The customers who got you here won’t get you there

I recently spoke with a company who sells a slick AI tool. They grew the company on a solid early adopter niche of SMBs, but investors don’t care about that audience. They want to see them in the high tech niche.

They can’t just score their database to find new similar customers, because the customers they want are not in their database. The need a leap of imagination to find the right buyers.

A similar thing happens with many companies as they grow. One example is the typical behavior of consultants. When they first start, they gravitate toward SMBs and “startups”, because they think they have a lot in common. They might even get a solid income from working with them.

Many, however, eventually discover that these companies make for bad customers. Startups are dysfunctional and their dysfunctions become the problems of their consultants. If the startup has cash issues, the consultant gets cash issues. If the startup has boundary issues, the consultant gets boundary issues.

Its possible to make a solid living working with these clients, but the consultant has to be strong enough in the areas where the startup is weak. They need incredible boundaries to offset the startup lifestyle, and they need strong cash flow so they can survive if they never get paid.

On the startup side, a similar model emerges: funded startups often start by selling to who they know, at a low price, but eventually they can only grow by increasing their prices 10x and finding the customers who can and will pay this much.

The timing of this is tricky: start too soon, and you have zero credibility among the larger customers. Meanwhile, you split your efforts between the market that pays already and the market that pays next year.

Start too late, and you still have zero credibility among your new market, but now you might have a brand that feels small. This is a problem Hubspot is facing now: their product feature set is now competitive with Marketo, but their positioning for many buyers is still “a toy” that “investors won’t take seriously.”

The best model seems to be 10% experiment. Most startups facing this situation will attract 10% in adjacent markets, and focusing some of their efforts on this space, as an exploratory thing, can enable big shifts later.

Usually flipping the funnel is a great approach, as Tunguz writes. Find customers just like your current customers, and you’ll have better success in growing. But you have to be aware of when to stay on track, and when to jump rails.