my startup
side projects
thinking
street art
about

« Back to posts

Viewed
times

Filed under

side-projects

August 17, 2010

Agencies & Start-ups: some initial thoughts

Edit
Delete
Tags
Autopost

Posted by Justin McMurray

8 responses
Like
Comment

over 1 year ago Justin McMurray responded:

I recently came across this organisation which looks pretty much the same as the 2nd proposition I talk about. http://sproutbox.com/

over 1 year ago Justin McMurray responded:

Thanks for all the email feedback flowing in. I'll post some snippets here so people can see what others are saying...

over 1 year ago Colin responded:

Justin this is great thinking. Love the format as well. There are agencies out here in the Bay Area that are only focusing on startups. I haven't interacted with any of them yet, mostly great engineers with design sensibilities, but hopefully will soon.

over 1 year ago Justin McMurray responded:

Here are some thoughts from a senior tech guy with start-up and agency experience:

"This is good, although the volume is quite low. I'm a fan of this
idea. A lot of people talk about San Francisco and startups, and
wonder why we can't replicate that in the UK/London, but to my mind agencies have always been our versions of startups, but more focussed around revenue generation from the start. That's probably another conversation but it does mean that I find the idea of agencies and startups co-existing very interesting.

Anyway, other thoughts were:

- cash poor startups, this is true but more so now, but it's not
always the case, especially not if a startup closes funding as those
first few weeks you're incredibly cash rich :)

- proposition 2 - angel investment, any complications in the start up
setup is going to deter angels, or at least slow them down. You must
make sure there are clear boundaries and plenty of pieces of signed
paperwork to protect everyone involved and not have the startup suffer as a result of using the sweatshop.

Besides that, though, I think this is a very good idea with plenty of
potential, and maybe some unexpected and rewarding side-effects too."

over 1 year ago Justin McMurray responded:

And a fascinating analogy from a friend in the digital/film/production business about proposition #2:

"The second proposition reminds me of the model film production has ended up working on - Production Companies (the sweatshops) looking for good film projects (start ups). The prod companies are funded by various sources including big film studios and distributors (and govt/cultural funding bodies).

"I suspect this is what the film industry settled into eventually because it worked best. It may not necessarily be the same for the world of digital, which runs at a different pace, with different distribution channels, and to different audiences than film, but I can already see moves towards this. In film this model is very 'waterfall' and spec based, as opposed to agile, with scripts and budgets and schedules prepared long before production. But that's really a workflow thing.

"I can see this model getting a little bogged down though, mainly because the angel investors will usually always want some input/control (won't they?)"

over 1 year ago Salim Virani responded:

Hey Justin,
Since Leancamp, I've been doing some investigating around these models, though from an entrepreneurial angle! Great to see some Lean Startup terms in the slides. As a framework for discussing the relationship between startups and agencies, I think its apt, even for startups that don't follow it explicitly.

From the startup side, I'd adjust some of the baseline hypotheses, and I have some correlated comments to those adjustments.

First, I'd say many startups, and most successful startups, are iterative rather than groundbreaking. Pioneers get arrows in the back and many great businesses start by taking a me-too approach and copying the incumbent, thus competing with lower capital requirements. (You can copy them cheaper than it cost them to learn themselves. Plus as markets get more educated, customer acquisition costs go down.) The Agile approach has a higher ROI when capital outlay has been lower.

The second adjustment is that being cash poor is, in many cases an advantage. New businesses build around contraints, which force focus, lateral thinking and innovation. In agencies, the opposite behaviour is common - scope creep is accepted due to client-side direction changes, and even sometimes condoned as the agency can charge more. I think there's opportunity here for a Lean Agency, where scope is constantly minimised using commercial risk models like Lean Startup, keeping the clients' bills and risk as low as possible. But will clients accept being told no all the time?

The third adjustment is with the startup lifecycle you've described. In the stereotypical cases I've seen, the business is self-funded until the prototype, angel funded until market validation, and VC funded to cover the scaling costs after this validation. The issue here is that the services an "Angel Agency" would provide would be primarily UX Research guidance, copywriting, and other sparse creative services to cover the pre-validation research. All of this is done on a shoe string. Once VCs are involved, there's cash to pay agencies.

With proposition 2, the agency as an intermediary, I can see the agency working directly for the Angels, who would make direct investments into startups and introduce the agency. The key difference here is that the investment money and startup selection aren't intermediated by the agency. Rather, the agency's role is intermediated by the Angel.

With the first proposition, the marketplace/brokerage, this creates increased pressure on the startup to create a tight value proposition as the agency's value can't be tied to it. I think this is a good thing, and fits well with this emerging breed of niche startups. I can see this agency/startup model working quite well, but only for non-core agency services and only as long as the startup remains in constant contact with the customers. Before Product-Market Fit and market validation, the business will be focused on UX-type research, and outsourcing this will create an inexorable dependence on continuity from the agency if the startup needs to pivot later. (And they will have to plan on that eventuality.) Pivoting *away* is easier, but choosing what to pivot *towards* depends on nuanced knowledge that, so far, has come only from having done the research yourself.

Even if you eschew Lean Startup and charge a startup to build a prototype or brand before market validation, the learning that goes into it will be lost if the startup needs to pivot later.

That said, I've been working with a few businesses to develop processes to remove this dependence. The goal is document learning in a way that creates research continuity across pivots.

When does the video go public? I think this is a conversation that would benefit from wider participation.

I'm back in London - would be great to talk through some of these nuances and trade notes. I'm getting some early traction with a project based on the agency/startup relationship.

Cheers,
Sal

about 1 year ago Justin McMurray responded:

[sorry for delay in getting back to people's questions, feedback and input to this. I'll be posting some extra thoughts in coming days]

For starters, here's some feedback from the founder of a very early stage start-up in London:

Wow, finally sat down and absorbed your Agencies + Startups vid...

First, some negative thoughts. There's clearly value for both sides in terms of collaboration. But the way this transfer of value occurs needs to be managed and above all needs credibility. This will be hard to generate straight off the bat.

... The idea of protecting IP is fundamental to getting this to work. Who owns what's built? What if the work done during such a resource swap goes on to become part of a billion-dollar piece of software? The way this ownership is structured needs to be validated by someone who's got major sway in the tech community (not just for the startuppers but investors too) in order to prevent "They're going to fuck me over" syndrome. IMO. The motivations behind the program should be made clear: this is so we can both build good shit, better & faster.

Also central to this is culture. I am beginning to feel that attitudes to the open sharing of sensitive ideas are different between the startup community and agency-land (hence the fears listed above). This gets me thinking about other cultural differences which could throw a spanner in the works.

...Final bit of negativity: What is a startup, other than its people? I can see this model working for short bits of work, but long term the startup should probably be looking to keep its IP, talent and code under lock and key - after all in the absence of cash those are the only assets it has.

On this final point, I think there should be a clause in any agreement that allows people to 'switch sides' if they want. It's better for both that if a member of either team digs what the other is up to, they should be able to transition over. In fact that could be the basis for the whole model - if the entrepreneur and embryonic team find a team of agency makers who really gel and want to jump ship to the startup full time, then that is the most valuable thing that could ever happen as a result of this whole process. There shouldn't be additional barriers to that happening.

Despite the points above, my overall feeling is "Fuck yes, do it!". If you're ok with it I could float the idea to a few other startuppers and sound them out, but in principal if this was well managed and had endorsement, then this has to happen. I think the model would work best if the deliverables were unconstrained - i.e as a startup I could go to the agency and ask for " a design audit of my app, maybe a logo" right up to " I need an entire iphone app + site built".

Regarding valuing the work: what I've done with my partner is bleed options to him at a rate a little below what he'd earn in a typical agency gig. I.e We arbitrarily valued [redacted] @ £Xmillion, and upon delivery of a prototype to the specs we agreed a while ago, we'll tot up how much the time he put in 'cost' him and he'll get options based on that. I.e £20,000 of his time = options worth Y%. (We're tracking this using a custom project management tool that lets us assign time + cost to a feature). This could be a good way to value the work carried out, but another idea could be to assign equity per sprint.

I.e it should be both parties jobs to fully spec the features that need to be built before any work is carried. Out. A group of agency specialist could then be assembled and a 'per sprint' cost assigned to them. This can then be referenced against the number of sprints the features require. I need to think that through.

But anyway - do it! (I could actually do with an iphone app...as the guinea pig it would need to be free as an 'experiment' though : ) )

about 1 year ago Justin McMurray responded:

[And now some thoughts from a strategist at a big London-based digital agency]:

Hi Justin.... very interesting thoughts! Some stuff that popped into my mind:

- I think that a lot of people in the agency business would see this as a real opportunity to develop themselves and do something that actually has the potential to change something. Every ambitious planner, creative, account I know would much rather help develop products and services than, well, advertising. Besides, this could be a great PR and talent attraction tool for agencies!

- Do startups really think that the best people for them are sitting in agencies? Or are entrepreneuers rather looking for people who have actually created businesses, products, services? Do they respect agency personel versus people from google, facebook etc?

- What kind of agencies would be interested in this kind of exchange/collaboration? Some restrictions might apply: only those who are not fully loaded with projects and need their (best) people to work on billable client work? Only agencies that themselves have a "start-up" mindset, meaning smaller, independant shops, rather than network bigships?

- What kind of human resources would start-ups want and need? People that make contacts (account)? People that help with strategy and planning? People that develop ideas and concepts? People that develop, engineer and produce solutions?

- What would agencies need entrepreneuers/startups for, couldn't they just start churning out their own profit streaming ideas into products/services? [removed] has already done that a couple of times at [removed], no client, no pain, more direct return on idea investment.

- At which point in the process can agencies add real value? Insight and idea stages might be the obvious ones, how about production/tech, which are hard to build up quickly and with high firepower as a startup?

- It sounds a bit as if it might be an interesting mid- to long-term second revenue leg for agencies. Why only serve their menu (strat, ideas, tech, development) to clients that are driving down prices in multi agency pitches, that only promise low short term, project based revenue, if you can invest your resources (peoples' time = money) into a potentially long term revenue generating bussiness.

- On that count: Pitches are feared and loathed and huge investment risks. What is the risk of throwing 30k worth of time out of the window when competing against 5 other agencies on a pitch versus the potential profit? Generally, even if you are very good, you might be extremely happy with an overall success rate of 50%. But obviously, industry wide, the average loss risk would in this case be 80%. Probably not a great investement as the potential profit normally might not be huge. Would be interesting to get some data on this from the industry (number of pitch agencies, average time/resource spend on pitches, average revenue/profit winnable in pitch) in order to juxtapose the two different types of investments. This might help persuade leaders in the agency market to consider putting their money in a different place.

- Who in agencies would be the people that drive this? Human resources are normally not incentivised on agency income. Management is traditionally risk averse and only in cases of independant agencies entrepreneurially minded.

I am repeating myself, but these are the questions I would have and would love to get answered... But you have probably already got shitloads of feedback. Would be interesting where your head is now, rather than two weeks ago;-)