Have Your Cake and Eat it Too (Part 1)
How to bridge the gap between lifestyle & tech businesses
In the cosseted world of Silicon Valley there is a sharp line drawn between technology businesses and what are derisively called “lifestyle” businesses. Tech businesses scale infinitely and lifestyle businesses are for people who have never even seen a pair of All Birds. In addition to foot ware problems, lifestyle businesses also have problems scaling. They are either dependent on the owner or they require hiring too many people or both. There’s none of the leverage you get from technology’s build once and sell a million times feature.
On Twitter we’ve seen push back to the dominance of tech. Now we have sweaty startups or businesses popularized by Brent Beshore and Nick Huber. They reject the Silicon Valley dichotomy and praise the cash flow of plumbing and pool companies, self-storage, and power washing. I’m naturally contrarian and suffer from a tech envy complex so I tend to side with the sweaty startup side.
However, things in life aren’t so black and white and we are missing the forest for the trees if we don’t realize these are not binaries. In reality I think there is a continuum of businesses that begin with solo practitioners who provide bespoke services and follow all the way up to pure SaaS businesses and online marketplaces with no humans involved at all. As you travel that continuum you traditionally see two things happen:
#1: Value Rises
Somewhere on the way from hanging up your consulting shingle to full automation, you go from selling your company for 2 times EBITDA to 15 times revenue. You go from a company that is just you and solely dependent on your experience and connections to a company that will keep going just fine if you get hit by a truck on the way to work. Revenue goes from intermittent to re-occurring to recurring and you can start showing that x marketing spend results in y conversions that lead to z lifetime value. BUT…
#2: Your Success Rate Falls
It’s estimated that 92% of SaaS startups fail in the first three years. It’s a hard business and has more winner take all dynamics that lifestyle businesses. The number one reason these startups fail is because they lack product market fit1. That’s a polite way of saying no one wants your shit. My anecdotal take on this is that most SaaS and tech companies are started by programmers and at least on the B2B side they just don’t have that much experience with their customers.
There is Middle Ground:
So in the end you can get a lot of value from building a recurring revenue SaaS business but the odds are low. Lots of people pound away for 5-10 years and end up with nothing but a below market salary. On the other side of the continuum, that sweaty business guy gets paid a lot more along the way but his chance of a big pay day in year 5-10 is much lower. But it doesn’t have to be a binary choice.
I’ve increasingly seen a middle ground between these two extremes. Service providers who deeply understand their customers have a massive opportunity to tech enable their businesses. Tech-enablement creates at least three benefits:
#1 Leverage: Leverage literally means increasing the force you can apply by using a lever. Technology is a lever. It lets you serve more customers and make more revenue without necessarily having to hire more people. Tech enabled leverage doesn’t mean no hiring but it can mean hiring a tenth of the people you’d have to without the tech.
#2 DeRisking: More tech-minded people can de risk their startup idea by grounding it in services (at least starting out) to find and test that elusive product market fit. If you truly want to build a transformational product, you have to be grounded in the customer experience. Services give you that access to their day-to-day.
#3 Funding: Finally service businesses are usually profitable so you can harvest profits from them to build your tech product. There’s no VC at your shoulder telling you what to do while gobbling all your equity.
If you can successfully navigate the continuum, you can have your cake and eat it too. You can make profits along the way and end up with a big payday based on intellectually property that is neither you or that staff going up and down in those elevators.
Next week I’m going to cover a four step process to go from bespoke services to full tech enablement and cover some of the risks and pitfalls I’ve seen. Until then…
That’s all for this week!
https://www.lightercapital.com/blog/why-do-most-saas-startups-fail/