Black Hole Customers – A necessary evil

Is it good to have a huge logo in your startup?

Every once in awhile, I come across startups in the tech world who claim to have a large customer at a very early stage. They will proudly cite a Fortune 50 company as their prized client. It will sound as if the startup has already arrived with a bang.

Not so fast.

It’s great to have a logo, but let’s not be under the false impression that this could be a good thing. For an innovative startup, it’s not that hard to find a large customer. Large companies have pockets of early adopters who are willing to try out new things. I have seen that in Coca Cola, Bank of America, Disney, IBM, American Express and Walmart.

Black holes are objects in the universe so dense that not even light cannot escape its strong gravitational force. Having a large customer can feel like a black hole, sucking away time and energy from every person in a startup. From the CEO to Sales to Support and to every Programmer. The demands of your black hole customer are just too much. They want to customize, they want new features, they want anytime support, they want documentation, training and on and on. Not to mention, there might be a large services component.  It can be extremely frustrating. The products and engineering team complain they focus too much time on one customer and not build out the product. Sales complain they cannot get their engineers to build new features fast enough. Marketing complains they cannot get enough case studies. The major brunt of the force is taken by support and customer success, who cannot find time to support other customers.

Dont’ assume your future investors are going to be impressed by the big logos. They will want to know what % of revenue is from this big client (>10% +/-  is a red flag) and what % of total revenue or cost is services (investors are averse to companies that have a services component).

Now, it is not necessarily a bad thing to have a large customer. In fact, you actually need them.  They provide a nice logo for your marketing. Always useful in an investor meeting even if to just open a few doors. They provide validation of your product, your vision, your idea. And that’s critical, if the eventual goal is to sell to many customers. The most important reason to have such a customer, is that they provide the much needed cash flow, especially if you are bootstrapped. Without this customer, your company will likely die. We got lucky with one such customer as we had no funding during a recessionary time.

A startup needs many many customers that are acquired in a repeatable and scalable way. That means, once you build a product, you sell to 10s and 100s of customers with little effort. But when you have a large customer to service, reaching that ultimate goal of a repeatable and scale model might seem elusive. You feel more like a services company rather than a product company.

So, how do you deal with such a situation which can make or break your startup (or more likely, you will keep the lights on at a low wattage level). There is no right or wrong way to deal with this. But there are precautions you can try.

Just acknowledging the truth is a good first step. Realize that this will not last long, and that there is a corner around.

Maintain your true north. Keep your original vision intact. It’s OK to think that ‘you are building something custom for this customer, and that’s not what we really want to be’.  Build the features that the customers request as if it might be needed by everyone. In other words productize your customers requirements. And avoid custom features into the product as far as possible. If something is totally custom e.g. a proprietary data load, then charge separately.

If possible, separate out the people who will be working on the services component. I mean physically separate. Outsource, if needed. Automate jobs, where you can.

The idea is that the percentage of time of spent on the product should slowly increase. It may take time. If after 6 months, the situation does not change, evaluate. Rinse and Repeat.

Bottom line – do not be complacent that you have a big customer. Your goal is to find that repeatable and scalable sales model.

A note to corporates – we need your business. In fact, your support to startups is the only thing that keeps the innovation machine going.