Blue Chip Customers Can Wreck Your Startup
If you sign that big name customer early on, chances are you are going to get in over your head. The allure is obvious; snag the big fish and wait as others come washing up at your feet as you swim in an ocean of cash. Blue chip customers convey the aura of instant credibility and validation to the market that your startup is a force to be reckoned with.
Wouldn’t you be excited if you had a customer logo slide like the one above?
The problem is that the reality never quite matches the vision, especially for early stage B2B startups. The big company does not look at your startup as a vendor from which it is buying a product; they view you as an extension of their organization tasked with delivering them a highly customized product. Upon signing that contract, your customer knows that they are your biggest customer, and perhaps your only real customer.
This shifts the balance of power in the relationship heavily in your customer’s favor. They realize that you are not likely to do anything to lose their business, so you have from that moment become the property of your customer. If you thought the sales cycle was long and costly, your development and customer support process is going to be even more painful.
You might ask however that if they are paying a ton of money, then what is the big deal? The big deal is that you have shifted from a product company to a services company. Your focus is on delivering a product to one customer instead of building a product for a marketplace. The focus is not on executing your product vision, but on fulfilling a statement of work. All your resources go into supporting that one customer, instead of selling to other customers. Even if you can pull off both, you become less effective across the board, satisfying neither your big customer nor gaining new customers at a fast enough pace.
If you want to be stubborn and go down that path however, you need to realize a few things:
- Fund raising stalls – Most investors are not comfortable in funding startup in such a situation as the potential is pretty high that the startup turns into a “lifestyle business”. If you are committed to growing big though, set strict deadlines around the contract deliverables and use the cash generated to pour back into the product and customer acquisition after the completion of the project. Then you have a better chance at raising funds.
- Lengthy and costly sales cycle – The sales cycle selling to large organizations can be brutal, sometimes taking well over a year to consummate a signed contract. This includes hard costs of travel, meetings, presentations, etc. as well as soft costs of dedicating resources to sustaining the sales effort across engineering, product management and support teams. Make sure you keep a tight rein on costs and focus on achieving key milestones in the sales cycle. Every meeting and customer event should lead you closer to a signed contract.
- Customer acquisition decreases – Trying to do sales when you are focused on one customer is dicey. You either run the risk of promising resources and product features that you cannot pull off or you develop tunnel vision. It is a common tendency is to see your one customer’s problem as something everyone else experiences, thus shoehorning your solution into their needs. Instead, think about hiring dedicated sales people or using an outsourced sales company to keep customer acquisition flowing while the bulk of the team can focus on supporting your existing customer.
- Product vision gets cloudy – The product that you develop for you customer may not necessarily be the product that the market is interested in buying. In the early stages, it is critical to understand product-market-customer fit, but you only delay that process when your get only one viewpoint. Make sure that you do not stop the customer and market discovery process; that process is critical for getting a wide enough swath of opinion to fine-tune the product.
Because of the above reasons, a better strategy for most startups is to not start at the top with the largest companies, but focus on smaller and mid-sized customers. With smaller companies, you have shorter sales cycles, easier access to decision makers and organizations more adaptable to change. You also have more bandwidth to increase sales and more flexibility in setting the product roadmap. Once you get an established set of smaller customers and have the product fleshed out, then consider looking upstream at those potential blue chip customers.
14 Notes/ Hide
- loganabbott liked this
- pukomuko liked this
- marksbirch posted this