One Big Customer
Copyright Jack Mixner. 714 449 1040. www.mixnerstrategy.com
Tech companies have a problem. Producing the first-off of a new product is prohibitively expensive. Or, sometimes, engineering isn't really done on the great new product, but it needs testing in a customer environment. A good way to do that is to form a relationship with a buyer, preferably with deep pockets, who will work with you to finish engineering and produce the first prototype. It might also be nice if the buyer of the new product paid on very good terms - read that, paid immediately on receipt, a very unusual relationship.
Why would a buyer agree to such a relationship? Access to a new technology that will help it keep ahead of its own competitors might be one reason. And what sort of relationship might be formed? Philips Electronics bought a small stake in Improv Systems, Inc. Why would Improv do it? Having one customer was easier to handle early on. Additionally, Improve didn't need a sales force until it was ready to expand (Winokur Munk).
Early on, a single large customer may make sense.
Later on, concentration of revenues with one large customer is a red flag. Intuitively, we all know that it is a problem. When we start work to increase the value of a company, we find that the concentration doesn't help at all. It is a weakness that reduces the value of the company and may prevent its sale down the road.
References
Winokur Munk, Cheryl. The Big Customer. Dow Jones & Company. 28 October 2002. http://www.improvsys.com/News/articles/big_customer.cfm