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

    Hey, Brian! Yes, you know where I learned to Elephant Hunt. re: sheep – I'm okay with them. If someone is willing to sign up, pay money and not suck up my resources I'll take them all day long.

    That said, the power of referenceability is enormously important in growing a business. But that's a different post.

  • http://bothsidesofthetable.com msuster

    re: SurveyMonkey, FreshBooks, etc … I don't know their revenue size. But I will say that if you can build up a large enough scale you can hunt rabbits. But I still prefer to build a large scale and focus on the deer. I'm not saying rabbit hunting can't work, just that too many people try it and fail. If you're a rabbit hunter make sure you know it and you better have a product that massive amounts of people can use and have a strategy for acquiring customers at a very low cost.

    re: AdWords – initially it was for rabbits IMO. In the end once you've scaled you can serve multiple segments – I'm really just talking about during the start-up phase.

  • Roman Giverts

    What do you do instead? go after everything?

  • http://bothsidesofthetable.com msuster

    I get it. Yes, divisions of companies can be seen as deer. But … many divisions of large companies still behave like elephants because they can. So you just have to be careful.

  • http://bothsidesofthetable.com msuster

    I'm talking about businesses that scale, not quick flips. The requirements for elephants drive companies to do things that they often shouldn't do. Yes, you can have one or two elephants as validation for your idea. But be careful not to orient the entire company around serving them as I did. I find many companies end up doing this.

  • http://bothsidesofthetable.com msuster

    I believe in creating products that meet functional requirements of a part of a business but that can scale across industries. So your product might orient itself around sales professionals, marketing professionals, the treasury department, recruiting, HR or whatever. But something that you can market to multiple industries.

    OR … you can build a deep vertical app in a large industry but with no intention of going across multiple verticals. Examples: Healthcare, Financial Services.

  • http://twitter.com/bakespace Babette-BakeSpaceCEO

    True.. good point. Thanks for your reply.

  • Roman Giverts

    I agree that products should scale. And I understand that if a product is created to only solve the problems of a single vertical, it will be difficult to scale outside that vertical?

    But assuming you have a product that can scale, shouldn't start ups with limited resources focus on a single vertical from a sales and marketing standpoint? Don't you think people make decisions based on references, i.e who else is doing it?

  • http://www.twiddla.com/ Ben Satterfield

    This is such a great article. Mark, I have been in this situation twice already. I can't help but ignore the urge to leave a product “open to anyone” because we've added features that are broad. I usually make a product with an intent on functionality and see what groups attract to it, before I decide what market and what size is the right to go after (with Twiddla.com I've been doing this). Am I just building a trap and then going after whatever game shows up? If so, this does this even count as hunting (maybe I'm just fishing), cause I'll eat anything I can get ;) Thanks for the insight.

  • http://iamjohnwright.com/blog John Wright

    Great article Mark! Informative and entertaining.

  • http://www.twitter.com/biggiesu Mike Su

    Good stuff Mark! Couldn't agree more. For the years I worked at Symantec, I saw first hand what it takes to hunt elephants. And I completely agree, it's hard, or darn near impossible, for a startup to chase after those elephants. Customers would regularly ask for two year roadmaps and ask you to commit to those features. The type of thing that would make Steve Blank or Eric Ries throw up their breakfast :) The sales cycles are measured in months if not years. RFPs that are broken into, I kid you not, multiple volumes (on a separate note, I'm convinced if someday we are able to completely digitize the RFP process, we'd save what's left of the Amazon). Once you land the customer, then it's backwards compatibility, supporting Windows 3.1 etc. etc.

    Companies like Symantec, IBM, etc can afford to chase after these big deals. Heck, the customer is pre-disposed to pick one of these big brands. CIOs could lose their jobs if they picked a startup whose product failed or went out of business. But who could blame them for going with Cisco or IBM? Unless you have completely defensible IP that solves an urgent problem that no-one else can solve, goodluck. And even if you have all those things, your best bet is to white label as part of a bundle with a bigger partner who hunts elephants rather than selling direct. But even then, you're still dealing with all the backwards compatibility issues and support demands.

    Sadly, most of these problems have nothing to do with product or features, but the political realities of selling to enterprises, which is why most entrepreneurs get tempted to hunt elephant – they know the elephant needs it, they know they're better than everyone else, so why wouldn't they be able to bag the big fat juicy elephant?

  • http://www.lyntonlabs.com Daniel at Lynton Labs

    I love your analogies! And you made me want to pop in deer hunter again. Well done.

  • http://www.jasonspalace.com/ jasonspalace

    so from the post and comments that follow, small businesses would be deer right? it's 2009 and to me this market still seems undernourished with great internet products, my development efforts are validated for the week with another great post! =)

  • http://www.jeremyhanks.com jeremyhanks

    AMEN! I've been living this with my company Doba for the past 7 years. We've been hunting rabbits like wild, being distracted by a couple of elephants, all the while hoping and praying and trying like hell to figure out how to bag a couple of deer and scale it. Super thoughts!

  • adityavempaty

    This post was great! Really enjoyed the bit about teh rabbits, as this is a path i have thought about going when creating my startup and looking for demo clients. The hardest part about giving a free demo and asking for input seems to be that even though its free, moment you ask for feedback the rabbit clients still run away.
    The deer ones which have stable growth and are eager to watch others grow (as I have learned from Blank to call them early-vangaists) are ones which want to help you but these are few and far inbetween.

    Now comes the elephants, these guys wont even touch you even if tis for free and a demo for feedback and take too long to get around the red tape to even get their attention. I have realized its best for these guys to come after you rather than you to them. Hence in terms of your post, for an early stage startup like mine: I would want many deer and few rabbits drinking from my waterhole (product) so that i can attract the elephants :)

    Question, what if one does not have the “right conections” from high up to get a call, is it worthwhile to start higher a sales team at that point or one sales guy with a huge Rolodex?

  • http://www.brekiri.com/blog/ Greg4

    Yup, makes sense. I've been giving it some thought since I'm debating whether my initial segment should be rabbits or deer (or a combination). I still kind of buy into the idea of a clearly-defined beachhead segment, even if it's not necessarily industry-focused. Looking forward to your eventual Chasm post.

  • http://www.lyntonlabs.com Daniel at Lynton Labs

    I love your analogies! And you made me want to pop in deer hunter again. Well done.

  • http://bothsidesofthetable.com msuster

    Even worse – many big customers pick big consultants to evaluate software selection. Paid consultants never say, “pick the simplest product that meets your needs so that it will be used.” In stead they say, “here is our 12 tab spreadsheet with the 115 criteria for selection.” Hand made for BigCo to win. Thanks for your valuable input.

  • http://bothsidesofthetable.com msuster

    Depends on your definition of small business. Soho for example are rabbits. The top end of SMB might be rabbits or deer. Depends how much $$ they are willing to part with for a solution like yours and how easy or not it is to reach them.

  • http://bothsidesofthetable.com msuster

    Thank you. I've been there.

  • http://bothsidesofthetable.com msuster

    re: elephants – I would argue that you need to be careful even if they come to you. The problem is that just serving them can have a negative impact on your business. Depends on the kind of business, but for many it's a poisoned chalice.

    re: hiring senior sales guy – never! I'm writing a future post on that. Please don't think that will solve your problems – it won't. It will just add a lot more costs to your business.

  • http://scotchi.net/ Scott Wheeler

    Another thing that is easy to miss in the excitement of an elephant showing up at your door is that if you're an early stage startup, they're probably not looking to buy your product; they're looking to buy your company. If you don't know the ropes and what that looks like it's easy to get caught up in thinking you're going to do a big sale only to find out that that's not what you were talking about. I'm a little embarrassed to admit that it took me a couple iterations to learn that.

  • http://mixergy.com AndrewWarner

    Mark, do you have examples of deer customers?

  • http://wiredforpolitics.com traviscooper

    totally agree.

  • http://seekingventurecapital.com jasonspalace

    so Homestead, in your firm's portfolio, aims at rabbits? and when you say “how easy or not”, you mean how capital intensive? now i have something to think about…

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

    I couldn't agree more and I think this is the best articulation of a common problem that every smart entrepreneurial salesperson realizes.

    I'd like to add one more point for going after elephants. My first startup ended up selling mainly to elephants (large mobile carriers). As we sold to carriers in Europe and Asia and Africa, and listened “a little too closely” to our customers who had varying requirements as their markets were very different, we turned from a product to a solutions company. And its tough to turn back with all the revenue pressure and promises sales has to make to close accounts.

    You warning about going after rabbits is perfect as well. The success of Basecamp has spawned way too many features-being-launched-as-SaaS-products companies (think of how many online invoicing apps are out there) and its impossible for them to build meaningful businesses in the long run. I think building meatier products that you can charge upwards of $100/month and ideally $500/month is much better.

    Thanks for spurring such a valuable discussion.

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

    Great analogies Mark. I think its helpful to make some assumptions to decide on the size of the customer to focus on. If my marketing and development costs so much and I expect x% success of all prospects I approach I must sign so many customers… so I must go after deers or elephants to make it worth my while. I can see deers to be the ideal customer in most cases because of the overhead (making rabits not profitable)…i also think elephants tend to have long sales cycles which increases the sales cost.

  • http://www.twitter.com/biggiesu Mike Su

    Yes! Exactly. And those spreadsheets, of course, are built by 22 year old college grads who worked 90 hours a week to get it done who have never had to live with the consequences of those decisions. The partner reviews it for typos and then passes it along to the client along with a six to seven figure invoice. These irrational realities of the business “game” are often overlooked by startups who are passionate about building great software and believe quality and rational minds will win the day.

  • http://bothsidesofthetable.com msuster

    Even worse – many big customers pick big consultants to evaluate software selection. Paid consultants never say, “pick the simplest product that meets your needs so that it will be used.” In stead they say, “here is our 12 tab spreadsheet with the 115 criteria for selection.” Hand made for BigCo to win. Thanks for your valuable input.

  • http://bothsidesofthetable.com msuster

    Depends on your definition of small business. Soho for example are rabbits. The top end of SMB might be rabbits or deer. Depends how much $$ they are willing to part with for a solution like yours and how easy or not it is to reach them.

  • http://bothsidesofthetable.com msuster

    Thank you. I've been there.

  • http://bothsidesofthetable.com msuster

    re: elephants – I would argue that you need to be careful even if they come to you. The problem is that just serving them can have a negative impact on your business. Depends on the kind of business, but for many it's a poisoned chalice.

    re: hiring senior sales guy – never! I'm writing a future post on that. Please don't think that will solve your problems – it won't. It will just add a lot more costs to your business.

  • http://blog.directededge.com/ Scott Wheeler

    Another thing that is easy to miss in the excitement of an elephant showing up at your door is that if you're an early stage startup, they're probably not looking to buy your product; they're looking to buy your company. If you don't know the ropes and what that looks like it's easy to get caught up in thinking you're going to do a big sale only to find out that that's not what you were talking about.

  • http://mixergy.com Andrew Warner

    Mark, do you have examples of deer customers?

  • http://wiredforpolitics.com traviscooper

    totally agree.

  • http://www.jasonspalace.com/ jasonspalace

    so Homestead, in your firm's portfolio, aims at rabbits? and when you say “how easy or not”, you mean how capital intensive? now i have something to think about…

  • http://bothsidesofthetable.com msuster

    Sometimes it is good, but it's not necessary. And it can be limiting.

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

    I couldn't agree more and I think this is the best articulation of a common problem that every smart entrepreneurial salesperson realizes.

    I'd like to add one more point for going after elephants. My first startup ended up selling mainly to elephants (large mobile carriers). As we sold to carriers in Europe and Asia and Africa, and listened “a little too closely” to our customers who had varying requirements as their markets were very different, we turned from a product to a solutions company. And its tough to turn back with all the revenue pressure and promises sales has to make to close accounts.

    You warning about going after rabbits is perfect as well. The success of Basecamp has spawned way too many features-being-launched-as-SaaS-products companies (think of how many online invoicing apps are out there) and its impossible for them to build meaningful businesses in the long run. I think building meatier products that you can charge upwards of $100/month and ideally $500/month is much better.

    Thanks for spurring such a valuable discussion.

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

    Great analogies Mark. I think its helpful to make some assumptions to decide on the size of the customer to focus on. If my marketing and development costs so much and I expect x% success of all prospects I approach I must sign so many customers… so I must go after deers or elephants to make it worth my while. I can see deers to be the ideal customer in most cases because of the overhead (making rabits not profitable)…i also think elephants tend to have long sales cycles which increases the sales cost.

  • http://www.twitter.com/biggiesu Mike Su

    Yes! Exactly. And those spreadsheets, of course, are built by 22 year old college grads who worked 90 hours a week to get it done who have never had to live with the consequences of those decisions. The partner reviews it for typos and then passes it along to the client along with a six to seven figure invoice. These irrational realities of the business “game” are often overlooked by startups who are passionate about building great software and believe quality and rational minds will win the day.

  • http://bothsidesofthetable.com msuster

    Sometimes it is good, but it's not necessary. And it can be limiting.

  • Pingback: Size of Customer: On Suster’s Deer Hunter Analogy — giffconstable.com()

  • http://giffconstable.com giffc

    Enjoyed the post. I've personally seen two bad results from elephant-obsession: 1. a startup I rep'd at Broadview which basically sold it's product dev team to a big customer — they got lots of revenue, but essentially had a market of 1 company, and thus no exit potential at all; 2. over-concentration of revenue among big customers, with the loss of one leading to a nasty spiral of layoffs and death of morale.

    Still, elephants can provide money, credibility, and PR so can be worth chasing as long as you keep the sales investment within reason and are willing to stand your ground and walk from a bad deal.

    My only extra color on “deer” is to warn newer entrepreneurs not to fall into the preconception that smaller companies are always easier to sell. This was a notion a lot of players had in the client/server ERP space, and learned to their chagrin that the mid-market sales cycle was as long and complex, and for a lot less money.

  • 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://giffconstable.com giffc

    Enjoyed the post. I've personally seen two bad results from elephant-obsession: 1. a startup I rep'd at Broadview which basically sold it's product dev team to a big customer — they got lots of revenue, but essentially had a market of 1 company, and thus no exit potential at all; 2. over-concentration of revenue among big customers, with the loss of one leading to a nasty spiral of layoffs and death of morale.

    Still, elephants can provide money, credibility, and PR so can be worth chasing as long as you keep the sales investment within reason and are willing to stand your ground and walk from a bad deal.

    My only extra color on “deer” is to warn newer entrepreneurs not to fall into the preconception that smaller companies are always easier to sell. This was a notion a lot of players had in the client/server ERP space, and learned to their chagrin that the mid-market sales cycle was as long and complex, and for a lot less money.

  • Pingback: Market Segmentation - Elephants, Deers and Rabbits « Raja Jasti’s Blog - Renaissance Thinking()