Can Your Startup Survive A One-Customer Market?
By Brett Fox at brettjfox.com
I’ve loved the Chicago Cubs since I was a little boy growing up in the northern suburbs of Chicago. The problem is they have broken my heart many, many times.
I watched my Grandfather pass away without the Cubs winning a World Series.
I watched my Dad pass away without the Cubs winning a World Series.
Now, my brother and I are the older generation. Will the Cubs get to the promised land before we die?
I believe this year, 2016, is the year because the Cubs have great players like Kyle Schwarber hitting moonshots like this one:
http://www.youtube.com/watch?v=E39GL1n9_k4
Headline: Cubs Kyle Schwarber out for the season after tearing his ACL and LCL!
Shit! But we have hope because the Cubs still have Kris Bryant. He hits equally impressive moonshots:
http://www.youtube.com/watch?v=wmKBur39NCA
Hope springs eternal when you are a Chicago Cubs fan. And hope springs eternal for entrepreneurs too.
We all believe our company will be the one company that defies the odds and becomes a huge success. And that’s how it should be. You need to have absolute belief to succeed as a startup CEO.
And that’s where moonshots come in.
Moonshots sound great. All we need is one big customer (and when I say big, I mean really BIG) to buy our product and we win! We’ve made the problem easier because we already know the market is huge! And, better yet, we know who the big customers are.
And, best of all, we have a better mousetrap than our established competitors do! It’ll be easy.
All we have to do is execute, and we’ll dominate the world.
Right?
Wrong!
There are five hidden reasons Moonshot startups don’t win.
And they are all related to your company being dependent upon one customer.
A. Your customer controls you. Don’t kid yourself. You are at your customer’s beck and call when all your revenue comes from one customer.
“Hey Brett, we want to change the spec from X to Y. Sorry that it’s going to cost you another twelve months of development time.”
You have no choice, but saying, “Yes” if you want to keep their business.
Or, let’s say this happens. “Hey Brett, we need you to drop your price by 50%. Sorry, we know we had a deal and a contract, but the margins are low for us too.” Yeah, you may be able to negotiate a little bit on this one, but suddenly your business model has changed radically, and not for the better.
Or maybe this happens…
B. Your established competitors will not let you win. Unless they want you to. Moonshot startups depend upon leveraging a large established market. Someone is servicing that market today, and likely this piece of business is significant for your larger competitor.
Your larger competitor is going to fight, and likely fight dirty to keep the business. They will use the old IBM F.U.D. (Fear, Uncertainty, Doubt) technique against you. In other words, they are going to scare the shit out of your customer.
Your product will likely have to be 100X better to win, and, even then, your win might be only temporary because your larger competitor likely will catch up to you.
Yes, I know, you have patents. However, you’ll need bulletproof patent protection to keep your competitors out. Large chunks of business attract large competitors. And these large competitors will not just give up.
And then you have the problem of your customer’s ever changing mood swings...
C. The product specification changes. Let’s say your development effort takes two years. A lot of things can change in two years.
The most likely change will be the project specification, and I say this from experience. Years ago the company I was working for was building a custom product for HP. At the end of the development, right before we were to provide HP with samples, they changed the specification on us.
“Sorry. It just happened, but now we need you to do this.” We were pissed, but we needed to change our product if we wanted their business.
Changing specifications is not the worst thing that can happen to you. Maybe the worst thing a Moonshot customer can do is…
D. Cancel the project. I’ve seen this one happen to. Customers cancel projects. That’s life in the real world.
However, canceling a project might not be the worst thing a Moonshot customer can do. The worst thing a Moonshot customer can do is…
E. Have a product that is not a market success. Now you’re really stuck. You’ve poured all your R&D into a product that is not taking off in the market place.
Why is this worse than canceling a product? We are all human, and it’s human nature to believe that somehow, someway, eventually the product will take off.
You could spend years, sinking time and lots of effort into supporting a product that will never take off.
Yeah, so maybe this Moonshot idea isn’t that great after all.
What can you do to protect yourself if you have a Moonshot plan?
You will always be dependent on a small number of customers with a Moonshot plan. There is no getting around the facts.
However, there are some steps you can take to increase your odds of success:
A. Get the money upfront. In other words, you need to treat the product you’re building for your Moonshot customer like a custom product. Think like a contractor would.
Get some sort of prepayment for your work. A customer that prepays you is much more likely to buy from you when they go to production.
I would be very concerned if your Moonshot customer was unwilling to pay you an advance. In fact, I would be so concerned, that I would probably rethink my whole business plan.
B. Enter into a contract. Don’t assume everything is just going to work out because there will be problems. A contract is good for both sides because the contract spells out what the Moonshot customer will do for under certain circumstances (especially changes in requirements), and the contract spells out what you will do for them.
C. Assume you will never make any money from your Moonshot customer. What? How’s that? You heard me, assume you will never make any money from your Moonshot customer.
Now what are you going to do? Thinking about the contingencies forces you come up with alternative plans. For example, maybe you can sell the core idea to other companies besides your Moonshot customer?
At least, you’ll know what can be done, and you can start acting on these ideas right now!
It’s spring, and right now the Cubs are playing great! They’re in first place and playing really good baseball. Jack Arrieta just threw a no-hitter! Life is good.
My Moonshot dream of the Cubs winning the World Series this year is still intact. I hope your Moonshot Startup Dreams are still intact too!