If the increase in complexity outruns the increase in revenues, you have a problem. Complexity can mean a variety of things including incurring higher overheads, having more employees involved from both your company and the client, greater compliance obligations, less efficiency in communications and other assorted headaches. But they can also come about due to the higher complexity of the client’s needs as the size of the engagement increases. Lower margins can come about due to a sub-optimal pricing model.
If higher revenue per customer does not translate into higher profit margins, then you need to re-evaluate what you do. Problem 4 is about how you design your offering and your business model. Your customer might not deliberately set out to squeeze you, but if their priorities ever change, you might yet find yourself in the lurch overnight despite everyone's best intentions. You don't have much recourse in the short term and your startup might be dead in the long run. If one customer accounts for a large part of your business, then they have you by the short and curlies. Problem 3 is customer concentration risk. A customer may not own a single share in your company but if they account for the majority of your business, then you can end up acting like – or they may expect you to act like – an extension of their workforce.
Problem 2 goes a step further: turning into a subsidiary in all but name. It can be difficult to turn down money that is staring you in the face, especially for founders who have been through struggles securing customers at their earliest stages. Problem 1: as one enterprise customer starts to pay you more and more money, you run the risk of turning into a consultant for that customer, i.e., providing custom services and spending less time on your own product roadmap. Let's take this as read. But if you have a few customers who are large and getting larger, you need to pre-emptively address some potential problems. Having big enterprises as customers who want to pay you more money over time is a far, far better situation to be in than having a product that no one wants to pay for. I'm getting worried.Ībsurd! …right? Is there anything valid in this concern? Didn't I just say in my last post that if you can finance your operations entirely with customer cash, then that is what you should do?įirst, let's state the obvious. Their revenue per customer keeps increasing over time.
An early-stage investor was saying to me: One of my portfolio companies has large enterprise customers.