NetGravity’s Costly Mistake: Why You Shouldn’t Bet Big on a Single Customer
By Richard Frankel
March 17, 2023

As someone who has worked in the world of enterprise software, I have seen firsthand how high-stakes the game can be. One of my most memorable examples of this was when I worked at NetGravity, a dot-com company, and we bet the farm on a partnership with the major search engine Infoseek. This project started with great promise but became a costly mistake that made us lose crucial time in a competitive and fast-moving market.

In this article, I want to share the lessons I learned from this experience and provide insights into the red flags to watch out for when pursuing large custom projects. By understanding these key points, enterprise software companies can avoid making the same mistakes as NetGravity and continue to thrive.

The Big Bet: NetGravity’s Partnership with Infoseek

I started working at NetGravity in the mid-1990s as part of the customer service team. We were a small startup with a big idea: to create software allowing website owners to manage their online advertising. NetGravity was an exceptional company to work for, with an incredibly talented team. Our product quickly gained popularity among digital publishers.

We aggressively tried to grow our customer base and win market share in an exploding market. Especially tempting were the ‘whales’ of the time – the search engines. When Infoseek, one of the most popular, expressed interest in our technology, we had to engage.

When we began talks with Infoseek, it quickly became apparent that their requirements differed significantly from what we offered. We had designed our product for digital publishers in the dot-com era, not search engines. Developing a platform suitable for Infoseek’s needs would require significant time and resources, diverting the product team for at least a few quarters. There was a lot of internal debate at NetGravity about what to do. 

The conflict in this situation was whether to pursue a multimillion-dollar opportunity or stick with a product that wasn’t a good fit for this whale.

  1. On the one hand, the partnership with Infoseek could have been a game changer for NetGravity. In the nineties, there was a diverse and vibrant search engine market. Delivering the Infoseek product required a massive diversion, but it could have paid off with a product ready for a set of large customers.
  2. On the other hand, continuing with the current product came with lower risk and reward. Digital publishers were reliable customers, but they were smaller fish. Focusing on search engine solutions also meant delaying building products for other emerging market segments, such as ad agencies. The opportunity cost of the Infoseek product not paying off was substantial.

At the time, which choice was the best was unclear. The team went back and forth, weighing the risks and rewards of pursuing this deal.

Eventually, leadership chose to pursue the Infoseek deal. I remember the excitement around the office when we announced the partnership. It felt like we were on the cusp of something big, and everyone was eager to see where this would take us.

However, things didn’t go as planned. 

The product team worked for over a year to deliver the Infoseek product. Despite their best efforts, the product they produced was not a fit. Infoseek paid in full, but never used what we produced. 

To make matters worse, the sales team couldn’t sell the product to other search engines. Also, the time we spent developing this product was time we could have spent improving our advertising product for our core customers or other markets, and as a result, we fell behind.

Despite the setback of the Infoseek project, NetGravity went on to achieve significant success. The company went public in 1998 and ultimately sold for $650 million, a testament to the hard work and innovation of the team. Part of the reason we were able to achieve such a grand exit was because of our learning experience with Infoseek. It highlighted the crucial role of strategic decision-making and the need to thoroughly evaluate the risks and benefits of pursuing new opportunities. 

The Infoseek deal was a huge learning experience for me. Making decisions based on short-term gains may lead to significant setbacks in the long run. Instead, the savvy executive needs to take a comprehensive view of the potential consequences of our actions and weigh the risks and rewards accordingly.

Don’t Bet the Farm: The Dangers of Relying on a Single Customer

In hindsight, it’s clear NetGravity’s decision to divert significant resources to a project that wasn’t aligned with our core product offering was a strategic error. The mismatch was apparent from the beginning, but our desire to land such a high-profile client and generate millions in revenue led us to pursue the project anyway. 

The takeaway is that pursuing a massive custom project for one client at the expense of other opportunities can derail long-term product roadmaps that appeal to the most possible customers in your segment. 

Developing and sticking to effective product roadmaps is a significant challenge all enterprise software companies face. Everyone encounters, at some point in their career, the prospect of catering to a large customer that overshadows your core customer base.

Red Flags: Signs You May Be Overcommitting Resources to a Single Customer

One warning sign that you may be overcommitting resources to a single customer is when you’re chasing sales and the customer wants a few special modifications to your product. 

Some special modifications make sense to pursue because they can be helpful for other customers. For example, large customers may request features like language localization into French. Such localizations can be beneficial in the future because while you may not currently have any French customers, French localization can open up that market cheaply.

As a rule of thumb, it’s crucial to ask yourself whether the modification will be helpful for most of your customers or a significant new market before investing substantial resources in it. If the answer is no, it may be best to focus on building and improving your core product to appeal to a broader customer base.

Sales will always push for customizations, citing the potential to bring in a whale of a customer. Your job as a leader is to reward them for focusing on selling what you have. 

When Exceptions Apply: The Benefits of Consulting Structures for Custom Projects

When building custom client projects, having a consulting structure can make a significant difference. Consulting can handle small changes for clients’ needs, but they can also manage larger projects that require substantial resources. Companies that can build platform solutions can benefit from this capability. However, it’s essential to remember that this approach has risks, and companies should still be cautious about overcommitting resources to a single client. Another option is to partner with consulting companies to do those customizations for your clients. Don’t underestimate how hard it is to operate this business. Custom development requires significant technology and business expertise. Especially for small software companies, creating an expert custom software function could be an expensive distraction. 

In Conclusion

The partnership between NetGravity and Infoseek serves as a cautionary tale for enterprise software companies. Pursuing a massive custom project for a single customer at the expense of other opportunities can derail long-term product roadmaps and put the company at risk of trading long-term growth for short-term revenue. It is crucial to carefully weigh the risks and benefits of pursuing new opportunities and to focus on building and improving your core product to appeal to the broadest possible customer base. 

As you scale, you can consider building custom development/consulting units, but companies should still approach them strategically and be cautious about overcommitting resources to a single client.

By keeping this in mind, enterprise software companies can avoid the dangers of relying on a single customer and grow and thrive in their industries.

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