We wanted to start a little startup, but things changed after a big company asked us to do some modules, and after being in talks, we thought now that it will be best to start with the small that handle "such a lare project", how you say in a polite way that we have take the decision to not enter to the project (they now have us considered in their plans, but nothing is wrote down... there no exist a contract, so we can still say no).
Tell your customer that...
- You appreciate the offer
- You are honest and the truth, at this stage of your startup, is that you cannot give them the level of service they require because you are small, have other projects under way, have personnel rotating, etc.
- HOWEVER, tell them at what minor scale you can operate, so you let the door open to still participate without risking doing a bad job.
But, if you did the mistake of show your startup as a bigger-than-it-really-is company, then mmm... that's matter for other question.
The old 'our investors have decided they want us to .....' is a useful generic way to communicate bad news. The worst that might happen is the big company will try offering you more money to do the project.
How about just saying no. What is not polite about being direct and honest, and doing it sooner than later. Trust me, they will appreciate this move much more than you quitting in the large project after it is started.
If your decision is to start a business where consulting is not in the picture then just do that, if you are unsure it might be possible you are not ready for the small startup yet.