It takes years for a startup to return profits for the owners - if ever. Over 90% of startups fail as founders struggle to find product market fit and burn cash to test their hypothesis. Building startups is hard. Building companies, however, takes a different approach. With the right playbook a Digital Venture Agency could reduce both the risk of failure and founder dilution.
The alternative methodology to building a startup is a conversation about growth vs sustainability. Founders seeking funding require the capital to build their product but forget that they are also purchasing a boss with a growth plan. It might be un-sexy to build a sustainable consulting agency - but for the common W2 employee, starting a consulting agency is more achievable than a startup.
For 10 years, Pavel and I have built NineTwoThree Digital Ventures and we spent many nights deciding between growth and sustainability. Retracing our history, we discovered that our model is both teachable and repeatable. By understanding the principles behind our model, any entrepreneur can de-risk their path to success by following our 10-step process.
The ultimate goal that we are after at NineTwoThree is Holistic Entrepreneurship, coined by Ryan Begelman, which is the belief that freedom of mind outweighs growth opportunities resulting in a balance between work, family, happiness, and mindfulness.
1. Start By Working for a Big Company
The best advice I can give a young entrepreneur is that building a business at the age of twenty is not going to help one's happiness. Twenty is a pivotal age in finding out who you are as a person and who you want to become.
Starting a career in a big company is great for two reasons. First, you get to see how big companies operate. This allows you to visualize what processes work and what does not - you will refer to these learnings for the rest of your life. Second, you will not be that important. In any large company a person spends 2 hours and 23 minutes doing actual work and the rest of the day in meetings or conversations (or browsing the internet.) This leaves 16 hours a day to explore the person you want to become. Also, at a big company, you for sure will have a boss, or a boss of a boss that will be terrible - and you will know how it feels to be on that end of the stick.
Both Pavel and myself look back at working for Big Co. and realize how many soft skills we learned over the 10 years of employment. The ability to show up on time, complete your work, and play office politics don't seem to matter at the time - but these soft lessons become engrained in your management style. It is important to learn from others while understanding emotions and empathy. Do not skip this step as an entrepreneur.
2. Find The Niche
Working for a big corporation allows you to understand the inefficiencies of throughput. There are many reasons companies operate the way they do and one day every successful startup will lose their speed. But in a Big Corp your mind can start noticing patterns of inefficient processes allowing you to conspire product ideas.
Product market fit in a niche is derived from experience and knowledge in that space. Outsiders of the niche always need to spend months learning the pain points to understand which product solves the pain. The advantage of the outsider is that their perspective is not clouded by legacy processes. There is no better opportunity to try and solve business problems than watching thousands of employees complain about a process.
When we started Altar Live for faith communities, we knew there was a problem with getting churches online. We also knew that there were about 340,000 churches in America all learning how to get their communities online during the pandemic without specific products from Silicon Valley. What we did not know is that every church figured out how to get online, but they could not figure out how to get people to engage. The product market fit became "engagement for churches" and the product finally fit the pain churches encountered. It took almost 6 months of sitting in a Church every Sunday running their sound board to discover what our product market fit actually was. Doing it again, we should have just worked for a big church for 6 months without building anything. It would have saved us a boatload of cash, but we wouldn't have learned as fast. (Foreshadowing...)
3. Learn Fast While Building
The most critical step to becoming an entrepreneur or an agency owner is how quickly you process the lean startup loop. Learn. Build. Measure. The entrepreneur must learn the entire market landscape and be able to measure where the product might fit - then test the hypothesis. Many times, the hypothesis will fail, but you must be willing to repeat this step rapidly for hundreds of iterations without burning out. Although this methodology is the standard mantra for startups - we have taken a different approach at NineTwoThree.
Pavel and I built our first app to 600,000 downloads and we collectively didn't know how to code apps, create websites, market, sell, or build a startup. We learned on the job. There is a plethora of podcasts, YouTube videos and books on any subject matter - and the startup loop will rapidly accelerate if the learning was based around building. If a specific problem arises while building - then go learn that skill and come back to building. After a while, something might work - then you can measure.
On the Tim Ferris Show, Jerry Seinfeld told a story about being asked to talk at a comedy class, he said:
“The fact that you have even signed up for this class is a very bad sign for what you’re trying to do. The fact that you think anyone can help you or there’s anything that you need to learn, you have gone off on a bad track because nobody knows anything about any of this. And if you want to do it, what I really should do is I should have a giant flag behind me that I would pull a string and it would roll down, and on the flag would just say two words: just work.”
When you attempt to play guitar, you don't just start strumming. You find a song and then learn it. Then you pick another song and learn that one. Pretty soon patterns emerge, and chord patterns become recognizable. We believe in the same method. Start with a specific learning plan followed by a way to measure its success. Then create the easiest thing possible to test if what you learn works. Move over Eric Reis, your Build Measure Learn loop is backwards.
4. Start A Consultancy Agency
Consultancy is a leap of faith. With a website and a mission statement a consultant must convince another business to pay for a solution to a problem. After you've taken our advice for steps 1 through 3, we arrive at an unexpected pivot.
While learning how to build a startup you must stop and build an Agency instead. You found the niche, you learned how to build the product, now you must find people to pay you. What sounds more exciting, one person paying $50,000 or 5000 people paying $10? Exactly.
After 2 years of learning application building, in 2016 Pavel and I were asked to build a mobile app for a company without yet having a mobile team. The company was Dorel - the largest baby product provider in America - and they wanted a Baby Monitor. We had self-taught ourselves design and code, and a company worth $2B dollars thought we could solve their app problem. Why? Because someone believed we could.
We were of course still building our precious startup, but five figure checks for a few months of work is well worth the ROI over a $7.00 / month SaaS product.
5. Hire A Team & Create Procedures
The two most critical components in building a successful digital agency are technical competency and continuous expectation setting. If you solve those two pieces of the puzzle, you will have deal flow up to your eyeballs.
Technical competency will take 5-10 years to curate properly and don't convince yourself otherwise. Attracting good talented individuals is hard and will only occur once your agency has solid procedures and processes. Building procedures that attract talent usually start working after years of mistakes and knowing what doesn't work.
For example, we started using Basecamp and Trello in 2016 for our clients' projects. We thought we were pretty cool using trendy software - but our clients hated it and never logged in. So, we switched to Monday.com in 2018 and found that the clients loved it. We adapted our procedures to support a modern style of project management. The result of this switch forced our procedures to be rock solid and has allowed us to repeat project success with any of our developers, project managers and quality engineers as they get hired into the company.
Continuous Expectation Setting has a bit of a time traveling element to it that few understand. Expectation setting happens BEFORE you even meet your client. When they are viewing your webpage and scrolling through your projects your client is envisioning how that first call might go. When the customer calls to see if the Agency is capable of supporting their needs you MUST set clear, human expectations.
Once the Agency wins the project, fulfilling the expectations with a team that is honest, capable and communicative is paramount. Having procedures in place for when projects start to go off the tracks allows team members to solve problems without escalating. More importantly, the team members act like owners and know that through their training they have the authority to make the tough decisions.
Once technical competency and continuous expectation setting is achieved a series of projects will have been completed and proudly displayed on the agency webpage. This starts generating the agency flywheel of historical work driving new sales.
Having an established team deliver a series of well communicated projects will create pinpoint customer service reviews that allow you to obtain more work. This is why the team is so critical - each project has a history that will be repeated - and when that sales call comes you need to respond with "yes, Denis is still working for us, and he knows everything there is to know about your project because he built something similar before."
6. Measure Gross Profit Margin
Building a digital agency is less risky than a startup because your profits can remain in parallel with revenue. Win a few projects, hire more teammates. Lose a few projects, remove a few teammates. Startups operate based on growth alone meaning that capital is spent on the next teammate that can contribute to growth. But when that growth stalls or declines - teammates are disposed of and seek other opportunities never to return to the startup. This is not the same in an agency if you understand how to manage your bench.
How we maintain our development bench at NineTwoThree comes directly from the teachings from supply chain management. When a developer sits idle after a project is complete, he is no different than unsold inventory. In lean manufacturing, inventory waste occurs when products expire on shelfs. To reduce or eliminate inventory waste the solution is to obtain the raw materials only when necessary to produce the quantities needed. At NineTwoThree we work tirelessly to maintain a strong development bench by providing two opportunities to our developers:
- The ability to work on one of our startups. (next section)
- The ability to work on one of our partner's products.
Both options keep our core team together for when agency work needs to ramp up without ever losing speed or talent.
It is the goal of every company "to make money by increasing throughput while simultaneously reducing inventory and operational expense." In an Agency, inventory is the team producing the work, operational expenses are the software costs and throughput is how strong the team can output valuable work. The way to measure all metrics is through your Gross Profit Margin. Personally, I love the Direct Labor Efficiency Ratio which tells me how much output the company earned for every hour input - but tomahto tomato.
Pick a GPM you feel comfortable with and make every decision based on keeping that GPM. Remember, it is only possible to scale upwards when the development bench is managed properly. A proper agency graph should look something like this...
7. Fund Digital Ventures with Profits
The second method of reducing inventory destroys your gross profit margins but is way more fun. Build a startup with your idle team. As developers, project managers and quality engineers' complete projects NineTwoThree has always had an internal project to jump into. Some call it the black hole, others call it the "place of no return" - which ironically is known to the rest of the world as "a startup."
Our projects have ranged from solving which chemicals to spray in a vineyard to how communities gather for church. Of course, some individuals enjoy the fast-paced challenge of working on a project that has unpredictable days and others enjoy the steady pace of an agency - but the ability for any team member to move from startup to agency work is very appealing. It allows NineTwoThree to maintain our team if a project becomes too stale for their tastes.
Startups are also very valuable because they allow for team learning to take place. Instead of removing a developer from the team - our internal ventures allow that developer to remain employed by NineTwoThree while investigating new technology. Hopefully, this exercise results in recurring revenue from an eventual product sold by the startup. But if not, the developer was able to calmly learn a new skill awaiting the next agency project.
Building startups, especially SaaS startups, turns static income into recurring revenue. The leverage a properly positioned SaaS product can have on cash flow is much larger than agency work. 100 hours of startup work could return $10,000 per month for 10 years while the same 1000 hours for an agency would produce $10,000 for just one month.
As I learn from other agency owners who also venture down this route, time becomes the biggest challenge. As the agency grows and produces more clients the management must support the new work. However, the startup needs direction and guidance from the same management team. The constant tug of war is to ensure both are supported even if one feels "more fun" at the time.
8. Hire CEO's to Run the Startups
After about our 6th Digital Venture at NineTwoThree we realized that the Startups were failing because of Pavel and I. Agency work for us is fun and exciting as clients already have the audience using the applications. We thoroughly enjoy thinking about how to solve problems and clients usually have good problems to solve. Focusing on agency work can impact the success of the startups - unless we replace ourselves.
Hiring a CEO is impossible. Hiring a project manager is not. Our now infamous job posting has pulled in three all-star CEO's for our startups and it does it by offering an opportunity of ownership.
Seeking a take-charge, self-directed person who is interested in managing a mini-team of developers and engineers dedicated to provide a mobile or web app solution to our clients. This person should have an entrepreneurial mindset and, consciously and subconsciously, act as if they have personal equity in the initiative’s success or failure.
We have also learned to offer a test project on any big hire. Provide the new person with a challenge or small paid project to see how that person works and thinks. This trial period allows you to get to know the person in YOUR work environment - not what was on their resume. As much as this method has brought in good talent, it has weeded out great talent that was not a fit for us which would have taken longer to discover.
The result is that you get a Product Minded individual waking up every morning to think about the startup. Customers, partnerships and the product are all woven together to the responsibilities of the Project CEO. For Altar, Stephanie has called over 900 pastures on the phone in attempts to learn what churches actually need post Covid. 1400 churches later, were starting to see the benefits of those efforts - which are efforts Pavel and myself never would have been able to have time for.
9. Figure out Marketing & Sales...Yourself
Building products is the strength of a development agency. Over time, some agencies stretch into a "full service" agency which means they offer foundation, design, development, and marketing. This comes with a cost as the number of top-level managers needed to understand each discipline will naturally decrease the GPM of the agency. By adding top heavy weight, the ROI of an hour coded becomes a diminished return on profit. So the only way to achieve decent profits is by growing the customer base.
Other agencies will outsource the marketing - including NineTwoThree. Once a product is finished, call up a partner agency to handle marketing needs for the client. This approach allows the development agency to focus on what it is good at - developing. It also allows the goals of the company to be clearly defined around the metrics that matter for quality products - not growth metrics which matter to marketing.
But what about the startups? They need marketing too - and the two options above remain an option. Become a full service agency, or hire an agency. Both decisions will shift the focus and the goals of the company into growth minded metrics - is this something your agency wants?
There is a third way - learn it yourself and find product market fit for your clients and your startups.
There are three words in "product market fit" and they are independently vital to success. In year 1 through 8 we thought that building a superior product would bring customers and assumed development was worth spending 90% of expenses to achieve success. In year 9 and 10 we now know that it is the complete opposite. 90% of a successful product is focused on marketing and sales. Of course, a product needs to exist to achieve spending 90% of your revenues on marketing - but the concept remains valid. If a startup/founder does not focus on the marketing aspect of the business - it will never gain traction.
Forcing yourself, the CEO, to learn marketing has three compounding benefits.
- You are the owner - you know what the customers are looking for - and you can make the quick decisions on how much money needs to be spent daily based on insights.
- Purchasing funnels that are learned on one product will be utilized on other products.
- Understanding CAC, LTV, APU and all the other metrics regarding costs vs revenue are very important to understand where to hire and double down. It also teaches you how to advertise for the agency - which will always be the hardest startup to sell.
Every step prior to this one has been how to avoid growth. Building a digital venture firm is about constant focus on profit margins while using excess cash for startups. Growth however is inevitable. The developers will start working on larger and longer projects which provides stability. The project managers will begin to have family type relationships with the clients resulting in higher trust.
Thus, the client base will increase.
From the startups you built, if a CEO is installed, the requirement on the agency management to assist with growth will naturally increase. More importantly, after a few digital ventures, one will start to gain serious traction and require more attention.
For 1 year, I have focused on the growth of NineTwoThree. Here are the lessons I am learning and working on today:
- Hire a professional to build your website.
- Hire another professional to write your copy.
- Write down a list of tasks you do every day. Label the ones that assist in revenue, human resources, or growth. Start pawning of all other tasks.
- Learn marketing yourself.
- Hire an advisor or coach that has grown businesses before.
- Work on yourself. Figure out what gets you agitated and annoyed - then work at fixing that.
- Start looking at the business like a machine. Where are the inputs, where are the outputs?
- Remain focused and aware of the GPM of the agency - everyday.
- Hire stronger people with higher potential.
- Spend time on people. Sit back in meetings and focus on the conversation. Help people grow.
Finally we have come to the end. The conclusion of the playbook. At this point the CEO can retire right? Not exactly. Two words: Capital Allocation. Where might the business place its recent capital into buckets of higher growth and where might the most risk be? Might there be opportunities to get into larger markets with more ad spend - or higher people spend? Follow us to find out and thanks for reading.