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 onRead More