“Do you know how many agencies in this city are building products in-house right now?”
My co-founder and I were listening with bated breath to the venture capitalist to whom we had just pitched our start-up, Proposify.
“All of them. And few, if any, will ever see the light of day.”
Sooooo, that’s a no?
It was a sobering thought that left us both a bit shaken. We were still running our agency and had been trying for years to build in-house products we could sell to offset the high overhead, long sales cycles, and late client payments that plague most small firms and drain their cash-flow. I suspect other agency owners build products for the same reasons.
We could see it now: waking up one golden morning and upon checking our bank account we notice tens of thousands of dollars more than the day before, all from people who had signed up to paid accounts! All of our cash-flow woes were replaced with monthly recurring revenue! It was a beautiful, profitable dream, and a dream we were willing to take a gamble on.
Of course, it’s never that easy and while we may still be in the dream-chasing process, I have learned a few lessons along the way:
6. Market validation is more than a hangover and a napkin sketch
Over the five years we ran the agency together, my co-founder and I developed four products. The first was a DIY website builder for small businesses. The second was a social media monitoring app. The third was a SaaS extranet that is still running today but is no longer owned by me. The fourth and current product is Proposify. (BTW, it’s a sweet proposal app that you should totally check out)
Two of the products failed pretty much right out of the gate and in both instances it really boiled down to the fact we spent almost zero time validating what we were developing. We just came up with the concepts based on anecdotal evidence that we were solving a problem and then we set to work building them. “We’re gonna be heroes!”
Let’s face it - it’s fun coming up with ideas and even more fun when there is no client there to tell you all the reasons why it won’t work. It’s fun to build your brilliant vision for the best _____ product that solves the worst _____ pain for the ______ market.
The problem is that if you don’t spend at least a month or two of serious research to validate your idea in the real world (hello, client?) then at least two of those blanks are going to be risky shots in the dark. And those shots in the dark could waste your precious time and money. In their book Lean Analytics, authors Ben Yoskovitz and Alistair Croll recommend the “empathy phase” - it’s where you take your original hunch and spend time testing to uncover whether or not you’re solving a real problem that exists.
"If you can't find 15 people to talk to, well, imagine how hard it's going to be to sell to them. So suck it up and get out of the office. Otherwise, you're wasting time and money building something nobody wants."
(Lean Analytics, p162)
If you’re an impulsive, impatient person, this isn’t a fun process but it’s essential if you want to avoid spending months, even years of your life developing a product that no one cares about.
5. You’ll need dedicated people or it will fail
If you own an agency then you’ve got all the people you need in-house to build out your product vision, right? You’ve got UI designers, web developers, copywriters, and project managers. Fantastic! One problem: they all have paying clients they need to service and paying clients always come before product development. It’s the law.
“I know! We’ll make every Friday product day when our developer will focus 100% on building the product!” Hang on, your developer just spent four days straight diving deep into the code base of other projects and now needs at least a couple hours of build-up time to get reacquainted with the code base of your product. By the time he/she actually has even part of a feature built, it’s beer o’clock and the product will have to wait until next week to reopen the hood.
In short, your product is never gonna launch.
It wasn’t until we were in a position to hire a full time, dedicated developer to work solely on our product and not touch a single client project that we were able to actually get a proper MVP (minimum viable product) to market. Some people cite 37 Signals as being the ultimate bootstrappers, building Basecamp while they ran a web design agency but even they had a full-time developer not working on client projects in order to get their flagship product launched. It really is the only way to do it.
In a post detailing why he decided to close down his web app Get Sign Off in 2011, Paul Boag explains:
"Part of the problem is that our project managers have targets to invoice each month. Because Get Sign Off wasn’t a paying client it was pushed down the priority list. It wasn’t going to help the project managers meet their targets."
If you are serious about getting a product launched, you either have to reinvest the profits from your agency to hire a full-time developer or you have to get funded. Depending on where you live that funding could come from a government grant or a private angel investor.
Eventually, we hired a dedicated full stack developer who is now our rocking CTO, and without him our product would still just be a sketch on a napkin and we’d probably still be hungover.
4. It’s a marathon, not a sprint, to get out of beta
“If you build it they will come.”
Fans of shitty movies from the ’90s will no doubt remember that line from Field of Dreams. In real life, Kevin Costner’s character would have made a terrible entrepreneur. Nobody flocks to a product without a carefully executed marketing plan and even then the product has to be amazing.
If you’ve ever heard of growth hacking, you may think applying some sort of clever hack to get your product to go viral is all that’s needed once you launch a product. The reality? Your product is going to suck when you first launch it, guaranteed.
Regardless of how much user-testing you perform while you’re building your product, the fact is, until you get it in people’s hands, start tracking the usage metrics and calling them up to ask what they think, you have no idea whether or not what you’ve built is easing your customer’s pain. In fact, you haven’t built a product, merely a tool to learn from. That’s what an MVP is - a minimum viable product.
This is where busy agencies with paying clients start losing interest in their baby. They have enough big paying clients to serve and listen to their demands and complaints; they hardly have time to listen to batches of users who aren’t paying them a dime. This is where you separate the dabblers from the real start-ups, and if you don’t have the tenacity, patience, and sheer endurance to keep moving forward and iterating your idea based on data, your product will never be any more than a kick at the can.
Our product was beyond terrible when it first launched but after a year of tweaking and iterating based on invaluable testing, metrics, and customer feedback, we now are approaching product/market fit. It really is a matter of simply not giving up on the product. Or on yourself.
3. You’ll probably need to raise money
We’d all like to be like Jason Fried, bootstrapping a world-class product while running a profitable agency, but bootstrapping a product purely with the profit or cash flow from your agency is risky and very difficult. At some point, if you want to take it to the next level, you’re going to need a dedicated team with a deep cash reserve to get you to cash-flow-positive.
Depending on where you live you can apply for government programs, including grants and interest-free loans (a much better avenue than banks), or private angel investment. If your product is far enough along and you have the right contacts to leverage you could also try for venture capital, but keep in mind, getting VC-backed is difficult and comes with its own risks.
Either way, your agency can’t be your start-up’s sugar mama forever, so get used to the idea that you’re going to need to add “fundraising” to your skillset.
2. To raise the money you’ll probably need to leave your agency
Oh, here’s the thing about people who fund start-ups - they want to pick start-ups that have the highest likelihood of success. And for all the reasons listed above, agencies have a deplorable track record for being able to launch highly successful start-ups that generate ROI for their investors.
VC’s especially will not give you a second look if you run a service business. As one VC told me, “I want to make sure you’re jumping out of the airplane without a parachute.”
Nice people those venture capitalists.
What she meant was, running a start-up is tough and there will be times you want to throw in the towel. If you have an agency on the side when those moments happen, you are more than likely to leave the start-up and go back to what makes you guaranteed cash. That means everyone loses, especially your investors. Eventually, I sold my agency to focus 100% on Proposify.
If you’re serious about your start-up, then get serious about selling off your agency. If that thought terrifies you, maybe you’re not ready to launch a product. No judgement here.
1. It will still be tough even if you have a great product
You’ve finally done it - you’re at (or close to) product/market fit where your product solves a problem for the majority of your target customers, and at least 40% of your users would be extremely disappointed if they could no longer use it. This is an incredible milestone, especially if you managed to get there while running an agency at the same time.
Many agency owners focus on the residual income and cash-flow that comes from a product but forget that the grass isn’t always greener on the other side. SaaS businesses have their own hurdles that keep the majority of them from growth. It may not be the late invoice payments or long sales cycles that come with agencies, but instead it’s things like high churn and CAC along with low LTV and average RPC. If you don’t know what any of those terms mean then it’s time to do your homework! Here’s a good place to start learning about SaaS metrics.
Long story short, having a cool idea for an app is very different from running a successful software start-up. If you don’t take the time to validate your idea, you’ll probably build something no one wants.
If you don’t learn about the right metrics you need to track, you won’t grow as a business.
If you don’t stick it out for the long haul, hire a dedicated team, get funded and remove yourself from your agency, your chances for success plummet drastically.
This article wasn’t meant to scare anyone off the idea of building a start-up because the world really needs more dreamers and doers. But there’s a serious reality check between people who simply want to tinker with an idea and those who are serious about building a lasting, meaningful product that solves a real problem for people, and generates a profit as a result.