The Better Customer–Startups or Big Enterprise?

I just want to turn my startup into like a real-time strategy game where I can sit at my computer and click on things and watch numbers go up. If I can do that and just sit on the couch and have people bring me food while I click things, we're in good shape.

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Hello, this is Michael with Harjin. Brad, welcome to Inside the Group Partner Lounge. As Y Combinator group partners, we find ourselves often repeating the same advice over and over again during our office hours with the startups we work with. For COVID, we'd often gather together in the Group Partner Lounge at the Y Combinator office to try to figure out why this was the case and how we could help startups figure it out faster.

Today, we're going to talk about when it is a good idea to sell software to startups.

Brad, do you want to set this one up?

Yeah, so you know, I think especially amongst Y Combinator companies, selling to other startups has been a formula for success. Some of our top companies, like Stripe, started out being just a payments processor company for other Y Combinator startups for a long time. PagerDuty, one of the first Y Combinator companies to go public—like, all of their early customers were other startups. Even when you read their S-1 filing when they went public, they were still referencing lots of those startup customers years later. So it's clearly something that can work really, really well.

I think the interesting thing, though, is when it doesn't work right—like when founders are kind of maybe cargo culting, not understanding why these folks do this. What do you think about that, Brad?

Yeah, so people have seen that those companies started off selling to startups and assume that they should do the same thing too, but it's not always the best move for them. There's a whole lot of reasons why companies think that they should be doing it, and it's not the best move for them.

I think the first one that I see all the time—and Michael, we've worked with some companies together that did this—where their product naturally should be sold to bigger companies. They're the only people that want it, but the sales cycle seems really long. So they're worried that if they just try going after those big companies, they won't get any traction and the company will never take off. Therefore, they should try selling this very enterprise-grade product to startups.

This one is so painful because, you know, we will see a founder who worked in some large company for three or four years, who saw a problem in that large company, who has a ton of insights on how to solve that problem for a large company. It's a problem that tiny companies don't have at all. One of the core reasons why we funded them was because they have this experience and they understand large companies so well.

Then in the first office hours, it's like, "Oh no, I'm going to sell this like enterprise-grade alerting dev tools system that is really only useful when you have over 500 engineers." But I'm gonna try to sell it to startups for $100 a month, $400 a month.

Yeah, yeah, and like three startups want to talk to me about it. So that's evidence that like it's solving an important problem for them. I don't know about y'all, but that's always like that office hour for me. I'm just like, "Oh no, please, how do I get you to not think this way?"

And this is like classic examples of this, right? If you look—you know companies that went public even recently like Snowflake. Like, Snowflake's basically a company you only need if you have like massive amounts of data in warehouses. Right? If you tried selling Snowflake to a startup, you would just waste your time.

I heard a story I remember about Workday, like a big HR company. Apparently, you know, all of Workday's early customers were doing like six- or seven-figure deals with them because you only needed some big comprehensive HR suite if you already had like hundreds of employees.

Two amazing examples. You know the other lie that I see early-stage companies telling themselves is that it's going to be easier to sell to startups—like it's going to be easier. And I alwa...