Note: in order to understand this article, you need to know the differences between bootstrapping your small business (i.e. funding it yourself) or raising venture capital. Check out this post from Tyler King about why we decided to bootstrap Less Annoying CRM, and how raising venture capital works.
If you’ve decided to bootstrap your startup, you’ve made a big decision that will affect how you run your company, create your business plan, and select your target market. Another way to look at it, you’ve put your business under different constraints than a VC-backed startup. Part of what has allowed us to build a profitable business is that we realized that we had to set ourselves apart from VC-backed startups early on and play a different game.
One way to do this is by selling to a market that most or no VC-backed companies will target: small businesses. For a variety of reasons we’ll go over in this post, small businesses are a perfect customer base for a bootstrapped company (and a bad one for a VC-backed company). By targeting small businesses, a bootstrapped startup is entering a market with little to no VC competition and working with a compatible customer base for their business model.
If you’re just starting to think about launching your own bootstrapped company, this post is for you. It’s easy to feel misled by articles written by well-established companies or venture capitalists on spending lots of time and money going after consumers or enterprises, when your bootstrapped company can’t afford to chase either. Instead, this post offers real insight from successful bootstrappers on why small businesses are a bootstrapped startup’s ideal customer, and how the needs of a bootstrapped business align with the the sales cycle and business plan of selling to small businesses.
First things first
Before we take a deep dive into bootstrapping, let’s cover some business basics: who can you sell to, and how?
The consumer: a consumer is an individual who purchases goods and services for personal use. If a business sells to consumers, they are considered a B2C (business to consumer).
- How they sell to them: often times, many consumer products (especially software) are hard to monetize at low volume. Businesses need many, many consumer customers in order to turn a profit because each individual sale is a small part of the revenue they need. Consumers are also on a very short sales cycle and don’t require much work to convert (think of how often you buy personal goods and services like groceries or a taxi ride) so B2Cs can pour their money into a few ad campaigns and sales agents, and they have a viable way of building their customer base. Even for buying luxury goods, the consumer sales cycle is still simple; sales agents only have to deal with one person, maybe two, and they have direct contact with the end-user of the product or service.
Enterprises: an enterprise is a very big company with hundreds or thousands of employees. When businesses sell to other businesses, they are considered B2B (business to business). Enterprises are often seen as the holy grail of customer bases; serving them can result in a higher frequency of transactions and higher profit.
- How they sell to them: there is a catch, though; unlike consumers, enterprises are on a long, complicated sales cycle. In order to snag an enterprise client, you often have to convince many people in the food chain to pick you, from the intern tasked with finding a product or service that fits certain criteria, to the CEO or CFO who decides if they will roll it out to thousands of their employees. Especially with software, selling to enterprises is really like selling to the boss of the end user’s manager; you’re at least a few steps removed from the end user, so the product/service you’re selling needs to be sold for the benefit of the people at the top, not necessarily those who will be actually using your product every day. Enterprise deals usually take over six months to close from first contact to signing the contract, with a lot of legal work, meetings, and negotiating in between.
Small businesses: the alternative to enterprise companies, most small businesses are non-employers. This is a very different kind of B2B selling that we will discuss in detail later in this post. Here are the basics for now.
- How they sell to them: essentially, the end user is usually also the person looking for the product or the service, so they mainly want functionality and ease of use, not necessarily managerial oversight. They also want a simple sales process; small businesses can’t afford to spend tons of time searching for a solution when they need it now. Finally, small businesses also appreciate a personal touch. They aren’t going to hire their own IT person or consultant to teach their team how to use your product, so good customer service is almost always a bonus.
Government, Education, and Other Institutions: businesses selling to government agencies, universities, hospitals, and other large organizations often function like B2Bs; they are dealing with clients that require a lot bureaucratic intervention during the sales process, but potentially a very large payoff at the end. Whenever we talk about enterprises in this piece, the issues of selling to government and educational institutions are almost identical.
If you need more explanation for why selling to enterprises, government, or educational institutions is so difficult and complicated (especially for growing small businesses), check out this article from Patrick McKenzie, creator of Kalzumeus Software, called “ Selling to The Fortune 500, Government, And Other Lovecraftian Horrors.”
Why it’s hard for bootstrappers to sell to enterprises or consumers
As we outlined above, chasing consumers and enterprises can be an expensive way to create a customer base. If you sell to consumers, your business needs to scale in order to start turning a profit, and you need to either have enough money to sustain your company in the meantime, or get big right away. VC-backed startups can afford to do both: spend money before making money, and hire a huge salesforce to accelerate growth. Bootstrappers for the most part can’t. They don’t have the money to pour into sales and marketing before they’re profitable, and often don’t have the funds to sustain them in the unprofitable period before that.
If you sell to enterprises, you also need enough money to keep your company going during the long and arduous sales cycle. Maybe you get really lucky and snag a big customer right away, and work from them holds you through long sales cycles with new enterprise clients. Or maybe you use VC money.
Plus, bootstrappers in these spaces have to compete with VC-backed companies who are better equipped to sell to these kinds of customers. Companies with venture capital can afford to go after consumers and enterprises because they don’t necessarily need to make money right away, and they can spend years in development if they want. They can also hire a big workforce to aggressively target their potential customer bases through sales, marketing, and special product designs.
Why VCs don’t target small businesses
VCs need customers who:
Can be reached via scalable, paid marketing channels. VCs have money, and they want a marketing plan that allows them to pour money into a channel or media and get customers out.
Offer the greatest return on investment. If a VC can spend marginally more money for a customer worth exponentially more, they will; they are looking to receive the greatest return on investment for themselves and their investors.
With marketing and sales in particular, VCs are looking for proven, scalable paid marketing channels that will work with their target market. For consumers, outbound marketing works; they can pour money into Facebook ads, email newsletters, or call centers, and they will make money. Alternatively, for enterprises, outbound sales works; having agents reach out and nurture enterprise leads results in conversions, and a ton of marketing isn’t necessary. For small businesses, there is no formula. Small businesses typically can’t buy as easily as consumers, and they don’t pay enough to make it worth it to do outbound sales. So, even if a VC-backed company has tons and tons of money, there isn’t a clear-cut road to success.
Serial entrepreneur Phil Beauregard explains the challenge of applying traditional sales and marketing tactics to small businesses: “Small business owners are always...running around—they have a million things to do, a million fires to put out...they are trying to do a million different things and there are so many vendors or software companies that will provide solutions.” But Beauregard says these companies often fail to connect with small business owners because they take too much of the SMB’s time by asking questions, requiring a lot of setup, or not providing adequate support. Beauregard continues, “There is not enough value or perceived value being derived to the owners.” So, the small business falls off the bandwagon and into their churn rate.
Selling to small businesses requires more than marketing: a personal, continuous touch so that the small business owners feel like the process of becoming your customer is not only valuable for their business, but easy to do. The small business should feel like your product, service, or software is working for them, not causing them more work. This strategy requires time more than anything; small businesses can be sold at almost no cost if you’re willing to wait for them. All bootstrappers have is time, so they often prefer waiting for customers to sign up on their own, whereas VC-backed companies need to start growing immediately and have the cash for it, so they often prefer to pay the price of acquiring enterprises immediately.
All that said, many VC-backed companies do start off selling to SMB’s, but then they move upmarket. That means that the company starts focusing more and more on their (bigger and more profitable) enterprise customers, so their product or services change to suit enterprise needs. Eventually, small business customers can no longer use their original product or service because it’s become bloated with enterprise features, or it’s no longer being supported by the vendor. Check out this article about our concerns on moving upmarket.
A thought experiment:
And why would a company leave their initial customer base behind? Besides it being a kind of jerk move, generating leads and closing sales is expensive, but selling to a more valuable lead (like an enterprise) isn’t proportionally more expensive than selling to a lower-value lead (like a small business). So if it costs $200 for your business to acquire a customer that will pay you $10/month, it might cost you $300 to get $25/month or $400 to get $50/month customers. In this scenario, it costs twice as much to get a customer who pays you five times as much, which is a pretty sweet deal from a cash flow standpoint. Essentially, you don’t have to spend proportionally to earn customers who will pay you exponentially more, so why go after the unprofitable and smaller fish?
You could also be wondering why VC-backed companies don’t spend all of their money on product design; why are sales and marketing so important? This is another situation in which time, and not money, is the necessary ingredient to success. A really well-designed product, software, or service takes years to develop and customers to test out. VC-backed companies do spend money on product design, of course, but good design works slowly. So does word of mouth—while a bootstrapper might rely on organic growth, a VC’s business goals can’t wait for word to spread. They need to help the process along with their salesforce and marketing team.
You can’t really dump money into relationship building, either; again, you need time more than anything else. Selling to small businesses just doesn’t scale at the pace VC-backed companies need to grow. So, VC-backed startups don’t target small businesses because their money is more likely to turn a profit if they chase consumers and enterprises.
Why bootstrappers should target small businesses
Bootstrappers need customers who are:
On a simple sales cycle. Bootstrappers can't afford to spend a lot of time and money acquiring customers because they need customers to stay afloat. So, they need customers that they can convert simply and efficiently.
Paying. Those customers also need to start paying them right away. Bootstrappers need customers who pay in order to become profitable.
The end user. Bootstrappers prefer to go straight to the source. Rather than having to go through management or satisfy upper-level needs, which would complicate the sales cycle and the product, bootstrappers prefer to deal with the end users directly.
Selling to consumers doesn’t take a lot of time, but you need to scale in order to start making money. Enterprises take a long time to sell to and pay off big in the end, but you need funds to sustain you during the chase .Let’s talk about time, something bootstrappers have a lot of, and its relationship with scale, something bootstrappers can’t control in the same way a VC-backed company can. Scaling requires the ability to dramatically increase your workforce and your supply. VC’s have the money to do this very quickly, whereas bootstrappers need more time and customers to have enough spendable cash to scale. Scale is what makes selling to consumers and enterprises so difficult for bootstrappers and so easy for VC-backed companies.
Bootstrappers can use time and scale to their advantage by selling to small businesses. If you’re a bootstrapper, you don’t have to burn through your fundraising at a breakneck speed, and you don’t have to hit 500+ million in revenue before year five. You can afford to take your time designing your product, building relationships with customers, and growing organically.
Bootstrappers can afford to sell to small businesses because they have the time and personal touch to demonstrate their value to a small business owner without burdening them with data, contracts, or long pitches. Bootstrappers can wait for small business customers to come to them, and they prefer word of mouth and organic growth to outbound sales because the former costs almost nothing to maintain. Organic growth might read as slow growth to a VC, but to a bootstrapper, it means that their business will scale at a manageable rate. They can wait to hire more employees or add more products as they can afford to. Selling to small businesses can be hard to scale, but time is on the bootstrapper’s side here.
There are other benefits to selling to small businesses that align with a bootstrapper’s needs. We already know that small businesses are paying customers on a simple sales cycle. You don’t have to play the waiting-or-endless-meetings game to hook them as a customer, and you can start earning money right away. Plus, with a small business, the end user is likely the decision maker in the buying process. This gives your bootstrapped business a few benefits in the long run: you get real feedback from real users (and not just their managers), and you can really focus on great product decisions, not an endless wishlist that will bloat your product with managerial tools. Your goal is to create something elegant, simple, and valuable, which is a very fulfilling way to focus your days.
Of course, there are many bootstrapped companies who target enterprises, education, government, or consumers— we’re arguing that those customer bases just aren’t as good of a fit for bootstrappers as small businesses. Read on for our final take on the bootstrapping-small business sweet spot.
The bottom line
As a bootstrapped startup, if you want to be successful, you have to play a different game than the VC backed guys. As our founder Tyler King has said in past blog posts,
“In sports, you're taught to attack your opponent's weakness. If a football team has a strong rush defense, pass against them. If a baseball team has a great hitter, walk him and move on to the weaker players on the team. When a small company tries to mimic the practices of a bigger company just because "that's how things are done", that's basically the same as deciding to match up your greatest weakness with your opponent's greatest strength.”
So, don’t do things that you know VCs are already doing better. VCs have said that they don’t want to invest in companies targeting small businesses. By building a customer base of small businesses, you are a) serving your own needs by having paying users on a simple sales cycle, and b) invested in a market that isn’t dominated by funded companies who could potentially out-spend you with marketing or product development.
The small business market is just one way Less Annoying CRM has separated itself from the VC game, but that customer pool has affected our company’s whole philosophy and our goals for our product development. Our customers want simple, affordable, and easy to use software, and we want to provide that for them. By continuing to align our values with our customers’, we don’t have to worry about VC competition at all— we’re playing a totally different game.
Glossary
Bootstrapping - funding a business without the help of outside investors. This normally means that the founders use their own money to pay for expenses until the business is profitable, at which point the business is funded with its own revenue.
VC - can stand for venture capital or venture capitalist. The former refers to a type of investment that startups often raise to fund their growth. The latter refers to the people who work at the venture capital fund.
Consumer - an individual you sell to. Consumers buy goods and services from small businesses and enterprises.
Small business - an independent business with fewer than a couple hundred employees. Most small businesses are nonemployers, meaning that they have no employees.
Enterprise - a very large company. Enterprise is the alternative to small business. At an enterprise, you have hundreds or thousands of employees and a complex operations setup (read more on enterprises here).
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