question and want to speak to an actual person? In that case, you are all but guaranteed to be bounced around a massive call center. Some consumers prefer this model, but does it actually provide good customer service? That is a topic of much debate. Ironically, this customer service model does not correlate with profitability. At the time of writing, Lemonade is still losing more money than it is making.

As the business landscape continues to shift, startups can learn from legacy companies that customer support is not just 'another' business function

So what makes legacy companies better at customer service than its upstart competitors? First, many established companies were founded before the internet, smartphones, or the software-as-a-service (SAAS) business model . This meant supporting customers with a dedicated account manager, an insurance agent that knew your life story, and a focus on eliminating churn. As the business landscape continues to shift, startups can learn from legacy companies that customer support is not just another business function, it is the heart-and-soul of creating a lasting business.

Leveraging existing channels rather than increasing marketing spend

Channel Distribution

The business landscape is truly an ecosystem where companies interact, compete for market share, and also support each other. Nowhere is this more true than in distribution channels. While startups seek to compete by creating new distribution channels such as marketplaces, partnerships, or direct to consumer, legacy businesses still have a thing or two they can teach startups about getting a product to market.

Welcome to the strange and whacky story of Juicero. Juicero was a company that made a device that was marketed as a fruit and vegetable juicer that extracted juice from pre-processed packets. The company's product was called the Juicero Press. It consisted of a Wi-Fi connected device that used single-serving packets of pre-juiced fruits and vegetables sold only by subscription. Juicero received $120 million in funding from some of Silicon Valley’s most notable investors, including Kleiner Perkins and Alphabet Inc.

Juicero’s downfall was sealed when investors and customers found the Juicero bags could be squeezed with bare hands. Two backers said the final device was bulkier than what was originally pitched, and that it puzzled them to find that customers could achieve similar results without it. Bloomberg performed its own press test, pitting a Juicero machine against a reporter’s grip. The experiment found that squeezing the bag yields nearly the same amount of juice just as quickly—and sometimes, faster—than using the device.

Juicero declined to comment. A person close to the company said Juicero is aware the packs can be squeezed by hand, but that most people would prefer to use the machine because the process is more consistent and less messy. The device also reads a QR code printed on the back of each produce pack and checks the source against an online database to ensure the contents have not expired or been recalled, the person said. They also printed the expiration date on the pack.

Legacy companies can use their existing connections to do what many startups either cannot do, or cannot do well: getting their product into the world.

While we can learn many things from Juicero, one of the key issues was lack of sales channels. By restricting purchase from only their website, they limited the amount of people that could come into contact with the product in day-to-day life. Legacy companies can use their existing connections to do what many startups either cannot do, or cannot do well: getting their product into the world. In order to build a healthy company, startups should learn from sales channels that established companies use. Leveraging relationships to promote viability and distribution is a necessary step to bring a new product to market.

Experience is the best teacher

Putting it into practice

The ‘startup’ label is often reserved for high-growth, technologically based companies. However, this categorization is reductionist; any company seeking to be innovative can and should be considered a startup. Having a deep understanding of the industry, providing a great customer service experience, and leveraging relationships for product distribution are things that most startups can do well.

Legacy companies provide brilliant case studies of how we can do and do this well. Ultimately, for startups to be viable from inception, these three things are paramount. From a new tech-enabled insurance brokerage to innovative service providers, learning lessons from legacy companies are essential. After all, the reason legacy companies operate in the way they do is because of hard lessons that they learned along the way of their own journey.

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