Entrepreneur Office Hours - Issue #78
Go small or go home...
Yeah, all the popular stories about entrepreneurial successes are about the huge home runs. The Amazons and Facebooks and Ubers of the world. However, enormously successful companies represent only a tiny fraction of all the entrepreneurial success stories out there.
Personally, I used to dream of building one of those types of companies — the huge, everyone uses your product types of companies. Then I realized those types of companies are really hard to build. As-in, if the chances of building a successful startup is already, say 1 in 100, the chance of building a successful Facebook type of company is more like 1 in a million. (BTW — all numbers here are estimated, but you get the point.)
Mind you, I don’t mean I’m not willing to put in the effort. It’s more about being practical. Practically speaking, I’d rather have better odds for a small-to-moderate success than absolutely minuscule odds of an enormous success. That’s why, in this issue’s featured article, I try to make the case for why going “small” and “niche” with your startup is a better approach than trying to build the next Silicon Valley unicorn.
Not that you have to agree with me. You do you.
You’re probably tempted to go after as many customers as possible, but is it a strategy that’s going to lead to success?
Creating one popular website is nearly impossible. Imagine having to do it twice. But that's exactly what Peter Rojas did. Hear the story of how he built Gizmodo and then Engadget on the new episode of Web Masters.
Listen now on:
…or search “Web Masters” wherever you listen to your favorite podcasts.
FROM THE ARCHIVES…
Everyone thinks a “yes” is the hardest response to get from a VC, but there’s actually a response that’s even more difficult to get.
Office Hours Q&A
I run a startup in the edutech space. It’s a tutoring app and service. To this point, we’ve been selling mostly to parents and having decent success. But one of our advisors is pushing us toward selling to schools who would buy it for their students.
We’ve tried selling to schools, and it takes a long time. But he’s arguing that, even though the sales cycle is longer, it’s a more efficient sale over the long term and having a bunch of schools already be our customers will make the company more valuable to potential acquirers versus having lots of parents.
Is he right? Should we pivot to focus exclusively on schools? Are parents a better market? Would it be smart to possibly do a combination of both?
Thank you for your help,
Let me provide some background on this question. A lot of the answer is specific to this particular founder and her company, and she and I actually had a good email exchange about those specific issues/points.
When a question is so specific, I normally wouldn’t share it in EOH, but there’s one aspect of this question that seemed worth addressing for a broader audience. Specifically, let’s focus on this issue of selling to individuals versus selling to larger entities that can then distribute your product to individuals. For the sake of providing some sort of simple nomenclature, let’s call them “distributor sales.”
I’d hesitate to say one option is definitively better than the other. Instead, I’d note that they both have their drawbacks and advantages. In relation to targeting the larger entity -- doing “distributor sales” -- the advantages mentioned in the question are certainly true. It’s often more efficient to target one large, “enterprise” customer than a bunch of smaller, consumer-level customers. For example, if an enterprise sale takes 15x longer but creates 20x the value, then the enterprise sale certainly can make more sense. In addition, as also alluded to in the question, enterprise customers can be more valuable to a potential acquirer. That might be especially true in the context of an education market because parents aren’t going to keep paying for a tutoring product once they no longer have kids in school, meaning they’re likely to churn quicker than if the customer is the school itself because, of course, the school will always have students.
Those kinds of things probably seem like huge advantages when deciding whether to sell to individuals or distributors. It’s better to go after the large “distributors,” right? But there’s also a big drawback. Specifically, when your target customer is going to be distributing your product rather than using it, you basically have to build two completely different companies.
Imagine you’re building the tutoring app referenced in the question. If you’re selling to the end users, everything you create is specifically geared toward that end user. In contrast, if you’re selling to a distributor – a middleman of sorts – you’re still going to have to create almost all of the same infrastructure you would have if you were just selling to end users. At the same time, you’re also going to have to create an entirely separate business around acquiring and supporting your “distributor” customers.
For example, if you were building the tutoring app described in the original question and selling it to schools instead of the students who will be using it, you’d have to build customer support infrastructure for both the app itself (i.e. the students using it) and for the school (the people paying for it).
In other words, this type of business model with a “middle man” distributing your product to other people can nearly double your workload and the amount of resources you need in order to operate your business. It’s by no means an impossible obstacle to overcome since, clearly, plenty of companies operate this way. But it’s definitely something to keep in mind as you consider your options. Do you have the capacity to basically build two companies simultaneously?
Got startup questions of your own? Reply to this email with whatever you want to know, and I’ll do my best to answer!