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Several times I've seen VCs force the shutdown of consulting businesses in companies to make them "focus" on the product. This is an example of where VC's inte

by MCRed 12y ago

Several times I've seen VCs force the shutdown of consulting businesses in companies to make them "focus" on the product. This is an example of where VC's interests and the companies are not aligned and VCs are pursuing short term goals. Specifically, they often "request" this be done well before a term sheet. If the company complies then they start running out of cash, making them more dependent on the VC money and less able to negotiate terms. Further, it's a mistake. These companies were using the income from other companies they were consulting for to build out the product. It's like free development. You get your engineer time paid for, and make a profit on it, and much of the work goes into the product side of things. All you need is to take some of those profits and build up a separate team that is focused on productizing the core product. IF you do it right, you can bootstrap and never need to take VC funding. Either way, a successful consulting business extends your runway. The claim about lacking focus is BS. Because the consulting- if being done right-- is in the exact area where the product is being built. You know what takes focus away? Running the senior management team all over the country or the valley talking to VCs who are mostly going to waste their time because they don't have the balls to say "no"... looking for the 1 in 100 that will invest in the company. I've seen this many times. If you're able to secure consulting for your company and it's in the core area of what you want the company to do long term, do it.

kluck 12y ago
I agree. A good VC is in for the long term and building knowledge (the kind you can base a consulting business on) is definitely a long-term goal. Also I am all for bootstrapping and not beeing dependent on VCs at all.
- rbanffy 12y ago
  I wouldn't marry a person who's in for a quick exit ;-)
ig1 12y ago
You're mistaken about why VCs want firms to focus on product rather consultancy, it's not for the short-term as you suggest but rather the long term. Time spent on consultancy today gets you revenue today but time spent on product gets you revenue tomorrow. Focusing on product rather than consultancy is the long-term play because you're focusing on what maximizes your value 5-10 years down the line rather than what pays the bill today. The big difference between consultancy and product based development is that with consultancy you're building what the individual customer needs rather than building what your product needs strategically in the long term (if they're both the same thing that great but doesn't happen that often in practice). There's also a distinctively different mindset between product and consultancy companies. At a consultancy the consultants are seen as the revenue generators and the product developers as a cost base; at a product company developers are seen as revenue creators. It's easy to underestimate the cultural impact that has on companies.
- bryanlarsen 12y ago
  "if they're both the same thing that great but doesn't happen that often in practice" On one side you've got a customer who needs something badly enough that they're willing to pay you real money. On the other side you have a larger number of potential future customers. As they say "a bird in the hand is worth more than than two in the bush". Of course the customer is never taking the product in exactly the direction you want it to take. But there are few things less valuable to a company than a close relationship with customers and visibility into their needs. If your consulting clients' needs and your planned product's capabilities aren't aligning, how about adjusting the plan rather than dropping the clients? In my 20 years of experience in the industry, adjusting the plan has always been the better strategy.
  - rbanffy 12y ago
    > the customer is never taking the product in exactly the direction you want it to take. This may actually a good thing. When you are developing a product, getting a good market fit is tricky. Consulting for your user allows you to precisely understand what your users expect of your product. Yes, it may not be what you expected to build, but building what your users actually want is usually a good idea.
- bitcrusher 12y ago
  I think you're mistaken on a couple of points: - VCs aren't interested in "revenue tomorrow" unless you mean a 10x+ exit multiple. VCs want you you to focus on your product because there's an invisible( and sometimes not so invisible) clock running as soon as you take the investment. - VCs aren't interested in 5-10 year tails on their investments. Most are looking for an 18mo.-3.yr ROI. If you can prove revenue and 'market traction' they'll extend your runway accordingly, however that's a constantly moving target and generally the types of VCs who are interested in the 'long tail' aren't the same that want to give you money at the infancy of your company. - There is definitely a big difference between a traditional consultancy and a product focused organization but only in the sense of the 'end goal'. If your entire plan is to bootstrap your company by building a consultancy, it's easy to keep a separation of concerns between the two halves of your organization. Usually the "clash" that you're talking about is when a consultancy based/focused organization decides to build a product, not when a product company decides to do some consultancy. Developers (in fact, all of technology) are considered cost centers at ALL businesses. There's not an MBA on the planet that wouldn't jettison the entire technology cost-center of their business in a heart-beat if they could figure out how to do it and still achieve their monetary objectives.
dragonwriter 12y ago
> These companies were using the income from other companies they were consulting for to build out the product. It's like free development. You get your engineer time paid for, and make a profit on it, and much of the work goes into the product side of things. Also, consultancy gives your team experience with how your customers are using product in the real world. You are basically building the product with input from one or more representatives of the class of customers that are likely to be most willing to pay the most money for your product.

by MCRed 12y ago

kluck 12y ago

I agree. A good VC is in for the long term and building knowledge (the kind you can base a consulting business on) is definitely a long-term goal. Also I am all for bootstrapping and not beeing dependent on VCs at all.

rbanffy 12y ago
I wouldn't marry a person who's in for a quick exit ;-)

ig1 12y ago

You're mistaken about why VCs want firms to focus on product rather consultancy, it's not for the short-term as you suggest but rather the long term. Time spent on consultancy today gets you revenue today but time spent on product gets you revenue tomorrow. Focusing on product rather than consultancy is the long-term play because you're focusing on what maximizes your value 5-10 years down the line rather than what pays the bill today. The big difference between consultancy and product based development is that with consultancy you're building what the individual customer needs rather than building what your product needs strategically in the long term (if they're both the same thing that great but doesn't happen that often in practice). There's also a distinctively different mindset between product and consultancy companies. At a consultancy the consultants are seen as the revenue generators and the product developers as a cost base; at a product company developers are seen as revenue creators. It's easy to underestimate the cultural impact that has on companies.

bryanlarsen 12y ago
"if they're both the same thing that great but doesn't happen that often in practice" On one side you've got a customer who needs something badly enough that they're willing to pay you real money. On the other side you have a larger number of potential future customers. As they say "a bird in the hand is worth more than than two in the bush". Of course the customer is never taking the product in exactly the direction you want it to take. But there are few things less valuable to a company than a close relationship with customers and visibility into their needs. If your consulting clients' needs and your planned product's capabilities aren't aligning, how about adjusting the plan rather than dropping the clients? In my 20 years of experience in the industry, adjusting the plan has always been the better strategy.
- rbanffy 12y ago
  > the customer is never taking the product in exactly the direction you want it to take. This may actually a good thing. When you are developing a product, getting a good market fit is tricky. Consulting for your user allows you to precisely understand what your users expect of your product. Yes, it may not be what you expected to build, but building what your users actually want is usually a good idea.
bitcrusher 12y ago
I think you're mistaken on a couple of points: - VCs aren't interested in "revenue tomorrow" unless you mean a 10x+ exit multiple. VCs want you you to focus on your product because there's an invisible( and sometimes not so invisible) clock running as soon as you take the investment. - VCs aren't interested in 5-10 year tails on their investments. Most are looking for an 18mo.-3.yr ROI. If you can prove revenue and 'market traction' they'll extend your runway accordingly, however that's a constantly moving target and generally the types of VCs who are interested in the 'long tail' aren't the same that want to give you money at the infancy of your company. - There is definitely a big difference between a traditional consultancy and a product focused organization but only in the sense of the 'end goal'. If your entire plan is to bootstrap your company by building a consultancy, it's easy to keep a separation of concerns between the two halves of your organization. Usually the "clash" that you're talking about is when a consultancy based/focused organization decides to build a product, not when a product company decides to do some consultancy. Developers (in fact, all of technology) are considered cost centers at ALL businesses. There's not an MBA on the planet that wouldn't jettison the entire technology cost-center of their business in a heart-beat if they could figure out how to do it and still achieve their monetary objectives.

dragonwriter 12y ago

> These companies were using the income from other companies they were consulting for to build out the product. It's like free development. You get your engineer time paid for, and make a profit on it, and much of the work goes into the product side of things. Also, consultancy gives your team experience with how your customers are using product in the real world. You are basically building the product with input from one or more representatives of the class of customers that are likely to be most willing to pay the most money for your product.