When it comes to startups, do products and services mix? Taking another look…

I’m really enjoying Rand Fishkin’s new book Lost and Founder. He takes a lot of myths that distort entrepreneurship and attacks them head on. One of the ways he structured the book was to take an external quote, set it up as a straw man, and then debunk it. Imagine my surprise when I got to chapter two and his quote to debunk was mine, from a 2010 blog post, When it comes to startups, products and services don’t mix. In particular, I wrote, “I believe that it is near impossible to build a successful software product while maintaining a services business.”

I want to clarify two things. First, I’m not down on services businesses, and I’m certainly not the kind of entrepreneur who is bought into the go-big-or-go-bust mindset. Second, the old piece (and this one) was and is not about having a services arm to your business that supports the implementation/customization of a product. Actually, one of the dirty secrets of SaaS is how much is propped up by member success organizations rather than product functionality. Rather this is about using a consulting practice as a way to finance the creation of a new product business.

When I wrote that original piece, I had come off of two separate startup experiences where I had seen first-hand the difficulties of juggling a consulting practice and a product business. However, it’s been over 8 years since I wrote that post. In the intervening time, I actually ran a product consulting company, Neo Innovation, and have spoken about this topic with countless consulting CEOs, so I thought I would revisit the topic. I’ll attempt to be concise about it.

1. Here’s where it can work really well:

If your consulting practice is perfectly aligned with your product idea. Rand’s own company Moz is a great example. He did SEO consulting and built a product to help with SEO optimization. His consulting business allowed him to be somewhat patient with the product business, while feeling aligned rather than distracted. In another case, I worked with an entrepreneur who had acted as a steel distributor, sitting between mills and buyers. His expertise and relationships from consulting set him up well to understand how a steel marketplace might be designed.

I actually encourage a lot of entrepreneurs to begin by “concierging” their idea as a consultant rather than jumping into product, at least where their idea lends itself to this “lean” de-risking approach.

2. Here’s where many try, but it often doesn’t work out:

When you build an internal product and then try to sell it. There are some very successful examples of where this worked: 37 Signal’s Basecamp, Pivotal’s Tracker, Amazon’s AWS.

I think those successes are more the exception than the rule because teams building an internal product don’t do enough of the hard work to validate their design ideas outside of their own walls. Furthermore, teams often underestimate the difficulty and cost of customer acquisition.

3. Here’s where it usually doesn’t work:

When your product has nothing to do with your actual consulting work. Take the many agile dev shops out there — they make products all the time but their job is to build software. Pivotal made Tracker, which made it easier for them to build their software (an example of scenario 2), but often times team fall in love with ideas not aligned with the consulting practice and try to make a run at them.

There are definitely examples of side projects that took off (for example, Crew’s Unsplash), but for every Monument Valley (built by ustwo), there are countless failures.

Why do these things fail?

Well, first of all, a lot of product ideas fail. Getting a new product to work requires a lot of things aligning. But here are the most common points of failure:

  1. Lack of focus: product startups require really tight focus on the mission, the market, and execution. If you are pulled in too many directions, you will fail. If you try to do X while selling Y, you will mostly likely fail. And look, running services companies is no walk in the park either, so it means your leadership and strongest talent can get stretched across both, hurting both.
  2. Skillsets: There are two parts to this. First of all, every product company needs a CEO, so the question is whether the consulting company can spare or successfully hire someone who is CEO material. The second issue is that there are plenty of consultants who are good at product, and plenty of product people who can be good consultants, but I’ve also seen a lot who really belong on one side and not the other.
  3. Dollars: I’ll just quote my friend Scott Francis from the original 2010 discussion: “I’ve seen more than one successful, profitable services company fold because they raided the cash cow to build and market a product – unsuccessfully.”
  4. Incentives and morale: This is solvable but it requires great finesse to solve two things: first, to manage equity distribution right when you are building for equity value rather than cash flows; second, to manage morale and culture so that the two sides of the business don’t get jealous or resentful of each other.

Ultimately, I’ve rounded out my view on this topic from 8 years ago, but still see a lot of risks in trying to do two things at the same time.

Photo by Jonathan Pielmayer on Unsplash