Know When to Walk Away

January 3, 2011 at 9:32 am 1 comment

By Terence Craig

Although I lean more towards hip-hop and heavy metal,  Kenny Rogers’ song,  The Gambler includes the perfect lyric for anybody selling Enterprise Software.  “You gotta know when to hold them, know when to fold them, know when to walk away and know when to run”.

Towards the end of last year I decided to stop pursuing business with a particular prospect. The company is a good name, we are a good fit for their needs, etc., etc. One of our engineers asked me why. Rather than try and explain, I sent him this very funny video which perfectly captures why this particular deal wasn’t a good use of our time and why going forward on the terms they wanted would be a disaster for both companies. Go watch the video now or the rest of this post won’t make any sense.

Funny, right? But if you have ever sold software or technical services for a company that isn’t Oracle, SAP, IBM, or Microsoft you probably got a little nauseous.

Enterprise software customers are gun shy, and rightfully so. During the internet bubble, a lot of venture backed companies sold software/services at prices that clearly weren’t going to ever allow them to become cash flow positive but that wasn’t the point. Pre-2001, the goal was to generate enough buzz to take your company public (after all, who needs profit?). And it worked for a few folks although enterprise software never enjoyed the success at this shell game that B2C internet companies did. But when the bubble popped, all the venture money dried up and all of sudden these companies had to find a way to self fund operations. This is pretty hard to do when you are selling your software and services at a third of the cost to build, maintain, install, and for ASP solutions, to maintain your hosting operations. Yes, people were doing hosted applications before the term “cloud computing” was coined. However, given the discrepancy between their cost structures and revenue streams, once venture capital dried up the result was inevitable – bankruptcy – with customers left holding the bag.

Many customers’ responses post bubble is paradoxical and IMHO, self defeating. They still want the cutting edge technology and slavish devotion that a private company will bring to a large customer as it tries to break out of the pack. But as shown in the video, using the higher perceived risk of a startup going bankrupt to negotiate economically infeasible prices or to attach deal conditions (like exclusivity, eternal price guarantees, demands for equity, rights to IP) simply does not make economic sense. If the private company accepts these conditions, it will most likely bring about exactly the type of failure that supposedly justifies the concessions that the prospect is demanding in the first place.

Enterprise software, whether hosted or on premise, is a long term partnership between a vendor and its clients. All parties lose if early stage companies don’t exert the discipline to participate in deals that help them build a strong sustainable business so that they can support themselves and continue to deliver value to their customers. All that being said, I still hate to walk away from business!

Entry filed under: General Business. Tags: .

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1 Comment Add your own

  • 1. Pat  |  January 10, 2011 at 10:34 am

    Great video. I can relate to this as I have been in the enterprise space for over 25 years. In addition to what Terence has pointed out it may be worth noting that large companies that have “money in the bank” take advantage of this by generously discounting their software (sometimes 95 – 98%) and making money on implementation (many times 7 – 10 times the cost of the software) and recurring maintenance costs of about 20% the price of the software. They want to build installed base and sell new products into existing customers. As Terence points out, this is difficult for the smaller companies who need the software revenue and also want to get their first 5 customers for reference.

    Great post! Thanks

    Like

    Reply

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