“Vendor Viability”: It’s a Risk Big Customers Know How to Take. But Help Them Take It.

Vendor Viability.  The question for bigger customers especially on if a vendor will actually stay around if they buy.

This remains a large risk with start-ups.  But it’s been mitigated to some extent in the minds of customers. With 100+ public Cloud companies, it’s now a bit clearer that at least after a certain point in time, SaaS vendors have a lot of stability.  But as you can see above with Bench abruptly shutting down after 13 years and raising $100m+ … you never know.

Vendor viability is a real issue even if you’ve raised a ton of venture capital. And large companies know that.  A few thoughts on how customers think about it, and how to approach questions around it:

First, large customers have distinct criteria for evaluating and working with “emerging vendors”.

They rarely put a small start-up at the true center of a mission-critical operation. They’ll often limit risk by using the start-up first just in one division, or perhaps across the company but in a less-critical segment of operations.

Big Companies have different risk standards for start-ups and at least try to knowingly take different risks there.

Because of this, you don’t really have to pretend you are too much bigger than you are. If they ask for your balance sheet, just give it. If they require your revenues, just share them. Big Companies know the trade-offs with emerging vendors / small start-ups. They are often OK with the risks, if they think the reward is worth it. They just want to bound the risk.  Limit it.

Second, few SaaS companies past $20m-$30m in ARR with net negative churn and high gross margins seem to fail. The revenue recurs, after all.

Some do fail, but they are generally ones with low NPS / high churn and other customer issues. And an application with high churn by nature is one that is relatively easy … to move on from. That suggests either the application isn’t really that mission-critical, and/or there are easy substitutes to switch from.

Switching costs are a big deal in SaaS. Folks that say switching costs generally are low are wrong. If nothing else, it’s a huge deal to retrain your workforce in how to use a new vendor.

So enterprises manage SaaS vendor risk by (i) limiting use cases for innovative, early-stage start-ups and (ii) betting on the #1 brand in a space where practical.

The #1 brand may not be the most innovative or exciting. But it’s the least likely to fail in the short and medium term.

A few tips to winning enterprise deals as … a start-up:

• Don’t hide your financials or size.  This will just undermine confidence.  I know you may not be comfortable sharing how small your balance sheet is, but hiding it won’t help.
• Help make it 100% crystal clear where you are the only solution for a given use case.  This will help justify the risk.  E.g., you are the only vendor integrated natively with SeviceNow.
• Accept a smaller deal and/or paid pilot to start.  This will help larger companies isolate the risk with a new vendor.  Don’t fight it too much — until you have a dominant brand.
• Do all the security and compliance stuff — now. Don’t wait to get the SOC-2 or HIPAA compliance or PCI.  Do it ahead of that enterprise prospect.  It builds confidence. Way too many start-ups go into potential great enterprise deals without having done the basics in enterprise compliance and security.
• Have great case studies of similar customers available, if they exist.  It’s aircover.
• Show up in person.  This really, really helps.  If they don’t want you to show up, that’ s a sign too 😉
• Get really good at security audits and the like.  Embrace them, in fact.  AI and some vendors can help here a bit.  Most importantly, resource it properly so you can turn them around very quickly with no bull.
• Put yourselves in their shoes.  If they ask for something and you’re not sure you want to do it, but you’d ask for it if you were in their shoes — maybe go the extra yard here.