The Risk Of Turning A Startup Into A Service Provider

When we create a startup, we usually have a bold and grand vision about its future. We want to create a product or a service which will have an impact and change to an extent the existing dynamics in a market.

While entrepreneurs usually struggle to raise their first or second tranche of capital, investors also want to see traction in the marketplace. It is important for the management team to be able to manage both parts at the same time. On one hand, you need to raise money to survive and develop the business, on the other hand you need to show some commercial results or data to be able to excite investors.

When focusing on the commercial side, many startups which had a grand B2C strategy rapidly realize that the amount of cash needed to promote their solution to the mass is significant. In order to get at least some initial data or commercial results, some startups tweak their initial plan in order to also target B2B clients and show initial commercial results. Even if the sale cycle is usually longer, the idea is to get a chance to sign a pilot or two and show the interest to investors. The idea is that the B2C strategy can wait until there’s more cash in the bank.

As always, there is not a perfect solution for what works. Usually, it is better to chose one channel and focus solely on it. Trying to focus on both channels at the very early stage of the company might lead to a waste of resources, focus and to an extent commitment to find the right fit in the marketplace. Using such an approach yields the risk of falling into a “service provider” model.

Large companies with tons of cash often see a very young startup as another way to outsource their research, technological development or simply to experiment new ideas. On the other hand, the young startup which partner with such a large organization needs to ensure the pilots under way are successful enough in order to go raise their next round of capital. The risk is to get couple of those pilots signed and at the same time get a strong push from initial investors to spend all the available resources on those deals, leaving the initial vision aside in order to “reduce” short-term risk.

Obviously, this strategy can make a lot sense and is sometimes required for the startup to get to the next level. Having couple of successful pilots, some initial revenues and precious data is needed to convince investors to continue bankrolling the company. Still, entrepreneurs need to be aware that most large organizations will absorb a large amount of time from their team and will usually have a flow of “special” requests. Those companies will want the solution to fit exactly their needs and will usually not accept to use the solution as is. This can become a serious issue for the young company has it start creating unique solutions targeted to the need of a single organization. And if several pilots are underway in parallel, the risk is to create several versions of the product in order to please those early but all-powerful clients.

This is very tricky. If the developments required create features that cannot be leverage by a broader audience, the startup is committing to maintain different systems for very specific customers. This is not scalable and create a lot of technical and commercial issues in the long-run. The company is becoming a sort of specialized service provider which overtime will reduce its ability to create one grand vision for all (forcing its clients to take its solution as is). Signing pilots and early customers is therefore  a good idea if its fits with the product roadmap. If not, you risk to convert the initial idea to a company which provide personalized services to large companies. AKA a service provider or an agency.

Here the need to balance all the different variables is great. On one hand, you must listen to initial customers as they might provide clues to what the market wants and what you should envision to become successful. On the other hand, you need to know when to draw the line to not get sucked up on non scalable projects and special development. Being very clear to where you want to go will help you navigate these early commercial agreements.