Don’t Let Your First Large Customer Kill Your Startup
By Amit Karp, Partner at Bessemer Venture Partners.
Being a CEO of an early stage startup is tough. You have to find a way to efficiently reach customers and convince them buy your product. At the same time, you are continuously tweaking the product, battling to prove product-market fit. At the back of your mind, you know you have limited time to demonstrate strong market traction to raise the next funding round successfully. At some point you might be approached by a large potential enterprise customer who expresses genuine interest in buying your product. Most often, this large enterprise is not renowned for being on the cutting edge of technology (think Bank of America, Staples, Comcast, State Farm, etc.). Obviously, this may seem like an incredible opportunity: First, it is flattering that a well-recognized enterprise is interested in your product and is willing to dedicate time and money to try it. Second, signing a deal with such a large customer can generate meaningful revenue, especially for an early stage startup. No more need to chase all these small customers. One single deal with this enterprise and you can exceed the plan for the year. Sounds promising, no?
What you don’t always realize is that by deciding to pursue this deal, you may have killed your startup.
Huge enterprise customers such as the ones mentioned above are tough to deal with. Even when they have a genuine interest in your product, it will still most likely take many months of difficult negotiations to sign a contract with them (including the pain of dealing with large legal and procurement departments). And after you sign that purchase order, it can still take a long time to get them to deploy and adopt even the simplest products. There is a very good chance they will ask you to tailor the product to their specific needs, and your talented R&D team will mostly become an outsourced dev shop for this customer. Even if you don’t customize the product to very specific needs, you will spend a lot of time and effort developing “enterprise-grade” features such as integrating with the customer’s existing systems and tools, adding security layers, building compliance and traceability features, and dealing with many other requests which were not originally on your product roadmap.
But perhaps, the biggest problem is that once the product has become “enterprise-grade” and the team has built expertise in solving large enterprise customer needs, the default strategy will be to target other large enterprise customers. Going after large enterprise customers is very difficult to do, especially for an early stage startup. It requires long and expensive sales cycles, complex deployments which typically translates to an extensive professional services team, and much less predictability into revenue since you depend on low volume of transactions. This “elephant hunting” will affect not only your sales and marketing teams, but also the product and R&D teams which will have to focus on existing enterprise customers and will build the product accordingly.
Some products are suitable only for large enterprise and require a traditional sales model. But even if your goal is to target large enterprise customers eventually, most startups are more likely to succeed by climbing their way up the value chain. This means starting with mid-size customers who are quicker to deploy your product, nailing the product / market fit without needing to develop non-core enterprise features, and building a higher velocity sales cycle. Only later (if needed) you should target the larger enterprise customers. By then your startup will be more mature and less vulnerable. You will have more cash, more resources, a more experienced sales team, and will be less dependent on a single deal to hit your numbers.
So don’t let the “easy money” fool you. By saying yes to a large enterprise early in your company’s life, you have, by definition, said “no” to many other more attractive opportunities.