Should you fund your product Startup by performing Services?

What prompted me to write on this topic is an email from one of the followers of my blog (completely anonymized) wrote to me seeking advice:


"Dear Abhinash,

I am XXX

I currently run my co-founded startup YYY with a team of 7 people.

The urge to email you started after reading your thoughts at http://randommusingsofabinash.blogspot.com/2009/06/building-kick-ass-team-part-i.html ! Pretty useful insights. However there are few challenges that we are facing and would love to have your suggestions over it.

We are basically a 6 months old startup who is working on social media strategies and as a web dev workshop, originally started with a vision of being a primarily product company we have shrunk to become a services company and see ourself under a deadlock . We need money to run our operations and thus need to make quick money. For quick money , We need to work. However , at the end of the month we end up spending all our time on outsourced projects and thus come in a deadlock of earning and spending.

However, we are doing good and are very positive. We are getting pretty good projects and customer feedback, But as mentioned in your blog post ("if candidate has worked in {ibm|infosys|tcs|satyam|patni..........any services firm in India} then move to Trash") something tells me inside that this is not something that we were supposed to be doing ! , Outsourcing projects , completing them , Fighting for payments slowly seeming to me a waste of time now.

Would love to have your suggestions....

Regards,
XXX
Co-founder
YYY"


This is something I have heard time and again and watch these companies with bright people just becoming high end consulting shops moving from one short-term project to another. I am by no means a purist and the advice I will provide is not going to take the moral high ground.

1. I have not seen any Silicon Valley company take the path of being a services company and succeed as a product company.

2. Most Indian companies which start out with a product vision but have to resort to services is primarily because:
a) they could not excite a VC or an Investor about their product Idea or the team and could not raise funding
b) believe that VCs /Angels are evil and think that giving up large chunks of equity to them is unjustified and they would rather become a services company to raise money

3. The Indian IT services industry is not about IP creation and works in the wafer thin less than ~20% profit margins zone. Product companies need to develop IP and working on projects does not help as you are generally working on somebody else's IP. I believe this kills the innovation capacity of startups. Nasscom would like for you to believe otherwise. You should seriously go to Nasscom's site and start reading their paid research if you believe them.

4. Delivering Services breeds some bad behavior in the team due to the time and material nature of billing. Poor quality code writing, lack of adequate quality control etc. However, the biggest issue I see is that developers become very impatient and don't enjoy long term product execution and building depth after working in the Services world. Typically short projects require you to learn something fast and to do something fairly basic with it. They believe that being a "Jack of All Trade and Master of None" and jumping from one technology to another as quickly as possible is the best way to remain competent. Their resumes look impressive with all kinds of cool technology listed in it but then when you interview this breed, you quickly realize that they can possibly string together a bunch of technologies and copy and paste code from Google to quickly create a nice prototype. But, if you ask them to turn this into a product that needs to scale, perform and deliver a quality experience, then they just haven't built the depth to do these things.


My advice is that if you are going to create a tech startup to build a cool new product or service, then you need to have the discipline to not get tempted by consulting/services opportunities. Stay the course, raise enough money to fund a team that can execute and execute like crazy. The IP you create will ultimately get you the valuation that will make you rich. Take the case of Zimbra, we raised US$31 million from VCs in 3 rounds of funding and were sold for US$350 million (~10X ROI to our investors) when we were making revenues well below US$20M per year. Services companies are typically valued around ~1.6 to 2 times revenue. The Indian IT services industry is an anomaly compared to the rest of the world and enjoys better valuations as IT Services is what is considered to be the Tech industry. This will change rapidly when IP creating technology companies start to grow and succeed in India. The Choice is very Simple :)