How a Large Customer Can Kill a Startup
I often hear a founder get very excited about the prospect of a large customer. The implied expectation is that this out-sized customer is going to shower the startup with cash & confer on them the imprimatur of legitimacy. However, when I hear a founder start talking about “the big one” I cringe. I start thinking about how to break it to them that pursuing this large customer strategy is highly likely to cause a lot of pain and suffering – and quite possibly kill the startup. While I know it’s my duty to inform the founders this is a bad idea, I know from experience that my message is not what they want to hear and is likely to be ignored, at least for a while.
Startups and large customers are a mismatch. Large sales are always complex, and involve huge resources to get all the constituencies of the prospect company on board. Big customers tend to want a long testing period for which they almost never pay and this usually will require the majority of the startup’s resources. Large customers also have needs that are often different from the rest of the market and they will usually demand that you modify your product to fit their needs.
Selling to large customers is like climbing a mountain with numerous “false peaks”, where you think you see the top of the mountain, but when you reach that spot, it turns out there is another higher peak and so on and so on. This process grinds you and your poor little startup down, and the oxygen (cash) just keeps getting thinner until you are exhausted and broke.
What’s worse is if by some small miracle you actually make it to the point that they decide they want your product or service, they will then grind you down on price mercilessly. They realize their leverage over you and promptly employ it. Even if you make it to a deal you can live with, you now have a one-customer company, which is not very impressive for a seasoned investor because one data point does not make a trend. It could just be an anomaly.
A single-customer company is in a very precarious position indeed. My first company, Inmark Development was in that position for a while & I learned the hard way (which is code for the expensive way) about all the real-world pitfalls.
By contrast, building a real business on small customers, then working your way up the food chain to medium customers and beyond makes for a far sturdier business. Importantly, the sales cycle is much shorter and requires fewer resources and often no modifications to the core product. You also get the benefit of more accurate and timely market feedback, which is so critical for a startup. It’s also much easier to stay true to the company or product mission, rather than being yanked around randomly by a single voice. With a diverse portfolio of customers, a single customer can’t inflict significant damage if you lose the account. Finally, investors will have more reference points and the traction that you gain will be more tangible and durable. Once you build a stable business of right-sized customers, at some point you will be in a position where you can afford to dance with elephants.
As I stress in my book, The Start-Up J Curve, it’s incredibly important for startups to do things in the proper sequence. Of course, large customers are fantastic once you are ready for them. But they can be fatal if you attempt to take them on too early.
So the non-intuitive advice that I end up giving a founder of an early stage startup when I hear them excitedly tell me of an elephant-sized make-the-company sales prospect is: “Dancing with elephants is dangerous, I recommend we blow ’em off.” For now.
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