Big deals for a startup?

When your company is still nascent, your number one concern is probably to generate immediate revenue and to pay the bills and the employees. With just a small number of early adopters for customers, the imperative is to get as many new customers as possible. This all makes basic business sense. Yet, sometimes having a flood of new customers or a few very large new customers can be a mixed blessing. This is particularly true with big early customers that demand a lot from your company.

I thought of this after reading an article on Inc Magazine about Chocomize, which early on had to turn down a major order even though they desperately needed more revenue. The company did turn down the order for the right reason: they did not yet have the production capacity to fulfill it, and subcontracting would be too risky.

Some commenters were critical of that decision, noting that they had given up a great opportunity for branding that really meant a lot for a new company. However, personally I believe that the company did the right thing. They made sure they could actually serve the customers and their needs at the same standard of quality they had offered their customers.

This situation is actually very common in our world of expansion stage technology companies. Many software startups start out as special projects or consulting engagements with major clients, out of which a product is built and commercialized. Many startups are also tempted by the promise of a big deal in exchange for special customizations and specific features. The decision of whether or not to take on a big client early on is a case by case situation because it has both major pros and cons:

Pros:

+ Get customers to fund development, therefore bootstrapping your growth and reducing needs for outside funding.

+ Having major customers help with brand building and credibility building

+ Scoring a major deal is a great morale boost for the company and its employees and investors

+ Last but not least, having big customers opens the door to more credit facilities, better cash flow and overall improved financial stability.

Cons:

+ Major contracts often require low margin professional services. You have to consider if you can have access to professional services resources, and the talents to manage that well, even at lower margins

+ Big customers have rigid requirements and slow processes which might slow or corrupt your company’s product and development process

+ It is very dangerous to start out with lots of customization because you will end up building a project-driven, bespoke programming firm instead of a product-driven software company

+ Lastly, having relied on big customers too early on might not set you up well for future funding. Venture capital firms do not like to see revenues that are dominated by one or even two big clients, because they are looking for risk factors, and reliance on few clients is surely a major concern.