Why Most Agencies Should Avoid Startup Clients

Karl Sakas — November 25, 2019 Follow @KarlSakas

Avoid startup clients at your agency… unless you love handling inevitable problems.

Should your agency avoid startup clients? Probably.

Many agency owners like working with startups, because startups are usually fun, magnetic, and interesting—and your agency’s work can make a huge impact.

Unfortunately, startups are structurally problematic, which means your agency will face predictable problems as you serve them. Each startup’s problems will become your problems… and you’re unlikely to receive fair compensation for the risks involved.

Today, I’ll share why most agencies should avoid working with startups as clients. (I know, “should” is a strong word.)

Why most agencies should avoid startup clients

In 2015, one of my clients asked agency owner Robert Glazer if Acceleration Partners still worked with startup clients.

Bob responded: “Based on past experience, we avoid working with clients where they would be our smallest client, but they feel like they are breaking the bank. Those never seem to end well from an expectation standpoint.”

Or as I tend to paraphrase: “Avoid client situations where something that’s small for you is big for them.” Let’s take a closer look at the 12 common problems you’ll face if you choose to work with startup clients.

12 common problems with startup clients

Every startup is unique—technically, “startup” could mean “bootstrapped solo business,” “profitable company with billions in funding,” or anything in between. Yet startups tend to have a combination of certain challenges as agency clients. Here are 12 problems to consider:

1. Undersized Budgets: No surprise, startups need a lot of help… but they can’t always afford it. This typically leads to startup clients expecting your agency to do big work on a small budget. This tends to be true whether it’s a tech startup getting an agency’s help building a SaaS product, needing an agency to brand the startup, or wanting help with ongoing marketing. Some clients will offer equity in lieu of cash, which is a risky approach for your agency.
2. Unproven Business Model: You’re helping a client that hasn’t figured out their business yet. In some cases, the startup might be pre-revenue; in others, they’re pre-profit. When most agencies seek 12-month retainers for ongoing help, startups may not be in business in 12 months… or they might be in an entirely different business.
3. Rapid Pivots: Under the Lean Startup Methodology, startups “pivot” when they realize they’ve been going in the wrong direction. The pivot is good for them—it keeps them viable—but it’s often bad for your agency. After the pivot, your team may have created work that’s not longer relevant… or it’s no longer a top priority. That’s bad for your team’s morale, and it means you need to have yet another sales conversation with the startup.
4. Start-Stop Urgency: Sometimes your agency is the founder’s #1 priority… and other times, you’ll be chasing them for weeks or months to get a response. Pivots tend to do this—to make things go faster or slower—but you might see shifts other times, too. Because startup team members are often generalists, you’re working with someone who’s trying to do the equivalent of three different jobs. Your work isn’t always their top priority… and when it does become their top priority again, they’ll want it to be done “(November 30, 2019).”
5. Pressure to Succeed: No matter how much you care about each client, the startup’s team needs the startup to succeed more than you need them to succeed. This creates pressure to succeed… which means you’ll feel their pressure to succeed. For instance, a specific startup might be 1% of your revenue but they demand 10-20% of your team’s time because they need their startup to succeed.
6. Magical Thinking: Are the founders trying to run a viable business, or are they hoping to make a quick exit after hitting the unicorn startup jackpot? I occasionally see magical thinking among agency owners—usually in the form of hockey stick growth goals. But the problem seems to be far more prevalent among the “we’re going to change the world” tech startups. Maybe they are going to change the world… but they need to pay their agencies fairly along the way.
7. Poor Management: Even if the startup’s leadership team includes good managers, they may be struggling to stay above water. And if they’re not good managers, you might see problems ranging from micromanagement to abdication. Most companies suffer from mediocre management skills—after all, it’s hard to be a good manager, but easy to be bad manager. Yet fast-growing startups tend to be especially bad at vetting people, which means bad managers are more likely to get in. (Send them a copy of my 2016 book Made to Lead.)
8. High Staff Turnover: Staffing isn’t stable at startups; your contact will eventually quit, get fired, or move to a new role at the company, Employee turnover happens at non-startups, too, but typically at a more manageable pace. This gets worse as startups grow, since the founders tend to hire middle managers as your new contacts. Sometimes this is an improvement… but the further you get from the founders, the more likely you are to be working with people with personal agendas.
9. Limited Loyalty: Even if your contacts don’t change, the startup is unlikely to stick with your agency forever. Why? Because their needs change over time, and you may not be able to meet their new needs. Or perhaps their new CMO wants to bring in their own agency. Some startups will promise, “Help us now and we’ll pay you more later”… but I don’t recommend relying on the promise.
10. Investor Interference: Prepare to deal with some surprise stakeholders—the startup’s outside investors. Forgot to ask about them? Oops! Outside investors are likely to swoop-and-poop at the least opportune time. Even if you’re doing a good job, the investors may expect faster results than your day-to-day contacts at the startup… which means extra pressure on your agency.
11. Delayed Payments: Even if a startup is getting revenue from its products or services, that doesn’t mean they’ll prioritize paying your agency. And if the startup is having a cash crunch, they’ll tend to pay their employees first. Watch out for excuses designed to get you to keep working, even as invoices become increasingly past-due.
12. Bankruptcy or Shutdown: Any of your clients could go bankrupt… but startups are the biggest risks. Bankruptcy could range from reorganization to liquidation. You may have some recourse to collect a fraction of what you’re owed—but odds are good you’re an “unsecured creditor” at best. Maybe you’ll get something in a year or two. In other cases, the startup might just shut the doors and disappear into the night, leaving with your unpaid invoice(s) and any sense of closure.

Fun times, right? All of these can certainly happen at your non-startup clients, too—but they typically happen less often and less abruptly.

If you’re an optimist, you might be thinking, “But not every startup is like that!” That’s true, but…

Are there exceptional startups? Occasionally…

Startups need help, yes—but I don’t recommend building your agency’s business model around inherently shaky clients. Might your agency work with a startup client that’s the exception to the rule? Of course… but they’re rare.

Consider that venture capitalists (VC) are picky about their investments… yet still expect single-digit success rates. And a failing startup won’t put the VC out of business. In contrast, you’re primarily risking your own money, and you need consistent cash flow to pay yourself and your team.

For most of my consulting and coaching clients, their agency is their #1 or #2 financial asset. It’s up to you, but—do you want your family’s financial future to depend on cash-starved, frequently-pivoting clients?

Question: What’s your agency’s policy on working with startup clients?

Business & Finance Articles on Business 2 Community

(57)