Your ACV controls your destiny more than you think
Building Intentionality around the customers you will thrive with
(X-posting this in the IIT KGP 2.2 blog)
Your ACV controls your destiny more than you think
You are sprinting to get to product-market fit. You close your first few pilots, you and your team park themselves at the customer's office to build the MVP, you work your ass off to show customer value, your customer champion is happy, and viola, you close your first customer. And the second. Third. Soon, your seed round. Life's all set - or is it?
One of the hard realities of startup life is that critical decisions get baked in those early days when you're worried about surviving instead of thriving. You go after momentum instead of intentionally analyzing what would be best for you and the business. One of those questions is: are you serving large or small customers, what does your Annual Contract Value (ACV) look like, and what will be the right sales motion for the product? Success or failure from here depends on understanding how to build the rest of the organization around the ideal customer.
I'll explore this question in more detail, but other similar questions may be important: for infrastructure companies, do you choose an open-core or closed-source business model? For consumer companies, do you bundle hardware + software? It's important to look around corners to see what the second-order effects of your decisions will look like on how you run your company.
How your ACV Determines Your Company's Culture
I've been in enterprise, small business, and consumer-focused companies. They can't be more different. The culture at these companies is vastly dissimilar. All decisions boil down to the customer segment and ACV the product wants to target. This is not limited to go-to-market - the build side of the house needs to be appropriately engineered.
Go-to-Market:
Depending on your ACV, you are best served choosing an appropriate GTM motion. The numbers are indicative and will likely change by industry but here's a ballpark I discussed with some founders at an event recently:
< $10K ACV - ideally sell all online with a product-led growth (PLG) motion, likely with freemium/prosumer pricing. Calendly is a great example in this segment, alongside public companies like Square and Quickbooks.
$10-50K ACV - ideally prospect entirely online with some SDRs closing the sale on a call. Zoom and Hubspot come to mind in this segment
$50-500K ACV - lots of inside sales, events, cold calling, but with a local field sales team that steps in to close the deal. Integrations, customer success, and independent software vendors (ISVs) start to rear their head. My first startup, Capillary, played in this segment
$500K ACV - often this starts to fall under "whale-hunting" and you might be working with a set of "named accounts". You leverage industry relationships and wining and dining are common. It's common to bundle a lot of capabilities under Enterprise Licenses. Oracle and SAP are kings of this business and take the cream of enterprise customers. A lot of vertical-specific SaaS (like InnovAccer and Veeva Systems) plays in this segment.
Building the Product:
It's incredible how different two products that perform the same Job To Be Done (JTBD) for these different customer segments can look and feel. Some examples of differences are:
Data-driven vs sales-driven roadmapping. In consumer/prosumer segments, often the product roadmap is driven based on customer surveys, market expectations, UXR, etc. In larger enterprise segments, roadmap development (for better or for worse) often ends up being driven by the sales pipeline and what the larger customers need every quarter. The role of Product Management is very different; product marketing and sales engineering have a strong voice at the table.
Knobs and Controls: Smaller customers want simplicity -- everything should just work out of the box. For larger customers, be prepared to build knobs to customize every part of the experience, or to get InfoSec or Legal approval.
Infrastructure choices: In a prosumer world, you are often building fully on the cloud with as much SaaS-based tooling as you can find to move fast. In enterprise segments, on-prem, multi-cloud and SOC2 enter your lexicon, and you realize that you often end up spending a bunch of time figuring out what your vendor's architecture looks like and how it will support the bandwidth, latency, and storage needs of your enterprises. Being able to plug in third-party point solutions or figuring out how to work with an ecosystem is critical.
Customer Support: With revenue concentration comes the need to bend backward for your customers. While support and incident management are critical everywhere, be ready to set up processes for escalation management and intricate release planning for enterprises.
Legacy: Does anybody remember COBOL and AIX? Yes, I ran into them for enterprise deals!
Moving up or down the ACV value chain
You will need to re-engineer your whole company if you want to move up or down the ACV value chain. It's not impossible: companies like Zoom and even Microsoft made the transition. I can think of some examples of companies that moved up the chain (e.g., Microsoft with Windows Server, Zoom with their workspace product, etc.) but I can't think of great examples of moving lower in the chain (ChatGPT couldn't come up with any good ones!)
Keep in mind that it ends up being incredibly hard since you have to re-tool every part of the company. Adding back knobs in a simple product is not easy, and neither is simplifying an interface with 1000 settings pages. Add to that the complexity of re-architecting a software stack used at scale and it starts to look daunting.
Often, the transition is only possible if one side of the business is incredibly successful, and gives you the cash cow to build and sustain a completely independent Business Unit for several years (organically or through acquisition) - so you have the time and talent to nail everything needed to be successful in another part of the business.
Takeaway for founders and executives
Given that re-architecting is so challenging, it would be wise to think about some of these considerations early in the life of the company.
What does the market opportunity look like? Based on your location, skills, and market dynamics, do you have a higher right to win in a particular segment? What kind of a team do you need around you? Does one approach set a ceiling for what the company can achieve?
Also, think through your motivations while you are still early in the journey. It's critical to think through what gives you and your team energy so you can shape the roadmap of the company appropriately - both paths can lead to success, but it's always better if you have more fun along the way!
PS: I had originally shared this with a set of founders from Upekkha, an India-US focused accelerator and the ideas really resonated. If you are looking to startup in this corridor, definitely check them out!