Why Building a Product Company is Key to Success
Are you in the process of establishing a Services or Product company?
During a recent virtual coffee meeting with Shawn O'Neill, an interesting topic came up that was posed by a mentor. I'd like to share some insights on it.
If your goal is to scale your business beyond a small team of practitioners, it is advisable to focus on building a Product company.
By "product," I am referring to technology that offers repeatability, predictability, and efficiency in delivering the services your firm provides.
The idea is to minimize the reliance on human involvement in service delivery, thus breaking the linear relationship between revenue growth and headcount expansion.
A services company that heavily depends on increasing revenue through more human resources will eventually require internal structures and personnel to manage the customer-facing team and ensure smooth business operations.
More employees mean additional responsibilities, such as performance management, resource allocation, talent acquisition, competition for top talent, timesheets, expense reports, and all the elements necessary to keep employees satisfied.
If your aim is to secure investment, services companies tend to be less attractive to investors due to the inherent challenges associated with scaling.
Software, on the other hand, has the ability to scale infinitely, along with revenue, albeit with human resources supporting customer acquisition and retention processes.
Even with this understanding, technology companies are embracing a product-led growth approach, where the sales process is initiated by the product as the first touchpoint.
Product companies command higher valuations, experience faster growth, and encounter fewer obstacles in acquiring and managing human talent.
On the investment front, my experience at Vision Critical clearly demonstrated the stark difference between Services and Product paradigms.
The company underwent a divestiture/sale of its services division to Maru Group, resulting in an increase in its valuation multiplier from a blend of services and product to that of a pure product company.
Despite the fractional revenue generated from software, the valuation of the company increased compared to the blended valuation of a software+services company.
Therefore, it is recommended to establish a product company while ensuring that services are available to enhance the value of the product. This approach allows customers to interact with the human element while remaining unaware of the behind-the-scenes operations.