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Productised services: #3: The best of both worlds

So, finally we come to this third option which, I believe, presents features of both. Product companies were covered here and services companies were covered here.

The third alternative: productised services

First of all, what is a productised service? It's a service which you've systematised and supported by tools, automation, processes, etc, so that you've decoupled the benefit given to the client from the amount of time spent on your side. In other words, whereas in a services company the ratio of X units of time for Y units of income is relatively fixed, in a productised service, X/Y can be all over the place. Some clients will be extremely profitable, and others less so (but still worth serving - otherwise, turn them away, of course).

Accounting services are a great example of productised services. Though many accountants will charge for time above and beyond their "standard service", most of them have packaged things like "yearly accounts" or "VAT returns" into a fixed price deal. This leaves them free to optimise the delivery of those services so that they take a minimum amount of time, while still charging the client the same amount.

Even large consulting companies, like Accenture, try to productise their services. Back when I was there, Accenture was very keen to sell what they called "Managed services", where they would take over an entire function of the business and deliver it for a fixed price, enabling them to manage the costs internally and deliver the service in an efficient way without undercutting their own revenues.

Productised services don't have to, and in many cases, shouldn't, be marketed as such, or else clients may try and push down your prices if they think it doesn't take you that long to deliver (conveniently forgetting the time it's taken you to systematise the service so it can be delivered more efficiently). "But you're getting a lot of value out of our service" doesn't always work, especially not with smaller companies, so think carefully before marketing your productised service as such.

Productised services have a number of advantages. Similarly to products, they can scale much more easily than services. Once a service is properly systematised, it is easier to actually carry out, which makes recruitment much easier, since you don't need your people to be as highly skilled. You won't be able to deal with a sudden million orders, but you can ramp up capacity pretty damn quickly if you need to.

Like products, the margins can also be quite high, because most of the time-consuming parts of the service have been automated or simplified so that the human time spent is small compared to the return. Unlike products, however, the process doesn't move along without human involvement, which means you have to keep working on it - but you can structure productised services so that there is a recurring component, which provides similar benefits.

Since this is a service (and perceived as such), people naturally understand the value of it and are willing to pay real amounts of money (in the thousands or tens of thousands) which they would not be likely to throw into a product by a small company.

Because it is a service, unfortunately, you must do the sales directly - it is difficult to sell services without any salespeople. However, the advantage is that you can tailor your pricing to the type of client, and how much value your productised service brings them. If your service will provide £100k of value to one client and £1m of value to another, it stands to reason that your proposal for the second client will have a markedly higher price tag than the first (which might be based on a percentage, or some other calculation method). This is difficult to achieve with most typical startup products, since you often don't know who you're selling to until too late.

Finally, another advantage of productised services over both products and services is that they can be taken in either direction if needed. If customers start to require a lot of bespoke work, you can evolve towards a normal service model. If, on the contrary, the customer base just keeps growing, you can automate more and more of the service until it becomes self-service. This makes productised services a great way to kick off a product business, by generating these product-related revenues early on and using them to continue building out the self-service aspects of the product (in effect cannibalising your own service with your product).

Productised services are not good at all stages of a company. Google could not and should not run AdWords as a productised service, for example. At that scale, you need maximum automation. But they could have done so in the early days of AdWords. Nor are they always possible in the very early stages, before you have any idea what your market wants (but then, why are you starting a business in that industry?).

I'll address the paths to a productised service, from either a product or a service, in later articles, but hopefully in this article I've made the case for why there is a third model, which sits in between products and services, and which should be worthy of your consideration when trying to figure out how the hell you'll get your company off the ground, particularly if you're a new entrepreneur and are taking my advice to stay away from investment until you have your basic business skills figured out.


A moral obligation to society?  

Burak Kanber:

Is that fair? Is that a decision I’m morally allowed to make? I have the skills to help other people out but instead I’m running a startup and writing on my blog. Should I feel guilty? Do I have a moral obligation to use my engineering skills to give back to the world in a bigger way?

This is a question that I have grappled with a number of times. Some people will feel this is irrelevant and doesn't matter. Others will feel that the entire point of entrepreneurship is precisely to control how you give back to society, and be able to ensure you contribute something worthwhile.

After much consideration, I lean towards the latter camp. Running my own business has enabled me to be so much more effective and "direct" in the way that I give back to society. As an employee of a business, most of your contribution will be through taxes. As a business owners, you will probably end up doing your best to reduce these taxes, but suddenly many opportunities will open to contribute back to society in meaningful, tangible way.

Whether those opportunities consist of teaching others who to become entrepreneurs themselves, or building a useful product, or helping other entrepreneurs build useful products, or advising people, or providing them with resources, or even the simple task of deciding to hire someone who deserves a chance and would otherwise not get that chance, opportunities for entrepreneurs to give back abound.

The more successful you become as an entrepreneur, the greater your leverage becomes, and therefore the more impact you can have on the world around you. A broke founder of an early software startup has little chance to contribute meaningfully to the world's big problems. Meanwhile, a highly successful entrepreneur like Bill Gates can influence heads of state and pour vast amounts of money into an attempt to eradicate Malaria.

I say keep doing what you love, get rich doing so (if you can), and keep an eye out for opportunities to align doing good for the world and doing good for you. After all, successful people focus on building more success, not on self-sacrifice.

On being an early startup employee  

I've never been an employee at a startup, but I wish I had. I spent four years of my life working for Accenture instead. Knowing what I know now, I would have tried much harder to find a role in a promising startup.

As a founder, particularly a technology founder, the picture has been very different. I've only had myself and the mentors I personally attracted to learn from. Back in Accenture, there was a whole hierarchy of managers and senior managers and partners and senior partners that could teach me the tricks of the trade. The startup world feels a lot more solitary.

For example, if I'm stuck on how to architect a certain service, there's no one I can pull in to help make the decision. More problematically, although everyone always has advice about how you should do your pricing, your sales, your marketing, and so on, ultimately they're all just opinions from people who have not spent anywhere near as long as you thinking about the problem. They may be insightful, and true even, but you can't know until you try it, and the decision to try or not try a certain idea rests entirely on your shoulders.

It's an unfortunate truth of the world of startups that the world expert on your startup is yourself.

So, in hindsight, I wish I'd gotten internships and jobs at startups before starting my own, so I could learn how someone else makes decisions about their own startups, see what they were doing wrong, and try to do better on my own.

James Yu, describing his time at Scribd, seems to agree that being an early startup employee is a great place to be:

It's hard to put in words the amount of experience an early employee gets at a fast moving technology startup. My time at Scribd wasn't just another job — it was a kaleidoscopic learning experience spanning all aspects of business and technology. For those of you weighing the benefits of an MBA program: join a startup instead. You'll not only learn about real world business problems, you'll also execute them in the real world with smart and passionate people.

One key insight before working at a startup, however, is to realise that you are an employee, not a cofounder. You need to be even more sure than founders that you will get something out of it even if the startup tanks. For example, don't work for a startup at a wage where you're losing money every month (though being paid less is ok). You need to be able to save for your own startup, right?

Even founders shouldn't sacrifice everything for a startup, as argued yesterday. For an employee, that should be completely out of the question.

It's one (bad) thing if your girlfriend dumps you because you work too hard on your startup. It's an order of magnitude worse if she dumps you because you're working too hard on someone else's startup!

Why new features usually flop  

I've experienced this on my previous startup, Woobius. Once the initial feature set has been built, launching new features is tricky. They are soon forgotten, and left mostly unused, and then the dev team is focusing on the next feature that needs to be launched (and forgotten), etc...

Luckily, here's a great guide by Des Traynor of Intercom that provides some clear, actionable tips for how to better launch new features to an existing product.

The thing is, unless customers use a feature it may as well not exist. This is often forgotten in the rush to ship fast, it’s not just about shipping code to servers, or checking boxes on a roadmap, it’s about getting your software used. So before you ship that next feature, ask yourself these questions…

The key questions:

  1. Will everyone see and understand it?
  2. Are you showing users what you did, or what they can do?
  3. Are you announcing it in context?
  4. How will tomorrow's signups hear about it?
  5. Do you plan to follow-up with users and non-users?

The full article is well worth a read.

Paid iPhone apps vs in-app purchases  

Tony Wright investigates the economics of paid apps vs in-app purchases, and finds that IAPs are where the money is.

So why are free apps outperforming paid apps? That deserves its own post. In brief, it comes down to ARPU (average revenue per user). Farmville-style games can pull in an ARPU $5 or more per month. In fact, there are reports of $13 ARPUs. Per month! Per user! Average!

How is this possible? Virtual goods elegantly fill up the demand curve for an offering. In other words, they accommodate customers who can happily spend hundreds or thousands of dollars (“Whales”, in Vegas parlance) without having to give up mainstream users (who can still be valuable as evangelists beyond the fact that they give the whales someone to play with).

This shouldn't be a huge surprise. After all, there's a good reason why SaaS is such a popular business model: a low monthly price tends to generate more revenue than a higher up-front price (for most types of products). IAP's throw in the advantages of an app-store like model where people can keep buying more without entering their credit card details.

In conclusion: if you can make your app charge via IAPs (but that's not always possible or advisable), do so, because it will make a significant difference to your revenues. In particular, as Tony suggests, try to ensure that if a customer turns up who, for whatever reason, feels like blowing $500 on your app, give them a way to do so.

Advice for a young entrepreneur  

Tony Stubblebine starts with the following (well presented) advice:

  1. Surround yourself with interesting people;
  2. Focus on the right things (which means, ironically, figuring out what the right things are);
  3. Be useful.

He ends on a little zinger:

There’s basically two ways to be financially successful as a company. One, you could rely on time-tested business fundamentals. I call this the Warren Buffet model.

Two, you could rely on the greater fool theory, which is that with enough hype, smoke, and mirrors you can find a buyer who is an even greater fool than your investors.

(...)

So much of the startup world is arrayed around the greater fool theory that I felt like my best chance was to build a company that was independent of that system. I think of bootstrapping as a very slow form of raising money. But now that we’ve done it, I have a reliable stream of income and never have to raise money again. It’s really just at this moment in time that we can switch from doing whatever it takes to survive to actually testing our ability to make a major impact.

To be fair, there are situations where you do need the extra money to grow extra fast, or else you lose. Groupon is a good example - had they not executed so brilliantly and quickly, they would have been eaten alive by the dozens of clones which emerged everywhere.

I'm a big fan of getting profitable early, but it is neither the only way, nor the universal best way.

How to use Business Development in a startup  

Via this post, here's a great set of slides by Charles Hudson, about when to hire someone for Business Development, and how to use them properly.

Here's a summary/extract of some of the key slides:

The purpose of business development is:

  • Licence someone else's technology or content for use in your product or service
  • Distribute your product or service through someone else's network

Revenue growth, sales, "business guy" are not BD roles.

First, make sure you actually need BD. Maybe you want a business hire who is not a BD person, to work on relationships with key partners, do market research, or help you sell your company. BD is costly to staff, more so than even a talented engineer or designer, so make sure you really need it.

BD creates extra work for the product team. If you're not willing to do the extra work, don't hire a BD person. Be aware that internal projects will often get deferred to process deals signed by BD.

Make sure the relationship between BD and product is healthy: don't allow overly padded estimates of delivery time, but also don't allow BD to over-estimate their likelihood of closing deals. In addition, make sure that your BD people don't treat pre-deal engineering work as "free" - spec work and mockups cost, and bringing in your top engineers to a meeting is very expensive. But make sure your engineers respect the BD function too.

The presentation also includes information on how to evaluate Business Development deals, and how to make sure you're not caught out by typical BD problems. It's worth a read.

Dangerous data for startups  

An interview with Patrick Vlaskovits, posted on the chart.io blog, outlining some good points about dangerous data:

Many people, especially those handicapped with a graduate level education, like myself, think that data is only interesting and can only be acted upon if it is “statistically significant”. In the context of early stage Customer Development, I believe this is well-intentioned, but ultimately, misguided.

and

Evidence comes in a diversity of forms. It can be anecdotal, it can be in aggregate or it can be a trend line. If you take an open-minded approach to the types of evidence you’ll accept, and adjust for their biases/problems/problems accordingly, you’ll likely fare better in the chaos of startup-land than just simply jettisoning what you feel is low-quality data.

and

In my opinion, trying to make CustDev formulaic, well–that’s a road to perdition. Some of the techniques that may work now, might not work as well in two, five, ten years, so there is no point writing a hyper-specific rule book because no book can know exactly the context you are operating in and when you are operating there.

There are a lot of other good points made, generally pointing to the fact that not all business decisions can be reduced to a statistical A/B test, and how techniques and methods for customer development need to remain contextually sensitive to be useful. It's worth reading the full article.

When to sell your company  

Excellent article by Ben Horowitz, about how to go about making the decision whether to sell your company, both emotionally and intellectually, and how to explain the decision (present or future) to employees.

When analyzing whether or not you should sell your company, a good basic rule of thumb is:

If: a) You are very early on in a very large market AND b) You have a good chance of being number 1 in that market

then you should remain stand-alone.

Also:

... it makes sense to pay the CEO [a salary], so that the decision to keep or sell the company isn’t a direct response to the CEO’s personal financial situation as in: “I don’t think that we should sell the company, but I live in an 850 square foot apartment with my husband and two kids and it’s that or divorce.”

Details of a company sale  

Fred Wilson shares this in-depth story of the recent sale of WhatCounts. It's very instructive if your company is about to go through a similar process, to set expectations and see what this lengthy and generally opaque process might look like.

Here's a different story detailing two failed acquisitions of another company, Backblaze.

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