The True Story of the Product Company Turned Development Studio

How chasing quick revenue growth led a product company through a few years of massive growth / stress / employee turnover.


Which company would you rather own and operate?

A single employee operating a few niche SAAS products generating approximately $200,000 in revenue?

A digital agency with 15 employees generating approximately $1,500,000 in revenue?

Remember your answer for later. There will be a pop quiz at the end of the lesson.

The Origin Story

In late 2009 me and a business partner became increasingly frustrated with a piece of software we were required to purchase and use while operating a real estate company. After a few rounds of the calculator game, for the uninitiated, you play the calculator game by taking out your favorite adding machine and performing calculations along the lines of, 10K users x $400 per user annual licensing fee. Eureka! We have found a potential business riches!

Oddly enough, our frustration with the software did not stem from how horrible the software was to use, it was pretty bad, but rather that this company was raking in profits on crappy software that was the only option available to operate our business.

We set out to create another option. Where the incumbent was Windows only with an archaic annual licensing structure, we built an online variant with a modern fremium model and an easy to understand monthly and annual pricing structure. The incumbent required you to purchase a license per computer, while we allowed open usage across any number of machines or devices. You get the picture, our product was awesome in all of the ways modern SAAS’s are awesome and their product represents all that is evil in the world. We were off to the races…

Slow and Steady

Fast forward two years and our side project had blossomed into a burgeoning niche SAAS powerhouse. While I wasn’t quite riding to work in a Bentley from my ocean front mansion, our company did have 1,500 paying customers and over 10,000 highly focused and engaged free users.

By 2012 the “company” was comprised of two partners and one employee. Between 2010 and 2012 the company had built around 5 niche SAAS products and we had gone a bit meta and built a program that allowed us to apply our niche software to different industries.

My business partner and I were mainly passive in the business. Most of our time remained dedicated to our real estate company. We handled all incoming support requests, which typically ranged from 1 to 2 per day if any at all. We also managed the overall direction of the company, for example, which niche would we go after next, etc.

Outside Influence

Near the beginning of 2012 as my business partner and I began souring on our real estate business we started looking for options to replace our real estate related income. While our SAAS products were growing at a slow and steady pace, they were not producing enough revenue to allow us both to escape the monotony of our self made prison, aka our real estate company.

How could we quickly grow revenue? Its time for a new round of the calculator game… How much did we pay for our real estate companies website again? $5,000 or so. Hold on, we can make websites… So let’s say we build 10 or so websites a month at around $5,000 each. Boom! Hold on, a buddy at an advertising agency just spent $50,000 on a piece of custom software to power some campaign for a huge brand. Even better, we could easily build that custom software, so let’s assume we can complete 3 or so of those projects monthly. We can make a killing on client work and continue building out our SAAS products… Now we are talking! We were off to the races again…

I’m focused man…

It is not an understatement when I say I love the software business. The power of the internet and all of its connected machines and people has never ceased to amaze me. For an introvert by choice, such as myself, I do not have to forcibly sell to people face-to-face. Throw up some web pages and people will throw their credit cards at you. While obviously over simplified, it still amazes me how quickly people will purchase something from you on the internet.

It’s not only my preference to not talk to strangers that drew me to the software business. I also loved the daily problem solving that comes along with each stage of software development.

Furthermore, with SAAS products or any product with passive income properties, the potential of making sales while sipping pina colada’s on the beach is an awesome feeling. This is not to imply that building up SAAS revenue is easy, because it is not. However, there is no better feeling then making sales while sleeping or working on something else.

Setting out to bring in client work we started bringing in any type of work we could find, from any source, from anywhere on the planet. We need an Adobe Air application to help judge jutitsu matches… Yep, we can build that. We need a mobile application that mimics the functionality of JJ Abrams’ Action Movie… Yep, we can build that.

With this type of scattershot approach, I am guessing that those of you reading along with experience taking on development work from clients knows what comes next. We had no problem bringing in clients. The problem was, we no longer controlled our own time.

A client’s deadline on a project is just that… a client’s deadline. Once we started bringing in multiple projects at a time, we had to actually build the client’s project. Client A does not care about Client B’s project, each client only cares about their own project being done by their respective deadline. No longer controlling our time we were forced to scale our development machine. Gone were the days of a single employee and picking and choosing what and when we were going to work on something. Our time was now accounted for, we had three weeks and two massive projects to deliver.

Our preferred method of scaling was pretty straightforward, add more people. When first starting and under the time crunch of client deadlines, we chose to add people who’s time would directly increase our output capabilities. This meant no management. This also meant calling up your local staffing agency and asking them to “send me everyone you have.”

Sell. Sell. Sell

Over the course of the first year as a “digital agency” we went from a team of one to a team of about ten. With no management, my partner and I were handling most of the day to day on client projects while also handling overall management and sales. If we were selling this much while overwhelmed managing the inner workings of these client projects, imagine how well a dedicated salesperson could perform.

It was time to build out the sales team. The first hire for our sales team was a disaster. Everyone knew it was not going to work out. I am pretty sure even the candidate knew it was not going to work out. But hey, we wanted a sales team and you have to start somewhere, so, welcome aboard! After about a month of absolute futility by both parties we decided to part ways.

With no defined product and with the client themselves often not understanding exactly what they need, custom development services are difficult to sell. Once we found an individual that was able to sell our services we applied our stellar scaling methodology to our sales team… Add more people!

If you are not a salesperson or have never worked with sales people, let me fill you in on a dirty little secret about sales people. They sell things. They sell things at any cost. When you tell a salesperson no, they don’t hear you. It is a scientific fact. Instead of hearing you say no, they are already planning a way to get you to say yes. For a sales organization with clearly defined products and pricing structures, this sell at any cost approach will typically work well. When the opposite is true, a good sales person can bankrupt a company. For example, when selling a project for a $10,000 ticket that takes $20,000 to develop.

Tick Tock

In the first full year of taking on client development work we built up a stable of clients and on going work. As we cycled through sales people and projects, we kept moving forward with the goal of bringing in more revenue. In hindsight our plan was working, we were growing revenue. The problem was, we had a bad plan.

While we did not perform normal business reviews, we did have frequent discussions about the course of our business and our overall direction. Once we were about 18 months into “grow revenue” mode we noticed that we had not made any progress with our products business. That is not to say that the products stopped collecting revenue, we just had not touched the product business in any way. Our only active participation with our product business was handling incoming support requests.

Wow. In the blink of an eye 18 months have passed and we have made no progress in our product business. In the previous 18 months with a staff of 1 we had built two products and brought on about 500 or so users. With a staff of 15 we had built no new products and made no improvements whatsoever to our products.

We were so distracted with building revenue and client work that we had completely ignored our products. We had come up with different names for achievements in our product business.

For example, when we had new paying signups for five of our products in one day we would call it an ‘exacta.’ When we had four new signups we would call it a ‘quinilla.’ Silly names, yes absolutely, was it a blast to scream out ‘exacta’ when we were notified of the fifth signup, yes absolutely. We had forgetten what we called a three signup day.

To this day that saying has evaporated from our consciousness. That is how drastically we changed course, we forgot a phrase we used to scream out every other day or so.

Having our cake

The benefit of our custom software development business was all of the talent we were able to accrue. We had gone from 1 programmer, to around 10 programmers. We now had in house graphic design, in house mobile application development and so forth. There was no limit to what we could build.

We knew that we were making a mistake by completely ignoring our product business. Recurring revenue is amazing and we knew we should have been also growing our recurring revenue as opposed to only growing our one-time client based revenue.

Given we had this amazing team behind us and we could build literally anything, we set out to build an extremely ambitious product. Latest server-side framework, check, latest front-end framework, check, Android app, check, iPhone app, check. With so much talent at our disposal it would have been a disservice to build a ‘simple’ product, at least that’s what we thought.

How do you deploy your resources as efficiently as possible? Does it make sense to deploy resources on non-revenue generating activities? That is the struggle. A client is paying you for a project. Once that project is complete you can collect the remaining balance of your project fee. Is it best to focus on completing the project? Or should you deploy your resources into a non-revenue generating activity such as working on your new product?

Building our new product became a difficult balancing act. We were stealing from ourselves to build this new product. Sacrificing time that should have been dedicated to a client to build our own product. Even worse, we were making minimal progress in building out our product. As soon as we would get in a groove we would have to shuffle the team to accommodate a new client project or deadline.

Pros and Cons

In the 1.0 version of our company it was pretty easy to estimate our hard costs associated with building a product. We had one employee and that employee cost us X per year. Combine all of the progress we had made in a set amount of time and it was pretty easy to figure out what that progress had cost us.

In the 2.0, 15 employee version of our company, estimating hard costs associated with building our own products was difficult. While we had all of the cost controls and time tracking measures in place, estimating how long and how much it would cost us to build something was near impossible.

Building a software product with our new 15 member team was not easy and it was not cheap. All said and done the project cost us about $80,000 in direct costs and much more in indirect costs. When we were a small 1 employee product company it would take us about 2 years to spend that amount of money. We also built more products and added more users with only 1 employee then we were able to do with 15.

The worst part about building the product is that we were stealing from our clients to do it. Our 15 employee company was supported by our clients, our salaries, our expenses, were paid by our clients. Any time we were dedicating to our own product was time we were stealing from client projects.

Enough is Enough

After two years of building our revenue we looked back and we discovered that we had done a pretty poor job of increasing our profitability. Where we succeeded in increasing our revenues, we also succeeded in increasing burdens on our cash flow and time. Bi-weekly payroll had soared from barely $2,000 to over $25,000.

So I ask the question again. Which company would you rather own and operate?

A single employee operating a few niche SAAS products generating approximately $200,000 in revenue?

A digital agency with 15 employees generating approximately $1,500,000 in revenue?

We know our answer. We are a product company and we need to focus on creating products. Service is an excellent business, but it is a very different business with a different ethos then a product company. This is not a story about agency vs. product company, they are both awesome. This is a story about being true to what you want and why you want it.

If we would have stayed focused exclusively on products there is no doubt in my mind that we would have double the number of users and we would be extremely profitable. Stay true to your business. More importantly stay focused on the type of business you want to own.

Where this all came from

I was largely inspired to write this post by this story, which outlines the story of a design studio chasing after the dream of becoming the next Basecamp / 37 Signals.

Initially my story might seem opposite to Richard’s, but I think they are pretty similar.

Amy Hoy wrote a great counter point here.

Like the story?

I also write about my wins and losses on the internet at longlivetheinternet.com