A long sales cycle which enterprise customers are notorious for, can kill a SaaS startup, if it is stubborn enough to pursue deals that take a long time to close.
I was mentoring a startup that has just graduated from a top tier accelerator, is barely funded, but planning to tackle the enterprise SaaS market with a $5K/month pricing target, and a very immature product.
Forget about it.
Here’s why this frontal approach doesn’t work for a startup. The long sales cycles inside an enterprise will kill a startup. To sell a $60K service inside a company, you will easily need a 6-12 months cycle, if not more.
You just can’t do it.
The only way a startup can make a dent into the enterprise is via a low-end consumerized approach, or a low-cost SaaS product, which requires at the most a “light touch inside sales” approach. David Skok explained this very well in How Sales Complexity impacts your Startup’s Viability. And Tomasz Tunguz put some numbers behind this, suggesting that you need to “price the product between $1K to $25K annually to optimize growth”. And for some real education on the economics of acquiring a customer, David Skok’s 2009 piece is as current today, as it was 4 years ago, Startup Killer: the Cost of Customer Acquisition.
So, what if you have latched on to 4-5 prospects that have a potential to give you that $60K per year. You might think, that’s $300K in revenue, wow. But what you’re not thinking about is the time it will take you to close them. Would you rather have 4-5 prospects that take you 6-9 months to close, or 20 of them at $500-2K/month that will close in 2-4 months? That’s why Boris Wertz prefers enterprise startups that “Sell to many” vs. those that “Sell to few”. If your startup looks like a traditional enterprise sales model, don’t go there.
If you have an immature product that hasn’t reached product/market fit, the onboarding costs and efforts required will kill you, because not only the product isn’t perfect yet, its implementation will be bumpy. I have written about The Fallacy of the Easy to Use SaaS Product, explaining that a difficult onboarding process adds to your customer acquisition costs, and you will have fewer implementations because of the time factor.
In addition, a larger enterprise sale will come with the following burdens, all them being time-sucking activities:
- Negotiations on the terms and conditions
- Approval levels
- Education of several people
- Support requirements
- Meeting delays
- Changes in agendas
- Budgetary cycles
- Resource allocation to run your product
I will end this post with this paragraph that Brad Burnham wrote in 2006 on the Union Square Ventures blog, and that still resonates today:
We are not afraid of investing in a web service that does one thing well. If anything, we are more skeptical of a young company that claims to do many things well. When a young company presents a matrix that shows them doing everything that well established competitors do only better, we rarely ask them back.
Unless you have at least $10M in the bank, don’t mount a frontal assault on the enterprise. You can’t get to that mountain that way. Break it up into smaller hills.