How a Large Customer Can Kill a Startup

Excellent article. And I want just to add more real world problems when dealing with large customers:

- they want to have multiple 'demos' with 5 or more attendees which end up being hours long

- you need to work hard to find out whether people you are talking to have any purchasing authority

- they want to have PoC deployed

- they want to have a kind of reviews and special contacts: security, special contracts, special NDAs, etc.

- they never pay invoices

- they are always want to tweak how the product works

In short, enterprise sales are more about relationship and negotiation - so you need to have team dedicated for doing only that (sales, sales engineers, etc.). It is not hard - but just you need to have team and process for doing that. For example, many established companies will have "paid PoC": You want to test our solution? Great. You have to pay first to test it.

I've worked for ten startups during my career. Even before the last couple, I had learned to recognize the "one big customer will bring us to the promised land" pattern as one of the surest indicators of failure. Those customers always end up sucking all the resources away from a more generally appealing product direction, and they never come through financially, so your development ends up months or years behind where it should have been with nothing to show for it. Some big companies deliberately take advantage of startups to do free work, with never any intent to buy the product itself. If you see this happening at your company, my advice is to start planning your next move.

I think one of the puzzling things about start-ups is a lack of appreciation for basic business analysis models such as Porter's 5 Forces.

Having a large customer means handing over a lot of power to your buyer. Although they may empower you, they can also empower your competitor. Another way I like to describe this is Australia's contractor law, which states something along the lines of: if more than 80% of your income comes from one client, you are an employee and not an independent contractor.

Most start-ups only seem to care about competitive forces relating to industry rivalry, threat of new entrants, and threat of substitution. Start-ups are usually very aware of substitution threat as companies that claim to be "disruptive" are attempting to be the substitution threat to an incumbent.

However, many overlook the power of suppliers and power of buyers. A large client demonstrates the power of buyers. The situation between Netflix and Starz shows the power of suppliers, or Spotify and the music industry. Anytime someone is trying to build a platform with vendor lock-in, they are trying to build their power as a supplier.

I hope for start-ups that when valuing an investor, a key criteria is their ability to provide a business perspective that may not be immediately obvious to a technical or sales/marketing focused founder. It may also be beneficial be for more people read up on business books/practices as they embark on their entrepreneurial journey.

I very much agree but Cygnus was saved by two large customers and not sunk, but not really helped by one.

The big early customer that really saved us was Intel. The saving wasn't in the money (though we were bootstrapped at the time and so needed the money) but it was early days and we were not particularly competent at anything but writing code. Intel needed an outside party to make a i960 compiler so they basically came regularly down to my house (where the company was located at the time) to lecture us on how we should be getting things done.

NASA was another key early customer who wanted us to succeed to kept us between pretty narrow rails that we learned from.

And Sun...well they just gave us cash, were intermittently demanding, and very slow to pay but fortunately our income wasn't dependent on them so we came out OK.

This is also dangerous for consultants. I always ended up working for one well paying customer who used up all my time. When that customer goes away you have to pretty much start from scratch.

The dangers listed in the article are true, but it's important to remember that as you grow, you'll always have a "big one", one customer who is more valuable and demanding than everyone else. Once you finish digesting your first big one, and close a few more their size, a new, even bigger "big one" will come along and the process will repeat a few times.

In the early stage, you are looking for users of your product who all will tell you about the common usage patterns so that a product can be made. The previous startup I co-founded started selling to couple of large customers because the CEO thought that we needed to start at the top. I actually signed up one of these guys. However, the customer never actually told us the common usage patterns to help us develop the product rather they told us their usage pattern and hence it seemed like consulting rather than building products.

My experience with large customers in my previous startup was that they do all those things: they want demos, they ask for large volume discounts, they wants custom features and a custom license agreement and a 24x7 phone support.

My solution was simple: just refuse to do all those things. To my surprise vast majority of them went ahead and still bought my product (some posed an "offended" stance initially).

I guess for that to work you really have to have the best product for their needs. :-)

This article left a lot of questions open--what's 'large', what kind of product are you developing and how are you building the company? Depending on the answers the article's advice may be completely wrong.

Fer instance: when creating a product that depends customer design partners, small companies typically cannot afford to make the investment necessary to hold up their end. You'll lose the deal and burn a customer in the process.

This is basically the typical pattern for successful enterprise start-up exits. However, the only way I've seen this work out is if working for that big customer is instrumental in the start-up exiting quickly, and this requires some experience by management to understand if a big customer is a potential acquirer or someone just trying to get out of working with a bigger company at typical enterprise b2b transaction profiles (very expensive, very slow). If so, then the costs of that customer are better weathered by a bigger company anyway because bureaucracy and long sales cycles are not a specialty of any start-up in the world. But admittedly, over time this results in big companies taking on the technical and relationship debts of the companies they acquire and the larger company becomes slower and less agile.

Disagree. If managed correctly a large customer can help grow your startup in some great ways:

- cash to invest into growth, especially if you can derive a higher profit margin than average from the customer

- increased stability ("battle tested") in the eyes of other large companies

- pushes you to build a scalable and secure product earlier on

In my experience with Codevolve (where we prefer to work with multi billion dollar companies) I've found there is a balance between how much they need you vs how much they are willing to bend to your startup mold. If they want you enough, they'll concede certain points to you. Some important things to stick to your guns on are:

- included support (you want to provide as little as possible, and get paid for it as much as possible)

- non competes (you don't want them to get one, or at least not for very long)

- pricing (leave yourself room to grow the account, especially if you have a product that can be used across multiple departments, and you're just starting with one)

The best way I've found to do this so far has been to go "bottom-up": find a champion in the company who will actually use your product. They're much more likely to work with you than an exec.

This is what I heard in Korea (someone with more insight, please correct me if it's nonsense): Doing a startup doesn't make sense because you'll end up as a contractor for one of the chaebols. Once that happens no other chaebols are going to touch you. So, in the end, you'll end up as an employee of the chaebol just without the stability and prestige that comes from working for a chaebol.

Walmart is famous for really pushing this. To the point where they want to see your company books and decide what your margin gets to be.

I've seen issues with this a few times and had to bite my lip quite hard when the cost of the software we were providing was compared to the (low) number of Porsche cars they could have bought instead. No, a Porsche couldn't do the job they wanted and neither could anything else they could find for the money.

I'm just starting out trying to get a new product off the ground but finding I have an issue just getting one customer as it's something most suited to organisations with large numbers of employees. Either I get my own big one or I'd imagine the product gets a slow death.

I don't agree with this, my experience is the opposite, the sales effort required to sell to large and small customers is not that different, whilst obviously the reward from a large customer is much greater. Large customers are often more willing to take a risk with a small venodor, beacause they have much better systems and procedures on place to deal with such risk and most importantly they can better afford the cost, if it goes wrong.

The problem is not having large customers. Large customers are great, the biggest sign that you've actually made it. Large customers have deep pockets, it's like the business version of rich friends. They don't mind paying extra, even multiple times as much for you to go out of your way even a little. Rich people, and big companies, usually understand the value of your time and have the money to compensate you well.

The key is dealing with them properly, which this article implies is impossible. It may well be impossible for a start-up without employees who have dealt with these relationships before, but it's business as usual is the corporate world.

The most important thing to remember is the distinction between a product company and a consulting company. When dealing with large customers you need to draw the line and stay firm. As a start-up, you're almost certainly a product company, and you should not customize your core product for anyone under any circumstances. If they want something customized "that bad" offer to sell yourself to them. Walk away with a bunch of money to start your next adventure and a corporate friend that's probably willing to do you some favors.

That said, if they're going to throw money at you, might as well find a way to take it. This is when you build a stellar API, or even better, build your whole product on top of an API and offer blessed access... For a price. Your best bet here is to either partner with a consulting company or divide your company into two parts, one that makes the core product and the other that makes customizations.

The rest of my advice is a few general things for dealing with big companies that startup land might not know.

Number one is to make sure you're charging enough money. I worked at a rapidly growing consulting agency once and we had the problem of too much work. We simply could not hire and train fast enough to keep up with our sales pipeline. We could have done the naive thing and paused our sales pipeline. Instead, we charged more money. Twice as much per hour at first, then almost 3x. Any new work coming in had to be at a vastly increased rate or we simply didn't take it. Our reasoning? We were honest, we had too much work and the premium was to pay for overtime to get your project finished. We ended up vastly more profitable, we could offer more for the job positions, we could hire more experienced devs that didn't need training, and afford even more marketing. It's been less than 2 years and that single dev shop is now ten full time devs and still growing rapidly. A side benefit, we started working with bigger companies with deeper pockets because they were the only ones that could afford us. Not sure if there's an economic theory on this but it seems like the middle market is where all the competition is. If you're either at the bottom or the top it's a lot easier to make money. Remember this when making you're SaaS. Serve the bottom with your boilerplate product and the top by building stuff on the side for the big dogs. It's much harder to lose this way.

The other thing about big companies is that sales are more personal, not less. Large companies are more stratified, more organized. At a big company the decision of whether to buy your product likely rests with one person. Make sure this person likes you, a lot. When meeting with them send the guy he likes the most even if it's the janitor. At big companies the chance that the person buying your product is the one who will use it is minimal. While the quality of your offering still matters the most important thing is whether the guy buying it is going to enjoy dealing with you for the next ten years.

This ended up a long diatribe but I disagree in practice that having big customers is a bad thing at all, and argue that it's actually the exact opposite as long as you know how the handle them. I have worked at small companies with big clients and the name value alone (if they like you enough to allow you to use them as a reference) is enough to open most doors. Nobody questions your product or team if one of the largest most prestigious companies in the world is your client. It's the business version of getting a 4.0 at Harvard.

Large companies have big legal resources: if you mess up a contract with a big company, it could be game over for yours

I keep seeing this kind of info and meaning to curate it somewhere because I can never seem to find it again when I want to tell someone what a problem this is. I have finally figured out where I will curate it. This is the first article I shall so curate.

I love the closing.

Even better thing is having 2-3 big customers, where each one has his own priorities and you end up with multiple systems to be fit into one. So yes having 50 customers of which none has big enough vote to make changes in YOUR system is nice.

Yeah I agree, in theory a large corporation should have lots of money to pay your startup. However in reality being dependent on one big prospect to make or break your startup is a situation set up for failure.

Been there, done that. You should avoid dealing with large clients if your main target is small biz niche and vice versa.

At least with regards with the fintech industry, due to the myriad regulations one must pass to do most things, securing a large customer is sometimes the only way to survive, let alone enter the market. One of the main reasons we haven't been exposed to as many large startups in the space.

I've heard a piece of general advice, that in general (if you are B2B) it is good to work with customers of a similar size as you! I think it makes sense.