THE STARTUP CHAT

[0:00:00]

Steli Efti: Hey everybody, this is Steli Efti.

 

[0:00:03]

Hiten Shah: And this Hiten Shah, and today on the Startup Chat, we’re going to talk about something that Steli and I have seen evolve, whether we are conscious to that evolution or not. And the idea is when startups are your customers. This is the idea of there’s B to B, business to business, there’s B to C, business to consumer, and then there’s … There’s other ones two, but the one we want to talk about is this new concept. I think Steli, you might have just invented it, like literally 30 seconds ago.

 

[0:00:33]

Steli Efti: Yep.

 

[0:00:33]

Hiten Shah: Which is startup to startup. And what we mean by that is when you’re a startup and your primary customer is another startup. Right?

 

[0:00:43]

Steli Efti: Mm-hmm (affirmative), yep. Which is very often the case, right? I mean I would say if we look at startups that try to sell to other businesses, independently if those other businesses, eventually if the aspiration is to sell to a large enterprise or small local businesses, often times the first type of business that a startup will try to go and pitch and acquire as a customer, are other startups. I think we should talk a little bit about that in terms of the evolution of it, but also how do you sell and how do you market to startups? What’s good, bad, what’s working, what’s not working? But also I’m a little curious to touch on the idea of, is that just a stop gap solution, is that just like a first step, similar to saying you’re going to raise a family and friends round? But if you really want to build a big business, eventually you’re going to have to go to venture capitalists to raise money. You won’t be able to raise $100 million from friends and family, at least not most people. Is selling to other startups, doing startup to startup sales, is that just something to get things started and not really a sustainable strategy long-term? I’m curious to explore that idea as well, but let’s start with the question of, was that always the case? Were startups always tending to go and try to get their first kind of customers being other startups, or is this something that just happened recently over the last 10 or 5 years, or so? What’s your observation of that?

 

[0:02:20]

Hiten Shah: There’s more startups than ever. Historically, I think a lot of people would poo-poo the idea of making a successful business based on you being a startup and selling to other startups. A lot of people have said historically that because there’s so much funding going into startups, that some markets are fake. Because if a startup is your sort of customer-set, and its other startups, they’re getting funding. They’re using that funding to pay you. You might have some funding too, right? So there’s this cycle of like, well when the funding dries up in a category, do all your customers go away, or do you have high turn? Also, startups don’t … There’s all kinds of stats about this, but not all startups succeed. So then you have a customer for maybe a few years, but then they’re gone because they failed at what they were trying to do. I think there’s these factors that you have to account for. So startups and small/medium businesses have a lot of parallels when it comes to how does that translate into your business metrics. And what I mean by that is, startups will have a higher turn rate. Startups will have a lower price point that they’re willing to pay. There are these core factors that you should keep in mind. Startups, because they have a high turn rate, they pay less money. It doesn’t mean it’s bad, it just means you need to know that. And I think historically, venture capitalists and other folks in business, knew that and would not focus on startups that funded other startups, unless those startups could get beyond just selling to startups. To me, startups and selling to them as a business, as a B to B business, isn’t a bad thing. It is something that you have to be really conscious of, whether those startups are going to be your long-term sort of customer, whether you’re just using them to start out so you can learn really fast, because startups tend to provide more feedback, they tend to be easier to onboard onto a product and things like that. Just as sort generic general terms, these things are true. And then you learn faster because of startups, about whether your product sucks or not. Then you could either shed the startups or move forward and keep them, and make sure that you’re able to support them as they grow, and then you start getting customers that are not just startups, as you move upmarket. If you have that strategy of going upmarket, startups can be a great start. But if you have a strategy where you think long-term or even medium-term, maybe even short-term, your customer isn’t a startup for whatever reason, then you should go after the right customer from the beginning. That would be the kind of way, that if someone was sitting in front of me and dealing with this, it’s kind of the way I’d describe it. And often times, people don’t think about that when they’re running these businesses. They don’t realize that startups have similar characteristics to SMBs, small medium businesses.

 

[0:05:14]

Steli Efti: Yeah. So I love your perspective, and I couldn’t agree more. I think that back in the day when there were a lot less startups around, I think that selling to another startup was really seen as just a very, very, very short-term approach to getting started. But I think a few trends have happened. A, there’s more startups than ever before, and I don’t think that trend will end. I do think that if I had to place a bet over the next 5, 10, 15, 20 years, long-term trends, I do think that more and more companies will be startups or will mimic startup characteristics. I do think that today it’s much more viable, and it’s not just like the first two or three customers could be a startup but then you really have to go and find another business, you could actually get really millions in revenue, and the first few years grow to thousands of customers, and all you serve is other startups. I think that that’s one big thing that has changed, is that now I think it’s much more … Well it could be a mid or even a longer term approach, and that didn’t use to be the case. The other thing is I think that startups today, not all of them obviously, there’s a lot of them that fail, but some of them grow much faster to become legit or not legit, but at least really large scale businesses. 20-30 years ago, there were not many startups that would start and within 12 months be billion dollar businesses. That was just much more rare. You have these unique cases now, where if you get the right startup customer early on, and you’re able to grow with them, their growth could really be fuel to the fire to your growth. There’s companies out there like Twilio that became really massive businesses and IPO’d, probably to a large degree because they had customers like UBER and Airbnb that really exploded and became massives amount of revenue for them, and real fuel to scale. So you have that dynamic going on, that didn’t use to be around. The other thing is that I think even disconnected from that, is that startups … I do think that the future of small and medium sized businesses around the world, will mimic many characteristics that are unique to startups today. I mean, the Lean Startup is one of those things where even large corporations try to think and act and break things down more in smaller startup-like acting teams. So I think that’s definitely a long-term trend to be betting on that didn’t use to be that way, 10, 20, 30 years ago. I think that what I love what you said earlier, is that you need to just realize what are the characteristics of selling to other startups as a startup? What is the good, the bad and the ugly, and just being fully aware of all of it. You need economics and other things of that nature. Let’s maybe run through some of them, we can ping-pong, you go, I go, on things that you should know as a startup when you’re trying to acquire other startups as customers, that are important to know.

 

[0:08:19]

Hiten Shah: Cool. Go, you first.

 

[0:08:20]

Steli Efti: Well the first one is, on the positive side, it’s usually much easier for you to market to them and to reach them because startups are very public usually, there’s lot of places with accurate and up-to-date information on the startup’s URL, contact information, phone numbers. They are using social media, they’re using all the new tools. They are online, so it’s fairly easy to reach a startup and get in front of somebody that’s a decision-maker, than it might be even in another small or medium sized business, like a restaurant. It’s much harder for you to market and sell to a restaurant usually, then to another startup. So that’s a really big benefit, and a big reason why I think startups even go to sell to other startups in the first place.

 

[0:09:02]

Hiten Shah: If you’re a startup, this is kind of like a tip, you should be emailing other startups to use your startup. Just email them and tell the founders. You can go founder to founder when you’re going startup to startup. That’s huge.

 

[0:09:16]

Steli Efti: Yes, yes. I think that’s , a double click on the founder to founder thing. It’s such a powerful connection, when you as a founder reach out to another founder and you say, “Hey, I’ve built something, I think you’d like it. I want to have a founder to founder chat and get your honest feedback.” It’s very hard for most founders to reject that. It’s also very hard for many founders to lie to you, or not be honest to you, because they received help from other founders in the early days so they want to pay it forward, and that’s a really powerful connection that you can utilize that many other small and medium sized business people can’t as easily utilize. So the founder to founder aspect is huge.

 

[0:09:53]

Hiten Shah: Speaking of which, I have something I’m about to text you that I want your feedback on.

 

[0:09:57]

Steli Efti: all right. Yeah, I’m looking forward to that. There you go. Okay, so next tip or next aspect that people have to think of, on the negative side from my side, you mentioned this. I do think that when you sell to other startups, they might have less budget, they might be much more cashflow constrained, so they might be very open to paying you on a month-to-month basis, but not open at all to upfront pay you for a whole year. But that’s not the only thing, the other thing that you need to realize is that when you sell to startups, you are selling to a fast changing organization, to a fast changing business. When they describe to you what their needs are, when they describe to you what they want from your product, all these needs might instantly change in a very short period of time. So it’s much harder for you to serve them, it is much harder to have like a constant that you’re working against. Because you acquired this customer because they told you they had a specific need, you built this feature to service that need, and then they don’t need that anymore because now they are a totally different type of business, or they have a totally different type of need. You need to be aware that the environment, the needs of that type of a customer is going to change so erratically. It’s going to be really hard to service them, or you’re going to have to be very disciplined and not zigzagging based on purely what they’re telling you today that they want.

 

[0:11:17]

Hiten Shah: Yep. I think that that’s super critical. Another tip I’ll give on this sort of startup to startup idea, is that you want to be conscious of the dynamics of a startup versus the dynamics of a larger organization, and not get confused. You might start seeing that adoption is really quick at a startup, like people in the startup use your product really fast, from person to person. That is probably not going to repeat inside of larger organizations. So don’t expect a startup to behave the same as companies that you sell to, or might want to sell to later upmarket. And even the excitement level and objections and things like that, can be much different. For example, larger companies tend to have more security-oriented and compliance-oriented concerns compared to a startup. A startup will likely just use your product and ignore a lot of those things, because they’re just trying to move fast, and they don’t have IT, so to speak, involved in anything. So I’ve seen founders get confused about, “Oh, now I’m going to larger companies. Crap, I have all these issues that I didn’t have with startups, and I thought it wouldn’t be like that.”

 

[0:12:29]

Steli Efti: Yeah, all right. So let’s round this up with one more tip from me and one more tip from you when it comes to startup to startup sales, or acquiring customers that are startups. I think that one big tip that I’ll give is that, and this is kind of bank rolling on something you said very early in the episode, is that you need to figure out a way, a very cost effective way to acquire these startups. You usually, if your customers are startups, you should have a really good portion of your funnel be self-serve. Because no matter how great your business is, no matter how great everything is you do, startups will churn at a higher rate than large organizations typically, because startups are going to pivot really hard and become a totally different business, or fail at a much higher rate than other small businesses, or other types of businesses and organizations on this planet. So you’re selling to a customer that might have just a shorter life cycle in general, so you need to account for that shorter life cycle in having fast acquisition models and cheaper acquisition models so you can acquire customers profitably. The customer lifetime value if you have more startup, needs to be profitable. You can’t accord to be giving in-person demos over six to nine months to acquire a startup. Usually that’s not going to really work well, because they’re not going to stick around long enough in the average case, to repay that investment and give you a profit on top of it.

 

[0:13:55]

Hiten Shah: Yeah, so my tip would be there’s easy ways to reach startups compared to most markets, where you can do it with local meet ups. Your local meet ups tend to have a lot of startup people coming when it’s about startup oriented stuff, as well accelerators, incubators, and labs, and things like that. And there’s one in every city these days. There’s always a way to reach startups, often times much faster, even if it’s in person.

 

[0:14:19]

Steli Efti: I love it. I think that’s it from us. I’m looking at the little thingy that you sent me to get feedback on.

 

[0:14:28]

Hiten Shah: Uh-huh.

 

[0:14:29]

Steli Efti: And one beautiful thing of it is that without reading a single word of a description, just zooming a little bit into a screenshot on my phone and looking at the naming of it, I instantly was like, “All right, I get it. I have to use this,” and I’m going to give you feedback very soon. But I like instantly got the value proposition, which I love.

 

[0:14:51]

Hiten Shah: Thank you for that first early feedback. I look forward to more.

 

[0:14:55]

Steli Efti: There you go, founder to founder feedback right here, right now. All right, that’s it from us for this episode. We’ll hear you guys very soon.

[0:15:02]