A friend recently asked, “Which path is better for SaaS startups? SMB to mid-market to enterprise or straight to enterprise?” It’s a key strategic question for many founders building software companies.
Startups that initially target small to medium businesses benefit from several key advantages. First, these businesses are faster to revenue. Simpler products satisfy SMBs, so startups can begin to charge smaller customers much sooner than enterprise customers in a product development lifecycle.
Second, these businesses tend to be more capital efficient. Cost of customer acquisition is lower in gross terms. The startup can hire less sophisticated sales teams, whose salaries are smaller. Most importantly, early revenue means small customers finance the product development for larger customers with their payments.
In exchange for these benefits, SMB startups cede the enterprise market early on. And, as they pursue more sophisticated customers, these businesses must learn a new sales/marketing motion, and develop enterprise grade software in parallel.
On the other hand, enterprise first startups require more capital upfront. These companies must develop enterprise grade software from the outset. Proofs of concept (PoCs) can offset some of those costs, but they tend not to generate meaningful revenue. In addition, these businesses must hire more sophisticated and expensive account executives.
Because the deal sizes are larger, initial sales cycles are less predictable. There a fewer chances to iterate sales techniques, because there are fewer customers and the sales cycles are longer.
But, once the startup masters the go to market strategy, that’s it. Just continue to repeat and execute the playbook at greater and greater scale.
Instead, the key conclusion is matching the strengths and passions of the management team to the go-to-market approach. When selling to the enterprise, credibility matters, rolodexes and relationships create competitive advantage, and the ability to raise a large initial round is essential. Those three things tend to come with experience.
Startups building software for small to medium businesses don’t need any of these. Less capital is required. Product and value trump relationships. Account executives can learn the simple sales process quickly.
Does this math change in the exit market? Oracle (enterprise) bought Netsuite (SMB) for $9.3B. Cisco (enterprise) buys AppDynamics (enterprise) for $3.7B. I can argue in either case. And the sample size is too small to really draw a conclusion.
That’s a very long way of saying choose a go to market strategy that matches the strengths and passions of the team. There is no conclusive analysis that I’ve done yet to show an advantage one way or the other.