Over the past 18 months I’ve had the benefit, or should I say the privilege, of working with a number of tech start-ups. I have the fullest respect for anyone founding a tech business. Frankly, how anyone can take the stress, the risk, the rejection and the 20 hour days, day in day out is beyond me – but there are a special few. On that note I would implore anyone reading this in the enterprise space to treat start-ups with this is mind. They could just very well be the best thing that ever happens to your business, if you let them.
Over the last 18 months, with the benefit of hindsight, I’ve identified 4 common critical failures start-ups make when trying to make an enterprise sale. In no particular order:
1. Not understanding your competitive landscape
I get it – your product/offer is unique, it’s better than everything else out there. You’ve won multiple awards, the functionality and extent of features all but puts competitors to shame. Maybe your product is so good you believe there isn’t a single competitor to consider. BIG MISTAKE. It’s likely your emotional attachment to the product you built, which in many instances founders see as an extension of themselves (either consciously or sub-consciously), isn’t as good as you think it is. It’s probably still pretty awesome, but you must always assess the competition – even if it’s significantly inferior to your product.
Why? Well there are a number of reasons – the next comparable product might be cheaper; there may be switching costs; it may be a cost lead market; you may not be able to tangibly demonstrate an ROI for the additional premium you may need to charge to recover the 2 years you spent in R&D or your target market may not yet be sufficiently sophisticated to understand your offer. Even to the extent (and its heartbreaking to say), you need to assess the comparison of your offer to a ‘do nothing’ approach from a client perspective, which may very well be the current behaviour. Getting enterprise clients to buy anything is difficult; getting them to buy something they have never bought before, from a firm they don’t know, is doubly hard.
2.Willingness to Pay
The three pillars you need to understand when setting your go to market price:
- Resource cost;
- Willingness to Pay; and
- Value capture.
Initially setting the wrong price point can be absolutely fatal to your business. In the same way the ‘network effect’ explodes market capture, market dominance and ultimately a huge valuation (e.g. Google, Facebook, Twitter), selecting the wrong price point has the opposite effect. It’s often also compounded by the fact you’ll be possibly pre-revenue and almost certainly pre-profit, which means you’re burning cash. You often won’t get another opportunity to go back to the market with revised pricing. What you may also inadvertently do is create the market for lower cost entrants coming behind you.
So what’s the solution? Most enterprise clients, in some way shape or form, buy on an ROI basis. Afford the time and effort to build your ROI models from a client perspective (that means base case, best case, worst case, sensitivity) and understand your true resource cost. This will also help hugely when you get to the negotiating table.
3.Only running one channel
Enterprise sales are hard, they are complex, challenging, technical and critically in the world of start-ups, always take longer than you think.
It’s easy to get seduced by an enterprise deal with a blue chip multinational client and in many instances a deal or series of these type of deals will hopefully form part of your strategy. For good reason, a successful deal with this type of client will create a platform for growth, provide credibility with other similar clients, offer opportunities to up / cross sell, offer marketing opportunities, help you raise capital, help you secure debt, etc. It could be the making of your business.
In my experience the timeframe to close these deals simply cannot be underestimated. You’ll have to work through their internal procurement process – I’m sorry – enterprise clients just don’t buy materially on new products from start-ups without doing their due diligence no matter how good the offer is. That takes time. Furthermore, you’ll also have to undertake pilots, proof of concepts, testing, new development to tailor the offer – all of which are normally at your cost, not theirs. From there you’ll have to negotiate terms which will be difficult because if you’re pushing a truly innovative product they won’t have precedent terms. So they’ll have to be done from scratch and they’ll be risk adverse – again more time. Then they’ll negotiate price and they’ll oscillate volume with discount, driving the most value for them, again more time.
Oh and don’t forget, make sure you line up with their budget cycle, which they may or may not tell you.
Aside from approaching the issue with ‘we have sufficient cash to sustain the cost of sale’, which is rather binary, it is often valuable to run a second more transactional channel in parallel. You’ll generate revenue (often with better margins, as the big players truly understand their bargaining power), get product feedback, get more market awareness of your product and increase your bargaining power for the enterprise clients (when you get to the table).
4.Don’t innovate too much (initially)
Okay, so this one is a bit contentious, but I’ll put it out there. Founders are typically very innovative people – it’s what separates them from the rest of us and allows them to build amazing products and amazing business.
If you haven’t geared your business up for long sales cycle, the temptation that I have seen play out is that in order to continually demonstrate innovation and value to your enterprise client target, you continually introduce new products and features to help get them across the line. This is great, but be aware that each time you introduce a new product or new feature, you are at the very least extending the time to close the deal, and as a worst case confusing your initial value proposition which got you through the door in the first place. I’m all for introducing a specific feature but only if it will close a deal and develop additional features when you have that anchor fee-paying client.
Should you consider deal cycles of up to 18 months and working with clients that may be exploring applications for your product in a very general way, you can easily find yourself in continual development mode – burning cash and not closing deals.
While enterprise sales are hard, if you are aware of the challenges and can overcome them you will be well on your way to building a really successful business. The advantage of an enterprise client base is that they are generally higher value and have lower churn (meaning they will be long-term customers), and you get to build a product that solves real business problems – which will make the hard work worth it.
The views and opinions expressed within this blog are my own and do not represent the views or opinion of any third parties, in addition, the views and opinions do not represent investment advice in any way.