What Should You Do with Your Crappy Little Services Business?

Posted on Apr 25, 2011 | 52 comments


This post originally appeared on TechCrunch.

There’s a line of thinking in Silicon Valley that you should build product businesses rather than services businesses. This thinking is largely driven by the venture capital industry (and subsequently Wall Street) who are in search of high margin, highly scalable businesses.

It’s nearly impossible to get a services company financed by VCs. You’re a small fish.

So pervasive has this thinking become that on several occasions startup companies with profitable & fast growing services businesses have come to me wanting to show me the product businesses they created internally to see whether they would be financeable or whether they might be able to create “spin outs” that could be financed.

A great recent example of this was a successful group of entrepreneurs who had created a company that will do $10-12 million in revenue at their system integration business (read: services business) in 2011 after having done $5 million or so in 2010 and $2-3 million in 2009. They feel very confident they can hit $18 – 20 million in 2012.

They have created two internal technology “products” and wanted to figure out how they could turn their services business into a product business that could be financed. This team is talented. They wanted advice. And probably some money. I gave them advice I don’t think they were expecting from a VC,

“Don’t raise venture capital for this business. Ever. And stop effing around trying to create a product company.”

It is advice I give entrepreneurs often as I have written here on why most businesses should never raise VC.

Why Shouldn’t Most Services Businesses Raise VC?

Well, let’s look at this exact situation:

  • I don’t have access to their actual financial statements but let me make some reasonable assumptions. It would not be a big stretch to image a well run service business like this making 15-25% net profit margins. Early in a services business there is usually no profits as the company reinvests in hiring people to grow, but by $20 million in sales the company should at least be pulling in 10% profits (if not more) depending on how much is reinvested.
  • So assume that in 2012 the company would do $20 million in sales and $2 million in profits (10%) and 2013 they would do sales of $25 million and $4 million in profit (16% net margin) and then slow growth in 2014 to $30 million and $6 million in profit (20% profit). That is $12 million in profits over 3 years.
  • The founders could reinvest this in growth (0% tax, focus on future equity growth) or take the profits of $12 million and divide amongst the founding partners. Assuming there are 3 founders and they own an equal amount (33%) then they’ve just taken $4 million each in profits and note that this is at a qualified dividend tax rate (currently 15%) versus an income tax rate (35%). True, the 15% rates will likely go up in the future, but I doubt they will approach the income tax percentage level.
  • The thing is – even if your services business is a smaller scale than this – you have complete control over the decisions about where to take the business. There is no shame in making a few million dollars in profit and paying yourself dividends while still owning a large percentage (if not all) of your business. It’s how things are done across the country outside of Silicon Valley.
  • The minute you raise VC you have one option – grow & try to become big. No VC is interested in dividends – they want growth. That’s the right answer for VCs.  It may be the right answer for you. But it might not.
  • Trying to turn a successful services business into a product business is getting the cart before the horse. If you really want to do a product business then hire a professional manager for your services company, quit that job and focus 100% on your product company.

Why Build a Services Business in the First Place?
There are at least two types of tech services businesses in my mind:

1. Service as a bridge to a product business - One of the best ways for young startups to finance their business without any dilution is what I call “customer financing,” which is mostly only possible in businesses that target businesses rather than consumers. Customer financing often comes in the form of your company agreeing to build a product with a “sponsor” customer or two and helping them with the rollout / implementation. Often in this strategy you end up giving them the product for free and bill them only services fees. You own the IP you create.

The benefits for the customer are: a mostly custom-built product addressing one of their internal needs, the focus of a very talented young startup focusing on their business need & free product – potentially for life.

The benefits for you are even more clear: you get to build a product raising significantly less external money (if any at all) and therefore no dilution, you get a customer who will help you figure out the real requirements for your business and you have your first real reference client lined up, which should help with future funding and with future sales.

If you set out to build this kind of business you just need to be sure you don’t become a permanent consulting business by default. The “customer-financed” type of tech service business is never frowned upon by VCs – unless you’ve been doing it for 2-3 years with no product business to show for it, by which point they assume you’re the second type of services business.

2. Services for services sake - The type of business that is generally shunned in Silicon Valley is the “pure services” business like consulting, system integration, value-added resellers (VARs), customer support businesses, outsourcing companies, etc.  I have already outlined some of the economic reasons these can be good businesses as well as the one of the most important – retaining full control in you business.

But the broader reason that I often suggest them to entrepreneurs is that they’re much easier to build than product businesses even though they’ll never become Google, Twitter or Facebook. Trust me – it is far easier to persuade a business to pay you for your services (a concept they readily understand) than it is to persuade them to buy a totally new product concept and pay for that product.

“How much is that software really worth? Who else is using it? How much did they pay? Wait, I’m only paying “X” for my Salesforce.com licenses – and you want me to pay “Y” for your product? Who are your competitors – how much do they charge?”

I could go on-and-on with all of the sales-blocking messages you will hear when you try to charge for a product. I’ll repeat: everybody understands paying for services. It’s pure irony. At my first company we would have a product sale of $80,000 where the customer would grind us to get the fee down to $70,000 but would readily pay $25,000 extra for “implementation & post-sales support.”

We were building a VC backed software business so I had to focus on the product business. But this lesson in business was never lost on me. And some of my former teammates are now building really awesome services businesses in the exact same field and they own 100% of their companies.

Even tech blogs know this. You struggle to get advertisers to pay your CPM rates and get your page clicks up in a business where you become a near commodity to ever other website out there. Yet you can run a conference and mint money. If it’s well run, people readily pay for conferences and sponsors readily pay to become platinum, gold or silver sponsors. Tech blogs can theoretically scale, tech conferences are pure service businesses.

But How Do Service Businesses Grow?
I’m not saying the scaling a services business is easy – it’s not. One big challenge is how to grow the company. You end up needing to add staff and take on more risk without knowing what your future demand will be. There are a couple of ways to think about this growth.

1. Start with a network of independent contractors (1099′s)- When you’re a young company with 3-4 people and you land work that requires 7-8 it can be daunting. You don’t necessarily want to take on the extra employees and risks. I recommend that you establish a network of contractors who want to do similar work to you but don’t know how to sell projects or to build a company. They’ll be glad for the occasional extra work.

2. Vendor financing – When you start to win business – let’s say as an implementation arm for tech / business products or as an ad sales team for large tech / media businesses – you can often get financed in a small way by your vendors who are all to happy to have a bigger ecosystem of implementation houses. They won’t do this before you prove yourself but once you hit a minimum scale this is always an option.

3. Angel financing – just because VCs won’t back this kind of business doesn’t mean angels won’t. If you can show a few million in sales and the ability to return dividends in the near-term there are always smart businesses professionals who will consider financing this. What are there other choices these days – money in a bank at 0.5% interest?

4. Bank financing – OK, so this isn’t immediately likely to come from Wells Fargo, but there are tech banks like Silicon Valley Bank or Square1 Bank that are in the business of financing startups. If you can show regular cashflow and are willing to put your profits into their bank you can often fund expansion this way.

Final message on financing – just be careful not to let your fixed costs get too high as a young services business. In a booming tech market like 2011 it’s easy to think your business will always expand. The problem with service businesses is that when the economy turns revenue & profits take a really big and quick hit. Those companies that have a largely variable cost base and make the tough decisions survive for the next boom.

Why Shouldn’t Service Businesses Become Product Businesses?
If you build a true “technology services for services sake” business at some point you’ll likely build technology products as part of your projects where you either own the IP or you own in jointly with your customer or business partner.

This is where many service businesses make mistakes and go pear shaped. They get “product business envy” because they read too much TechCrunch about their product brethren raising money at crazy valuations and getting sold at even crazier ones. So they set out to build a product business within a services company.

A few problems arise. Firstly, they don’t realize how hard product businesses are. They mistake their successes in selling services as a competency in selling products. This is a huge mistake. Secondly, they often ramp up their cost base to accommodate these costs, which when a down market hits they are more effed than those that stay focused. Finally, the focus on the product (envy) means that they take their eye off of their core business, which is services. So the core business suffers.

I saw this first hand. My first career was at Andersen Consulting (one of the largest services businesses in the world). We built a hugely successful global services business yet we never got over our product envy from watching our tech clients. So we created internal software projects and all of the internal consultants on those projects became blowhards who thought they knew how to create software product businesses.

We stunk at every product we ever created. We had no sense for gathering real customer requirements. We over-spec’d products. We built for our over-intellectual selves. I can’t think of any great software tools ever created internally by Andersen Consulting. We were a great services business. Period.

What Should Services Businesses do with Their Product Businesses?
So back to my advice to the company I recently spoke to about spinning out their tech business or raising VC. My advice wasn’t to shut down all product / IP initiatives but rather to be clear on their purpose and how to monetize them.

1. Products as a service sales machine – My dear friend Franck Meudec in Paris knows this best. He has built some internal technology products to support his services business. They are “loss leaders” for his core business. In stead of going in and trying to hold the line on how much to charge for these products he can tell customers, “Sure, we’ll give you our planning software at cost if you decide to work with us.”

His business is booming. These products help him win his core sales. He is not confused about which is the horse & which is the cart. He is building a services business. In stead of owning 1% in options to join a startup tech company he created his own tech services business. He is the majority owner. Higher risk, higher reward than joining as a junior employee somewhere else.

2. Products as a key differentiator – Another important reason for having internal IP in your services business is as a key differentiator against other services businesses. If a customer is faced with two equal choices for companies who can implement Salesforce.com – how do they choose one other than references & price? Imagine if you had built a few modules on top of Salesforce.com that made that product more effective? Even if you didn’t charge for these it would sure increase your sales hit rate.

Tech services business in booming markets are mostly about how fast you can sell, implement, manage quality, hire and sell some more. In a down market IP can become a huge differentiator.

3. Products as a gross margin bump - Finally, it should be said that in a services business often your implementation rate becomes a commodity relative to others in the market. If you can make an extra 10% on each sale by selling your “ad on” products that are at 90% gross margins not only will you increase your win rates but you’ll also add valuable profits to your bottom line.

In summary: I’m not advocating that companies are crazy to try and be product companies. In fact, that’s all that I fund as a VC. But I don’t want the narrow world of venture-backed companies and the trade rags that report on them to dissuade the overwhelming masses of potential entrepreneurs from building meaningful businesses that are both fun and economically rewarding.

  • Anonymous

    The reason services business are easy to get into is that services business are easy to get out of.

    Man, it’s *hard* to run a services company. I’ve run product and services companies, and products are much easier, once you have some scale. Services businesses are much harder to run at scale.

    Mmmm, recurring support revenues, yummy. And no bench/beach issues.

    -XC

    PS – I work in Oracle License sales now, but I used to work in Oracle Consulting so I am NOT talking the same kind of scale you mean about Anderson/Accenture. I’m talking about the other 99% of non-sole proprietor scale. At the size of Oracle or Accenture it’s almost hard to screw it up.

  • http://www.repeatablesale.com/ Scott Barnett

    Mark – right on the money. One important point you didn’t mention – At a service business, it is typically a referral business – you are selling to people you know and their friends. Your prospecting volume is very small compared to a product company. With a product, you need to sell to strangers – figure out how to find them, thrill them, and then convince them to give you all that money at huge margins! You do mention that people who sell in a services company think they can sell a product, but you didn’t explain why – I think it’s critical to understand this difference.

  • http://www.brekiri.com/ Greg4

    Yeah, this is a classic services company mistake.

    On the other hand, I do think a lot of services businesses are probably great breeding grounds for disruptive products – the products that will automate some aspect of the service and cannibalize the service revenue. But of course it’s almost impossible to cannibalize your own business, so you have to leave the services arena or spin out the product. It’s more likely that the product company founder comes out of the service company than the company itself being able to create the product.

  • Anonymous

    I think you do a huge service when you write posts like these. There are so few that look at the other perspective. Good point on tech blogs….didn’t think about the trade show aspect.

    You are right that most services businesses have product envy. I get recurring revenue with no work? Yum, as Cliff says. It is very tough getting there though. You are right customers really focus on the product cost but are willing to get bled on the service side. Its why you see so much consulting around ERP systems.

    Best regards.

  • http://mattreport.com Matt Medeiros

    This was a great article.

    I’m in the process of splitting into a national product myself from running a service business after 2 years. This is really enlightening.

  • Anonymous

    Great point.

    Even worse, the developers of the product are your revenue resources. So a development schedule is a toughie.

    It’s like the transition from doing all your own sales and billing on the weekend to having overhead. Whoops, fixed cost spiral!

    -XC

    PS – Products, baby, are where it is at long term. Having said that, if my corporate masters were to kick me to the curb (or kerb if my new boss is from the UK) I’d be consulting immediately – the money is immediate.

  • Dimas

    hey Mark

    interesting perspective

    I am a CEO of a company in Indonesia. I run service business but only for financial services. It is tough but it is good money

    I am using that money to finance my products and I only take a little bit salary for my products

    product is my dream and now since I have a little bit money then I am giving my service business to someone as a COO while I pursue my dream of making great products

    well just my 2 cents

  • http://twitter.com/EdOBoyle Ed O’Boyle

    Great post Mark,

    I have been in services (management consulting) for many years before starting a more technology-enabled service business. A service business nonetheless. For the reasons you mention, the big product companies in adjacent space (in our case, Kodak for example) were discounted as competitors (even though they have services).

    In our case, we believe we can increase our leverage through process and technology innovation. When we deliver the best economics in the space, stay horizontal (go wide) we are finding we can partner with products companies (rev share). This works when you clearly can “feed” product sales. Everyone stays focused.

  • http://wearenytech.com/64-mark-birch-investor-entrepreneur-trader Mark Birch

    You are forever at the mercy of your staff when you run a services business. There is little that any services business brings to the table other than the people it charges out to clients. Methodologies, processes and the like are really not differentiators. It is purely about the people, whether it is a managing consulting practice or outsourced tech body shop. Since I was on that side for awhile, I know exactly what a crummy business it is and the precarious balance that is played between hiring / retention and bench / billing.

    When you have a product, you are less at the mercy of this carefully established labor arbitrage. I tell everyone to start with product and build a product-based company. It is not even a matter of getting funding, I simply believe that once you go services, it is extremely hard to get into product and do it right. Having seen what Accenture do to a few of my clients with their “products”, I can concur that they and a whole host of services companies simply do not have the DNA to support and foster strong products.

  • http://twitter.com/anngaglioti Ann Gaglioti

    Thanks, Mark! Justifying my humble existence. Forwarded to my senior staff. It isn’t sexy but we employee a lot of folks and provide valuable services to clients that need them.

  • Anonymous

    Great post Mark, thanks very much. I’ve been running a services business since 2000 and I can relate to the product envy emotion. We built several great products for people who had incredibly good exits, and it was natural to feel the urge to switch gears.

    In our case, I think we’re taking an interesting approach that is working really well so far. We split our services businesses into “consulting” and “portfolio” divisions that work together in a way that’s very unique in my experience (sharing contacts, leads, labor, products, etc.)

    Now we have a great structure where staff members who have a passion for product have a place to become satisfied (rather than leaving the services business for a new job, I can just find a place for them on the portfolio side) and when things need to get lean on a product, there’s always a consulting project to fill any resource allocation gaps (so I don’t have to worry about attrition as much.)

    The profits from the consulting side provide funding for the portfolio side, so rather than taking dividends, the partners own 100% of the equity in everything the portfolio side produces. So far it’s working very well, but no big exits yet.. I’ll chime back into this thread in a couple years and let you know if I’m still feeling optimistic. ;)

    Thanks again,
    – j.

  • http://www.victusspiritus.com/ Mark Essel

    +1 Phil, appreciated this post as well. Great review on the balance of product companies vs. consulting shops by Mark.

  • Anonymous

    You are always at the mercy of your staff. Probably more so at a product company.

    You can have lower caliber staff at a services company and make it up billing more hours. You actually don’t want great staff. They are a pain in the ass and not willing to tolerate bullshit. Less quality people LOVE conference calls and meetings….all billable.

    At a product company, if you don’t have the best you die.

    Look at the compensation per employee at Google or Facebook or Twitter versus Accenture, IBM, or SAP. At least four fold difference.

    Enough said.

  • http://www.24pagebooks.com MartinEdic

    My take is that we are talking about lifestyle vs. growth businesses. Great post. We’re doing a title on niche expertise businesses and this is directly relevant. Thx.

  • http://twitter.com/Mojsilovic E-75 IT Services

    its not easy t run a service business. In service business you have to sell all the time. One job is done, move to the next one. Its not easy to do that these days. To start selling to the friends of friends lot of time need to pass, you need to get references, to get word out there that you are good at what you do.

    that’s not easy at all. I’ve been running a service company for 2 years now and you never know whats going to happened after 6 months. Will you find new clients, will you be able to sell something to existing ones? You cannot have lots of clients at the same time since you don’t have resources to back it up. If you have employees your are in trouble if you don’t find more work.

    With product business you can get recurring revenues after one sale, you can work with less resources and you can even use that product base clients to by some services as well.

  • http://twitter.com/kevinleversee kevinleversee

    Its almost common sense- reading this I keep nodding my head. Surprisingly this is what I and a few others I know pretty well have been doing since we lost our ‘Jobs’ back in the first dot com bust. Hustle, service customers, do good work, repeat. The biggest issue is when your kinda tired of building things for other people. Here is the Rub, you start the services business to fund your ideas, only you tend to get so damn busy scraping it thru and manifesting it, that sometimes that idea never really is created. Ideas are worthless unless they are executed on. I’m at a crossroads, sometimes its like you need to make sure your idea isnt lost, the energy to get the thing going isnt left behind. People are key, working with them rather then having them work FOR you. I realize all my success is from looking out the window to the people that got me here rather than in the mirror… great post.

  • http://eastagile.com kenberger

    There’s a lot to be said for selling picks and shovels to the miners in a gold rush, rather than rushing in with all the miners yourself.

  • http://bothsidesofthetable.com msuster

    re: screwing up at scales vs. small business – of course you’re right. I hope I didn’t imply that service businesses are “easy” – no startup is.

    re: recurring revenue – Of course it’s much better than services revenue – that’s why VCs only fund these companies. High gross margin – lower ongoing risks once business is established. The problem is – to get those lovely “recurring” revenues you need to get the initial “occurring’ revenue from the initial sale. And this is much, much, much harder than people anticipate.

  • http://bothsidesofthetable.com msuster

    re: selling to friends / referrals – I think both businesses really work this way. You grow services or product businesses initially largely through referrals. As either business scales you need to add “proper” sales mechanisms.

    re: products vs. services – often the latter is selling bodies to do a job the customer already knows he/she needs to do or if not you are convincing them to do the work (but you didn’t have to invest in building the product in the first place). Example: you want to persuade your customer to install an expensive CAD/CAM package and you’re expertise is in rolling these out, configuring them, training the staff and post-sales support. You can bill service rates for this work but you don’t have to spend $20 million building the software in the first place. Services = lower entry costs, easier to sell, less risks, less funding requirements & less dilution, but …. less scale advantages, less margins.

  • http://bothsidesofthetable.com msuster

    I think most people who have built careers in services often don’t know how to build a commercially viable technology product. They build features more than a packaged product. That’s why it is so nice as an “add on” to existing sales versus separately commercializing it.

  • http://bothsidesofthetable.com msuster

    Thanks, Phil. Agreed on all accounts.

  • http://bothsidesofthetable.com msuster

    Dimas, sounds like a smart move. As I said in the article, if you really want to do a product business then have somebody else run your services business so you can focus.

  • http://bothsidesofthetable.com msuster

    Complex set of statements. A quick response:
    - yes, labor issues are bigger at service companies. They ARE your product. but if treated well, compensated properly, invested in from a training perspective … you can definitely retain staff. It’s a management issue
    - people mistakenly think in a startup that you’re not at “the mercy of your staff” – tell that to any Silicon Valley startup who hasn’t become “hot” overnight. Ask them how easy it is to build their product business when they can’t keep programmers or the constant Sirens of higher salary by better funded companies are calling.

    I believe in either type of business staff retention matters. Great leadership = great leadership.

  • http://bothsidesofthetable.com msuster

    Ha. I wrote a different version of exactly the same point. i should have just read yours first and said, “what he said!” Thanks.

  • http://bothsidesofthetable.com msuster

    Ha. I wrote a different version of exactly the same point. i should have just read yours first and said, “what he said!” Thanks.

  • http://bothsidesofthetable.com msuster

    Hey, Ann!

    re: “sexy” … no startup is sexy to the people on the inside. It’s a sausage factory and you never want to see that being made. It only looks sexy in press releases.

    Being able to provide valuable services to clients, employ happy staff and make money – that’s what it’s all about.

  • http://bothsidesofthetable.com msuster

    Thanks for that. I didn’t do a great job of explaining that in the article so I’m appreciative for your reflections. Of course building products is great in service companies because of the reasons you mentions: staff motivation, productive work between projects, etc.

    BUT … it’s what you do with those products that matters. Used in the way I describe and I think they’re very valuable. Used as “shrink wrapped, packaged software” to compete in a normal software process … not so much.

  • http://bothsidesofthetable.com msuster

    Depends on your definition of “lifestyle” business, which of course in Silicon Valley is a very pejorative term. If lifestyle business means millions in profits when my business starts to hit scale – sure, I’d suggest lifestyle businesses all day long.

    We’re in an era where people are creating companies and then selling for $30 million 1 year later. That’s a bubble – not a normal economy. When people see this they get “product envy” but the reality is these product exits are few and far between (but form the majority of the tech press.

  • http://bothsidesofthetable.com msuster

    I hope I didn’t imply that it was “easy” – it is not. But neither is selling products. I’m not endorsing only one model – but so many people dissuade people from service businesses that I at least wanted to write the counter points to that argument.

  • http://www.24pagebooks.com MartinEdic

    I agree about product- while many companies are getting funded for very sketchy ‘products’ these days, I think that a product must still have a revenue model. If your product is content are you crossing the line into services?
    One of the first things I ask when talking to start-up entrepreneurs is ‘is this a company or a license?’. As often as not, especially in Upstate NY where most innovation is hardware/materials, the answer is the latter.
    As for lifestyle, isn’t scalability a defining difference between growth and lifestyle businesses? Most service businesses’ ability to scale is limited to the size of the market and the human capital bandwidth available.
    Great discussion.

  • Anonymous

    I think this is so true. Here is why.

    What makes a great product developer? They are an absolute kick ass programmer that doesn’t budge on their vision. They own the product. Its their baby. Schlocking it up with bells and do dads that are just “hung on” kills them. They believe in the architecture. They are a pain in the ass. They get stuff done ten times faster than anybody else. They don’t tolerate meetings. When somebody wants something changed, they dig in like an Alabama tick.

    This is exact opposite of what makes a person great in a services environment. Get something done in a day that could be milked for a month? Literally, you’re killing yourself. You need to find 19 more days of billable hours or your utilization rate is going to hell. Customer asks for changes or better yet doesn’t know what their doing and whirls round and round?? That’s called job stability not a reason to tell them to fuck off.

    Again, not saying one is better than the other, just saying different.

  • Anonymous

    Nope, I didn’t take it that way. It’s all tough, but having done both I’ll take product tough over services. I’ll never ever never ever never sell something physical that requires support (ran a VMNO) again though.

    -XC

  • Anonymous

    Small nit btw.

    If they are an S corp profits are taxed at individual rate.

    If they are a C corp the corp pays the U.S. corporate rate of 35% and the applicable state rate and THEN the individuals pay the dividend rate. That is why its called double taxation.

    So usually its cheaper to gross up the salary and pay the Medicare tax.

  • http://www.repeatablesale.com/ Scott Barnett

    ok, perhaps I’m splitting hairs here – of course a product company will start showing their product to people they know/trust and try to start selling to their inner circle first – but the real measure of repeatability in a product company is when you can find / market / sell to somebody you don’t know. Perhaps the largest SI’s out there (like Accenture) do need to sell to people they don’t know as well – but the type of consulting house you’re referring to (the typical ‘lifestyle’ business) is almost always a referral based business.

  • Dave W Baldwin

    Good post. Those in the service side need to follow your main point of getting ahead with the bills, then look realistically at the options if you’re looking at product dev.

    If you do services, follow what Mark has stated more than once re management… you have to! When you and your partners own all the equity and they bust their ass filling that pot, you’d better show some appreciation. That goes with Philsugar’s mention of the lower qualified… treat them right and they’ll do more in the end.

    This post solidifies my realization regarding ‘cake and ingredients’ where ingredients may be key looking forward into rev opportunity, but the cake itelf is the product.

    Last, but not least, there is a way to do a product avoiding VC stuff, leaving that to enhancing an opportunity. Build a product the companies want, just go for an Angel or two who have what it takes in the arena of negotiation. Doing the better product allows pivot of convenience vs. desperation because all of the growth is based on a finite box.

  • Dave W Baldwin

    Good post. Those in the service side need to follow your main point of getting ahead with the bills, then look realistically at the options if you’re looking at product dev.

    If you do services, follow what Mark has stated more than once re management… you have to! When you and your partners own all the equity and they bust their ass filling that pot, you’d better show some appreciation. That goes with Philsugar’s mention of the lower qualified… treat them right and they’ll do more in the end.

    This post solidifies my realization regarding ‘cake and ingredients’ where ingredients may be key looking forward into rev opportunity, but the cake itelf is the product.

    Last, but not least, there is a way to do a product avoiding VC stuff, leaving that to enhancing an opportunity. Build a product the companies want, just go for an Angel or two who have what it takes in the arena of negotiation. Doing the better product allows pivot of convenience vs. desperation because all of the growth is based on a finite box.

  • http://smashingboxes.com Nick

    product envy, love it, have it, happy to see rational thinking prevail and hear that products arent always the end all. it definitely can be a closed loop of information if all we as service business owners read are tech crunch and vc blogs….

  • http://contributopia.typepad.com Michael Motta

    I’d like to hear your thoughts on the value of services activities in a primarily product business, the flip-side of the present discussion. It is a crucial issue for many product businsses. Here is the important use case: custom development on top of existing products. A customer is willing to pay, often handsomely, for features unique to themselves on a quicker schedule than the standard product release plan. Many product companies get completely effed up on this. Who is going to do the work? The best candidates to do the development work are the same people working on advancing the core product. Should the requested features become part of the product? How to support the special features in the field? How to manage the (very different) engagement with the customer for producing and delivering the special work. It is much more than an issue of whether the company should take some professional services candy. It is basic to product lifecycle discussions (e.g., what to do with an EOL product.) It is even more basic, if you think about this in terms of product-market fit. We could say “Oh just focus on the product, will ya” Or we could say “Build out the partner ecosystem to be able to add those customizations themselves”. But if we pawn off professional services to others or avoid it altogether, the product company is missing something important.

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  • Anonymous

    I used to read the posts and not the comments! now I regret not reading the comments …

  • Paul

    Hi Mark,

    Along the same line, I’m curious what are your thoughts on the “overnight” billion $ product startups like GroupOn, LivingSocial and others recruiting like it’s 1999.

    From the outside, they seem to be staff-heavy with the urgent need to hire sales folk. If so, I imagine in a slowdown that that fixed cost (even if most are on commission there’s the new healthcare law amongst other costs that mega-startups won’t be exempt from) is a hindrance.

    Any thoughts on how VCs view these in the service / product and startup / mega-startup matrix?

    Thanks.

    Paul

  • http://paleolithicnutrition.org Joshua Ansell-McKinnon

    Love it! I start consulting to make money now, so I can fund my other start up opportunities. I feel like a lot of companies try to scale service businesses and end up with lame service businesses.

  • Chad

    I’m a musician (piano), CEO of one of these “crummy businesses” (but successful and nothing at all like the services businesses described by some in the comments), but also the founder of an investment firm that invests entirely in product companies; so, I have some perspective here.

    A piano is an easy instrument in some ways. You hit a key and it sounds good. Mechanically, you’re able to produce something resembling music almost instantly. Mastering it though is profoundly complex, with nuances that take 10s of thousands of hours of dedication to really master.

    The violin is a difficult instrument. When the bow first hits the string, you sound terrible. It takes months, years to really produce anything that resembles music. There is little to no instant gratification whatsoever.

    So I would liken a services business to the piano, a product company to a violin. A services business has a lot of instant gratification. You land a contract, even if it’s just one person, and suddenly you think you’re in business! Hey, it’s easy! Mastering it takes years, a lot of risk and a lot of people that most product startups accept on day *one*.

    As you grow, however, you have to deal with all of these things like average bill rates, utilization, pipeline both in sales and recruiting, employee retention, ridiculously high insurance rates, etc. Suddenly this isn’t so easy folks! It’s going from Mary Had a Little Lamb to Rach’s 3rd.

    You don’t have this luxury in most product businesses. The risk is accumulated day one, and you can’t plod on the keys and get away with sounding like you know what you’re doing. If you can’t see the long-term vision, if you can’t vision yourself transforming from that terrible sound offending your ear to the virtuoso, you’re dead before you start. And it’s as true for the inspiring violinist as it is the envious product company.

    That’s my perspective anyway.

  • http://profiles.google.com/bloggingarrow David Samborski

    Hi Mark,

    Great Post! It inspired me to write this post on my blog. http://bit.ly/ivUsGG

    Some of the comments earlier mentioned how to sell services. Ironically, I actually think there is a product in that problem.

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  • http://twitter.com/eltonjain Elton Jain

    HI Mark
    this is in response to your post http://www.bothsidesofthetable.com/2009/08/14/angel-funding-advice/ (courtesy to the comments closed under that post)
    Your articles are very much humble AND informative AND helpful, BUT, I’m from india, and whatever you say, I find it difficult in here. How can I find VC’s or angle’s here? Also, before goin for VC or angel, I want a mentor, how can I get there? I asked neil patel but he says he’s too busy. Help me,.

  • http://twitter.com/eltonjain Elton Jain

    Hi mark, howdy
    I’m looking out for some help and guidance before I take ransom decisions, though I know they are fine, I need someone who can guide, mentor, so that I go the right way, and the better right way.
    I’m from India