Experimenting with products while running an agency

The following is an edited excerpt from my book Free Trials (and Tribulations): How to Build a Business While Getting Punched in the Mouth.

If you’re an elder millennial like myself (or older), chances are you’ve probably played Tetris before. At first, the coloured blocks aren’t a problem to manage, and you can match the patterns pretty easily, clearing them out of your way. Eventually, you make a couple of mistakes and you have a large pillar of blocks on one side of the screen, which creates less and less room for error. By the end of the round, your entire screen is filled with blocks and one wrong move means game over.

It’s kind of like that running a business. I’ve shared a lot of my mistakes building my first company — mistakes many first-time agency owners make. And really, making mistakes is a part of learning and getting better. Still, when you make too many mistakes, they pile up. Eventually, you’re in so deep there’s not much you can do to save yourself, except tread water and try not to drown. We treaded water for a long time. On a good week, we’d have money to deposit in the company bank account on Monday so people could get paid on Thursday. Other times, we had no idea where that money would come from. Sometimes the only way to make payroll was for Kevin to lend his personal savings to the business.

It wasn’t that we lacked receivables, but sometimes we couldn’t wait even one extra day for that payment. Several times, when a payment was just a couple days past due, Kevin pretended to have a meeting in the client’s hometown so he could offer to “swing by” and pick up the cheque, saving them the postage. It worked. We did whatever it took to stay afloat.

Our cash flow roller coaster took us on a wild ride. Projects went over budget because the client made changes we hadn’t anticipated. When that happened, we would draw on our line of credit to pull us out of the dip. Then the next project would take twice as long as we’d planned, eating up our fixed fee too quickly. So, we’d borrow more money. Not a great idea. Headspace maxed out at $150,000 in loans very quickly.

Seeking Stability

We knew we needed to get out of the agency business and into SaaS and selling subscriptions. We were inspired by Basecamp’s origin story — how Jason Fried and David Heinemeier Hansson ran a web design business before offering Basecamp as project management software. Eventually, their subscription business took over and became more profitable than the agency business. That sounded like a pretty smooth transition. Surely, we could do the same.

We started investing my time, and the time of our employees who weren’t busy, into product development. I’ll tell you about each SaaS product we tried before deciding to focus on Proposify:

1. Site Tea. We had found that, perhaps due to our lack of strong positioning in the market as a premium web shop, we had to turn down a lot of mom-and-pop leads who simply didn’t have the budget to work with us. But what if there was a way for us to generate a templated website for them that they could customize themselves, allow them to pay a small monthly subscription, say twenty dollars a month, and we would include the hosting? Sounds familiar, right? We created a minimum viable product, using WordPress, and we called the product Site Tea.7 We got a few subscribers, but ultimately the product was garbage compared to the newly emerging Wix and Squarespace, and we didn’t have the wherewithal to double down and focus on the DIY website market.
2. Social Gopher. Next, we built social media analytics software, called Social Gopher. Social media was just beginning to blossom at this time and our clients were starting to talk about it.8 We were already producing a social media monitoring report that we used to sell our services. Why not make it into a SaaS product? We could have an app generate the report automatically — just crawl websites and compile it all together. What could go wrong? A lot, as it turned out. We got two or three customers paying one hundred dollars a month, but we clearly needed more. Too late, we discovered we couldn’t handle more, because there were crawling limits we had never heard of. We heard soon enough, when we began to exceed the number of requests allowed to the websites’ API. Twitter just shut us off after ten clients. We could have paid a third-party provider to handle all the requests and send them back to us, but it would have cost thousands of dollars a month. We were struggling to make payroll. Social Gopher was quickly shut down.
3. Extrify. We had already built a custom extranet for a client in Alberta, a recycling and wastewater management facility, to handle their internal communications. We owned the IP and there was nothing about the product that was inherent to wastewater; it had features like messages, file uploads, group permissions, chat, scheduling, and so on. There are a lot of large businesses that need a product like this, and Microsoft SharePoint is the industry standard. Like most enterprise software incumbents, SharePoint is ugly, hard to use, and everyone hates it. So, we packaged it up and sold it to another handful of subscribers. Extrify wasn’t a colossal failure; it did end up being a selling point later when we sold the agency business — as part of the deal, the buyers got to keep Extrify (but not Proposify). I was more passionate about my proposal software concept and it was difficult to spread my focus across so many different projects.

Most entrepreneurs need to swing and miss a few times before they hit a home run, and with every business you make mistakes and try not to repeat them the next time. The upside of building all of these SaaS products was that we were learning a lot. The first three attempts at SaaS many not have been successful, but we were getting experienced at building SaaS.

As many mistakes as we made with SaaS, we made even more when it came to running an agency. I touched on some of them in the last chapter. Here are some core lessons I learned running Headspace.

Charge A Premium

Our first, and perhaps most painful, lesson was financial. We had to get the message that it wasn’t worth charging a low fee just to keep a lead from walking away. Eventually, we got it. We came to see that charging a premium and moving up-market was important for longevity. We needed to be more of a premium agency that works with Fortune 5000 companies who have six- and seven-figure marketing budgets. We never quite got there, but we could have in time.

Avoid wasting your time with small deals where the client still quibbles over price. If there is to be any quibbling, you need to be sure you have the upper hand. No more throwing out a budget number the client is only too eager to snap up. I got into the habit of starting the money conversation by asking the client to tell me their budget. Or, I might throw out a high number, but not my highest number.

These techniques worked so much better, I wish I had understood them much, much earlier. I could have used them when we booked the university project. Instead, we threw out the biggest number we could imagine — $150,000 — way too little for what they wanted us to accomplish. If I had known what I know now, I probably could have asked for, and received, half a million dollars.

I would relearn this lesson later with Proposify. In the early days of running a SaaS business, it’s easier to sell to consumers or small businesses at a low monthly fee, like nineteen dollars a month. But as you scale, those small businesses cancel their subscription at a much higher rate, which impacts your growth, lifetime value, business valuation, and a number of other important metrics. Moving up-market and selling to larger businesses and enterprise is a common way for SaaS companies to grow because big businesses pay you more and they rarely churn once they’ve adopted your software. Charging too little, out of fear of losing the sale, is a mistake entrepreneurs constantly make, and one you need discipline to avoid.

How To Create Steady Cashflow

Making a big ask can definitely work in your favour. Then your only problem is actually getting paid, which can be harder than you might think.

In the beginning when we sold $10,000 websites, we typically asked for $2,000 up front, then started working. It might be weeks or months before we could present something to the client. It often took longer to get any feedback from them. Sometimes clients just vanished. Or they would return after a long, unexplained absence. In our na?veté, we just picked up where they had left off and didn’t charge for the delay. It could be a long haul before we saw the entire $10,000.

Projects got delayed for the most ridiculous reasons. I’ll never forget the commercial real estate company owner who wanted social media buttons at the bottom of his site, but refused to set up the accounts behind the buttons. Fine. We’d launch without the buttons. The launch went well, but we noticed he wasn’t paying his final invoice. You can guess why not — the original design specified social media buttons, and they weren’t on the final website. No matter that it was his own fault. I wanted to reach through the phone and throttle him. In the end, I changed his password to the website back end and locked him out until he paid.

One of the reasons Proposify has succeeded is that we don’t have to do this kind of negotiation over and over again. With the subscription model, recurring revenue not only brings in fees on a consistent basis, it compounds our results every month. There hasn’t been a time since we hit product/market fit when we’ve generated less monthly recurring revenue (MRR) than the previous month. Now, sometimes we want it to go up higher and faster, but it never goes down and it rarely stays the same. Never worrying about having enough cash to pay myself or my employees is a gift I try to never take for granted.

How To Protect Yourself

Another crucial lesson we learned in the early years: always have a contract that specifies the scope of the work. One university client, for example, had unreasonable expectations; they wanted us to create their course materials. Because that wasn’t communicated in the contract, we misunderstood. We thought they were providing the content and we were building the software. Not that anyone said as much in any conversation, or noted it in the budget. Still, they wanted to hold us accountable, because in their head, they assumed we would know they needed us to build their course material, despite the fact that they were the psychology researchers — not us! We did what we could to accommodate their request, but in hindsight we should have just said no and hired a lawyer if things got hostile. As it was, we worked on this project for over a year and got paid upfront, but with no end in sight.

Having our lawyer deal with their legal team on the contract would have protected us, but we were too desperate to close the deal and cash the cheque. (We signed a contract, but the client had their legal team write it and we were too cheap to hire our own lawyer to review it.)

In Nova Scotia, many deals are sealed with a handshake and, early on, that seemed just fine to us. We learned quickly that it wasn’t. One such “good old boy” engaged us this way, and we did an upfront discovery even though he hadn’t signed the contract or paid the invoice. We had idle people who we wanted to get busy, so we got rolling. When we had sunk about ten hours into the project, the client changed his mind and pulled out of the deal, and we never got paid a cent.

Never start a project without a signed contract. Get it in writing, and if your client makes amendments, hire a good attorney on retainer to review it. Never talk to your client’s lawyer. Only lawyers talk to lawyers.

Don’t Be A Cog In The Machine; Build The Machine

One of the hardest lessons for me to learn was that, as a founder and entrepreneur, you have to work on the business, not in it. I had heard that advice when I was running Headspace, but I didn’t know how to apply it. What did it mean to work on the business?

It meant taking a different perspective, coming out of the trenches and looking at the whole picture. That’s not always easy for someone used to doing it all himself. For instance, at Headspace, I was so caught up in the day-to-day logistics, I failed to pay attention to any of the key performance indicators to manage profitability. Instead, I was still working with clients and sitting in on discovery meetings, or installing WordPress plugins, when those were no longer my jobs. My job, as founder, was to bring in new clients and oversee operations. I didn’t have time to spend in the guts of the machine. I should have breezed into those discovery meetings, shaken a few hands, and then gone back to recruiting new clients.

Since building Proposify, Kevin and I have a new goal: to hire ourselves out of our jobs. Not because we’re lazy (okay, we’re a little lazy), but because it’s the responsible thing to do: create a scalable business that can be sold. Less than a year ago, Kevin was overwhelmed with human resources and office management. I had to convince him to hire employees to do it all. Now he doesn’t know what he would do without Jennie and Cavell, who are running HR and office management, respectively.

An agency is made up of a handful of departments. Your job is to recruit heads to run these departments and hold them accountable for hitting business metrics, like sales revenue and billable hours. In an agency or consulting business, your departments look like this:

• Business development. These are the people who craft relationships, hop on planes, and participate in pitching new business. The movers and shakers. The salespeople. This is the hardest job to outsource as an agency founder, and thus the last department you’ll build.
• Client services. This is your customer success department, made up of account managers. They communicate with clients, make them happy, and reach out to earn repeat business.
• Production. Depending on the type of service business you run, these are the folks who make the donuts. The designers, producers, strategists, marketing consultants, and developers. Their job is to deliver top-quality work that gets clients results.
• Operations. Don’t skimp on this. You need bean counters who make sure clients are being billed, projects aren’t over budget, financial metrics are being hit, and the business is running smoothly.
• Human resources. Recruiting and onboarding new talent, handling the day-to-day management of employees, like performance reviews and firing, managing payroll and health benefits, and deciding whether your office needs a foosball table for “culture.”

That’s pretty much it. If you can build these departments and employ a few good men and women to lead them, you just might have a profitable agency on your hands, with at least 20 to 30 percent gross margins. As a business owner, you should be thinking about how to make the business run so that you never have to be there. If you ever have to sell the business, it will be that much more valuable to the new owners. If the business depends on your name and sales ability to keep going, it’s worth a lot less to a potential buyer. You need to be able to just hand over the keys. A potential buyer would immediately know that the business won’t survive without you, and that they’ll have to hire a whole new team to make up for losing you.

How To Stay Motivated

You might wonder what kept us going through all of our challenges. I don’t know how it is for others, but for me, the more difficult the terrain, the harder I push. It might just be the way I’m wired — facing problems makes me excited to get out of bed. When things seem easy, I actually feel more worried — worried that I might become complacent.

A couple of years after Proposify started growing, I felt like I was getting a little too relaxed. The business was growing and everyone was happy. That was great, but I was uneasy, because there were no problems to solve. I needed a problem. It wasn’t long before I got one.

When we brought investors on board in 2018, Kevin and I set the ambitious goal of reaching $10 million in annual revenue by the end of the year. Our investors were expecting us to hit that goal, and we hit challenges along the way. I’m actually more excited about the business than I was last year, because I’ve got a high benchmark to reach, and the pressure of a new board. Now I’m working even harder than I was a year ago, and getting coached to improve my performance as a CEO. I’m in that startup mindset again. Fear works for me.

Spite works pretty well, too. I was very motivated to prove wrong all the people who said I’d never make it on my own in business. Someone will always doubt you. Even when we were successfully running Proposify, people kept telling us it wouldn’t last. Everyone, from clients to investors, had their opinions. Kevin and I had to turn that around and say, “Oh really? You think we’ll fail? Watch us prove you wrong!” Some might say we have a chip on our shoulder. Maybe, but we’ve earned the chip. Entrepreneurs tend to be arrogant people because they have to be; on some level you need to believe you’re right and everyone else is wrong because otherwise you’ll give up before you start. Naturally, that arrogance has to be tempered with the humility to learn from your mistakes and adjust course as needed.

Perfection Is The Enemy Of Done

To be successful, you have to walk the line between careful and reckless. Starting out, it’s better to perform customer research so you don’t end up working on a problem nobody has. We were apt to approach each product with enthusiasm, but we seldom validated the product ahead of time. Instead, each time we got an idea in our heads, like Social Gopher, Extrify, or Site Tea, we jumped into the fun part — building version one — without doing any research. We tried to build the full vision for what the product should be instead of just building a small part, a minimum viable product, and showing it to potential customers to understand where we needed to go next.

Even when we started Proposify, we didn’t validate it. Thankfully, our intuition was right. We could have been earlier to market with it, but instead treated it more like a side project, letting short-term client projects take priority over the one that would sustain us long term. We should have dedicated one employee’s time to Proposify and kept them off client projects — that’s what Basecamp did. Eventually, we got on a grant program and hired Jonathan to work on Proposify day in and day out.

Once you’ve got someone dedicated to product development, you face a new question: When to launch? Here’s your answer: go home and launch it. That’s my best advice. No matter what shape it’s in, put it out there and start seeing what people think. It can have bugs, because guess what? It will always have bugs, from the day you ship it to the day you sell it. The longer you wait to launch, the longer you wait to learn. There’s a caveat here: if you’re already a well-established company with an existing customer base, you’ll need to tread more lightly. You don’t want to piss off or disappoint your customers by releasing an unstable product. But if you’re starting out and relatively unknown, or selling to a completely new market, you can afford to look the fool for a little while. It’s the cost of learning.

Perfectionism holds people back. Some of them are afraid of what people will say; nobody wants to be told their baby is ugly, but that might be just what you need to hear. If you don’t hear those messages, you’ll never know what you need to improve.

How To Thrive Beyond Launch

So you’ve created the “perfect” product, and launch day is here. Launch day gets good press; you’d think it was all cheers, customers, and steady growth from that day forward. More often, launch day comes and goes, and nothing much happens at all. You don’t hear cheers, just crickets. Or you get a few clients, but they try the product and don’t like it. Or they sign up to a paid account and then leave.

Most people don’t realize that the launch is only one step. After that comes months and months of iterating, learning, and trying to figure out what’s going to resonate and net you the ever-elusive product/market fit. You have to pick up the phone and talk to your customers every day. You have to make the time, be patient, and keep your interest high in the face of many unknowns. In the words of Steve Perry, from the band Journey, don’t stop believing.

Fortunately, most entrepreneurs don’t mind stepping out into the unknown. They’re the ones eager to jump out of the plane with no parachute, figuring out on the way down how they can build a plane. You just have to take that first step.

Eventually, we decided to sell our agency and raise a small amount of money to give Proposify the shot it needed to fly. I’ll share that story in a later chapter, but first, I want you to know what was going on in my personal life that changed everything about who I was.

To keep reading, pick up Free Trials (and Tribulations): How to Build a Business While Getting Punched in the Mouth by Kyle Racki.