When a startup is better off saying no to revenue

When you’re in the initial phases of launching a startup, acquiring customers becomes a top priority. It’s crucial to kickstart revenue generation as quickly as possible because investors closely scrutinize how rapidly your revenue is growing from your initial funding round to subsequent ones.

If your revenue isn’t substantial, you might encounter difficulties securing additional funding rounds. According to Alex Kayyal, a partner at Lightspeed Venture Partners, who spoke at TechCrunch Early Stage in Boston recently, establishing the right early partnerships is essential.

A common challenge for early-stage startups is relying too heavily on a single major customer. While such a customer may be significant and influential, the aim isn’t to tailor your product solely to their needs. Instead, you must cater to a diverse range of use cases to ignite revenue growth effectively.

“I think as a startup one of the hardest things to do is saying no to revenue, and a customer, who is willing to say, ‘Hey here’s a $200,000 check for your product,’” Kayyal said. That’s especially true when that check might be so much bigger than your next closest customer. But at the same time, you also don’t want to be an outsourced development shop for one company, and that’s a real danger with the one big customer phenomenon.

Relying solely on one major customer can be problematic because of the considerable leverage they wield. “This is a common scenario in retail, exemplified by giants like Walmart, who can dictate terms, exert pricing pressure, and essentially hold smaller companies at their mercy,” he explained.

While the allure of a big payday may be strong, startups cannot afford to prioritize one customer over others. Hence, there are instances where it’s essential to decline such offers and discerning the right timing to engage with such companies becomes a crucial skill for fledgling ventures.

“It can lead to a slippery slope where you’re customizing code and building features just for them, and unfortunately that doesn’t represent the rest of the market,” Kayyal said. “Your real goal is product-market fit and product-market fit that is repeatable across the industry, not just with one customer.”

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