Before starting Devshop, I worked for 4 other small to mid-sized software companies. The last 3, as head of engineering. Each of these companies was around the 25 person mark (one of them ballooned to over 100 people during the dot-com boom but came quickly back down to earth shortly afterwards).

In each of these companies, the whole management team had gotten it into their minds that they were going to build enterprise class software and sell it for hundreds of thousands of dollars to some of the biggest companies in North America. In a couple cases, the teams were out hunting the elusive “million dollar deals”.

Back then, I didn’t know any better and since I was merely head of R&D, I happily went along with many of the “business” folks and put together the engineering plans to build the enterprise class software for them. They’d look after pulling in the sales.

None of these companies were successful in doing what they were trying to do – land and service the “big deals”.

Worse: all of them eventually got crushed under the weight of their own deals and entered a nose dive.

Someone trying to convince me today that a small company (< 50 people) is going to go out to land and successfully service million dollar enterprise software deals, would have a really hard time. I don’t buy it anymore.

The call of the “big deal” is seductive… I know it well. “If we can only land this $x deal, our business will be assured of success! We’ll be stars! We’ll have enough money to buy anything – hire anyone!”

Here’s a couple of the reason why I don’t believe this strategy works:

First of all, small companies can’t service big companies effectively. Big companies demand things like:

• Escrow agreements

• 24×7 support

• On-site assistance

• Huge price breaks (based on volume)

• Maintenance contracts

• Hands-on training

• lots of customization

• And because of the big checks being written, they don’t take “no” for an answer, on just about anything. If you even start to utter the “N”-word, you can just see them starting to tear the check up. “Eek! I meant YES, YES we can do that, of course! (fingers crossed)”

The trouble is, in the small company’s minds, the deal is simple: they build the software, sell it for $1 m-i-l-l-i-o-n dollars, and walk away rich and happy. In reality what happens is some combination of the following:

• The deal takes 3x as long to close as you think, depleting your runway and leverage to the point where you become desperate to close at any costs – it becomes more a thing of survival that actually achieving any return on investment

• When (if) the deal does close, it’s 1/3 the size you were teased with (big companies like to do things in phases or multi-year contracts, for a variety of reasons), so you never actually get the kind of instant influx of cash you thought you were going to get and spent all your time chasing

• The pre-sales ordeal defocuses the entire company and everyone believes it’s just for a little while until the deal closes and then everyone can get back to building or running the rest of the company

• When (if) the deal closes, the amount of attention the customer demands increases, instead of decreasing like you thought it would, since now you’re not just dealing with the champion, the legal and purchasing departments, but all of the users and IT folks too!

Worst of all (and a little more subtle) is this: Suppose you land your first big deal. Suddenly, you’ve got a “lead” customer who effectively generates say 50% to 75% of your revenue.

How much leverage do you think you
have in any negotiating after that deal closes?

Absolutely none. They own you.

At any point in time, they can switch directions, have a budget cut, fail to renew and instantly decimate your company. I’ve seen it happen several times.

In software, big enterprise deals start to approach “services” businesses, where there is still a core of software in there somewhere, but with all the deployment, training, customization and support, there’s often actually more being spent on the people to service the deal than on the software licenses (the high margin piece) themselves.

So in general, the bigger the deal, the more people you need to service them. Small companies’ advantages are not large amounts of people at their disposal – there’s where the disconnect is. A small company needs the kind of leverage where it can build something and sell it many times over without incurring a lot of supporting infrastructure. Otherwise, small companies never have the cash and leverage to grow into medium sized companies, and ultimately grow into large sized companies!

Watching this happen over and over again made me a firm believer that small companies shouldn’t try to land big shaggy enterprise deals. Instead, sell lots of small ones and maybe a few mid-sized ones. Get really good at that first and grow from your margins. Then take on a slightly bigger deal size. This gives you a sane growth path and ensures you’re not going to bite off more than you can actually chew and end up choking on it. It also keeps you firmly in the driver’s seat.