Your Customers Define Your Company
Deciding early on who you serve determines whether you’re a product-led company or a sales-led company.
If you decide to take on big enterprise clients, a few of whom make up most of your revenue, you’re building a sales-led company.
- Initially, you might grow quickly and get a windfall each time you close a big, enterprise deal.
- But you’ll have less control over product direction, which your big enterprise customers will want to dictate.
If you decide to refuse enterprise clients and go self-serve for small and medium sized businesses, each of whom contribute a small amount to your total revenue, you’re building a product-led company.
- You will maintain control over your product’s development, because no single customer will have the influence to compel you to develop custom features specifically for them.
- Your growth will start slowly because your first few customers will only be paying you around $50 or $100/mo each.
Neither type of company is better than the other, but making a conscious decision enables you to shape how you grow your client base and reinforces which kind of company you want to build the long term.
Why We Decided To Be Product-Led
Before Customer.io, my co-founder John and I worked together building software that powered online competitions. As the head of engineering and the head of product, respectively, John and I wanted nothing more than to build a feature once and have it enhance the experience for every end user of our software.
Software is a multiplier on effort — code written once and pushed to the internet can affect millions of people around the world.
However, our customers were not the end users. Our customers were large organizations and businesses. Each time we’d sell to them, they’d want our software to do something it didn’t already do just for them. For the money they were offering, it made sense for the company to agree to the new feature in order to close the deal.
John and I were the ones who had to figure out how to design and write custom code for the new special case in our product. We’d try to make sure as we made changes we continued to improve the experience for the end users of the software, but that ended up being a secondary rather than a primary goal for our team.
That’s why, when we built our own company, we knew we wanted to be firmly in the “product-led company” camp. We’d rather have 1000 companies paying $100 each month than 1 company paying us $100,000 each month. The former allows us freedom in how to build the best product for all customers — the latter can tie you down and force you to go a specific way.
No Whales: The 5% Rule
A product-led company is like a democracy, whereas a sales-led company is like an oligarchy. When you’re focused on product, you want to build your business to do the most good for the most people. You don’t want to bend over backwards for any one customer, because it distorts your ability to serve all of your customers.
- To build the right product for all of your customers, you need to be able to tell your big customers “no” when customization demands and feature requests diverge from a long-term product vision that serves the majority.
- To stand firm on your vision, you need to be ready to let that customer find a better fit for them. It’s hard to do that if a single customer makes up a huge portion of your MRR.
At Customer.io, our rule is that no customer should be more than 5% of our revenue. That means that even if a customer account is large from an absolute standpoint, it’s small relative to the customer base as a whole.
Looking back over our history, no single customer has exceeded 5% of revenue with one exception. We signed a contract with a company early on when our monthly revenue was pretty small (in the $10s of thousands a month). Their business ended up being 36% of our revenue in their first month and decreased as our other business grew. Luckily this company wasn’t pressuring us to build features just for them. Given how meaningful their revenue was to the existence of our business at that time, they could have really put the screws to us! My advice if you are in the same situation? If it’s a sub $100k per year contract, you might want to take a calculated risk to do a deal like we did.
We’ve built our company to focus on many clients writing us smaller checks in order to retain independence and control over the development of our product. While it doesn’t feel great if we lose out on a big enterprise deal, we prefer missing out on these deals to building a business that allows a small handful of customers decide how we do what we do.
Is trading customer influence for investor influence a worthwhile trade?
Product-led companies take time to scale up. You need 100 customers paying $100 per month to get close to paying for a single founder’s salary. At Customer.io, it took us over one year to get to $10,000 per month in recurring revenue.
During this time, we needed to find a way to pay for operating the business. Neither my co-founder John nor I had any money saved up, so we decided to raise money. To get Customer.io off the ground in mid-2012, we put together $125k in small checks from friends and family plus two angel investors.
In making this choice, we knew that we didn’t want to trade the influence of large customers for that of our investors.
- Heavily invested shareholders can influence you to build for an investment thesis rather than to solve concrete customer problems.
- You can end up adapting the investor’s risk profile because your business is reliant on them to raise subsequent rounds of funding.
We decided to finance our business by fundstrapping, which is neither fully fundraising nor bootstrapping.
Fundstrappers take funding to get their companies off of the ground but they spend that cash deliberately and cautiously like a bootstrapper to get the most out of it.
At Customer.io, we have multiple months of profitability each year, even as we’re spending money to grow. We’ve raised money, but we’ve done it through angels and small funds, not through a single large institution where a VC joins the board and has an important say in how the business is run. And we’ve grown the customer revenue that comes into the business so we’re never dependent on investment to exist.
Strap ratio: How to manage investment risk
Your strap ratio is the ratio of total amount invested to annual recurring revenue (ARR). Early on, you’ll have a high strap ratio when you raise money to build a product and get your first customers.
At the time of our first round of funding of $125k, we were making about $50 per month or $600 per year. Our total capital raised was over 20,000% of our ARR.
Over time, success in the business via ARR growth has meant that our strap ratio has declined. At Customer.io, we’ve developed these strap ratio benchmarks to help us decide when and how much to raise.
- From $0 — $1M in ARR, you will probably have an astronomical strap ratio if you raise money but want your strap ratio quickly trending towards 100% or less.
- After $1M in ARR, fundstrapping responsibly means maintaining a strap ratio of 50% to 150%, which means you’re using external capital, but not excessively.
What you’re looking for is a healthy balance between capital raised and the size of your business. You want to raise money at the start to give yourself time to build an ambitious product business. You raise subsequent rounds to kickstart growth and make sure your focus is always on the customer.
By minimizing dependence on outside capital, you ensure that you always have a path to profitability, and that means that you control your own destiny to build the company that you want to build.
What kind of business do you want?
There are lots of temptations (usually in the form of money) that lead you down a path where other people telling you how to run your business.
You aren’t born with the confidence to say “no” to whales.
I certainly wasn’t.
Nine or ten months into Customer.io, we tried to raise a Series A round of funding because that’s the route I thought we were supposed to take. I started putting together a pitch deck with a vision big enough to lure venture funding, including going upmarket and taking on the enterprise.
But it didn’t feel right.
I felt like I was filling up the slides with bullshit that I didn’t believe in, in order to make the company interesting enough for VCs. For example this slide:
When I look back on it, I realize that I didn’t have the confidence (or the track record) as a CEO to stand firm about our business and our values. I believed investors would reject us for the way we wanted to build our company. I ended up listening to other people tell me where we should go and how we should declare our plans to conquer the world. We made a lot of mistakes this way, but it’s been during these times that we’ve reflected internally and reaffirmed that we’re a product-led business, serving a large customer base rather than a sales-led business doing whatever it takes to close the deal.
We’ve gained confidence by reaching our internalmilestones, not by seeking external validation. That’s given us the confidence to bet harder on ourselves and our own judgment for where the business should go.