SMB vs. Enterprise: Is Bigger Always Better?
Getting B2B sales right: A series of lessons learned from the signals VC ecosystem
Working with our portfolio companies and talking to many founders each week has shown us one topic that routinely emerges as a key challenge for startups: how to succeed at sales. In an attempt to share what we’ve learned so far, I’m publishing a series on B2B sales, sharing key learnings that we’ve gathered from our founders at signals VC. We asked our portfolio founders to share key lessons from their own experiences, which I’ve attempted to qualitatively summarize and analyze in this blog post. If you’re a founder in the B2B SaaS space, we hope that you’ll benefit from some of these insights.
One of the decisions founders in B2B SaaS have to make in the early days is determining who their initial customer(s) will be. Should the startup be going after enterprise clients, smaller businesses (SMBs), or something in-between? While there is no silver bullet to answer that pesky, but essential question, there are thankfully some recurring patterns that we can observe.
The very first things to consider are, on the one hand, the product itself and on the other, its target market. This, in many cases, already determines which segments to go after. For example, imagine a product is exclusively adding value for large organizations. This case would inevitably lead to an enterprise strategy from very early on. Or perhaps a product requires high implementation and/or onboarding efforts, regardless of a customer’s size. In that case, it all comes down to whether or not a potential annual contract value (ACV) justifies the effort. One of our founders said in this regard that “putting a threshold at €15k ACVs and brutally cutting any other requests that are below” was one key learning he had to make. In the case that there’s no clear direction determined by your product or market, the following analysis will help guide you through this decision.
SMB vs Enterprise: who is the better customer?
Conventional wisdom dictates that the larger the customer, the higher its value. After all, enterprise customers have larger budgets and therefore bring larger ACVs to the table. Once signed, they hardly ever churn and very rarely do they go out of business. Enterprise customers have a great potential for further upsell and cross-sell opportunities. Winning large and recognizable customers helps strengthen your brand, which improves conversion rates and shortens sales cycles. Moreover, there are only so many large enterprises out there that are thus easy to identify (one google query will do the trick). SMBs, in comparison, lack all of these advantages and viewed in this light, would seem to be the inferior customer.
So should one always go after the juicy enterprises straight away? In most cases, it’s not that simple and a lot depends on the stage and capabilities of your B2B startup. While there are very strong arguments in favor of pursuing enterprise customers, going after SMBs in the early days can still be a viable choice. Let’s examine the reasons.
5 reasons why SMBs can be great for starters
1. SMBs sales require fewer resources
In contrast to enterprises, selling to SMBs is less complex. They don’t require an experienced “been there, done that” type of sales profile to get you started and founders can even do the early sales themselves. This relative simplicity also means lower bars for hiring the types of talents required; young B2B startups can hire less expensive talent in this case. Another plus is that founders have the opportunity to hire super motivated team members and train them internally.
2. SMB feedback loops are faster
Chances are high that young B2B startups still haven’t totally nailed product-market fit (PMF) yet and are still on a journey of testing and learning. There is a need for as much customer feedback and data as quickly as possible in order to iterate and validate initial hypotheses on the product and market. Sales cycles of enterprise customers can go way beyond six months and budgets are often already allocated for the entire year. SMB sales cycles on the other hand are quick, usually ranging from weeks to a few months, and feedback loops are fast. If some hypotheses turn out to be wrong or certain segments don’t work out, you can move on swiftly.
3. SMBs can be great to build momentum
Incumbent competitors typically focus on high-yielding enterprise accounts and the SMB long-tail is often an under-served market. Starting where the incumbents are not can be a good strategy for a B2B startup. Especially as a VC-backed startup, you are constantly under pressure to show traction and growth. What SMBs lack in buying power, they make up for in repeatability (once you have a funnel in place it’s easier to scale) and accessibility (while enterprises may be easier to identify, it’s far quicker to access decision-makers with fewer politics involved in smaller organizations). Going after an SMB can be a favorable strategy to build momentum early, proving that people are willing to pay for your product, and ultimately showing early signs of PMF.
4. SMB product requirements are less complex
SMBs have simpler product requirements which are easier for young B2B startups to satisfy. Typically there is no need for complicated integrations, data migrations, customizations, compliance certifications, and so on. In this context, one founder said: “I don’t know how competitors are doing it, we have three in-house lawyers and people only responsible for IT security: it’s a living hell . . . and then they have specific requests such as single-sign-on or other customizations”. Building these prerequisites can be a huge blocker for young B2B startups and they will be especially painful when you find out, after building it, that it lacks PMF anyways.
5. SMB Startups are early adopters
Enterprises are late adopters. They tend not to be the first ones in line to try out new things and usually lag behind in terms of technology adoption. In fact, they often tend to see startups as risky and prefer to purchase from established vendors (“nobody ever got fired for buying IBM”). Most SMBs, among them many early- to mid-stage startups, in contrast, live and breathe technology and therefore are more likely to buy a solution early if you solve an immediate pain point. A similar mindset between your startup and the client, combined with the ability to make fast decisions can ultimately make a difference in the early days.
While enterprise customers have strong arguments in theory, most B2B startups are starting with an SMB strategy for a good reason: it’s simply more compatible with the dynamics of a startup. It requires fewer resources and can demonstrate early momentum that satisfies milestone-based investors. It’s easier to hypothesis-test towards PMF and it affords the opportunity of moving upmarket over time.
Enterprise beats SMB in the long run
While SMBs can be a viable starting point in your sales strategy, achieving meaningful scale often requires moving upmarket at some point in time. In fact, SMBs are, in the long run, considered a rather undesirable customer. They have the smallest budgets and the upsell and cross-sell opportunities are limited. Once signed, SMBs churn more frequently and are more likely to go out of business, with startups being the worst risk in this regard. Having said that, there are great businesses out there like Shopify, who primarily target SMBs. They managed to grow and sustain a great business despite a whopping 5% monthly logo churn (=45% logo churn p.a.) due to strong organic growth and expansion within their existing customer base, which in turn ultimately overcompensated the high churn. For most startups, however, the unit economics are in favor of enterprise customers, who make the more attractive customers in the long run.
The intermediate model
So far, the distinction between SMB and enterprise has been only binary. But there are also types of customers that can share “in-between” characteristics of SMB and enterprise and could be attractive compromises for B2B startups.
Line of business (LOB), department, or team sales
Due to the trends around teams having autonomy over their respective software stacks, large enterprises are purchasing software in an increasingly decentralized manner. Teams have become the curators and purchasers of best-in-class SaaS applications, which they integrate into operating systems that are tailored to their specific needs. Startups leveraging this can have better access to enterprises when they are targeting a specific line of business, department, or team within the organization. That is to say, only if the head of this department can effectively act like a small business owner within the larger enterprise. For this to work, the head of the department must have both an incentive as well as the autonomy to act like a true business owner (e.g. VP of Sales buying a SaaS vendor that increases the effectiveness of his sales reps’ ability to hit quota). Once a team buys the product, you can expand it within the enterprise (“land and expand”). This type of customer can combine best-of-both-world characteristics.
If this sales motion can be leveraged by brand and virality to expand bottom-up within the enterprise, it can lead to significantly easier sales cycles — an approach that has been successfully applied by SaaS companies like Slack, Dropbox, or Zoom.
Conclusion
While enterprise customers seem to be the ideal customer in theory, this doesn’t properly take into account the complexity and difficulty level of this segment. Especially as a young B2B startup, there can be a huge mismatch in terms of resources needed to close large accounts, the complexity of the product, and the velocity in business operations. Starting in an environment that matches the needs of a startup can be advantageous to better evolve, and in practice, it’s easier to stay agile and build momentum by going after SMBs.
If a B2B startup, however, can target specific groups within an enterprise, they might get a best-of-both-worlds customer: tapping into enterprise budgets while addressing small business owners within the larger company.
Are you a founder in the B2B space? I’m sure this blog post only scratches the surface of a broad subject, and I’m always happy to start conversations and learn from entrepreneurs that are building companies in the B2B space. Feel free to reach out, I’m looking forward to chatting with you.
Stay tuned for my next post where I’ll be digging into B2B Sales Hiring and shed some light on an often underestimated topic.
