Should a Startup Ever Turn Down a Profitable Customer?

Patagonia recently made news by announcing that it would not make branded logo vests for companies that are not “mission-driven companies that prioritize the planet.” Although existing customers are grandfathered in, Patagonia will presumably not make branded apparel for new customers in the oil and gas or metals and mining industries, for example. Furthermore, financial services companies, including investment firms, will have to make the case to Patagonia that they are ecologically friendly.

Recently, the issue of customer-selection hit home with one of our portfolio companies, Jopwell. Over the last few years, we have been privileged to have the chance to work closely with our portfolio company Jopwell, and in particular with their talented and dynamic co-founders Porter Braswell and Ryan Williams. Jopwell (www.Jopwell.com), an NYC-based HR tech SaaS company, is the leading career advancement platform for Black, Latinx, and Native American students and professionals. They have many marquee customers including Goldman Sachs, Facebook, the NBA, American Express, Lyft, Spotify, Bloomberg, and many others.

Porter and Ryan came to me with an interesting dilemma. Jopwell was approached by a large, well-known consumer brand that wanted to buy their software. However (without going into too much detail), the prospective customer was a closely held company whose owners were known to believe in and contribute to a cause that some may consider offensive.

This was the first time I had to think about a problem like this. I had been faced many times with the issue of turning down an economically unattractive customer (because they were too small, likely to churn, unable to afford our desired pricing, or required a high degree of customization). I was also familiar with the issue of turning down a financially attractive customer due to a business conflict. But the prospect of turning down a profitable customer for non-economic reasons was a new one to me.

We discussed the pros and cons of taking the customer on. It should be said that Porter and Ryan – who are both highly principled individuals – were already biased towards turning the business down due in part to pushback they had received from some of their employees.

My view was that they should take the customer on. The rationale was:

  • If a customer is trying to improve – in this case, increase their diversity – how is that not fulfilling Jopwell’s mission and in so doing making the world a better place?
  • Turning down a profitable customer is a slippery slope. Where do you draw the line? To take an extreme example, let’s suppose you don’t like Donald Trump. Does that mean that you will not allow the US Government to buy your product?
  • There is an economic cost. Cash is scarce at a startup. It is an economic sacrifice to reject the cash concomitant with a profitable customer.
  • While rare, this issue is not unprecedented. In the technology world, Microsoft, Amazon, and Oracle, recently faced employee backlash related to large contracts with the US Department of Defense (DoD). Microsoft’s case was particularly interesting. At issue was a $480 million DoD contract to supply virtual reality equipment that could conceivably be used for weaponry development. In all three cases, the companies pressed ahead with the contracts despite employee backlash.
  • While some employees may react negatively to taking the customer on, it is the founders’ job to show leadership and make the case, either way, to their workforce.

Porter and Ryan countered:

  • The Jopwell brand is valuable, and they don’t want to take on any customer that may potentially damage or change the way people perceive it. This point was reinforced by Jopwell’s PR firm, who encouraged them to not take the customer on at this time.
  • Jopwell has two customer constituencies: enterprise customers as well as a large set of candidate members. While enterprise customers may not care as much, Porter and Ryan believed that many of their candidate members could potentially react negatively. Jopwell needs both constituencies to be happy.
  • Several of Jopwell employees were strongly opposed to taking the customer on. They debated the issue internally at length. They work hard to keep their employees happy and wanted to keep it this way.

After a meaningful exchange where we highlighted the risks, the Jopwell team made the tough decision to turn down the customer. They did so in a very diplomatic way and preserved the right to work with the customer in the future. Ultimately, Porter and Ryan reasoned that the economic cost of taking the customer on – in terms of potential brand damage, job candidates who may be been turned away, and possible employee turnover – outweighed the ACV of this customer (which was, they pointed out, on the small side for them).

I respect the way Porter and Ryan approached their decision. In addition to living by their principles and ethical concerns, Porter and Ryan carefully considered the commercial issues.

As an investor, I certainly appreciate that.

One thought on “Should a Startup Ever Turn Down a Profitable Customer?

  1. Great post. There’s a lot to chew on here. A lot of points you brought up is where my head initially went. I guess the real question is “Are you actually in a better overall position by taking on this customer or does it truly set you back?” These founders are probably going to be the best people to answer that. Even if they’re wrong, it might become a case of if they believe they will be in a worse position by taking the customer on it becomes a self fulling prophecy.

    Like

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