The Law of Software Anti-Gravity

By: Neill Occhiogrosso, Venture Partner

The lay version of the law of gravity is: what goes up, must come down. There’s something that I like to call the Law of Software Anti-gravity™: what goes upmarket must not (and cannot) come downmarket.

I’ve seen both the pattern and the anti-pattern many times in ten years as a venture capitalist. I remember meeting with Brian Halligan in 2006 when he described HubSpot as “two guys and a trick duck.” At the time they had one product, for $250 per month, targeting companies with 50 employees. We’ve also seen startups and public companies (unnamed to protect the guilty) burn time, money, and effort on unsuccessful moves downmarket. This article isn’t a blanket indictment of enterprise sales, though. The majority of companies in my current portfolio rightfully have enterprise sales models. Rather, it’s a cautionary statement about the far-reaching and often permanent implications of that decision.

Some companies are conceived to solve a problem that occurs in either only large enterprises or small businesses. However, many software startups endeavor to solve a problem so universal that small, midsize, and large companies all experience it. Lining up all the functions and processes around a core customer group is essential, so realizing this, many early stage entrepreneurs arrive at the have-your-cake-and-eat-it-too conclusion: I’m going to start in one end of the market and move to the other.

That’s where the Law of Software Sales Anti-gravity comes in. It is somewhere between difficult and impossible to start with big, enterprise deals, and move downmarket. It is much easier — not easy, but easier — to start small and go bigger over time.

The table below is by no means an exhaustive list, but it includes some key examples of how operations differ among companies that target small to mid-market customers versus those that target larger enterprises:

Why is it harder to go downmarket than upmarket?

First, SMB-focused vendors will generally be smaller and leaner in the early years. This is counterintuitive. After all, if you can hire one salesperson to sell $1 million of enterprise business, can’t you hire five inside salespeople to each sell $200,000 of mid-market business? From what I’ve seen, the answer is unfortunately no, because regardless of deal size, companies start with one or two salespeople and learn from there. Later, as a startup company maniacally focused on growth, once you have salespeople capable of selling hundreds of thousands of dollars of business in a single quarter, it will be impossible to justify investing the time and energy in an SMB team that will close, at best, tens of thousands in their first productive quarter.

On the product side, it is incredibly hard to simplify a complex product. It is even harder to try to do so while building ever more features for enterprise customers. We all know that wringing out costs and expenses is difficult in any context. Once a company begins to shoulder the costs of customization, services, deployment, and high-touch support, those costs are nearly impossible to squeeze out of the system, and smaller deals don’t pay for them. It almost never works.

What does going upmarket well look like?

A productive, high-velocity team can gradually progress to larger deals and develop or hire enterprise salespeople — who will quickly pay for themselves — when the time is right.

Honing product maturity and building a strong reference base with SMBs paves the way for a move into mid-market, which allows a company to broaden its understanding of the problem and ultimately make the transition into the enterprise. Often, companies realize that the higher price points as they move upmarket are necessary to make the business model (for which the ultimate equation is CAC:LTV) work. When going upmarket, it is usually a process of first capturing the interest of a few larger customers and then judiciously adding features to satisfy their requirements.

Make a choice; make it early.

At some point, founders must realize that they will have to choose which market segment to target — at least until they get to a certain point of scale. The decision of which segment to target significantly impacts every aspect of the business — sales, marketing, product, and even finance (as we articulated in the Kinesthetic Chain). So making a harder decision earlier will actually pay massive dividends in the efficiency of your business, especially its early days.

If you want to read more about the contrast between a high-velocity sales model and a field sales model, check out Ben Horowitz’s “Meet the New Enterprise Customer, He’s a Lot Like the Old Enterprise Customer”. To learn about disruption from below, check out Clay Christensen’s seminal work on Disruption Theory. For interesting academic work on what Greg calls the “kinesthetic chain”, there’s Firms as Systems of Interdependent Choices (PDF) by Nicolaj Siggelkow.