Putting Services Companies in Their Place
“7 Startups Vying to Become the Uber of Pot.” The headline simultaneously breaks my heart and puts my eyes through the ocular experience of hearing Yoko Ono’s scream song.(Real headline, btw.)
Glitzy sensationalism, VC incentives, and the prestigious job title of “entrepreneur,” make technology startups hotter than ever. Stories of these starving entrepreneurs get covered and shared (my dear aunt sent me that one). That would be fine, but…
Unfortunately, the stories of many less exciting, but on average more lucrative, companies get buried. I want to explore these other companies, and suggest:
If you’re young, risk-averse, and neither interested in getting funding nor in building products or platforms, starting a services company is a good way to start your career, explore entrepreneurship, and decide what to do after. You’ll also have made a bundle of money in the process.
After your services company is successful, it will serve as the foundation for your next steps — an enterprise acquisition (for a high-ranking, stable, job at a larger company or for cashflow), to build your own products (like Postlight and Marvel’s digital product studio concept), completely pivot (like 37 Signals into Basecamp), or some combination of the them (like Metalab making Flow and starting Tiny).
For context, let’s paint a picture of the difference between product and services companies. Products, according to MIT Sloan School of Management’s Michael A. Cusumano:
In my definition, to be mainly a products company means that the majority of a firm’s revenues come through sales of standardized offerings. In the case of software, “products” are usually “shrink-wrapped” programs named for the plastic wrapping that used to cover boxes containing floppy disks or CD-ROMs… But, in general, it costs roughly the same to make one copy or one million copies of a software product because the product is replicated digitally. Therefore, you would be a fool not to want to make and sell a million copies of every software product you create.
Services, à la Cusumano:
If firms go in this direction of providing more customized features, services, and maintenance than they do standardized products, then the more people the company is likely to need, the more unique projects or labor-intensive work it will probably undertake, and the more the firm leans toward becoming what I will call, for short, a services company.
A few years ago, I couldn’t quite wrap my head around why anyone would start a services company until I came across BuzzFeed founder Jonah Peretti’s interview with Felix Salmon in Matter:
“I like venture-backed companies. I think VCs in general are great to be partnered with if you have the same goals. If you want to build a giant company relatively quickly, in an emerging space where the market isn’t mature enough to generate a lot of revenue early on, then VCs are the perfect partner.If you want to own 100 percent of a company and build it over twenty years, even if it’s a fairly fast growing company, in a market where revenue is booked quickly and ideally where the revenue comes before you have to sell the product so you have nice cash flow to build a business from, then it’d be great to do it without VCs. If you want to build a business that generates $10 million a year in revenue and $2 million a year that goes to you and your partner, and that’s what you’re interested in, then you should figure out how to bootstrap. A lot of agency businesses are that way. When you look around New York, there’s a lot of really successful fifty-person boutique agencies, where the people who started them are making a lot of money and no VC would ever touch them.”
Today, the entrepreneurship narrative is driven by the product-based unicorns (bless your soul if you don’t know this term… a startup company valued at over $1 billion). Facebook, Uber, Pinterest, etc.
VCs want the returns, startup entrepreneurs want the glory and power, and employees want the equity and prestige. Unfortunately, amidst all the venture money, very many companies end up dying (which shouldn’t have been funded or started in the first place — a nod to the seven Ubers for pot).
The ensuing opportunity cost is also that quite a few smaller companies ($5 — $10 million) companies that don’t get started because the talent — founders and employees alike — were all caught up trying to become something they weren’t meant to be. (Companies like Varagesale and Joist come to mind. Or in a more extreme scenario, a company like Theranos. )
But it doesn’t have to be like that…
Rather than going all-in and betting the farm on a technology startup, you and your business partners could stay at your jobs until you land a contract big enough for one of you to quit. Or all of you to quit. And hence, your services company will have started.
Starting a services company is great for learning and applying “business fundamentals” (sales, marketing, negotiation, ops, recruiting, etc.). There are also fewer illusions about what your company’s and team’s skills are worth to the market — if people see value, they’ll pay. If they don’t, they won’t.
The ideal upside to this is as someone with equity in the services company, you’ll get closer to capturing the max value that you create. Turning back to startups for a second, Social Capital founder, and former Facebook VP of Growth, Chamath Palihapitiya says of them:
Companies generally only give employees 5–10% of the value that they create. As much value as I created at Facebook, I captured maybe 5% of that value for me, economically. That’s just the scenario. That’s how companies can get built to be profitable.An interesting question would be, well what would happen if companies were forced to pay more towards the theoretical ceiling of what an individual generated for that company? 50% of the value. 80% of the value. You can’t do that in the absence of transparency. When you’re hiring me, it’s not like every other person who’s trying to hire me also knows. So to me, it’s a really disruptive idea that the very, very, good can basically become like free agents in sports.
And this higher value capture takes place because of the leverage that comes with bundling talent. Former founder and Facebook product manager Antonio García Martínez illustrates this with how acqui-hires of small startups work:
Since this sort of early-stage “acqui-hire” is more “hire” than “acqui,” every employee Facebook cares about must go through the usual hiring screen you’d experience if you had simply applied individually. The fact that you come bundled just changes the economics. We used to have unions that would give workers a magical thing called collective bargaining. Now being part of a hot startup is your union, and the only dues required are your entire life for the time you’re in the startup. Welcome to our new collectivism, tovarish. By bundling the talent, though, you command a premium due to mere leverage — don’t like the price, we’re all off the table.
But substitute “startup” with “services company,” and you’ve got a ton of examples. Tiny Hearts, Jet Cooper, and Boltmade (all to Shopify), Teehan+Lax (founders left to join Facebook), all from lil ol’ Ontario, Canada. And the marketing world is full of these larger agencies gobbling up smaller ones (Brew and OneMethod come to mind).
And now, focus on the “collective bargaining” part, the reason why a team of people can command a much higher collective rate than a single individual contributor. They can do so much more, in so much less time.
No matter what you want to chase after — a leadership role at a larger company, keep the services company running and get money, optimize for passive income and savor life — a services company can be the stepping stone to make any of that happen.
And even if you shut the services company down, the skill of making money will be useful. Shopify’s CPO Craig Miller shares his advice for careers:
Learn how to to make money for yourself. Then when you have trouble scaling that, join a company in that role and learn how that company scales. Eventually re-start your own business once you know how to scale.
That first part is something you can do with a services company… Not the most scalable thing in the world, but certainly rewarding for stability and finances.
My fascination, and why I find services companies beautiful, is that they’re accessible to anyone. Everyone that knows how to Google and learn skillsets, work with people, and has work ethic, honesty, and integrity, will be able to succeed with services.
And, there are also higher-risk, higher-reward, permutations of services companies. While most services companies are compensated in cash, there have always been deals where companies take equity instead. Consider contemporary companies like Expa or Betaworks, essentially services companies (labeled as “studios”) that take equity in their customers (which aren’t large corporations, but entrepreneurs and startups).
Even if you go into startups one day, the leadership and management skills you pick up leading a services company will come in handy. Martínez writes:
People go into startups thinking that the technical problems are the challenges. In practice, the technical stuff is easy, unless you’re incompetent or really at the hairy edge of human knowledge — for example, putting a man on Mars. No, every real problem in startups is a people problem, and as such they’re the hardest to solve, as they often don’t have a real solution, much less a ready software fix. Startups are experiments in group psychology. As CEO, you’re both the therapist leader, and the patient most in need of therapy. As Geoff Ralston, a YC partner, told us: people don’t really change, they just become better actors.
And frankly, all these skills you acquire at a services company means an easier learning curve if you do choose to build a startup in the future.
If you’re trying to accelerate your career or test the waters of entrepreneurship, startups aren’t the only option. Give services a try. It won’t be easy, but it’s a stable, secure, way of learning business, exploring entrepreneurship, and making a lot of money. Let everyone else chase the glittering lure of venture-backed startups and the get rich quick flavor of the month.
P.S., That’s no knock on bootstrapped products, especially if you have a skillset to stuff online — check out Indiehackers if you’re interested.
This story is published in The Startup, Medium’s largest entrepreneurship publication followed by 314,601+ people.
Subscribe to receive our top stories here.
