Can startups survive selling to enterprise customers?

September 10, 2017

 

 

When your business is little more than an idea, a deck and a spreadsheet - selling to enterprise customers makes complete sense.

 

For a start, very large companies are a rich source of inefficiencies and problems that we can recognise and observe from the outside, simply through our interactions with them as consumers. This is idea rocket fuel for the problem-seeking entrepreneur.

 

Secondly, there is a bewitching appeal to the basic maths of targeting the enterprise - especially when devoid of pesky facts and probabilities. To get to £5m annual sales from a £10 a month SaaS product I'd need 41,666 customers and no churn. That's a lot of customers. At a 5% conversion rate that is 833,333 sales conversations. Very hard. To get to £5m annual sales from enterprises, heck I just need 5 customers paying a million a year each. At a 25% conversion rate that's 20 sales conversations. Much more doable.

 

Trust me, my friend, this is delusional. Even those who used bird entrails to divine the future would sneer at this kind of prediction. Nevertheless, I can absolutely see its appeal. Crimes against forecasting aside, selling to enterprises will kill you if you are not very careful and very self-aware. Here's why.

 

The biggest enterprise danger signs

 

Individual inability to buy. The biggest challenge in selling to enterprises is that you are not just selling to a single person, you are selling to an entire decision-making unit of people. That unit is almost always cross-functional. It likely contains people who don't know each other. There are complexities that are unknowable and unsolvable to the startup. There is also a significant mismatch of resource capabilities - it is quite normal for there to be more people in the meeting from the client's side than there are in the entire company of the startup. Your champion is usually the person who has the problem - they have been motivated to seek out a solution (even from a startup) because they are in some way measured on reducing this problem. Chances are though, no one else in the buying unit cares - they have their own roles, such as to reduce risk, veto, or make sure no other work dependencies/costs arise as a result. There is every possibility the cause of the problem is in the decision-making unit for your solution - have a guess how that will work out for you. In my experience, it is only when an individual goes rogue and buys a small piece of what you do under the radar, or you have an extraordinarily aligned buying unit who are all feeling the pain, that you actually get to a successful close on a sale.

 

Staff turnover cycles faster than the buying cycle. If your sales cycle is 18 months from first awareness to close (sorry, that is no exaggeration) then you have a fatal problem if your buying unit typically falls apart in under 12 months. You will never close because people are always moving on or being reassigned to new roles. Retail is notorious for this. High staff churn is like quicksand for the startup, the surest way to survive is to avoid it. Look at LinkedIn - how long have people been in their current post, what does the staff turnover cycle look like (remember it's about the role, not time with the company. Someone may have been there 20 years, that's irrelevant if they change project every 6 months).

There is also the headache of ever-changing strategic priorities and moving goal posts. If you are targeting an enterprise with a history of high CEO/executive turnover, run away. No one is going to be around, or stay worried about the problem you solve, for long enough for you to close a meaningful sale. This is homework you can do while validating whether you are targeting a good market segment - if the average months of tenure of the key decision makers in your buying unit is lower than the high-end of your estimated time to close a sale, this is not a valid market to be in.

 

Inability to act. Change is the hardest thing for an enterprise and when it comes to working with innovative startups, we are typically injecting the threat and risk of change into every key interaction - buying, integration, use and wider adoption. That is likely too much to solve for even the most dedicated internal champion, or the most patient and well-funded founder. One enterprise insider told me "this pilot has shown me how much we have to change as a business to be ready to buy." Another said "the more innovative and more advanced a technology gets, the further it gets from our ability to use it. We still have to engage the business in the very basics." It may seem that the answer is to go higher, target the C-Suite and run a top down sale. But that is not realistic - they are far more risk sensitive than the problem owner, they will turn to low-risk partners (IBM, Accenture) if they act at all.

 

The myth of the consultative sale. It is this slow cycle of change that makes me reject the widely held view that "all" startups need to do to sell to the enterprise is to start with consultancy the highlights the problem and then upsell in the technology solution from there. However good the technology, however easy to use and to buy, change takes years. Startups don't have years. If there is a three-year lag between the enterprise understanding they have a problem to then being ready to buy the technology solution the startup provides, there is a fundamental problem with the market segment and business model. The companies this model does work for very nicely is the big consultancies and solutions integrators - and they make money whether the enterprise changes or not.

 

Cannibalism in the culture. The enterprise that screws its existing and potential suppliers will have a pattern in how they operate and will have left a trail of corpses. This is not about the no-doubt lovely individual you are dealing with, this is about the enterprise's cultural and commercial approach to buying. The biggest names are often the worst offenders - they know that you'll potentially do anything to have them as a customer. The trouble is, even if you succeed, they will kill you. If they've done it before, they'll do it again - you owe it to your company's survival to continually realistically assess the ongoing cost and probability of a sale closing, and the actual long-term value of the deal (including the opportunity cost of what you're not doing as a result). Ask around.

 

The danger of chasing a single big carrot. An enterprise doesn't have to have evil intents to still kill you. By distracting you, or causing you to overly focus on a solution that serves only them, they can just as easily kill you by accident. Your biggest threat is time - you simply don't have enough of it to get too many rolls of the dice. You have to choose wisely where you focus. A customer who leads you down a developmental cul-de-sac, or is just too problematic to efficiently serve, consumes your time and therefore consumes all your other opportunities for success.

 

Unlike you, your customer's biggest threat is not time, it is risk. If they get something wrong, the risk is they lose their job, their headcount or their budget, or face some other nasty consequence. If they do something well, chances are no one notices. And if they do it faster than expected, they actually make things harder for themselves in future, because expectations on them will adjust. While you need to go as fast as possible to survive, the enterprise employee needs to go as slowly as required to reduce risk. It is very hard for the interests to ever align if you are not realistic in your expectations of where you are heading together and what success really means.

 

All the above factors add up to an unsustainably high cost of sale. If you cannot cut through the above challenges, do not directly sell to enterprises.

 

Killing you with kindness

 

Beware, even if you don't directly sell to them, very large companies have other methods of killing you with kindness.

 

Have some free stuff and all we ask is that you build on our platform. Two words - technical debt. Two more words - never again. Free credits, developer sandboxes, free tools, free cloud space for X many months are all tactics to lock you into their development environment, to achieve their commercial goals - not yours. Only if they absolutely utterly align with your already stated technical and business goals should you even consider this one. Otherwise, the future cost of your choice (from servicing technical development to literally having to pay licence costs) can seriously constrain your progress.

 

Great chats with lovely people. Time is your enemy, whereas having chats with innovative new companies is the other person's job. Do not mistake this for buying signals and do not be afraid to directly ask them about what they're measured on and if they can get you where you need to go. If they genuinely want to help you, they'll understand and be honest with you.

 

The incubator/accelerator trap. Large companies are not as easily able to execute on innovation as startups - so a commercial model has emerged to force the two together. I do believe there are real positives in incubators/accelerators - especially in the altruistic model. What is dangerous is the false expectations that are often peddled. When startups commit 6 or 9 precious months to something, it is at the cost of pretty much everything else - the upside has to be real, highly relevant and valid. The enterprise accelerator must provide actual access to genuine customers, or real new routes to market, or significantly reduce the obstacles in the startup's way. Otherwise, it is exploitation. There are good ones out there, but there are also a lot of unrealistic expectations on what working with an enterprise will deliver.

 

Join our partner program. Startups do not partner with enterprises - this can never be an equal or exclusive relationship. You're either a potential customer, someone's pet - or both. What you are very very unlikely to ever be is a future acquisition target. And even if you are, this is not the route to achieving that outcome. Park all thoughts of a trade sale and instead build a business worth acquiring.

 

Are there smarter ways for startups to work with enterprises?

 

Change the rules. Break what you offer down into the smallest possible repeat buyable pieces - essentially make it possible for your customer to go under the radar and act like an individual, not an enterprise. (LinkedIn nailed this). Solve a specific person's problem awesomely - focus on being so good, so easy to buy and so necessary to success that your individual customer would keep buying with their own money if they lost the budget. That way you side step the enterprise's buying process entirely.

 

Change the channel. As a startup, do not waste time and money on traditional direct or consultative sales approaches to enterprises. Do not think an expensive commercial director or sales director, or entire sales team will help you. Do not think a small consultancy piece will lead to a big software sale. Enterprises often literally cannot buy from startups even if they want to - their risk and procurement models won't allow it. In all likelihood, you will have to either change who you sell too (eg individual buyers who just happen to work in an enterprise) or who you sell through (including the big companies that big companies already buy from - to which all the same enterprise challenges apply!)

 

Change the game. This means going slower at the beginning, thinking harder, and thinking way more radically. The type of startup that is targeting enterprise has generally hit on a problem of significant inefficiency and come up with a solution of sorts to that. They then build their business model/revenue plans around selling the solution to the inefficient big businesses that have the problem. Who then turn out to be inefficient for a reason, including a structural inability to act fast. 

 

Next time I'm pondering problems of enterprise, I will think bigger and think harder. I will ask if this inefficiency and problem can be used against the incumbent to the extent that instead of selling the solution to the enterprise, I sell it to their customer base and replace them. Well, it does no harm to ask!

 

 

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