If you watch the tech startup scene as keenly as we do, you might have noticed a trend starting to emerge over the last couple of years.
A startup catches your attention. It looks like it has a seriously promising product. Even if it’s not the next big thing, you think the people behind it could go pretty far. A little while down the road you check back in on it and find that the company’s abandoned its original product and that it’s started offering services more usually associated with a digital agency or that its staff size has ballooned and the product that looked so promising is drowning in ads.
But why? Surely if you’ve risked everything to build a startup, you do everything you can to stick to the original plan, otherwise you would’ve started an agency in the first place?
As it turns out though, it’s not that simple and even figuring out the exact point at which a promising startup becomes an agency can give you a bigger headache than a night out with “Tiger Blood”-era Charlie Sheen.
Getting a basic grasp on the key differences between startups and agencies isn’t a bad place to start when trying to figure out why the one so frequently segues into the other.
At the most basic level, a startup is a company in the very early stages of existence that lacks a repeatable and scalable business model and certainty.
As Ventureburn contributor and Angelhub co-founder Keet van Zyl notes, “unless you are in pursuit of doing something new or different with high growth prospects and an uncertain outcome, you are not a startup”.
Traditionally, the agency model, be it web development, digital services, or advertising, has been the opposite of that.
The model has been repeated time and time again: an agency’s success depends on its ability to win new clients and keep old ones over time. How it does that might vary but the model will always be pretty much the same.
The lines are blurring
While those rules certainly apply to the traditional agency model, the lines are becoming increasingly indistinct.
Technology and the prominence of the startup movement mean that agencies have started taking on board some of the principles used by the most successful startups.
While a traditional agency can, in the words of World Wide Creative (WWC) founder Fred Roed, “grow quickly to hundreds of staff members despite dangerously narrow profit margins and only a handful of clients”.
He notes however that technology is making it easier to run an agency on so-called “lean” principles. Drawing on the example of WWC, he says that it’s now possible for agencies to innovate without adding huge expenses to their overheads:
We have what we call an ‘elastic’ model where we have partners, teams and freelancers around the country who we can call upon for different projects. Tech allows us to do this efficiently. We have also partnered with a bigger brother, Saratoga, that gives us access to some of the smartest business analysts and software developers around. Working remotely, putting small agile teams on innovative tech projects, we can punch well above our weight.
By the same token, startups, especially those founded by people with experience in the agency world, can use this to do work for a client that an established agency might not be able to. It doesn’t necessarily mean that they’re giving up on *that* dream project that’ll scale faster than Instagram once it takes off, but dreams don’t always put food on the table right away.
Perhaps the most prominent example of this blurring is Groupon. While we tend to treat Groupon like a tech company, it isn’t really. It employs more than 10 000 staff, mostly in sales, and has no breakthrough technology or services. Its ability to grow comes from that sales team, not the product itself.
But because it’s online we associate it with the tech sector and, until he got fired, founder Andrew Mason was frequently mentioned as a game changer of the same ilk as Mark Zuckerberg or Instagram’s Kevin Systrom. Indeed when Groupon was in the development stages, Mason probably didn’t think it would turn into a barely controllable behemoth battling just to stay afloat.
Compare that to a company like Instagram, which got to 100-million users with eight people. Or, if you want a South African example, compare Groupon South Africa’s office, which has over 160 employees to WordPress theme builder WooThemes, which only employs around 30 people, despite its “products” being used worldwide (WooCommerce, its flagship product, has been downloaded over one-million times).
But it’s hardly inconceivable to think that, had any of these companies’ business plans had to change even slightly for whatever reason, they would’ve ended up on a similar path to Groupon.
So that’s the tech companies sorted, but what about when the shift happens the other way round?
On the agency side, says Roed “we are seeing smart young folks coming into the market with low overheads and doing some great work”. He cites international companies like Achtung! in Holland as being the on the crest of a new wave of agencies that “create functional solutions for their clients at the same time as delivering strong creative campaigns”.
It’s hardly inconceivable therefore that a company that starts out selling hours could come up with a kickass product and start looking a hell of a lot more like a startup.
As we said, the lines are blurring.
While there will always be key differences in the mindsets of the kind of entrepreneur who builds a tech startup and the kind who builds an agency, there are similarities.
It’s fairly obvious, as former Mxit CEO Alan Knott Craig Jnr notes, that “most people don’t start companies thinking they’ll end up selling hours”, but Roed’s advice of: “Don’t do it unless you’re really, really passionate about the work” applies equally to agencies and startups.
You absolutely have to believe in what you’re doing and as we’ve already noted some startups have to alter their business plans, even if it’s only for a limited time, to keep the dream alive and avoid having to go back to your boring day job.
But when we asked Roed why people start agencies, we couldn’t help thinking that his answer could easily have come from the lips of a successful tech startup founder:
“It’s a fun sector to be in and a creative-minded person can feel very fulfilled,” he said, adding that “the owners can also make a lot of money”.
It’s that attitude toward money that can play a big part in a startup pivoting towards becoming an agency. In the end, says Knott-Craig, “cash-flow wins” for most entrepreneurs.
The challenges they face can also be similar: long hours, intense pressure, and a highly competitive environment are things every agency boss knows all too well, but they’re also things people working on startups face all the time, so a startup founder wouldn’t find the pressures of an agency all that alien.
As Roed notes however any startup transitioning into an agency has to be aware that they “are at the whim” of their clients’ requirements. That could be difficult for someone who’s used to spending most of their energy on a single product.
Attracting the investors
Another reason that a startup might transition towards becoming an agency is because of the investment opportunities. This is especially true of an emerging market country like South Africa, where the investment scene can be really tough, especially with VCs and angel investors a little thin on the ground.
It’s not as easy for agencies to get funding, or even exit, as it once was either. According to Roed, “the time where agencies were naming their price is gone”.
“I think the perspective has changed. Businesses investing in agencies now are looking much closer at the commercials and scrutinising the value of agencies a lot more effectively,” he adds.
The same is most certainly true of startups and, ironically, behaving more like an agency could actually help bring in investment because, beyond the seed-fund and early stage guys, investors like to see a solid revenue flow.
Before any startup founders reading this go running out to change their business models, it’s worth bearing in mind that this isn’t always the case, even when it looks like it is.
Take Motribe, bought by African mobile social network Mxit in late 2012. It started out as a mobile social network builder, with a focus on emerging markets. Then it built a couple of killer Mxit apps at the same time as building apps for clients.
It would be fairly natural to assume therefore that close interest in Mxit made Motribe a much more attractive acquisition target.
Not so, says Knott-Craig. In fact the Stellenbosch-based social network had apparently had Motribe on its radar for some time. “They had achieved much already,” Knott-Craig tells Ventureburn, “mainly because they managed to keep their eye on the product-ball, making something really big for themselves (rather than for clients)”.
While Motribe apparently got acquired on the strength of its product focus, it’s worth remembering that companies that do exit after adopting the agency model, or continue operating at their own pace, have not failed.
Sometimes it’s just a necessary step in the evolution of a business. As van Zyl notes, the ambition to build a hot startup doesn’t always come to fruition, “but because there are savvy entrepreneurs behind good startups they adapt and evolve to take advantage of gaps in the market as time goes by”.
“This might mean pivoting from the rapid scaling idea to where the money and clients are… And into a more traditional business,” he says, adding that “this is not necessarily a bad thing, as many great early-stage business are built on more risk averse strategies”.
Take Facebook and Google for example. On their own the big blue social network and Google’s search engine were great products and ones that could scale quickly with relatively small teams. When investors started asking where they were going to get money from though, they had to get into the ad game and hire lots of people with agency knowledge. It worked well (especially for Google, which reported revenues of US$14-billion for Q1 2013), but it meant that operating on the same lean principles which made them so successful in the first place became a lot more difficult.
That in turn has allowed people like Sir Martin Sorrell, head of advertising giant WPP, to slam them as “faux-tech companies”, but Zuckerberg, Page and Brin most likely just view those factors as minor compromises, helping keep their dreams alive.
The hard part of any startup, says Knott-Craig, is sticking to the big dream rather than de-risking. “In the end the right path is probably a combination of agency work to pay the bills, and product work to chase your idea”, he says.
And while that’s lot easier said than done, we’ve already seen that it’s not impossible and, with the right mentality and approach, is something that entrepreneurs can seriously benefit from.