
How a Large Customer Can Kill a Startup - imartin2k
http://www.howardlove.com/dancing-elephants-dangerous/
======
tlogan
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.

~~~
douche
Hit right on the nail with every point. I'll add one more: feature requests
that are fishing expeditions on the customer's part, but are interpreted as
show-stopping issues by sales/management.

And one more: byzantine network architectures and change management procedures
that take six weeks and seventeen different signoffs to get a VM provisioned
or an account created.

~~~
caseysoftware
Always, always push back.

When I'm on a call and the customer/prospect* asks for something we don't
have, I push to make it concrete. Here are some of my questions:

\- How are you doing that now?

\- Where is that in your roadmap? Is that required for the current phase?

\- When do you plan to implement/use it? Is this 3, 6, 12, or 24 months out?

\- Is this more or less important than X? Where X is another project or
initiative, because there always is one.

\- Is that a nice to have or a must have?

* Until they give you money, they're a prospect, not a customer.

~~~
tormeh
When a big customer makes a feature request, call it a change request and tell
them you'll make them an offer (they pay money up front) for it. Sure, if they
never adopt the product the effort could be better spent elsewhere, but at
least you'll get paid for their bullshit.

If it's expensive for you to do then you should always demand real money up
front.

------
notacoward
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.

~~~
acchow
Even large startups. Starbucks cost Square some $80+ million.

~~~
lappa
Can I get more info on this?

~~~
dhbanes
[http://www.seattletimes.com/business/retail/square-winds-
dow...](http://www.seattletimes.com/business/retail/square-winds-down-costly-
relationship-with-starbucks/)

------
ser0
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.

~~~
hdhzy
Very interesting analysis. Could you list business books that you like?

------
gumby
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.

------
maxxxxx
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.

~~~
jason_pomerleau
Most of my indie-or-small-team consultant peers have an anchor client that
drives 90%+ of their revenue. And most of them make substantially better money
than I do, as their billing utilization rates can be nearly perfect.

I'm admittedly slightly envious, as I have to work quite a bit harder for each
dollar of revenue and my utilization rates are more in line with traditional
professional services firms.

I do, however, take comfort knowing that my largest customer is ~8% of my
annual revenue. I feel like I have a more sustainable and resilient business.
And I think business development is something that needs to be happening all
the time, not just when the threat of imminent starvation looms.

Another unexpected benefit of this arrangement is that I can walk away from
"bad revenue". Since I'm not under pressure to grow or feed the beast of a
substantial payroll, I've been able to start being more selective about the
projects I take on. Once you've been in this business awhile, you can spot
bear traps ahead of time, but that only matters if you're able to maneuver
around them.

~~~
maxxxxx
I think you have much better chance long term and you can probably scale up if
you want to do so. With the anchor client you are stuck in a very comfortable
place but you can't raise rates, you can't do different things or hire people.

~~~
ethbro
And worse, even as a consultant, you have a sample size of 1 with which to
base all of your decisions re: what customers want, what solutions are best,
etc.

Which makes you even less appealing to other clients.

------
dmh2000
[https://m.signalvnoise.com/bigger-prices-bigger-
problems-728...](https://m.signalvnoise.com/bigger-prices-bigger-
problems-72820249456f)

~~~
walterbell
_> The moment one customer pays you a lot more than any other customer, you’re
no longer a product company, you’re a services/consulting company again_

Thanks.

------
ductionist
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.

------
stevesmith
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.

------
devman
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. :-)

------
hodgesrm
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.

~~~
hodgesrm
p.s., Oracle and the CIA deal is a canonical example of 'one big customer'
working out. [0]

[0] [http://www.businessinsider.com/the-cia-made-larry-
ellison-a-...](http://www.businessinsider.com/the-cia-made-larry-ellison-a-
billionaire-2014-9)

~~~
mb22
There is also a similar story for Siebel (Northwestern Mutual I think?). In
enterprise software, buying from small companies is not the norm, so if some
large organizations invest in your product, it can trigger the larger market
to believe in you. I believe the trick is to make sure the "big" accounts you
take on aren't ones that are going to take you too far off your normally
planned roadmap. If you find yourself building one-off features, one for each
customer, you are in for a world of hurt. If your big customers drive you to
build your roadmap faster or more aggressively, that isn't always a bad thing.

~~~
hodgesrm
For enterprise products the obvious 'large customers' to avoid are companies
like Google and Facebook. They operate at such enormous scale that the
problems you see there are unlikely to pop up in normal corporate use. If the
article had mentioned these I would agree completely.

In my last company we had one particularly large customer that really put us
on the map. It was grindingly hard to get things to work but fortunately they
had a problem they really needed solved and just enough patience to let us
solve the teething problems of new software. Once we had them as a reference
it made a huge difference both in terms of product quality as well as
validation of the company.

------
devonkim
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.

------
sauldcosta
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.

~~~
notacoward
There's a problem with the word "customer" here. Sure, having a large customer
- i.e. somebody who has paid or is paying you - is fantastic in all the ways
you mention. Unfortunately, what the OP was really talking about was
_prospects_. People who dangle hopes or promises of some huge future gain, but
with the condition that you have to expend a great deal of your own resources
and use up your own runway to collect, are not so beneficial. They're the
Nigerian email scam of business strategy.

"Greetings, X. I have many millions of dollars I'd like to spend, and I'm
willing to give you a share. To facilitate this, you need only devote 50% of
your company to me for a year. Please start working on features Y and Z
immediately, so that I can make you rich."

Yeeeeaaaahhhh, not so much.

------
rumcajz
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.

~~~
al_chemist
chaebol - noun - (in South Korea) a large family-owned business conglomerate.

------
tyingq
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.

~~~
mb22
I've worked with Walmart a few times now, and they want to invest in
innovative start ups, however they are also risk adverse and they want to
mitigate that. Perhaps they look at your books to see if you are going to be
around next week/month/year and the side effect is insight into pricing. They
definitely push you to deliver, however it's usually pretty pragmatic stuff.

------
Dirlewanger
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.

~~~
pmart123
The best example of this is Bloomberg. The first 20 terminals went to Merrill
Lynch ([https://www.fastcompany.com/3051883/the-bloomberg-
terminal](https://www.fastcompany.com/3051883/the-bloomberg-terminal)). In
fintech, I think both the regulatory hurdle you mention, in addition to
solving semi-custom workflows can be a prerequisite for developing a useful
product. Take Addepar for example. They have to integrate into the Bloomberg's
of the world before they are useful. And, while specifically, a Bloomberg
integration could be meaningless for the next customer who uses Capital IQ,
neither are likely one-off integrations. Spending time customizing/connecting
to other smaller/startup fintech services probably is likely disastrous.

------
cs02rm0
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.

~~~
fencepost
Is it in a state such that you could sell it to a larger product or consulting
firm serving the kinds of companies you were targeting? Either as a finished
product ready for them to take over or as an acquihire?

------
garyclarke27
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.

~~~
notacoward
> my experience is the opposite

I suggest that your experience is not universal, and might even be anomalous.
Please, look at other comments on this story. A significant majority of the
stories people are telling involve long lead times, expensive POCs, unpaid
invoices, and so on. There's at least one mention of a "customer" who it
turned out lacked the budgetary authority to make the purchase - something
I've seen myself at two companies that fell into this trap. This is the same
pattern I've seen every other time or place this topic has come up. Large
companies are often _more_ risk-averse because of internal politics and
policies. Their systems and procedures are often the thing that make the sales
process slower and more difficult. And they _will_ use the carrot of that
ever-in-the-future big sale to wring every last bit of free work out of a
desperate startup. I think it's great that you've had a different experience,
but only in the same way I think it's great if someone who walked into a den
of lions got out alive. I wouldn't present it as the normal case.

------
shouldbworking
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.

~~~
shouldbworking
To add to my own comment after seeing a lot of others.... Big companies won't
screw you if you have a solid contract. No contract, no work. Fight hard for
NET30 and stop working the day the bill is late.

We never got fucked by a single client more than maybe 1k. Not once. Because
we stopped working when we didn't get paid.

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

------
Mz
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.

------
ozim
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.

------
donovanm
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.

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

------
logicallee
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.

~~~
rwallace
It makes nonzero sense, but be careful of applying it too literally; very
often, outfits of a similar size to you, either don't need you or don't have
any money to spend.

