7 tips for Services Startups

Early in 2013, I was sitting on a beach in Costa Rica with the AgilityFeat team. Also with me was an author and visionary we hired to come work with our team for a couple days. That visionary was Patrick Vlaskovits, co-author of “The Lean Entrepreneur.”**

As the Sun set over the Pacific, and we all enjoyed some fine drinks, Patrick leaned over to me … “Is this what you had in mind when you started AgilityFeat?”

I smiled and watched the ocean waves rolling in. “Yes, it is” … and then I took another sip of my drink.

For me, that was a special moment. Bringing our whole team together in Tamarindo Costa Rica for a retreat was a great experience. We formed new bonds, learned from Patrick and each other, and I learned to surf.

When Patrick leaned over and asked me that question, I think he already knew the answer. He probably enjoyed watching me relish in it. It was not a moment to babble on about my business, and so I didn’t say much else. Instead I reflected quietly for a few minutes on just how far we had come, and it felt really good.

I’ve had the compliment lately of being asked by several people to share a few tips over beers on starting their own company. So I thought I’d share some of those tips here. No beer is necessary!

The following tips focus on starting up a consulting or services related business, because that is what AgilityFeat is primarily. It’s not my first foray into consulting and contract software development, so I’ve learned a few lessons from starting my company and working for other similar companies.

Tip #1: Use your current employer as a Lean Experiment

If you have burned your bridges at your current job, or you’re looking to switch fields because you stink at what you do now … then don’t read any farther. But that’s probably not the case if you’re considering a services related startup. You are probably pretty good at what you do, and you feel bored or undervalued at your current job.

But don’t let that boredom or feeling of being underappreciated let you overlook your current employer. Twice I have left a perfectly good full time job with a nice salary because I wanted to go it alone. Both times I did not rashly jump into it because I had a bad day and had just cussed out my boss. (I wanted to once, but my wife rightly talked me out of it)

In both cases, I carefully considered the decision, and then went to my current employer with a proposal. I proposed continuing to work for them at least part time for the next 6 months at an hourly rate that was lower than what I would charge future customers. In both cases, they accepted after only a little bit of haggling around the hourly rate.

This gave both of us a smooth runway to end our relationship. I was assured of a few more months of decent pay, the time to start selling my services to others, and the freedom to go public with my decision before I was desperate for the next gig. It also gave my employer more than two weeks to find my replacement.

It’s hard to run lean startup experiments in a services business, because the sales cycle is much longer than a consumer product based business. Each sale is tens of thousands of dollars, not a few bucks, and so your customer experiments necessarily take longer and are harder to measure.

The simplest and most effective lean startup experiment you can run is with your current boss. Do they value what you do enough to pay you as a consultant to do it?

Tip #2: Get a good accountant

If you follow Tip 1, then you immediately are replacing your salary with comparable income from your current employer. But they are no longer going to pay your taxes for you, your healthcare or anything else. You are talking serious money right from the start, and so you better get serious about your accounting.

The smartest thing I’ve ever done was find a good accountant from the start. For over a decade he has kept me on the right side of the law. Taxes and other overhead are going to be a big deal when you go solo, and if you don’t pay them properly or set aside money to pay them right from the start, then you are going to have a really painful experience at the end of your first year of self employment.

Tip #3: Work for revenue of twice your salary

Taxes and health care are not the only things that eat up your revenue. When a company hires a new employee, and that person asks for a certain salary, the company is marking that number up by at least 20% in their minds to cover additional costs of employing them. They are considering the employer taxes they pay, health care costs, and other overhead.

But if you want to make $100,000 in your first year as a solo consultant, you better plan on bringing in at least $200,000 revenue. You’ve got a lot more to pay than just taxes. You need to cushion for downtime (vacations, sick days, or just a couple weeks in between contracts), as well as cash set aside for any marketing expenses, accountant and lawyer fees, industry conferences you want to attend, and more.

Tip #4: Have a runway of at least 90 days

When you are first starting out, you will need to remember that clients don’t typically pay you every two weeks. You can try to ask for that, but more likely they will want you to invoice them once a month, and then they will want to have at least 30 days to pay their bills before you tack on interest.

Trust me, many of them will milk every day of that time limit that you give them. They’re not trying to be mean or screw you, but not everyone will pay on time or pay promptly. Expect to spend some time politely following up on invoices, and expect that you won’t get your first pay until 60-90 days into the business.

Starting this business is not worth losing your mortgage or your marriage over, so make sure you’ve got 90 days of money set aside that you can tap into.

Tip #5: Stay Hungry, but don’t be Foolish

All these expenses may sound scary if you have never started your own side business before. It is scary, but the payoff is worth it!

All businesses come down to cash flow, and that will be especially true for you as you get started. You will be very hungry to take any work that comes your way. You will take clients that don’t fit your ideal profile of the type of work that you want to do.

That’s ok – it’s understandable. But don’t be foolish and be very careful about underselling yourself.

I got myself into some jams early in my solo consulting career because I took on projects that offered a little bit of short term money, but also dragged on and on and eventually I lost money on them if you consider the hours I put into it. I vastly undersold myself, and I was selling to a customer segment that couldn’t afford my true value.

You will be tempted to take on the cheap clients who can barely afford you in order to get some cash in the door. But they are stretching their dollars to hire you (remember, they’re cheap), and unfortunately those low-dollar clients are often the loudest clients who end up being a real pain to deal with.

You’ll learn to recognize those clients quickly (especially after you fail a couple times). Stay hungry, but don’t be foolish. Have the courage to turn them away.

Tip #6: Specialization Pays Dividends

Eventually, you’re going to be really good at a couple of specific things. Maybe you already are. The sooner you can focus on those specific things, become an expert in them, the sooner you will be able to charge higher rates and have more profit. You might need to travel more in order to specialize, so consider your market and customer base carefully.

When you are first starting out, as stated before, you’ll be hungry and take lots of different types of work. “We can program in any language!” is what I would have said earlier in AgilityFeat’s business. Now we are specializing more in Ruby on Rails and mobile applications. Over time, we’ll probably specialize more, perhaps in a specific industry vertical or a type of application.

The most successful of my peers have stopped trying to be everything to everyone. They say “no” more than they say “yes”. They began to specialize in certain skills or technologies, and that is when they became truly successful. That’s the transition we’re making at AgilityFeat and you should plan to make that transition too.

Tip #7: Always Be Closing

When you are new, every time someone gives you their business card or doesn’t hang up on you, you will think you have a new client firmly on the hook. You may stop selling or leave that networking event thinking you have done your job. Don’t ever be complacent!

I used to panic a lot if I had four proposals in the hopper, all promising to do some work during the same time frame, and I was afraid what would happen if I won all of them.

Be realistic, you won’t win all of them. You’ll be doing great if you have 1 of 4 proposals accepted when you first start out. So oversell yourself, and always work on closing contracts. If you do have too many customers say “Yes” at the same time, there are graceful ways to handle that. You might be able to grow your team or outsource part of the work. Or you just might be able to say “Sorry, someone else just beat you in the door and I’m full now.”

If you put an expiration date on all your proposals that the offer expires in a short period of time (a week perhaps), then you are giving them an incentive to accept your price quickly. You are also creating the impression that you are in high demand, which can only help you.

Get going and don’t look back

If you’re like me, once you get a taste of being a solo entrepreneur it will be hard to go back. You might even go well beyond solo-status and end up hiring a team of people like you or even better than you. That’s what I’ve done at AgilityFeat.

Proceed cautiously into services startups, but don’t be afraid to give it a shot. The great thing about starting these types of companies is you don’t need any capital to get started. The worst that will happen is you drain some of your savings and waste your time. But you can recover from that (as long as you don’t wait so long that you kill off your mortgage or your marriage).

Good luck with your services startup and please let me know how it goes!

** Thanks for reading this post! If you would like a free copy of The Lean Entrepreneur, email Arin@AgilityFeat.com and just ask. We ordered a bunch of promotional copies and if we still have one floating around I’ll be happy to send you one. We’ll ship it for free in the US or Canada.