Having a clear understanding of the makeup of your customer base is important to know exactly where your revenue is coming from. Many startups tend to have one large customer that can account for 20-30%+ of its revenue base; this is known as customer concentration. While you may be proud to have landed and service this large customer (as you should be), it can cause a headache when fundraising and/or selling your business.
As a founder, you must be prepared to build a case to de-risk the significance of that customer on the business in order to get a deal done and/or support a higher valuation of the business. (More on this below).
For investors, customer concentration can be a primary initial filter when they are sourcing deals. They have to feel comfortable, upon execution of a deal, that the large customer’s relationship has longevity. There are numerous risks associated with customer concentration including:
As a Strategic Finance Senior Manager here at KPI Sense, I get asked quite a bit about how to present customer concentration to concerned investors. With these concerns in mind, I’ve come up with a list of considerations to help and prove to investors that not only are you aware of these risks, but also are taking proactive steps to mitigate them.
It may be prudent, if customer concentration is a quality of your current business, to have a small write up in your data room defending why the current customer concentration risk is not an issue.
If you’re not sure where to start, we can help! We work with companies every day to gather and present their financial story to investors in the best light possible. We’ve helped startups formulate and answer numerous due diligence questions since our inception and we can help you as you prepare for significant financial events in your future. Drop us a note here!