Love Mark Suster's Blog on Crappy Little Services Companies

Scott Francis
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If there weren’t already lots of reasons to like Mark Suster’s Blog, I have to admit, this article (“What Should You Do With Your Crappy Little Services Business?”) gives me another great one:
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 tech services businesses have come to me wanting to change their companies to product businesses or to create “spin outs.”
I’ve seen that happen a few times as well.  In fact, Giff Constable had a great article about it.  We’ve even written a few ourselves.  Mark hits on pretty much all the points I would have made about a services business.  It isn’t just that services businesses are small fish – it is also that they generally can be self-financed.  The result is that the services business owners aren’t willing to part with equity cheaply, and at the same time, the VCs would likely want *more* equity in exchange for their cash because they’re not expecting the expansion to be as rapid if the service is a hit. And as Mark points out – at that point you have to swing for the fences, no more singles and doubles. The biggest challenge in building a services business (truly growing it, versus just being an independent contractor) is financing.  His #4 financing option is bank financing – specifically he mentions Silicon Valley Bank (SVB) and Square1 Bank.  These are both fine institutions and if you can get financing from them, so much the better.  But if you need a line of credit or loan of less than $500k to $1M, you’re unlikely to get their attention.  That means you need to have a certain scale before you even try to work with those banks.  Surprisingly, we found large multinational banks to be more willing to finance our activities than these alleged startup-friendly banks. Mark also has good advice for what to do with the product business within your services company:
  • Use the products as a service sales machine – essentially a loss- or break-even instrument to get more services sold in or support contracts.
  • Use the products as a key differentiator to win new business over other service providers.  The products could make you more efficient (allowing for lower bids for the same work), or allow you to more clearly tackle intractable problems.
  • Use the products as a margin bump – allowing you to stay above “commodity” in the long run.
I’d add another:
  • Use product as a badge of credibility in your market niche.  Much like writing a book or whitepaper or blog enhances your credibility (assuming they’re well-received).
Kudos to Mark for writing on this subject.      
  • I also loved mark’s post. Interesting tidbit here on banks and financing, and agree with your addition on why a product can be good for a services business.

    • I found financing the most frustrating part of the growth of the business, initially. My recommendation to anyone seeking financing is to get some bank-financing with as few covenants as you can – even if it is for a pittance – 10k, 30k, etc. Just get some track record established so that when you go back a year later with a bigger business, you have an argument for your reliability as a debtor or line of credit user. We found it much easier the second time around. I imagine the next time around it will be easier still, economic conditions permitting.

      Incidentally – re: my last point about product being good for a services company – often in this case, and in the case where product is a lead for services – it may be advantageous to open source the project (or to use contribution to a relevant open source project as a means of building credibility in your space).

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