Venture Capital Festivus: Professional services

There is an awful lot of start ups out there.
Time is a very efficient mechanism for sorting quality and quantity. I have no doubt that with crowd funding platforms and retail like distribution, there will be an unprecedented and sustained start up increase complemented by continuing velocity of money with mega VC funds eager to deploy.
The money movement has migrated into a category I am intimate with and have been lucky enough to have had success: complex professional services.
 A few things baffle me…
Some I chalk up to being somewhat new to momentum in this context, others I attribute to my puzzlement at the VC scatter shot approach and how it gives fuel to inferior companies and novice entrepreneurs. Neither is a phenomenon I am unfamiliar or unpracticed in discerning, its just that there is such an abundance.
So I write this as much to myself as to others to better articulate some recent conversations on this topic.
This admission:
1. The correction in some part is my own recalibration of risk tolerance.
And I must improve my ability to anticipate and guide others corrections, maturity and whole systems view.
And reduce the likelihood that my investments are the lifestyle businesses of tomorrow: someone else’s that is.
So then, as we are in Festivus season, I commence with my airing of grievances.
And…some glimpses of admirable start up architecture.
Industry view: These are mature industries that employ lots of feet on the street, maintain strong brands, faithful clients, high cost of customer acquisition, high client retention/engagement, pricing discipline and longer term contracts that give a predictability to their earnings.
Category leaders have survived tumultuous years, strong ability to forecast growth (or losses) and are cognizant of the relationships between their moving parts and profitability. They have had management attrition/generational shift and embrace useful technology, managed risk and enjoy considerable distance from rivals.
This infers that the best of breed are willing to incubate innovation without an urgency for the product or ancillary service to be immediately profitable. They have excess capacity with which they can afford to lose money on the front end.
They will never starve like a toothless elephant, it’s indigestion that kills them.
Distant second and third tier players look for innovations that are foreseeably accretive. They are being challenged on all the flanks having not had the internal resources to compete, they are preciously holding onto their most profitable clients while trying to pare their unprofitable clients or acquire and service them cheaper.
System & environmental view: Tier 1 players insist that they are the platform and that they own the distribution or demand ‘shelf space’, salesperson front of mind and the highest client facing visibility.
In recent years they had the vision, money and resources to dramatically improve legacy systems, now that it has been built and the money spent, they want ROI in the form of client volume and ancillary services to plug into their brand with expectation of revenue share/residual split.
Look from the system outwards, building a company with precision and care given to ‘fit’.
Whiteboard and start with ‘how can I recruit ‘non’ clients, economically gain intimacy, reduce labor in a process and create a superiority in profitability’.
What attribute will we own: The three excellencies:
A company can’t do all three equally well, it’s a balancing act. I am very biased to the latter of the three
1. Operational excellence: The secret sauce of a profitable company where all the pieces come together for a perfect fit that encompasses sales, alignment in culture, pricing discipline, marketing, underwriting, billing, info/vendor aggregation and other providers in its ecosystem. It is the most difficult to master and it takes years of trial and error as there is so much complexity.
Start ups rarely have the inside surveillance of a large companies systems gaps or insight into their future offerings, so they build what they ‘think’ should fit, not what ‘does’ fit.
2. Technology: These days G wiz is the expected/norm and almost every company has some meritorious claim. The race to WOW is largely over as the leaders have spent years and million conforming to new needs and now want hotels built on their Monopoly board.
The third tier players are still battling with legacy issues and require band aids, a reasonable strategy, until they can do an overhaul.
3. Intimacy: Easy to give great service and answer calls when you have just a few clients.
Intimacy is premium business. Start ups must decide from (pre)day one if they’re model will be high fidelity or high convenience, because the two can’t co-exist. Pivots lose time ‘equity’ and usually cause an unrecoverable disruption.
Because of shareholder demands, category leaders down to third string players have tripped themselves to create leverage by changing staffing ratios away from client facing service. This servicing flaw is noticeable to clients and endangers their retention. Building a model that regains intimacy is job 1.
Client acquisition:
By itself, low cost client acquisition is not jaw dropping compelling to an industry built on big upfront sales/marketing/implementation burn and then client retention. They will sink big dollars if they can retain the client and become profitable on the client after year 2.
Self sell/self enroll/self service:
I love the consumerization experience. Online behaviors/wide scale acceptance of outsourcing/more distributed workforces/costs/bandwidth and both sides of the user base did not permit this until relatively recently.
However, there is a risk that you comoditize the same product you later want to make premium and that you won’t have enough high margin clients to subsidize the freem(ium) offering.
Be a premium product that is self sell/serve, without compromising intimacy.
Processes that are entirely built on technology can suffer human error that requires forensics. There’s a real risk you’re going to need huge amounts of human intervention later on in the sale/servicing.
Adding another bell and flashing light to a pinball machine doesn’t make it appreciably ‘better’ and the visual experience won’t bluster past misaligned bumpers.
Be on the lookout and say no to those clients that will become the money losers of (today) tomorrow.
Sifting bad/unprofitable clients is cyclical and you may find you don’t have a real business, instead you have a Ralph Kramden scheme.
Velocity in prospects/clients:
Many entrepreneurs are sold on a social network mythology and lack appreciation on what scale is, and what it costs.
Companies that rely on technology have to achieve real, ass kicking velocity in prospects.
Lets call it ‘looks’. They need an amount that makes peoples head snap. 50 shitty, unqualified prospects a week isn’t going to do it, for that type of pipeline your better off hiring hordes of sales people.
Ass kicking volume takes presence, marketing, sales people, service folks, on boarding/off boarding and seamless integration.
If you open up flood gates for ‘free(mium)’ there is give somewhere in the resources of the organization. Logjams downstream, where manpower is not available, is more expensive and becomes very labor intensive. So if you’ve built a self service that reduces reliance on sales people walking prospects to the front door there has to be a clearly defined assembly line with little human intervention that gets the deal to close.
Free(mium) is a vitamin deficiency: In most scenarios, free(mium) is not a strategy unless you don’t intend on being around long enough to suffer its heartbreak and consequences. Freemium clients are cheap bastards.
Okay if you don’t have a lever to organically create profitability, as long as you go the ‘yammer’ route and build it so that getting it to create value is someone elses problem. This means that its even more important that you create tremendous velocity in prospects.
Exit: “ADP, this/that company will want to buy me, they already called me ‘cos they wanna see what we have”
No they don’t and (k)no(w) they won’t: Companies like ADP are slow moving battleships that own their ecosystems and unless you’ve built your company from the ground up with specificity to fit into company x operational (excellence) infrastructure its not happening.
Whats (waaaay) more likely is that they will endlessly peek under your kimono until you are exhausted, discouraged, resource depleted and are either willing to be acquired from bankruptcy or they have gained enough views to do it themselves.
In many categories there is no dominant national player. There are strong national brands but also boutique firms with strong local or client type competency.Consistent with industry’s with low barrier to entry, this should be a good thing as it permits new entrants and offers some probability of a being bought in a PE/VC or other roll up. In these instances the acquirer is buying either truly useful innovation, top line growth or a beachhead into a new market.
Building too much code: With so much great code already out there, some entrepreneurs just wanna write – when its not needed and down the road will significantly inhibit progress. They expect that their product and the market is flexible. If they make an error in sequence it can be repaired en route, like fixing a flat while driving. The reality is that it is entirely inelastic, particularly in mature markets like professional services with entrenched leaders and quick outliers who aren’t making mistakes.

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