Whales Can Kill Startups
Updated: Oct 30, 2020
We often to refer to huge new customers as whales. In sales this usually means a customer that is 10 times the average sale. Working with big customers isn’t just about the money though; we usually think of the value of having that logo on our list of customers and as a means to legitimize our products and efforts.
Sometimes we start with a big name. Other times we grow into it. Larger customers are a natural point of growth for small and medium-sized businesses and it’s thrilling to get a chance to work with them. Suddenly, it seems like we’ve really gotten there. Like our other customers will feel vindicated, our investors will increase the value of the organization, our team will be energized, and our parents will be proud
But hold on just a second. Now that we have a big customer and contract, the work is just beginning. There are a bunch of things that we need to be real and proactive about in order to not let them ruin our business.
Instead of thinking of these types of organizations as high paying cusotmers, think about them as partners. Let’s look at some of the ways we’re going to need to adapt (if we haven’t already) to such a partnership.
Prepare for meetings. Large companies need collaboration by a number of teams. This can be hard to understand in a two or three person company but it’s important for the champion who brought us in to gain acceptance that they’re doing the right thing across all the stakeholders who will use our products. The more people that have to be in meetings, the further back they push. Having dozens of meetings will take us away from our core objective, although they can teach us a lot about our product and how customers might want to use the product. One way to prepare for the meetings is to simply ask about the cadence of meetings when acquiring larger customers.
Be prepared for latency. Larger contracts require more people to make decisions and that takes time. Additional time needs to be allocated for budgets. For example, many companies need to wait until the beginning of the year for new contracts. Once budget is allocated, the terms are usually such that we might don’t take payment for 90 days (or further out) after we invoice larger customers. And of course, an invoice can be stalled while it just sits on someone’s desk for months during a routine audit. We need to plan cash flows around these longer account acquisition cycles.
Factor additional spending for contracts. Our contact at a company usually can’t just accept our terms - they need attorneys on staff at their company to review terms and often have their own contracts, or master service agreements we have to agree to. Most startups don’t have staff legal teams like they do. But we can’t just agree to any contract without first understanding the terms, and there can be some pretty stringent requirements that impact how we run our companies long-term. Maybe this means we can’t sell equity in the company without a big customer approving the sale or that a customer contractually requires us to meet a certain service level or they get credits. Or they could end up owning the rights to certain features they help us to mentally model. All the back and forth to negotiate large contracts requires time and we’re usually paying by the hour, so make sure to plan for that.
Know the impact to business processes. Compliance means that we may end up needing to plan time to fill out security questionnaires and be prepared to change our own business processes in order to be compliant with the needs of larger customers. For example, developers might not be able to access data in a database. This can complicate testing and troubleshooting, but in general these requirements are there for a reason (even if we don’t understand them in the beginning) and knowing the guidelines up front reduces latency while making sure that we’re a good fit for some of the bigger customers.
Understand fiduciary requirements. Larger organizations often require additional insurance, audited financials, and a more mature outlook on accounting. It’s important to know all of the aspects of working with a company before agreeing to increase those third party contracts. Once done, though, we’ll be better prepared to work with the next whale!
Get ready to compete. The larger the contracts, the more competitors are willing to reduce pricing. This means we can easily end up selling our products for less than half the going rate to win and retain the largest of contracts. Most true enterprises have buyers on staff who make a living by getting better deals from vendors. Don’t let the contract sizes cause decisions that might be detrimental to the business though. Stay mindful of requirements and the time associated with winning a large opportunity to preserve margins.
Be understanding. These big new customers need the kinds of requirements we're given. It's important not to get resentful of the hoops we have to jump through to close deals. They have evolved because they have had to and we cannot know all of the reasons each requirement exists. As partners, it's on us to understand the requirements and evolve our business to meet them where they are, or back out as quickly as possible if we cannot.
As we’ve shown, there are a lot of places where an “Enterprise” company can crush us if we aren’t careful. The contracts seem large. But we have to bake the extra effort, legal requirements, and compliance needs into our pricing. This usually means the signup page for products needs a “Enterprise” option that is open ended if we want to allow for enterprise buyers.
A big new relationship comes with a potentially big price tag, branding opportunities, making us a legitimate authority in our space, and what we do to meet their requirements sets us up to be able to work with other large organizations. Landing a whale doesn't come without a number of challenges though. The key is to go into these with our eyes wide open, so we can leverage the relationships to take our organization to the next level rather than let them nickel and dime us right out of business.