When a startup is better off saying no to revenue

When you’re an early stage startup, you are clamoring for customers. It’s imperative that you start generating revenue as soon as possible because it is a metric that investors look at: how fast you’re growing revenue between your seed and your A round.

If you aren’t generating a ton of revenue, you’ll probably have a tough time when it comes to raising your next round. Alex Kayyal, a partner at Lightspeed Venture Partners, speaking at TechCrunch Early Stage in Boston last week, says that finding the right early partners is crucial.

One issue that sometimes comes up for early-stage companies is the single big customer. The company is large and influential, but you aren’t building a product for the needs of one company. You need to address a broad range of use cases to really jumpstart the revenue machine.

“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 $200k 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.

The trouble with one big customer is that it has the power to throw its weight around. “You know you see this all the time in retail with Walmart where they can dictate terms. They can drive pricing power, and as a small company you’re at their whim,” he said.

As tempting as it is to take the money and run, a startup can’t afford to take on a customer at the cost of other customers. So sometimes saying no and actually knowing when is the right time to work with a company like that is a key skill for young companies.

“It can lead to a slippery slope where your 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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