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

Vendor Viability … if they will stay around once you 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 vendor viability is still a real issue, of course. 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 it.

Second, few SaaS companies past $20m in ARR with negative churn 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.

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Published on May 30, 2019

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