Key Moments
The Better Customer–Startups or Big Enterprise?
Y CombinatorKey Moments
Selling to startups is a common Y Combinator strategy, but founders often misunderstand *why* it works, mistakenly believing it's inherently easier, leading them to sell products to customers who don't actually need them.
Key Insights
Companies like Stripe and PagerDuty found early success selling to other startups, with PagerDuty still referencing startup customers years after going public.
Founders may target startups with enterprise-grade products precisely because the sales cycle to large companies appears long, fearing a lack of initial traction.
Products like Snowflake, which require massive data warehouses, are impractical for startups and would be a waste of time to sell to them.
While startups might be willing to talk about a problem, this doesn't equate to an 'easier sell' than a larger company with a genuine, established need.
Selling to startups can be a powerful strategy to build a great product and user experience, as seen with Gusto using startups as a bridge into the SMB market.
Even companies that excel at 'bottoms-up' sales to developers, like AWS and Stripe, ultimately build dedicated enterprise sales teams to close major deals.
The allure and pitfalls of selling to startups
Selling software to fellow startups has been a successful strategy for many Y Combinator alumni, with companies like Stripe and PagerDuty leveraging this model in their early growth. PagerDuty, for instance, continued to count early startup customers even years after its public offering. This approach seems logical: a shared understanding of needs and a potentially faster sales cycle. However, founders often fall into a trap of 'cargo culting' this strategy, adopting it without understanding the underlying reasons for its success, or when it's appropriate. This can lead to a misallocation of resources, targeting customers who don't truly need the product. A key pitfall is founders from enterprise backgrounds, who witnessed specific problems in large corporations, attempting to sell highly specialized, enterprise-grade solutions (like complex alerting systems for over 500 engineers) to nascent startups at a low price point ($100-$400/month), a mismatch that invariably fails to gain traction.
Mistaking willingness to talk for an easy sale at a problem
A common fallacy is assuming that because a startup is willing to engage and discuss a problem, it signifies an easy sale. This conflates a conversation with a genuine need or buying intent. Founders may perceive responsiveness from multiple startups as validation, leading them to believe they've found an easier market. However, this is a dangerous misinterpretation. Selling to a customer who doesn't yet have the problem or a clear need for the solution is significantly harder than selling to a customer who does have the problem but takes longer to make a decision. This distinction is critical, as it can lead founders down a path where they spend significant time and effort engaging with uninterested parties, mistaking engagement for progress.
The myth of the lower-maintenance startup customer
Another misconception is that startups are inherently less demanding or 'lower maintenance' customers than large enterprises. While it's true that enterprise sales often involve navigating more complex procurement processes, forms, and onboarding hurdles, the end-user experience can be equally demanding regardless of company size. An individual user encountering bugs or needing support can be just as high-maintenance at Microsoft as they are at a small startup. The critical difference, however, is financial: enterprise customers typically pay significantly more, meaning vendors can afford to dedicate more resources to support. Startups, conversely, can be demanding while simultaneously being unwilling to pay a premium, a combination founders must carefully consider.
The churn problem: startups scaling beyond early solutions
A significant challenge with selling to early-stage companies is the high probability of churn as those companies grow. While some products, like Stripe's payment processing, are designed to scale seamlessly with a growing business, many others are not. For instance, HR software or platforms like Heroku often find their early startup customers outgrow them once they reach a certain size (e.g., 500 employees). At this point, the company's needs evolve, and they require more comprehensive, specialized, or even custom-built solutions. This necessitates a realization for founders: securing an early customer doesn't guarantee long-term retention if the product's scalability doesn't align with the customer's growth trajectory. This dynamic forces product teams to either adapt to major enterprise demands or risk losing the customer entirely.
When startups fundamentally change product needs
The evolution of a customer's needs as they scale directly impacts product requirements. For example, a startup might initially sell a lightweight CRM to founders handling sales. However, as the company grows and hires a dedicated VP of Sales to build a team of 50 people, the organizational need shifts dramatically, often towards robust enterprise solutions like Salesforce. Similarly, a technical screening tool built for engineers by engineers might work for early startup customers where engineers are the users. But once the company hires non-technical recruiters, the product often needs a complete overhaul or a separate offering to cater to the new user base. This highlights that the 'buyer' and 'user' can change significantly, demanding product adaptation that isn't always feasible or strategic.
Categories prone to churn: scaling with people vs. revenue
Certain software categories are inherently more prone to churn as companies scale, often because they scale with headcount rather than direct revenue. HR tools and CRMs, for example, are prime candidates. As a company hires more people, its HR needs become more complex, necessitating a more robust system. Likewise, a growing sales team requires more sophisticated CRM capabilities. In contrast, services like payment processing scale differently. This distinction is crucial for founders to understand when building a business model around early-stage customers. The key is to identify whether one's product is fundamentally aligned with the scaling needs of a business or if it will likely be superseded by enterprise alternatives as the customer matures.
Overcoming the fear of sales through startup targeting
A significant, and often deadly, lie founders tell themselves is that selling to startups will be easier, frequently driven by a fear of sales. Founders with strong product backgrounds may be uncomfortable with the prospect of influencing, persuading, and guiding potential customers through a sales process. They might fantasize about a 'Civilization' game-like scenario where numbers simply go up by clicking buttons. This desire can lead them to target other startups as a way to avoid direct sales engagement, perhaps by relying solely on self-serve flows and hoping for organic growth. However, building a successful company, especially in B2B software, requires actively selling, influencing behavior, and championing the product, regardless of the target customer's size.
Leveraging startups as a strategic launchpad
Despite the potential pitfalls, selling to startups can be a powerful and deliberate strategy. Companies like Gusto, a payroll provider, used early startup customers, particularly within the Y Combinator ecosystem, to build a robust product and refine the user experience. This allowed them to develop a strong offering that could then be scaled into the broader small-to-medium business (SMB) market. Similarly, Amazon Web Services (AWS) utilized a 'bottoms-up' approach, selling to developers at startups who were early adopters of cloud computing. This strategy built familiarity and expertise, and as those developers moved to larger companies, they often advocated for and brought AWS with them. This approach enabled AWS to penetrate markets where traditional enterprise sales relationships were lacking. It's crucial to recognize that 'bottoms-up' sales, while effective for adoption, usually still require a dedicated enterprise sales effort to close large deals, serving as a booster rather than a replacement for direct sales engagement.
Mentioned in This Episode
●Companies
Common Questions
It's a good idea if your strategy is to grow with customers from their early stages to IPO, like Stripe, or if you plan to use startups to build and refine a product before launching it to a larger market, like Gusto. The key is to consciously align this strategy with your long-term business goals.
Topics
Mentioned in this video
A payroll company that started with startups, became the de facto provider for yc companies, and used this as a bridge to enter the broader SMB market with a well-developed product.
A company that initially built a technical product for screening engineers, suited for startups, but had to build a new product for non-technical recruiters as their customer base evolved.
A company whose product, requiring massive amounts of data and warehousing, is not suitable for startups, illustrating a product mismatch.
A company that successfully started by processing payments for other startups and grew with its customers, demonstrating a model where customers don't churn easily.
The go-to CRM solution for companies scaling their sales teams to hundreds of people, illustrating how a lightweight CRM for startups is insufficient at scale.
One of the first YC companies to go public, with early customers being other startups.
A startup where the buyer and product needs changed as the company grew, moving from a founder or marketing person to a full marketing team requiring different solutions.
A cloud computing service that used a bottom-up sales strategy by selling to engineers at startups, who then became advocates and influenced larger companies to adopt their services.
A platform where customers often churn as their companies grow larger, needing more robust or customized solutions than Heroku provides for scaling organizations.
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