Pricing & Revenue

The Enterprise: Go Biggish, or Go Home

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Jason Lemkin

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.  Go lean?  Go big?  Spare the dilution?  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.  InstaGram was bought for $1b+ with 7 guys.  Epic.  Yammer was similarly bought for $1b+, but with well over 200+ employees, according to both LinkedIn.  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.  You’ll need sales people, and someone to manage them.  At first, that can be you, but not for all that long.  You’ll need a client success team to keep them engaged and active.  Again, at first that can be you, maybe.  Maybe.  But not for long.  A real customer support team.  A real tech ops team.  Maybe a services team.  All of this really to get to, and past, $1m in ARR and certainly to get past $3-$5m in ARR.

So what?  The so what is, small and smallish markets don’t work well for enterprise services / SaaS start-ups.  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.  Because you just don’t need as many people.

But creating wonderful (or even mediocre) products for the enterprise has a big human element.  Customers want to talk to people.  They want to work on their issues.  They want help.  They need you there.

So if you are thinking of starting something in the enterprise, don’t fall into a trap.  Small markets can be great, and lucrative — if you can successfully service them with small teams.  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.   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.  So focusing on a small segment of a large market can work well.  You can always grow horizontally into other segments of a large market.  But the world’s greatest enterprise product in a <$100m market … faggedaboudit.

Published on August 22, 2012
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