Why do so many startups sell to other startups?
Also: co-working in NYC, and Normal Computing is hiring!
Hi! It’s a bit of a short post this week. I just moved to New York, which has been a bit of a whirlwind, in a good way.
I’ve been meeting a ton of cool folks in the NYC tech scene too! I specifically want to shout out Fractal Tech – they have a very cool co-working space, they offer an amazing software boot-camp, and they regularly put on tech events for the larger NYC tech community! Rumor has it that I may be putting on a chip-related event at Fractal sometime soon, so you can have a chance to meet the Zach behind the tech blog in the flesh. Stay tuned…
Another major NYC update: my team at Normal Computing is hiring! We’re building out a small, agile silicon team to build a new kind of computer chip. Powered by thermodynamic principles, our chips are going to make probabilistic AI workloads significantly faster and more efficient. We have some roles open in London and some in NYC, but I’d encourage any great chip designers to apply regardless of location! Feel free to reach out to me directly on Twitter (@blip_tm) if you have any questions.
Now, on to the main event!
If you’ve paid attention to the startup world over the past couple decades, you might have noticed an interesting trend. A lot of businesses-to-business (B2B) startups’ first customers are other startups. From companies selling developer tools to companies selling AI infrastructure services, startups usually find that it’s easier to sell their new products to other startups, rather than to large, established companies.
At first glance, this might seem counterproductive. Startups are notoriously bad customers; they don’t have very much money, their needs change as they pivot, and they may even go out of business suddenly. Established companies can sign huge, stable contracts – the exact kind of contracts a sales team would want to land.
However, selling to established companies is really, really hard. Startups are faster and easier to land as customers, and they also often provide more direct feedback to their software vendors. This makes them great customers for other startups who are still working on finding product-market fit.
Specifically, there are a few differentiating factors that make big companies hard to sell to, and make startups appealing customers for early-stage B2B companies.
Established companies are risk-averse.
You may have heard the saying, “Nobody gets fired for buying IBM”. Essentially, executives in charge of large purchasing decisions at established companies are very risk-averse. Part of this is because established companies don’t need to take risks to establish a strong position in the market – they already have a strong position. If a new startup offers an infrastructure service that can reduce hosting costs by 10%, that could represent meaningful savings, but at the same time, it introduces a risk. If the startup selling that service goes out of business, their customers might have to quickly migrate away from the service that startup provided, no matter how efficient it was.
If the buyer is also a startup, they may be willing to take that risk. A startup buyer could leverage the 10% lower hosting cost and deliver their products more cheaply, helping them compete with incumbents. But the incumbents already have established, reliable income streams. They have a lot to lose if they use a new service and it goes wrong, and not nearly as much to gain.
“Nobody gets fired for buying IBM” also gets at a deeper challenge when selling to established companies. Often, the person in charge of a large purchasing decision isn’t going to get a huge personal benefit if they purchase services from a new startup and those tools work great. They may get a small bonus, or their stock options may be slightly more valuable, but the upside is relatively small. On the other hand, if they decide to purchase services from a startup and that decision turns out horribly, their job is on the line. Ultimately, the individuals making purchasing decisions at established companies have very little incentive, at an organization level or personally, to take the risk of buying from a startup.
Startups give great product feedback.
Startups, on the other hand, are willing to take those risks. They’re already risky enterprises in the first place, and new, powerful B2B products, sold by other startups, often can represent the edge startups need to disrupt legacy players in their markets.
While startups may not be the best customers in terms of reliability, they’re great customers when it comes to finding product-market fit. Sure, a startup won’t be able to pay as much for a service as an established company, and they may be out of business in a year, but during that year, they can provide very clear product feedback. Startups lack the complex, slow acquisition processes of large companies, and they lack the bureaucracy that keeps salespeople from talking to the actual users of their products.
If a startup sells to an established company, they may get a small amount of feedback via an intermediary every few weeks. If they sell to another startup, they can be getting drinks with the CEO every week and getting his unfiltered feedback on what features he wants in their product.
Once you hit product-market fit, sell to the big guys.
Ultimately, as a startup, there is a time and a place for selling your product to other startups. If you are still figuring out product-market fit, the ability to get rapid customer feedback is more important than landing large contracts with established companies. But once you really feel the pull of that product-market fit, things change. Now, you have a product you know people really want, and your focus needs to switch from iteration to sales. Even though big companies are hard to sell to and are risk-averse, if you want to build a huge B2B business, you eventually need to sell to the big guys.