Startups in Japan have a problem.

It’s the same problem that faces startup founders around the world, but the misunderstanding is so strong here that it causes a lot of companies to go out of business just as they should be starting to scale. 

Too many startups fail to understand the difference between relationship-based companies and product-based companies. All famous consumer brands are product companies: Facebook, Nike, Honda, Apple, Chanel, Google. Customers are attracted to market-ready products and, on average, customers feel far greater loyalty to those companies than those companies feel for their customers.

Marketing managers at product-based companies may talk about “building a relationship with the customer” or a “customer’s relationship with the brand”. But those relationships are so shallow that it’s almost a misuse of the term. They exist only so far as they encourage mass purchase of additional goods. The company and the consumer both value the product, not the relationship.

Only product-based companies can scale globally, but just because you make a product doesn’t make you are a product based company.

In fact, most Japanese companies with products are actually relationship companies in disguise. This is slowly starting to change, but the cultural importance of relationships has a long history here. When I started my first Japanese company back in 1998, the goal of almost every startup was to become part of a large company’s supply chain. Having that kind of relationship guaranteed a steady, if low margin, stream of business.

These relationships were more important back then, because although the keiretsu were starting to crumble under their own weight, most companies still preferred to do business within their own corporate groups. Small to medium enterprises had little independent buying power. In fact, the existence of these captive, protected keiretsu micro-markets, is one of the big reasons Japan did not develop a globally competitive software market in the ‘80s and ‘90s.

At that time, an independent Japanese company that could sell across multiple keiretsu groups was a rare and powerful beast indeed. For the most part, the way to survive was to build what your client, often your only client, told you to build. That relationship was the only thing keeping you in business.

Things have improved a lot in the last 20 years, but many so-called start-ups are really firms with one or two primary clients and no hope of scaling. They have a relationship that guarantees a certain level of orders, but their product can not stand on its own in the marketplace.

Don’t get me wrong, it’s great to have those relationships. Knowing the right people can give you a huge head start in finding your first customers and in getting distribution. But if you do not value your product far more than you value any single customer, things are going to break down eventually.

Four Signs Your Startup is a Relationship Company

In the early stages, it can be hard to tell a product startup from a relationships startup, and nearly all companies with a product insist that they are product companies. Here are four hard questions you need to answer honestly to make sure you re not really a relationship company in disguise.

  1. Are you are still doing, or do you plan on doing, custom development work after you receive funding? 
  2. Does your product requires extensive customization with you being the only company doing that customization? 
  3. Did your product start out as a project for one customer, and then you decided to turn it into a mass-market product? 
  4. If you have more than 20 customers, would losing your two biggest put you out of business?

If you answered yes to more than one of those questions, than you are almost certainly a relationship company.

Of course, there is nothing intrinsically wrong with relationship companies. Relationship companies can make a lot of money. In fact, since relationship companies are more willing to customize their offerings to meet the demands of their initial customers, they often grow faster than product-companies, at least initially.

The problem is that relationship companies don’t scale well. Those early customizations, special features and configuration options that you add to keep those early customers happy come at a cost. They keep your relationships strong in the short run, but they doom your product in the long run.

As you grow, you will spend increasing amounts of time and money supporting every one of those special features. Each one makes your product a little more complex and a bit harder to use. Most damaging of all, each special case dilutes your vision of what your product should be. Even if you end up with a steady revenue stream, meaningful innovation will have stopped.

It is important to delight your customers, but no single relationships is ever more valuable than your product.