Gokul Rajaram

Gokul Rajaram

29-07-2022

02:22

Early stage B2B Founders: If you have to choose between one very large first customer (say $500k+ ACV) and ten smaller first customers (say $50k ACV each), the right choice (at least for venture funded companies) in most cases is the latter. Why?

Three reasons: 1. Your product becomes better 2. You can forecast better 3. You build better sales muscle and process

First, you end up building a better product because your product serves the needs of multiple customers instead of one large customer. With a large customer, it’s hard to push back against custom feature requests, even if it’s not the right thing to build.

Second, one large customer leads to “whale hunting: the compulsion to target only large prospects. This leads to each quarter being nail bitingly intense as your numbers completely depend on 1-2 decisions within large companies. This kills revenue predictability.

Third, to acquire multiple smaller customers, you need to have built an actual sales process and muscle thereof, or at least one better than that needed to acquire a very large customer.

This is why investors are typically loathe to invest in companies that have just one massive anchor customer and nothing else. As with every rule, there are exceptions. Here are a couple

Exception 1: In some industries (government comes to mind), there are a small number of massive customers. So there is no alternative to massive customers and going whale hunting.

Exception 2: If you want to bootstrap and don’t want to raise venture capital, large contracts (especially with upfront payment) can give you the funding you need to build your business. You can sell these customers yourself and don’t need to hire many sales people.

tl;dr in most cases, target “lots of small to mid sized customers” versus “one massive customer” as your first customers. ACVs will grow as you expand within co or your product becomes more robust. Early on, focus on customer count (and use case uniformity) versus on ACV.


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