Over the past few years, this customer has given him more and more work and started generating a nice income for him. He focused on this customer because they were the fastest way to success. He and his wife are in escrow on a house and life looked good. The customer even suggested he start his own company - they would go with him.
Then disaster struck. One of the components failed. It was the manufacturer's fault, but the customer needed a scapegoat and terminated all contracts with him and his company. He lost 80% of his income because of something that wasn't his fault. Fortunately, he still has a job, his wife is employed, and he can hopefully start rebuilding a more balanced client base.
Since he was looking at starting his own company, I told him my own horror story of relying too much on one customer, emphasizing that this is an important lesson to be learned by anyone forming a startup. I call it the one-customer syndrome. As tempting as it is to all of us, it must be avoided.
When I formed Syzygy Communications, my first startup, I decided to bootstrap it. I began by doing strategic-level consulting for a number of large networking companies and performing technology evaluations for Venture Capital firms. It was lucrative, fun, and offered me visibility into potential product/service opportunities.
One of my customers was IBM. I had completed an architecture project for them and the manager of the project asked me if I could build the product for them. I put together a team of contractors and we went to work. That project led to another, then another. Within a year, I had 25 people working on IBM projects in different divisions across the country.
With the rapid growth of Syzygy and reliable revenue pouring in, I converted most of the contractors into employees, promising stable income, great benefits, vacations, the rewards of working with a team, and all the things that independent contractors have a hard time getting on their own.
I expanded our office space and staff, bought the best equipment, software, and tools for my team, and put forth the image of a successful company that we deserved. We got a receivables line of credit from a local bank.
The bank had a policy that if a single customer represented more than 50% of the total receivables, they would limit their line with respect to that customer. I ultimately convinced them that each IBM division was a separate entity and each division should be treated as a separate customer, so we didn't have a single customer that represented 50% of our business.
I honestly saw the divisions as separate customers. I had separate contracts with completely different terms and was paid from different places. Knowing the size of IBM and the independence of the divisions, I felt safe. If one division had problems, others would be fine. But in a reality I refused to see, IBM represented nearly 80% of our business.
As you can probably guess, in the midst of a minor recession, IBM had a reorganization. Corporate dictated that all outside contractors had to go. Within a few months, we had zero business from IBM.
We scrambled to replace the projects with work from new customers, but our dedication or perhaps addiction to IBM had enabled us to ignore other opportunities. We had to start almost from scratch. And closing new sales takes time.
Of course at that point, we had the overhead associated with nice offices and thirty employees. We drew on our line of credit, hoping to bridge to our new contracts. It looked like we were almost there. Unfortunately, because of this same minor recession, our bank was acquired by a foreign bank who decided to get out of what they considered the risky high tech industry. They called our line - demanded immediate repayment. Syzygy was in trouble.
For me personally, this was a complete disaster. My integrity was on the line. Most of my team had given up their own businesses because they had faith in me and in the future of Syzygy. My team was my family. And now, the situation dictated that I had to layoff the majority of them. It was difficult for them and humiliating for me, but I learned a lesson.
We reduced the size of the company to ten people and started rebuilding. We never again allowed ourselves to become dependent on one customer for our survival.
Ultimately, we rehired most of the people we'd laid off. Syzygy became one of Red Herring's top ten companies to watch, as we developed a world-changing technology that should have made us rich. But that's another story (which is chronicled in The Silicon Lathe).
Bottom line? Bootstrapping a company is hard. It's easiest if you have customers who can pay your way. But the one-customer syndrome can be fatal. I gave an example of financial dependence. But even if you can avoid financial dependence, that one customer can demand too many of your resources. What seems to be focus on this customer's needs can prevent you from building the best product/service. Tunnel vision may cause you to miss the market altogether because your view is so narrow.
So, for multiple reasons, avoid the one-customer syndrome at all cost.