The following is one of the 4 types of scalable Internet startups, we have identified based on the complexity of their customer relationship. You can find the other types here.
 If you have feedback, send us an email at feedback@startupcompass.co

 


Startup Type 3 – The Challenger 

The success of Type 3’s centers around their ability to successfully do enterprise sales. Challenger startups typically have very high revenue per customer, which enables them to be very profitable with a small number of customers. They also usually operate in very large markets. But these markets are often very rigid and the startup is very dependent on a few key deals closing quickly, which can make Challenger startups fragile. If the founder has a good rolodex in the space it can be relatively easy to get the first few deals. However, many Challenger startups stall out once they start trying to sell the product to people out of their social circle.
 
Example Challenger Companies:
 
Salesforce, Zimbra, MySQL, Redhat, Jive, Ariba, Rapleaf, Involver, Oracle, Yammer, BazaarVoice, Atlassian, BuddyMedia, Palantir, Netsuite, Passkey, WorkDay, Apptio, Zuora, Cloudera, Splunk, SuccessFactor, Yammer, Postini, BrightEdge

Summary:

Avg Months to Move Through Marmer Stages

Primary Service Providers Hired Type of Founding Team that is Most Successful Market size Estimation (Efficiency & Scale Stages)
64 Sales, Business Development, PR Business Heavy Team $65B

Primary Motivation Market Type Avg. Team Size (Scale Stage) Avg. Funds Raised (Scale Stage) Avg. User Growth in Last Month Percentage of User Base is Paid
Build a Great Product Existing Market (Better) or New Market 46 $4,100,000 36% 27%

Revenue Stream:

Of all the types, Challengers monetize the highest percentage of their user base. Few business models incorporate a free component.

Markets:

ERP, Business Information Systems, Security,    

The market size of Challengers is on average 6-7 times bigger than other types.

Potential:
They have the potential to make large amounts of revenue per customer with high lifetime value due to high switching costs. If they can make it to the mainstream market with a few big customers many will follow, as it becomes the de facto standard.

Challenges & Risks:
The founding team needs to make sure they find earlyvangelist customers to develop the product around so they don’t get lost developing an overly complex product that nobody wants.

One of the main risks for Challengers after they close their first few deals is getting stuck being a consultant for a few large companies. They must strive for consistency in feature set and develop a product that will appeal to wide range of customers.

Sales efficiency is a key challenge for type 3 startups. Staffing a sales team gets expensive quickly and if the founder isn’t able to pass on his knowledge about how to close deals in the form of a repeatable scalable sales roadmap the sales team will flounder.

Type 3 startups must also make sure they are solving a problem that is a top priority for the enterprise. Many type 3 startups solve problems that are real, but not high enough priority to garner any attention.

“Only if your product is a top priority can you get powerful champions to cut through the red tape.” – Chris Dixon

Due to Challengers’ high dependency on just a few number of clients they are likely to have erratic pivoting behavior, pivoting very frequently or not at all.

 
Market Entrance:
Challenger startups don’t have as many competitors as other types because the selling costs are high and the product usually requires domain expertise. Their main challenge is breaking through a status quo that often hasn’t changed for many years. Challenger startups usually enter the market by positioning their product as far superior to the status quo or are try to convince large corporations that they need to care about a new emerging market to stay competitive.
Competitive Advantage:
Type 3 startups can achieve competitive advantage through key partnerships, signing up lighthouse accounts, and developing
superior technology.

Value Proposition:
The value proposition is usually focused on optimizing a business process and delivering a measurable ROI or significant cost savings over the previous software being used.

Founding Team Expertise:
Business Heavy founding teams perform better than technology and balanced founding teams. The founding team typically has deep domain expertise in the problem they’re solving and experienced the problem themselves.

 

 
Founding Team Motivations:

 
Support Network:

Customer Development Process:
The customer development process for type 3 centers around learning what your customers biggest pain is and understanding the intricacies of their daily workflow.
Since your target customer base is relatively small and the decision makers are often powerful, busy people it can be a challenge getting meetings to learn from them. This is why it’s a big advantage to have an existing rolodex in the space. If the founding team doesn’t have this they need to make bringing on someone who does a top priority and recruit a number of prominent advisors in their space.

Customer Acquisition Strategy:
Type 3 startups need to find a few visionary customers who are willing to buy the product unfinished so that they can iterate the product around them. The focus then needs to be on figuring out a repeatable, scalable sales process and testing it with a few sales people before ramping up the team. When prospects recognize and respect existing customers sales speed increases greatly.

Sales also needs to make sure they are focusing their effort on just the 1-2 market segments deemed to have the most potential. There is danger in pursuing many segments in parallel and thinning the sales and product development in multiple directions, because there won’t be enough energy to breakthrough in any one segment.

Investment:
Challenger startups need significantly more capital than other types of startups.

 

Common Pitfalls
The CEO delegates sales and doesn’t understand why the sales forecast isn’t met. The CEO needs to take an active role in understanding why customers do and don’t want the product.

Type 3 founders must not underestimate the complexity of enterprise sales. Employees who want the product can’t just whip out the checkbook or credit card. Typically a purchase order (PO) is needed, which needs to pass through multiple decision makers who are affected by people who can influence the deal positively or try to sabotage it.

Developmental Stages:

The developmental stages outline the key milestones that startups move through. Our initial data and observations show that how fast startups move through these stages is a good indicator of their success. However, startups that jump over stages typically suffer a slow death or a confined to becoming a small business with limited growth.

1. Discovery
a) Idea
b) Hypotheses
c) Problem/Solution Fit

2. Validation
a) Earlyvangelists
b) Early adopters

3. Efficiency

Customer Development Goals:
a) Repeatable, Scalable Sales & Marketing Roadmap
b) Beachhead in the Early Market

4. Scale

Challenger startups need about twice as much time as Social Transformer startups to reach the scale stage and three times as much time as Automizer and Integrator startups. Challenger startups also have large team growth at the scaling stage.

Customer Development Goals:
a) Cross the Chasm