Most Startups Should be Deer Hunters

Posted on Sep 16, 2009 | 120 comments


This post is part of my series “Startup Lessons

Elephants, Deer and Rabbits – Some thoughts on start-up segmentation

deerhunter

Nearly all of the mistakes I made at my first company I fixed by the time of my second company.  This is the only mistake I repeated twice and it is a mistake that I see many, many companies make.

I know that this advice won’t apply to every possible startup – but I think it applies to many.

When you start your company the very first question you need to ask yourself is which kind of customers do you want to serve.  Many start-ups (and even growth firms) lack this discipline and they therefore serve customers off all sizes.   This leads to suboptimal results for all.

Make sure you know what the size of customer you want to serve is, what the people in a company of that size do, the problems they have, the features that will resonate and the channels you’ll need to sell into and service that customer.   Because it will vary dramatically by different segments I believe you need to pick an animal size and go for it.

I’ve stated my animal bias in the title – but each can work for different business types.  The segment breakdowns are below:

Elephants:

elephantIt is very tempting for many start-ups to hunt elephants.  These are really massive customers.  It’s landing AT&T or Microsoft as a customer when you’re a start-up.  You’ve got 8 people and are serving a business unit that has 5,000.

It’s tempting on many levels to be an elephant hunter.  If you manage to kill an elephant they have so much meat they’ll feed you for a long time.  But elephants are hard to catch and take whole teams of people to bring down.  They take special tools.  If you’re not successful you may starve.  If you do catch them, it could be even worse.  Avoid elephants in your early stages.  Learn from my mistakes.

Here is the real world story.  I worked for Andersen Consulting for more than 8 years.  Initially as a systems designer and programmer and post MBA as a strategy consultant.  We knew how to land huge corporate customers.  We knew how to “call high” into board rooms and get meetings.   So when I started my first company I naturally went for elephants.

The problem is that they were initially very easy for me to find.  I could easily go into the board rooms of major European companies (I was based in London) and land $500k – $1 million contracts so my order book grew rapidly.  The problem is that to win each of these deals I had to promise high service levels.  We typically committed to building “missing” features and therefore steered off of our MVP (minimum viable product).

We had to promise really steep service SLAs and help desk hours.  We had to do intense training sessions.  And when things didn’t go perfectly these organizations had huge leverage over us.  In short, servicing the elephants consumed us.  It soaked up all of our development resources and didn’t allow us to focus on what we felt our company strategy was.

We started out with such big dreams about changing the world.  On some level we felt we did because being a SaaS company in 1999 was trailblazing.  But in the end we ended up building esoteric features that we knew our clients would never use because they paid us lots of money.   See definition of a whore.

And this is not just a problem at start-ups.  I remember working for Salesforce.com and we were bagging elephants relative to our size.  We were obsessed with landing Merrill Lynch, Dell and Cisco.  I watched the first two of these customers consume significant portions of our internal programming resources.  I personally felt that we would have been better served putting more resource into building out cloud services, for example, to make Salesforce more scalable in terms of our user base. (note: my internal friends at Salesforce tell me that they’ve really fixed this now and internal dev teams are much more focused on bigger, more strategic development).

Elephant hunting does work for some companies.  Some companies / products are designed for large organizations from day 1.  But I believe that if you go down this road you will struggle to simultaneously serve the SMB market.  The needs are too different as are the sales channels and marketing messages.  If you want to hunt elephants optimize your tools for just that.  And know that VC will be hard to come by.

group of bunnies

Rabbits:

Equally deceiving are rabbits.  There are so many of them – they seem like they’re everywhere.  So you chase them.  But as you get closer to them you realize that they’re quick little buggers.  They scatter and get away.  You wonder whether they were really worth the effort after all.

Rabbits for me are the equivalent of having a low-end version of your product that you feel you’ll make up for in volume.  I see it all the time.  Companies post the $5 / month product designed for self-service clients.  Or they have products that cost $40 / month but that require a direct sales person to close them.

This is especially problematic in the Web 2.0 / Freemium world where too many company build their business models around trying to build massive scale of free customers and then convert a small share to low monthly payments.  I guess it has worked for some companies? (Basecamp?  Who else?)

My second company, Koral, tried to go down the freemium route.  We found that at the low end there wasn’t enough revenue to make it worth our while.  Then Salesforce.com asked us to implement our solution to all 3,000 employees (before they decided to buy us).  So we were trying to optimize for freemium while building in all of the special requests Salesforce asked for in order to win the deal.  We went after it because it was worth some serious elephant meat.

Sometimes it is acceptable for companies to focus on low-level entry customers – Rabbits.  Obviously if you’re going to build a massively scaled business like Twitter, Facebook or Zynga you’re going for huge volumes and the small transaction value model can work.  I’m told this model has worked well for Zoho in the small business sector.  But unless you’re a very large volume business and focused on transactions rabbits are deceptive.

I came across a company today at TechCrunch50 called Outright that is perfectly suited to rabbits.  I believe it can actually build a big Rabbit Business and it’s strategy seems perfectly suited to reaching this customer base through partners.

But few companies are good at trapping rabbits.

Want to be the SharePoint killer?  Avoid rabbits.  Have a better version of BaseCamp?  Ditto.  Want to build a product that relies on converting local mom-and-pop businesses into online advertisers – see if a regional approach might work better.  Have a product for online backups? Avoid the low end of the market – too elusive and hard to shake enough money out of them.

In short, when you hunt rabbits they’re not as easy to catch as you might think.  When you catch them they don’t have much meat.  So you need a lot of them to feed the village.

Deer:

deerThe analogy is now obvious.  Deer are easy to kill.  When you do bag deer they have plenty of meat on them to have made it worth you while.  Deer are right-sized for a start-up.

Deer are not so big that they can make huge demands on you for your development resources or customer support.  They can barely get you to agree to make changes to your standard terms & conditions.  If you catch lots of them you’re not beholden to one big one that if they cancel their order you’d be devastated.

When you’re a start-up it is far easier to cut your teeth on companies that are easy to serve, not as demanding yet can afford to pay you fair prices for your product.  If their demands are too high you can easily move on to the next customer.  They allow you to stay focused on your defined company strategy without having to compromise.

That’s why I believe most early stage companies should be deer hunters.

Final question I’m often asked – how big financially are Elephants, Deer & Rabbits?  That’s for you to determine for your own business because it depends on your customer base and the value you’re providing them.   Many of my friends who were initially focused on low-entry price point consumers have moved up market to focus on slightly smaller markets with customers willing to pay.  For me, classic definition of deer segmentation.

Apologies to all vegetarians.

  • http://bothsidesofthetable.com msuster

    When I first heard about it I thought FNAC. But at 6.5 million users I'll have to register and understand what it's all about.

  • http://giffconstable.com giffc

    ah gotcha, you're putting the mid-market in the rabbit category for SAP/Oracle in that stage of the ERP market. Yes, I guess you cannot define size explicitly — it all depends on context.

  • http://bothsidesofthetable.com msuster

    I think it's a segmentation exercise for any company to determine the exact value but let me say it this way:

    Elephants = very large companies. Large contracts $100k+ but huge demands because they know they're big.

    Rabbits = web 2.0 freemium focus. I'll just charge users $5 / months for my product and lots of SOHO customers will pay. a) they seldom convert easily and when you do convert you get $60 / year.

    Deer are somewhere in between. It's companies or departments that are willing to spend real money. I can't say what that is because the value of what someone will pay for a product depends on the perceived utility of that product and the ROI to the purchaser (real or implicit). But in my experience for many companies this means getting meaningful money in exchange for using your product.

    In my past experience Elephants contracts were $250k+, Deer were $50k-$100k and Rabbits were $5k-25k. Everything between were edge cases. But obviously these price points are not blanket prices across all businesses.

    My deer were regional engineering firms, mid-sized construction firms or regional utility companies. My elephants were: BNP Paribas (the largest bank in Europe) who consumed my entire engineering resources for 6 months, The London Underground (similar story), Thames Water, etc.

    We had great references and quick cash. But we ended up being a company who didn't pursue the larger strategy that we all believed in.

    Hope that adds the color you were after. Thanks for stopping by.

  • http://bothsidesofthetable.com msuster

    thank you. we have a name for those feature co's. We call them FNAC (feature not a company).

  • http://bothsidesofthetable.com msuster

    Exactly.

  • http://bothsidesofthetable.com msuster

    agreed on all points. My analogy of a rabbit is that they seem plentiful but are hard to catch – probably even harder than deer. And when you get them there's less meat.

  • http://www.betterlabs.net Vaibhav Domkundwar

    Apt.

    Do you think DailyBooth is a feature or a company?

  • http://bothsidesofthetable.com msuster

    When I first heard about it I thought FNAC. But at 6.5 million users I'll have to register and understand what it's all about.

  • http://giffconstable.com giffc

    ah gotcha, you're putting the mid-market in the rabbit category for SAP/Oracle in that stage of the ERP market. Yes, I guess you cannot define size explicitly — it all depends on context.

  • http://www.entrepreneursworldcup.com/ jennifer
  • Pingback: Linktipps für Startups | portalerWissen

  • Pingback: Destillat KW39-2009 | duetsch.info - GNU/Linux, Open Source, Softwareentwicklung, Selbstmanagement, Vim ...

  • http://www.doneordoneright.com David Calabrese

    Everyone wants to be Ryan Howard, the problem is you may not have another chance at bat if you strike out.

    Hitting singles builds sustainable businesses, swinging for the fences means you are either a Hall of Famer or back working at Walmart… most end up working at Walmart.

  • Pingback: Startups Fail Because They Lack a Market Focus and Targeted Vertical

  • http://paulstamatiou.com Paul Stamatiou

    Nothing to say – just wanted to let you know I thorougly enjoyed this post!

  • http://paulstamatiou.com Paul Stamatiou

    Nothing to say – just wanted to let you know I thorougly enjoyed this post!

  • http://www.nuiteq.com/ Harry van der Veen

    Love your comparison with the animals.

    In our case we also have experience of aiming for the elephant and actually getting it. Though the hunt itself was very challenging and in the end not THAT rewarding as we lost a lot of resources on the project (more than initially expected and calculated). So even though hunt was very challenging and satisfying once the elephant was taken down, the meat was not that great. But of course you can use the knowledge that you gained to take down the elephant, to take down deers more easily, as they are more easily to hunt for. Looking back at it, the hunt was more about the hunting challenge itself, than that it was for the meat.

  • http://www.nuiteq.com/ Harry van der Veen

    Love your comparison with the animals.

    In our case we also have experience of aiming for the elephant and actually getting it. Though the hunt itself was very challenging and in the end not THAT rewarding as we lost a lot of resources on the project (more than initially expected and calculated). So even though hunt was very challenging and satisfying once the elephant was taken down, the meat was not that great. But of course you can use the knowledge that you gained to take down the elephant, to take down deers more easily, as they are more easily to hunt for. Looking back at it, the hunt was more about the hunting challenge itself, than that it was for the meat.

  • Pingback: Startups as Deer Hunters « B2B Tech Entrepreneur – David Cummings

  • rahul2084

    Mark, It is great that you reply to a lot of comments on your blog. It creates a very engaging audience! I went back to this post as a 'refresher' and saw you commented on my post a month after (thanks for the comment. it makes me more confident in what im doing)…though Im not sure why I didnt get an email notification after subscribing to the comments.

  • http://bothsidesofthetable.com msuster

    thanks, Paul. That's good enough – it's nice just to get feedback.

  • http://bothsidesofthetable.com msuster

    Hmm. Not sure why you didn't get an email notice – maybe check your Disqus settings and/or your spam filter? But maybe it's a nice excuse to come back to the blog to check out the comments ;-)

  • http://twitter.com/rahul2084 Rahul

    Mark, It is great that you reply to a lot of comments on your blog. It creates a very engaging audience! I went back to this post as a 'refresher' and saw you commented on my post a month after (thanks for the comment. it makes me more confident in what im doing)…though Im not sure why I didnt get an email notification after subscribing to the comments.

  • http://www.ecoelectrons.com/ Rahul

    Mark, It is great that you reply to a lot of comments on your blog. It creates a very engaging audience! I went back to this post as a 'refresher' and saw you commented on my post a month after (thanks for the comment. it makes me more confident in what im doing)…though Im not sure why I didnt get an email notification after subscribing to the comments.

  • http://bothsidesofthetable.com msuster

    thanks, Paul. That's good enough – it's nice just to get feedback.

  • http://bothsidesofthetable.com msuster

    thanks, Paul. That's good enough – it's nice just to get feedback.

  • http://bothsidesofthetable.com msuster

    Hmm. Not sure why you didn't get an email notice – maybe check your Disqus settings and/or your spam filter? But maybe it's a nice excuse to come back to the blog to check out the comments ;-)

  • http://bothsidesofthetable.com msuster

    Hmm. Not sure why you didn't get an email notice – maybe check your Disqus settings and/or your spam filter? But maybe it's a nice excuse to come back to the blog to check out the comments ;-)