Should you sell one big contract to a single customer or lots of smaller contracts to many customers? It’s easy to make an argument for either. Selling to a single, large account means fewer sales cycles and fewer customers to support on an ongoing basis. Selling to small accounts, though, reduces the risk that a churned account could prove a material hindrance to growth.
It has long been received wisdom in venture capital that B2B startups should move upmarket as they grow. The idea is that as startups build their product or service, they can take on increasingly larger customers.
Sure, this can lead to revenue concentration, which can, in some cases, prove a material concern. But as software customers tend to buy more over time, landing enterprise-scale accounts has often been a way for startups to not only secure new revenue in large chunks but also durable, self-expanding top line.
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SMBs, in contrast, have more limited upside when it comes to account expansion. And, they may not have as much interest in churn-limiting annual contracts compared to opting for monthly access. Many software companies have eventually gone public on the back of selling to big companies. SMB-focused startups have, too, but they’re rarer.
Expense management provider Expensify is one such SMB-focused startup that went public, but getting there wasn’t easy. Before it IPO’d, CEO Dave Barrett told TechCrunch how much negative feedback he received in Expensify’s early days when he realized that SMBs might be its best target:
There was just so much enthusiasm from the SMB sector, which I was always told, as an entrepreneur, was terrible. It’s like, “Oh, yeah. You can’t make an SMB business. They’re impossible. They’re terrible customers. They churn fast. They won’t pay any money,” and things like this. “Enterprise is where it’s at.” I’m like, I don’t know. Everyone that’s excited about my business seems to be in the small business. They don’t seem like they’re churning. They don’t seem like they’re unwilling to pay. I don’t know.
Regardless, our goal this morning is not to vet the conventional perspective that startups should eschew smaller customers over time and sell to large corporations. Instead, we want to talk about just what an SMB is and how not all small accounts are the same.
Brex’s clarifying move
Brex’s recent decision to exit part of the SMB market made a few waves.
The fintech decacorn had a history of serving smaller accounts and collecting interchange fees on their transactions, aggregating the small slices of transactions it facilitated into rapid revenue growth.
Investors loved the company, and its noisy success attracted high-profile competition. Airbase competes with Brex, historically with a greater focus on software than most so-called corporate spend startups, while younger rival Ramp is following part of the early Brex playbook with its own software twist.
But the corporate spend market has evolved. Today, software is the differentiator between the rival providers; charging for that code is what puts Airbase and Brex on one side and Ramp on the other (Divvy was taken off the startup playing board in a sale).
Diving deeper into Brex’s choice to cut a host of SMB accounts, there’s clear criteria differentiating who is in and who isn’t: Brex is still willing to serve startups, just not SMBs more generally.
Our own Mary Ann Azevedo spoke with the CEO of Brex about his choice, which helped us understand the logic:
Now initially there was some confusion as to what that meant. SMBs like brick-and-mortar businesses? SMBs as in startups? [ … ]
[CEO Henrique] Dubugras emphasized that Brex, which started its life focused on startups, “remains committed to startups.” When asked about the criteria in which it determined which businesses would be impacted by its move, he said that Brex chose to no longer work with any businesses that did not have some sort of “professional” funding — either venture capital, angel money or funding from an accelerator. As a result, “tens of thousands” of businesses were told their accounts would be shut down as of August 15. Dubugras admitted the set of criteria may not have been “perfect” but that it had to “have one.”
Is professional funding the line setting startups apart from SMBs? Probably not. There are plenty of bootstrapped startups out there, for instance. But when Brex is saying that it will only work with professionally funded businesses, it’s really talking about growth; it wants clients that are on the spending and hiring path that you only get from external funding.
Different paths to growth
Taking a step back, we can venture that Brex didn’t sell to startups out of love for small businesses. Selling to peers is simply a natural starting point and not one that only Brex has pursued — YC companies are known for selling to other YC companies in their early days.
Such companies do expand their market remit over time, though. “Startups that have largely been built off selling to other startups are wise to diversify,” OpenView partner Blake Bartlett told TechCrunch. After all, these startups never meant to only attract small clients; they hoped to grow with them while also acquiring larger customers later on.
Startups tend to grow more quickly than other SMBs. For one, startups often have far more capital thanks to the venture capital model and generally harbor a growth-first mindset over a focus on cash flow, at least while they’re young. This means that selling to startups is one way to land future enterprise accounts. Selling to more traditional SMBs, however, likely won’t generate the same level of per-account growth, or eventual whale accounts.
But Bartlett’s point about diversification does not mean that he expects all startups that sell to other small companies to eventually ditch SMBs entirely. “If you build the right product solving a universal pain point for all working professionals, you can serve all customers, from solopreneurs to enterprises and everything in between. This is especially true if you leverage a [product-led growth] strategy built on self-service distribution,” he said.
The business model is a key consideration when deciding if SMBs are worth a company’s time. If a company only knows how to sell through a sales-led model, small contracts won’t be a fit. However, that means it’ll miss out on a large market segment — almost half of all American employees work in small businesses.
“We quickly came to learn that the SMB [market] is like the land before time — this market that no one thinks about, especially in Silicon Valley, because everyone is so obsessed with the enterprise that they’re just missing out on the biggest opportunity,” Barrett said last year.
Despite Brex’s announcement, the market isn’t exactly bullish on SMB-friendly Expensify, whose stock has dropped sharply since its IPO. But the company is used to being contrarian, and it is not completely alone either. OpenView, which led Expensify’s Series C round, shares some of the company’s bullishness for a market segment that demands better software solutions. Among Main Street SMBs, Bartlett said, “many of them still need new technology to adapt to customer expectations.”
Some companies, like Brex, may decide to pass their turn. But one man’s trash is another man’s treasure, and we wouldn’t be surprised to see more product-led, SMB-focused startups emerge in segments where competitors only focus on enterprise sales.