Comment by shubhamjain
1 year ago
The more apt framing of this article would be something along the lines, of "The Agency Trap." The author grew his marketing agency to $1M quickly. That might sound great for HNers here, but there are reasons why such businesses don't attract handsome valuations. You always have to keep grinding to keep the inflow of customers, you're never free, and growth is directly tied to the number of employees. Additionally, such business can have severe ups and downs depending upon market conditions.
Building a product, on the other hand, is slow at the start but after a point, the rewards start showing up. The inflow of cash is consistent and keeps growing while the costs remain the same.
There's nothing wrong with the agency business, but it'd be a smart bet to use at least some of the proceeds into building something long-term. Some agencies, notably 37signals, have been quite successful doing that. Most, though, never do it.
If you run an "agency" business then you should always be promoting junior employees to full partner. They start our doing work that you find for them, but after a few years of training from you they are now bringing in their own work and should be treated like an independent business owner in your space that you agree not to compete with (which would be against monopoly laws if you were not the same company) and once in a while one covers for the other for vacations/sick. Lawyers regularly change the name of their company to reflect changes in who is partner.
Not all employees become full partners. Most do not, but it should be clear to everyone what hard work is required to become a partner and they should see examples of it happening.
I think you make, in miniature, a good example of the case for why most businesses should be making most employees into equity stakeholders.
Most employees don't generate anything that can be taken elsewhere.
overall emplopee owned companies are a bad idea because you get too invested personally in it. If the company goes bankrupt you are out not only your job but also your savings.
4 replies →
This is an interesting idea. I started in agencies and this is indeed a problem.
It’s a good start for junior people to get experience but they tend not to stay long.
It also attracts people who can do it all - design, programming, animation, etc who become stars, and then wonder why they aren’t working for themselves.
Generalists like that also tend to navigate poor management well (also very common) because they remove the need to be managed.
The agencies I was at came to the opposite conclusion - why do we even have employees instead of contractors? Which never really worked out.
> It also attracts people who can do it all - design, programming, animation, etc who become stars, and then wonder why they aren’t working for themselves.
This is why you promote to full partner all the time. The people who wonder why they aren't working for themselves should answer "I will have all the advantages of working for myself, plus the advantages of partners for the few places that matter". If you don't promote to partner you lose all the effort you put into training that person if you did you get someone who can help you once in a while.
Most B2B firms live in the grey area between consultancy and product for most of their lives. I’ve known of more than one database company with greater than 50% of their HC tied to bespoke asks from top clients.
In my opinion, the difference is really in whether the core founders can scale super-linearly with HC, and whether you can maintain a wide enough spread of clients that you can afford to lose a few of your biggest and not care beyond the signal you get on how your product is doing in the market. Practically, every top B2B startup fails the latter test to some degree.
> There's nothing wrong with the agency business, but it'd be a smart bet to use at least some of the proceeds into building something long-term. Some agencies, notably 37signals, have been quite successful doing that. Most, though, never do it.
I've been part of a few agencies that spent a lot of time and money trying to build products. It is a different focus and hard to pull off when you are used to the hustle of agency culture.
Two better options in my mind:
- selling a recurring service related to the agency's work (hosting for a webdev agency, for example)
- productized services related to your work that are more custom than a full product, but more scalable than typical agency work
Yes—lots of good examples of marketing agencies building themselves into product companies, most notably Moz, HubSpot and Semrush. This is the way.
In order to scale past $1M in profit, you need to professionalize the management of the agency and scale the workforce, probably using offshore/nearshore help. I've found that a lot of agency owners just don't want the hassle, and are fine taking home $1M/year (fair!)