It can be difficult in these days of $1b pre-money Series D rounds, sandwiched between 100 of the latest Y Combinator start-ups founded on $20,000 and a half dozen futons, to know what’s the best strategy for a web services start-up. Â Go lean? Â Go big? Â Spare the dilution? Â Find some white space, an area the big guys care nothing about — or take them on, head on?
While optimal strategies will vary, one thing that is very different comparing enterprise web services to consumer web services are the fixed costs — in particular, the fixed and semi-fixed people costs. Â Instagram was bought for $1b+ with 7 guys. Â Epic. Â Yammer was similarly bought for $1b+, but with well over 200+ employees, according to LinkedIn. Â And that’s with a substantial freemium component to Yammer on the lead generation and pre-revenue customer side.
If you are going to sell to, and service, enterprise customers you are going to need people. Â You’ll need sales people, and someone to manage them. Â At first, that can be you, but not for all that long. Â You’ll need a client success team to keep them engaged and active. Â Again, at first that can be you, maybe. Â Maybe. Â But not for long. Â A real customer support team. Â A real tech ops team. Â Maybe a services team. Â All of this really to get to, and past, $1m in ARR and certainly to get past $3-$5m in ARR.
So what? Â The so what is, small and smallish markets don’t work well for enterprise services / SaaS start-ups. Â On the freemium, VSB, and consumer side, you might be able to take a team of guys and build something with millions of users, or millions (not tens of millions, but millions) in revenue. Â Because you just don’t need as many people.
But creating wonderful (or even mediocre) products for the enterprise has a big human element. Â Customers want to talk to people. Â They want to work on their issues. Â They want help. Â They need you there.
So if you are thinking of starting something in the enterprise, don’t fall into a trap. Â Small markets can be great, and lucrative — if you can successfully service them with small teams. Â Build the world’s greatest product in the enterprise, for too small of a market — and you’ll be stuck never getting enough revenue to cover your fixed costs. Â You may get the worlds greatest, happiest customers — but it won’t be worth it, nine times out of ten.
Of course, it doesn’t make sense to take Salesforce or any multibillion dollar SaaS leader on directly. Â So focusing on a small segment of a large market can work well. Â You can always grow horizontally into other segments of a large market. Â But the world’s greatest enterprise product in a <$100m market … faggedaboudit.