Whose Customer Are They, Anyway?

A fellow investor told me about one of his better-performing portfolio companies. It’s executing well, hiring amazing people, and seeing a path for scaling if things go well. One area of uncertainty right now is the customer relationship. The company generates revenue by performing work on behalf of other companies. Translation: it doesn’t know or own the customer. The other company has a direct relationship with the customer. This investor believes that to unlock exponential growth, this portfolio company must develop a strategy to own the customer relationship.

Acquiring a direct customer can be hard and expensive for start-ups in some industries. Partnering with a larger company that has an established customer base and can funnel those customers to you is attractive in the early stages of going from zero to one. The cost to acquire them is usually low (if not zero), and the customers can be plentiful if you solve a pain point.

However, this usually isn’t a reliable long-term strategy. It can have lots of downsides. A major one is lack of feedback. You need feedback to make your product better, which you must do to achieve product–market fit—but it’s difficult to get feedback from customers you don’t know. Most companies don’t provide you with their customer contact information (email address or phone number), so it’s hard to reach out after the transaction is completed. You never really know what the customer loves or hates about your solution.

Another downside is concentration. You’re at the mercy of someone else to acquire customers, and they can make a change that severely and negatively affects your business without warning. You could see your business evaporate overnight and not be able to do anything about it. Conversely, if you’re ready to scale, the bigger company can limit your growth if it chooses to not play nice.

Customer relationships are key, and there should be a plan to have direct relationships. It’s OK to have partnerships and other go-to-market strategies, but the core strategy should be a direct relationship.