Let’s say you are a small company and you just landed a contract with a very large company. Is it a good thing or a bad thing? This is a trick question. Before answering it consider this.

You are in a small boat and want to cross a large ocean. Now would you hitch your boat to a large ship that could very easily pull you along and take your boat across the ocean? But what about the strong wake of the ship? Will it let your boat stay afloat or capsize it?

Sometimes landing a large customer when you are a small company is like hitching your small boat to that large ship. Temptation to be pulled by a large vessel is great but navigating its wake could be even more challenging. Many a small companies have found it out the hard way.

A Big Company As First Customer

For a fledgling startup the pitfalls of tying up with a large company are just too many and may be too enormous to overcome. Early in a company’s life the need to validate its products and solutions are quite great. The intuitive thinking says that who better to validate your product offering then a large customer. A large company has credibility. It has a thorough process of evaluating solutions. And, it is financially reliable so the payments are sure to come. It could become a good reference customer and based upon that reference the startup could get more business.

This is the good side. The flip side of this coin is that large companies are usually quite bureaucratic. It may take months for them to go from buying or contract-signing process to actually implementing the solutions. During this time they could not effectively act as a reference.

One networking company based in Chantilly, Virginia, found it hard way. Its first customer was a large company. The startup was elated when it got the big company to buy its networking product. But the startup did not take into consideration the internal evaluation and approval processes that the big company uses before deploying any solution for its sensitive networks. These processes took long time and only after that the customer implemented the startup’s solution. During this time customer also demanded various enhancements and features for the product to fit its vast network. This derailed the startup’s product development and did not provide it with the much-needed reference customer early enough in its life that it hoped to get when it signed that big customer. The setback was very costly for the startup.

How About A Large Customer As A Partner?

One of the struggles of small company is to secure good and deep distribution channels. Developing such channels takes time and lots of capital. So another intuitive solution is to tie-up with a big company that is willing to utilize its large distribution channels to push the small company’s products. With one partnership the small company could extend its reach to cover a vast geography or population. Right?

Well not so fast. There are a number of inherent pitfalls associate with such a strategy. One such pitfall was narrated by a sales executive of a small company in a recent ‘Coffee & DoughNets’ event held in Northern Virginia by Morino Institute.

His small company landed a Fortune 50 company as the distribution partner. Every one in the company thought that now they had arrived. With the vast distribution network of the Fortune 50 company they hoped that their products would reach out to every nook and corner of US. They thought that soon their sales will pickup and the company would grow exponentially. What was missing from their calculations was the dynamics of the Fortune 50 company’s distribution network and its sales force. Within that vast distribution network huge number of products were pushed. The sales force also had different kinds of incentives to push those products. Guess who lost the tussle between the Fortune 50’s own product line and the small company’s product line?

What If The Large Company Gives You A Big Contract?

What is worse than having one customer accounting for a large portion of your business? Well that would be having one huge customer account for a large portion of your business.

Early in 1980, one entrepreneur landed a large insurance company as customer. The deal was that the insurance company would use entrepreneur’s product and pay him 20% commission along with a $1 million annual consulting – a very sweet deal for the entrepreneur. But he did not realize the impact of product modifications that were needed from time-to-time to conform to the needs of the insurance company. Soon enough the insurance company was able to exercise much direct and indirect control over the product. The insurance company also realized that the deal was not financially favorable to it. The net result was that within three years the entrepreneur was forced to sell the company to the large insurance company – off course at a good price but that is beside the point.

How About Large Companies As Your Major Customer References?

No problems except when your target segment is small-to-mid sized companies (SME). If you are targeting SMEs then having large companies as reference customers may back fire. It definitely feels good to tell prospects that your products are being used by such and such large corporation. But SMEs could also find it to be intimidating.

Large and small companies have different price-tolerances. The size of their purchases and contracts differ a lot too. You may find it very hard to convince a price-sensitive SME that your value proposition is in its range when your reference customer is a large company, which is not price sensitive. You also may have trouble convincing the SME that it will get the same type of service support from you when there is a toss-up between it and the large company.

What If You Are Established And Large Companies Are Some Of Your Customer?

This is perfect. You are in business for some time and have established a track record. Your references include a variety of solutions, applications and customer types. Large companies constitute 5-10% of your customers and 30-40% of revenue. This is a great situation for a small company.

Large companies are usually financially stable. The payments streams from them are more reliable as compared to small companies. So having some big enterprises as customers gives you financial stability and cash flow predictability. If less than 50% of your revenue comes from large corporations and no single company accounts for over 20% of your revenue then you are not dependent upon a big company for survival. Because the only thing worse than having a single customer accounting for significant portion of your revenue is having a very large company account for significant portion of your revenue.

For a small company having a large company as a customer or partner could be a blessing in disguise or a major curse. It could be like hitching your small boat to that large ship. The large ship could help you cross the ocean but only if you are able to navigate its wake.