“Customer Concentration” might be the longest four-letter word in business.
For a mature business, having a customer represent more than 10% of revenue is a big risk. More than 20% or 30%? Yikes.
Losing a large customer can be a crushing blow. Unfortunately, a large customer will know this and, eventually, use their leverage against their vendor.
However, in the world of seed stage and Series A stage SaaS startups, customer concentration isn’t so bad.
Why?
For a SaaS startup trying to find and prove its product-market-fit, a large or extra-large customer is great validation.
It’s a proof point that a serious company is willing pay real money for a startup’s solution. If one company will pay, say, 300k/year, then there are usually many, many other customer prospects who could pay even more.1
On the other hand, beware of the risk of a large prospect in your early-stage sales funnel:
The hit rate on whale prospects converting into whale customers is lower than most founders realize
Even if the whale converts into a customer, it will probably take longer than expected and convert at a lower price than expected
This brings us to the Law of Large Customers in SaaS:
If a potential deal looks like it will grow a startup's ARR by over 50%, expect the deal to slow down in the funnel and/or shrink in ACV to represent less than 50% growth if/when it closes.2
Let’s say a startup has 200k in ARR and a 200k potential deal in the funnel. If it converts, that deal would grow ARR over 50%. Expect that deal to lag and/or shrink. If/when it closes, it will end up less than 33% of ARR (ie less than 50% growth).
Why does this happen? Large customers don’t want to represent an out-sized chunk of a startup’s revenue. They’ll worry about the startups’s stability and its ability to deliver. They’ll also use their importance as leverage to get more attractive terms.
Fortunately, the Law of Large Customers is one of those laws that, when understood, is easy to manage. The keys are:
Diversify your sales funnel so that you aren’t overly reliant on a single big deal
Calibrate your expectations on timing & pricing
With proper patience and expectations (and a great product as your harpoon), whale hunting can be quite rewarding.
Happy hunting!
Customer concentration at later stages is a different matter and deserves its four-letter word status.
Like any Law coined in a Substack post, there are exceptions - and experienced enterprise founders with plenty of whale-hunting experience will be able to occasionally harpoon a beluga that represents more than 50% revenue growth.