Each week, we seek out expert advice to help a small or medium-sized company overcome a key issue.
Since Cleverfox.com launched in 2011, the business-management software company has built up a loyal base of small, service-industry clients – thanks, in large measure, to the level of one-on-one service they provide.
Yoga studios and hair salons flock to cloud-based Cleverfox looking for efficient ways to manage their businesses remotely, whether it involves online booking for customers, staff schedule co-ordination, or customer retention tools that allow employees to plug in client preferences that can be used to offer future incentives.
Because of this focus on detail, the Toronto company's small staff spends a great deal of time with each client to design a software system tailored to their needs. After the system is up and running, a Cleverfox representative will engage in lengthy follow-up with the client to iron out any kinks, says co-founder and chief executive officer David Shafrir.
"It's a result of the time and effort we spend making sure each of our businesses is serviced and up and running and able to integrate fully that's led to our expansion in the market. … This is what bigger software companies miss out on at times," says Mr. Shafrir, who got the attention of the Dragons' Den investors during an appearance last March. Although four out of five of CBC's televised fire breathers offered to invest in his idea, Mr. Shafrir says he ultimately decided to turn down the deal in order to keep more control over the company's direction.
With operating revenue of about $1-million and more than 1,000 clients on its roster, Cleverfox appears to have found a solid niche in a crowded field.
But the lure of netting a bigger, multimillion-dollar fish, like a bank or large corporation, has led the company to a strategic crossroads. To create a software management matrix for such a company, Cleverfox would need to allocate six to nine months' worth of resources – time, money and brain power – to the task.
This would require diverting resources with no guarantee that a big company will bite. To do so would also mean that their current clients could experience a downgrade in customer service.
"You've got to spend time identifying all the little requirements that create a holistic solution for the client," explains Mr. Shafrir, who founded the company with partner Fazal Khaishgi. "So we have to have an account manager dedicated to them, at least one. Then from a development standpoint we'll need several top-level developers, which frankly we just don't have the resources to hire."
At the same time, acquiring one major client could put the company's foot into a bigger door – always the hardest step for a startup – and would assure that other major players would take them more seriously.
"It opens a huge door for us, but at the same time a sales cycle with an enterprise-level client is substantial and long versus a small or medium-sized business who will essentially sign a service contract when you meet them," Mr. Shafrir says.
"Do we stop everything we're doing and address the needs of a bank, with there being a strong possibility that we might not land that contract because there are potentially other people bidding? Or do we continue focusing our resources on building our product out to address the needs of our existing clients? This has been a real head scratcher."
The Challenge: Should Cleverfox risk its client base of small businesses in order to reallocate resources toward netting a "big fish?"
THE EXPERTS WEIGH IN
Michael Denham, president and country managing director at Accenture Canada, Montreal
I think they really need to get to the bottom first of why they need to do this, because it is going to be risky and it is going to be costly. If they've answered that and the right answer is to go get the big fish, the key thing they'll need to get right is to have a very rigorous qualifying process. There are lots of big fish to go get. There are lots of cloud-based requirements big fish have.
So the question is, where are you going to focus? Point one: In what way is their service truly differentiated versus the competition? They've got to have very honest answers here. Secondly, it's helpful to have a coach or friend or set of relationships inside the clients they want to sell to in order to get advice and increase their odds of winning. Where can they get those relationships?
They also need to understand legal, balance sheet and credit rating issues, because big fish often need to deal with other big fish. Cleverfox needs to understand if they're going to be disadvantaged by the mere fact that they're privately held and small. Lastly, they need to understand the competitive status of other incumbents: Are there switching costs? What's the incumbent's track record? Because chances are there's someone providing this service already, and dislodging an incumbent is a challenge in itself.
Kristi Miller, co-founder and vice-president of First West Capital, Vancouver
I would try to scale, but my preference would be to consider a joint venture with a potential customer, because there's a perfect blend of sharing the risks but still having some exposure to the upside. I've seen it work because it helps to mitigate some of the most material risks in this equation, which are how do you finance it and how do you staff it? You can share the costs and you can share some of the human resources and expertise as well, plus you have clear market endorsement by having the joint venture partner go with you in the first place. You know you're building something that's relevant.
My second choice would be to raise some debt – provided that they're really confident about what they're doing, because essentially they would be leaning on the success of the existing business to grow the line of the new business, so you don't want to do that unless you're pretty sure about what you're doing.
Mike McDerment, CEO and founder of Toronto-based FreshBooks, a provider of cloud-based accounting software for small businesses
Cleverfox needs to make some choices about what kind of company they want to be when they grow up, and they have to understand certain tradeoffs that are happening in front of them right now. They need to be very clear about what the implications are, because once you get that big customer they're going to be very demanding. They're going to tell you what to build for them, whereas with the small customers you have a lot more control over the relationship; your revenue is a lot more dispersed, but it's hard to grow your revenue when you're serving lots of little guys.
I can speak credibly from experience how we chose to pass up some really big deals with big financial institutions. Suffice it to say, we decided if we take on this really big customer we're not going to be able to focus on developing our product and we're going to have a really big customer telling us what to do instead of serving a bunch of smaller folks. And I think that decision has made all the difference.
THREE THINGS THE COMPANY CAN DO NOW
Do some soul searching
Figure out what kind of company it wants to be. If it is trying to develop its own unique, recognizable brand, it may be wise to stick to smaller customers who allow for more control over the product and relationship.
Ask the right questions
Cleverfox needs to be very clear about which "big fish" it wants to target. A contact inside the enterprise it's trying to target can be useful in providing insight into how to tailor a pitch.
Consider a joint venture
Forming a partnership with a potential customer could mitigate some of the risks sustained by the company taking a leap on its own. Financial and staffing concerns could be shared between them.
Interviews have been edited and condensed.
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