Mark Suster always provides interesting food for thought. In a recent post “Most Startups Should be Deer Hunters“, he examined whether startups should go for “elephants, deer, or rabbits.”
He is right to warn of elephants. They can bring in cash, please your investors with a brand name, and put your company on the map in terms of credibility and new waves of public relations. However, you have to be careful about the cost (I discussed this a little in “don’t be afraid to lose“). I remember one client I was representing at Broadview that had gotten themselves completely beholden to Citibank. As a customer, Citi gave them a metric ton of money each year, but in turn completely dominated the startup’s product team and dev roadmap. They ended up with a 1-company market, and struggled to sell the business.
By concentrating your revenue on one or two really large customers, you also embrace very unhealthy operational risk. If a large customer changes its mind (and this can happen for many reasons: your champion is restructured away from the scene, they get acquired, they face a business crisis of some kind, etc), excessive dependence can turn into a nasty spiral of layoffs and collapsed morale.
However, don’t be afraid of the enterprise market IF it suits your business model and product. Not every large company will act like an overpowering elephant, or at least, they might try, but you can certainly try to hold your ground. You need to be willing to pass/lose on a big, but bad, deal (and in this case, it helps to have investors who have been entrepreneurs themselves).
The deer market isn’t necessarily easier to attack, however. This could be seen in the later stages of the client/server ERP market. SAP and Oracle had strongly penetrated the Fortune 500, so were looking at growth from the mid-market where a set of smaller ERP competitors played. They soon realized that the sales cycles in the mid-market could be as long and as complex as going after the Fortune 1000, but the revenue reward at the end was considerably lower. It was still a decent market to chase (albeit with a different cost structure), but a lot of pre-conceptions were dashed against the rocks.