You're the founder of a profitable service-based business, you understand the limits to scalability inherent in a business model based on billable hours, and you're exhausted by running a company where your business model is selling time. You have an idea for a software product that you can't seem to purge from your mind, and you're ready to divert profits from your existing business into giving the software business a shot.
Hireology, the company that I launched in 2010, was in that exact position. My co-founders and I made the decision to funnel every available dollar from our service operation into software development, with the vision to exit the service business within two years. We were successful in our transition from service business to software company, but it wasn't easy.
There are four critical lessons that I've learned about transforming a service-based business model to one based on a subscription-based technology platform.
1. Running two businesses at the same time isn't easy.
When we made the decision to build our software platform, I knew that we were in for million-hour work weeks for the foreseeable future. What I failed to appreciate was just how hard it is to effectively lead two businesses at the same time.
Running a profitable business is difficult, no matter what business you're in. When you make the decision to build software, you're making the decision to operate two companies simultaneously. One business requires you to do billable work, the other business requires you to build and sell a product.
The minute we started building software at Hireology, the existing service business started to suffer. I found that running two businesses at the same time forced me to pick which business' urgent problems would be ignored that day. The tradeoffs are real, and that's not a great way to run a company.
2. Building a software company is extremely capital-intensive.
When fellow entrepreneurs running service businesses ask me what it's like to build a software company, I explain it this way: "Get a shovel, dig a giant hole and then fill it with money."
Launching the first version of your product is pretty straightforward, and it can be done without a huge outlay of cash. "I can get a beta version out for next to nothing," you might think. True, but once you get paying customers, and the feature requests and support tickets and phone calls start rolling in, you feel immediate pressure to build features that address all of these things.
It'll take you about a week to realize that to continue with your technology venture, you're going to have to build product a lot faster and fund product development forever (literally). It's the reason why most software entrepreneurs raise venture capital. Building software is a cash furnace.
3. Software does not sell itself.
You're going to build the best software product in the world, and nobody is going to buy it. In fact, you're eventually going to build an amazing sales force dedicated to selling your product and they still won't buy it, at least not predictably.
Only after two or more years of serious brain damage will you figure out--maybe--how to build an efficient customer acquisition machine. The story about how Drew Houston at Dropbox got millions of people to download his product using viral techniques is a great case study, but that was years ago and the world is different now. The competition for your prospect's attention is intense, and cutting through the clutter requires all of your time and focus.
If you can't stomach the idea of personally getting in the trenches to market and sell your technology product, then don't build software. Period. Your chances of success are crippled to the point where the risk-reward equation doesn't work. Stay in the service business.
4. Running a software company requires different management skills.
When you're running a service-based business, you're spending your time managing engagements that are delivered by actual human beings. Meaning, you can typically throw time and effort at solving issues and meeting deadlines. Customer deliverable is behind? Put in some work on a weekend.
In the software game, it's really difficult to solve problems by working more hours. The reason is because most problems in a subscription-based software businesses are product-related, not people-related. Solving product-related problems require you to build product road maps, manage release cycles, choose how to allocate expensive and finite engineering time, and other issues that simply don't exist in a a service business.
In short, it's a whole new set of chops that you're going to have to learn.
The upside of successfully transitioning from a service business to a software company can be substantial, but it's not an easy path. Approach this decision with your eyes wide open.