What do Acquisio, Freshbooks, Hootsuite and Shopify all have in common? Well, for one, they are all kick ass, high growth Canadian startups. For another, they all started out as web agencies. i.e. service companies.

Each has a different story for how they transitioned from services to product. But each one had the benefit and luxury of starting from an existing, profitable business and taking the time that was needed to develop and validate their vision.

None of them approached VCs out of the gate. And for those that did raise VC, I’m pretty sure they had a (relatively) easy time of it. Why? Well, they did not *need* it (because they had services to subsidize) and they had time to build traction, giving them funding options.

As a seed investor I meet many entrepreneurs with fresh new companies that are going to “change the World” in same way. And since we are venture fund, we do need to see big visions. But in most cases these visions are hallucinations because the founders don’t know what they don’t know yet. If they had been in market for a while, funding what they were doing with friends and family / ¬†angel money or subsidizing through services, then they would have a lot more validation to back up their grand plans.

While VCs on average fund 1% of the companies they meet, I am sure if you dissect the data the % is way higher for those companies that walk through the door, not needing those $, but wanting them, and having the ability to say ‘no’ to a VC.

So, what am I saying? Am I suggesting you put your startup on hold and start a web agency? Not necessarily. But what I am saying is:

- Good things usually take time. Don’t feel the rush to serve up some huge vision

- Investor discussions go better when you pitch what you *know* to be true, not what you hope will be. So, starting small and/ or being in market already is powerful. Now, for sure you have to be building ahead of actual market demand, so there is some leap of faith required. But it’s better if that leap is based on actual domain experience and traction

- It all starts with one segment. Facebook dominated Harvard, then other Boston universities and grew from there

- Investors want what they cannot have. If you don’t need them, they might just want you more

- Vision without domain knowledge and actual traction can sometimes be hallucination

Category:
Angels, Raising Capital, Strategy, Venture Capital
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  • http://twitter.com/jacktiantai @jacktiantai

    We are definitely feeling the pressure in quickly discovering what is our ultimate vision, but after reading your article, I feel a lot better.

  • http://www.catalogprintingexperts.com/ Print Catalogs

    Hey Mark,

    Business transitioning from services to products requires a lot of effort, hard work and dedication. I certainly agree with you saying that "good things usually take time". Yes they are, and when that time comes, you'll realize how much you sacrificed that are all worth it.

    ~ Blake

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  • http://twitter.com/ekovarski @ekovarski

    Mark,

    Great article and I think I understand what you are saying but I think the title is misleading because one needs a vision whether you are building services or products. As time progresses your services and products might shift to accommodate new demands but the vision led by the founders is still important.

    Take a look at Apple. They started of as a computer manufacture, evolved into the entertainment industry segment with the iPod and iTunes, leaped forward in the smart phone segment and now are doing the same for the tablet market. Directions might have changed but their vision is still pretty much the same it has been for years.

    • http://startupcfo.ca Mark MacLeod

      I would say that Apple did not begin with a grand vision. They just wanted to build a better personal computer. And their timing was perfect in terms of the evolution of personal pc technology.

      Going back to my examples:
      Freshbooks – services agency. Built their own billing system to charge clients. Clients loved it so much they asked to use it. That's how freshbooks was born.

      Shopify: The guys loved to snowboard but hated that there was nowhere to buy good snowboards in Ottawa. They hated Yahoo! stores as an experience so they built their own online store initially just to sell snowboards themselves.

  • http://twitter.com/TimurKhamitov @TimurKhamitov

    I agree. To add another example of a company that successfully went from agency/service to product is 37signals – perhaps one of the best global examples.

    • http://startupcfo.ca Mark MacLeod

      For sure. Great example

  • http://twitter.com/kevin_swan @kevin_swan

    Good post, Mark. While I agree on this approach in terms of building up some learnings and getting some traction before approaching anyone for funding there is also trepidation among most investors in funding a service company. For some reason, many people running service companies feel compelled to "spin out" a product based company. I don't get this desire and agree a lto with what Mark Suster has to say on the topic:
    http://www.bothsidesofthetable.com/2011/04/25/wha

    Most entrepreneurs have an extremely difficult time transforming from a service to product company and are hesitant to take the plunge. I would be too if I had good revenues coming through the door! Investors want someone who is "all in" and that normally requires completely removing themselves from the service business. However, I agree that you can mitigate a lot of risk by searching for that product-market fit on your service company's revenue.

    Hats off to the companies above, and specifically, the entrepreneurs behind them, for making it happen. Like most successful startups, it is more of a commentary on the people behind the company than the specific situation it was launched out of.

    • http://startupcfo.ca Mark MacLeod

      Hey Kevin,

      For sure, I would never fund a services business. But that experience can sometimes (as these examples show) give you the experience and $ needed to start something.

      And for sure, not everyone who was part of that services business should be part of the product company. Everyone I have spoken with who made the transition agrees with that point.

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