1 posts categorized "investment"

January 18, 2012

Fire your customers and shut the doors… or be a services firm forever

I recently spent some time with a company that successfully overcame a huge challenge: Changing business models. ProdNotServ started out as an outsourced software development service company, run by a very talented small team – three engineers, a designer, and a product manager. For two years, things had been going great. They had more demand for their services than they could handle. They were working with big-name startups and celebrities. They were getting rave reviews
from clients.

So why make a change? They decided that because they weren’t building a product themselves, they were missing out on a chance to grow revenues faster than their billable hours and staff.

Sure, as a service company, they had some advantages. They had the engineering and design talent that so many early-stage companies need these days. There were startups flush with VC cash lining up to pay this team to help develop their products. Plus, they enjoyed steady cash flow, control over their own schedules, and minimal risk. Working with different clients added some variety to their days.

But if they successfully made their own product, they’d not only get the feeling of ownership that comes from creating something entirely new, they’d be giving themselves a chance to make a lot more money.

ProdNotServ was able to make this difficult transition because its CEO made two key decisions. First, he created a cash reserve by taking only his salary, instead of distributing the firm’s net earnings to himself and the other owners. Next, he led his team to shut their doors for a year – stop taking on new business, and just use the cash reserve they’d built up to keep paying everyone their current salaries. They’d spend the year they’d bought themselves brainstorming, designing, and perfecting a product they’d come up with as a group.

It’s also important to note what the CEO did not do. There were a few common mistakes he managed to avoid: He didn’t try to keep building the service business, just putting a fraction of the company’s time and money towards building the product. Instead, he focused all of his team’s energy on the new idea. He didn’t steal the best ideas from the product design process to drum up more easy cash from the services business. Instead, he stuck with his new vision for the company’s future. And he didn’t doubt himself or lose sight of that new vision when team members questioned his strategy, or when product development hit snags.

One year later, the team has just launched a third version of their product, and it’s selling pretty steadily. They’re about to close their first round of VC funding. In other words, they’ve done it.

You can’t develop a successful product part-time. Can anyone name a product launched by a company still mostly focused on services? What about one that doesn’t suck?

Alex Kinnier

Alex Kinnier is a Venture Captial Partner at NEA. He's an Xoogler, a passionate product developer (from ad servers to air conditioners to Febreze) and a fan of NYC pizza. He is a father of 2 angels.

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