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.