Don't kill your startup selling to enterprises

Over the last 10 years, I’ve gotten a unique perspective into enterprise sales. I’ve been on the selling side, the buying side and the consulting/implementation side. I’ve seen this at large enterprise companies and at startups. I’ve seen deals that have taken years to put together fall apart in weeks because the new CTO didn’t like how the sales rep wrote his emails (true story). I’ve seen software that was supposed to take 3 months to implement take over a year. It’s because of this experience that whenever I talk to early stage startups, I try and guide founders away from going after large enterprise deals.

I would even argue that most early stage companies should actively avoid large enterprise deals for their first 2-3 years in market. Not only are they time-consuming, frustrating, meticulous, slow and can go wrong at anytime, even if they close, they can introduce unexpected risk during the most formative days of a startup.

At a time when founders should be optimizing for speed and growth, they get lured into the long and painful cycles of trying to navigate multiple stakeholders, legal, compliance and ever-changing priorities all for a big contract.

Below, I’ve laid out the four biggest reasons why startups should avoid large enterprise deals in the early days and how they can avoid unnecessary risk and pressure.

The signaling trap

Signaling is one of the strongest techniques that startups can leverage to access better talent pools, attract top investors and shape the narrative of their business. Signaling can also be a slippery slope. Some founders believe that if they can close a large enterprise customer they can signal to the market, their investors, their competitors, their employees and to themselves that they have built a legitimate product that enterprise companies want to buy. Afterall, if a Fortune 500 company buys your product, why wouldn’t everyone else? This is a pretty common way of thinking that, on the surface, seems logical, but can get you into trouble. I call this “the signaling trap”. It’s when founders and early stage startups over-index on a strategy that tries to maximize signal value over sustainable growth.

While investors do eventually want to see that you can close enterprise deals, when you’re just going to market, what they really want to see is that you can develop and execute a repeatable sales playbook that delivers stable revenue growth across a diverse customer base. The challenge is that early on, closing enterprise deals and stable, sustainable growth are usually at odds. Closing enterprise deals requires much more time, patience and effort than closing small and medium-sized deals. When you’re trying to show that you can reliably and repeatedly close business, you want to minimize the time and effort associated with each deal. The longer it takes to close a deal, the less stable your revenue will be. And the more effort it takes to close a deal, the less repeatable your sales process will be.

Even if the ACV is lower than if you went up-market to enterprise, proving that you can reliably close business is far and away the most important indicator of future success. If an investor has to choose between funding a company that has closed 50 small to medium sized deals in 1 year and a company that has closed 3 large deals in 1 year, they (should) take the 50 deals in a heartbeat. The company with 50 deals has lower execution risk, stable revenue growth, a proven, repeatable sales model, and a diverse revenue base. If anyone of those 50 customers decides to cancel tomorrow, they’re likely not going to be materially impacted. However, if 1/3 customers decides to cancel, that’s going to materially impact your revenue, moral and momentum.

It’s easy to get stuck in the trap of “all I have to do is close 4 large deals to hit my revenue goals” thought pattern but it’s rarely the right strategy for early stage companies. Optimizing for repeatability sets the stage for scalability. But that’s for another blog post :)

Longer sales cycles = slower iteration speed

As an early-stage startup, iteration is your best friend. The faster you can iterate your product, messaging and sales approach, the better. I think of iteration speed as having three components:

• the length of the customer feedback cycle (f)

• the time it takes to process the customer feedback (p)

• the time it takes to develop a new iteration and ship it (d)

(for my math nerds, here’s a formula: f+p+d=iteration speed).

The first thing to notice is that both the time it takes to process customer feedback and the time it takes to develop a new iteration of the product, messaging, etc. are completely within the startup’s control. The length of the sales cycle is the only thing that is externally-dependent. More importantly, the time it takes to process the feedback and the time it takes to develop a new iteration are completely dependent on the length of the customer feedback cycle. If there is no feedback, then there is nothing to process and nothing to iterate on. This means that the length of the customer feedback cycle is the most important input to iteration speed. The longer the customer feedback cycle = the slower iteration; regardless of how fast you can process and develop.

In my opinion, this is the biggest challenge with trying to sell to enterprise customers too early. The sales cycles and customer feedback loops are too long to be able to iterate and ship as quickly as you need to in the early days. I think of the first few years of a startup as a collection of experiments aimed at identifying the right mix of product features, messaging, strategy and sales process. As a founder, your goal is to run enough experiments, in as short of a time window as possible, until it becomes obvious that you’ve identified the right mix of product, marketing and strategy. By their nature, chasing enterprise deals both lengthens this time window and reduces the number of experiments you can run in a given time window.

In the early days, optimize your product, marketing and sales organizations to iterate quickly. Other startups and small to medium-sized companies are a great place to run experiments and quickly get feedback on what is working and what is not. The faster you can build, ship and test, the faster you can learn from your customers.

Don’t lose control over your roadmap

As someone in product, this one is painful. The truth is that early stage startups have very little leverage against their enterprise customers. Enterprise customers know this and usually use it to their advantage. They will ask for features that you didn’t have in your roadmap, custom development work that is specific to their environment, and even to provide input on your roadmap. While you might think, “isn’t this the kind of customer feedback that I want?”, they’re usually not asking, they’re implicitly (sometimes explicitly) telling you what to build next. Before you know it, you’ve lost control over your roadmap and you’re now enterprise company X’s outsourced dev shop.

I’ve seen this happen and it’s not pretty. It’s not that they’re being malicious, but if you step into their shoes, it’s a lot easier to get the early stage startup to build custom products for them than it is to get their own engineering team to do the work. They understand their leverage. A lot of early stage teams rationalize this by thinking that they can do it faster than their customer’s dev team and that the size of the contract justifies that additional work. While both of those may be true, the problem with this line of thinking is that it’s a slippery slope. As soon as you start to do some additional work, some more will appear and then there becomes an expectation that you will continue to do additional work. With limited resources and focus, you start to slip on delivering other parts of your product roadmap. This is a tough spot to be in and even harder to get out of.

This isn’t to say that you should absolutely avoid enterprise customers. But you should be aware of the expectations and obligations that come with having enterprise customers. And understanding where you have, and where you don’t have, leverage, can save you a lot of trouble and distraction.

Concentrated Revenue Risk is Real

You’ve closed a major enterprise customer. They’re paying you 4-6x what anyone else is paying you. Everything is great, right? From an revenue perspective, yeah, things are looking up. But from a risk perspective, maybe not so much.

We talked above about some of the expectations that came along with signing enterprise customers, but the other thing to keep in mind is how a large enterprise customer can increase your company’s risk. Afterall, if one customer makes up >50% of your ARR (this happens more often than you think early on), you feel obligated to do anything you can to retain them. The risk is obvious in that if you lose that customer then they take a majority of your revenue with them. Imagine what losing 50% of your revenue in one fell swoop can do to your momentum and team morale?

I’ve been in this situation, and it’s ugly. What inevitably happens is a giant scramble to pull up revenue from deals that aren’t fully baked in order to maintain momentum and signaling to investors and employees. There are a lot of problems with this but I’ll mention the two biggest ones: 1. Because you’ve now lost leverage in the sales cycle, you viciously discount your contracts to close a deal which ends up leaving a lot of money on the table, and 2. You decrease the likelihood of other early stage deals closing because you rush the sales cycle and try to close a deal which isn’t ready yet. This is a tough spot to be in and from my experience, it’s usually not even worth the revenue that you got from the enterprise deal in the first place. It’s massive distraction that blow up your pipeline and delay your roadmap by months.

At the end of the day, revenue risk is another type of risk that early stage startups need to manage. Hell, even some public companies need to manage it. Here’s an excerpt from Marqeta’s risk factors section of their S-1:

We currently generate significant net revenue from our largest Customer, Square, and the loss or decline in net revenue from Square could adversely affect our business, results of operations, and financial condition.

A small number of Customers account for a large percentage of our net revenue. For the years ended December 31, 2019 and 2020, Square accounted for 60% and 70% of our net revenue, respectively. For the three months ended March 31, 2020 and 2021, we generated 66% and 73%, respectively, of our net revenue from Square.

The only thing worse than showing slow or no growth to your investors and employees is showing negative growth. Understand that concentrated revenue risk is real and that if you’re going to be going after enterprise customers early on, think about how you can manage that risk in the case that something goes wrong.

So, when do I go after enterprise deals?

Like any good question, the answer is “it depends”. In the early days, when you have limited resources and bandwidth, you have to ruthlessly prioritize your focus and efforts. Spending your time trying to close a deal that can take 6-9 months is likely a bad investment of your time and energy when you’ve only been in market for a few months and are trying to close your first few customers.

As you grow and stabilize your revenue, roadmap and strategy, then consider going after larger deals. That may take 1 year or 5 years. Don’t rush, play the long game and stick to your strategy. Enterprise deals will eventually come and even if they don’t, well, it worked out okay for Square, Shopify, Hubspot, Intuit, Webflow, Wix, Dropbox and many others.

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PS. I had an amazing Fast and Furious reference that I was going to use for the Signaling section but I just couldn’t get it to fit :(