When is an elephant worth forgetting??

Continuing on the theme of elephants….

I was lucky enough to be at GeeknRolla – the excellent TechCrunch Europe startup event – a couple of weeks back, and two very similar conversations I had during the day with online-software entrepreneurs stayed with me.

The conversations with the went something like this:

“We have started to gain good traction in the SME market, we have secured a good channel partner / we are proving that we can scale…now we just need to win a {blue chip / really big} customer to get the next round of funding”

There’s something about winning an elephant customer that seems irresistible: while the idea of having large annual recurring contracts is attractive, for a new company that has worked hard to get its model working and scaling in the SME space, winning an ‘elephant deal’ is almost certainly a double-edged sword.

One of RIG’s former clients had an online enterprise software offering and it was making good progress winning large companies. Then it had the chance to bid for an enormous global customer. In the process of preparing the tender it had become clear that a lot of customization and special support would be needed, but it was such a prestigious account that the client pressed ahead and ended up winning it. 

The strain from having to service the new customer was evident – development resources were insufficient to cover the new customer, continue core development and keep the existing customer base happy. Funds that might have been put into marketing to drive the critical transition from predominantly out-bound to predominantly in-bound lead generation were diverted to providing customized support. It is very hard, even as a growth-stage technology company, to serve multiple masters, and even harder as a start-up. 

If you have worked out how to acquire, deliver to, service, and retain SME customers in a scalable way, then you are already doing very well. SME customers are often under-rated: they can be very dependable, and as a service provider, you don’t have the risks associated with revenue concentration.

Think carefully before you go elephant hunting. Scalability is a key driver of the valuations that SaaS companies can receive. At the point where a company is having to customize and maintain customer-specific resources, it can still call itself ‘SaaS’ but it starts to look more and more ‘old economy’. Savvy buyers and investors increasingly recognise this. So, as ever, if you do choose to try to break into the enterprise market, make sure your assumptions stand up to heavy scrutiny.