It sounds harsh, and this is what many people hear when they present their agency as an innovative startup. So the question I will try to answer is why.
First, this post was inspired by a discussion on the “French Start-Up” group on Facebook. I was with others trying to shed light on this same topic.
Second, my position on this. I worked on the agency side and the client side and created, worked with or within tech startups. This helped a lot to understand the realities inside such a business and how others will perceive it.
Long story short: an agency is not a startup.
Here are some elements to explain why.
A non-academic startup vs agencies definition for 2019
From the founder’s eyes, especially corporate dropouts who start their first business, everything looks like a startup: fewer processes, maximum agility, and working on getting things done. It is, in part, very similar to building an agency at the beginning, as the hierarchy is not a big thing, and usually, account management is relatively easy. Let’s call this the “garage” phase, where the two models are pretty blurry.
From the financial side, things are different from the beginning. People will look at your capability to scale immediately. A startup in this definition will look into scaling products from 1 to 100 and 100 to 1’000 in a short time (0 to 3 years), of course at an optimised workforce and innovative IP assets protection. There is a good reason why tech companies are well positioned for that expansion in the eye of an investor vs an agency. They build a product designed to scale. On the other side, when getting traction, Agencies need customers who pay on time and who will not kill your billable rates by extra-workshops-and-not-planned. The innovative aspect is harder to differentiate, and while you can protect methodologies from the beginning, it is still a tough innovation race vs a tech startup. Agencies can still value brands and long-term retainer contracts, but most of the time, they will also invest in immobilisation, such as cars and real estate, to re-insure banks that they have tangible assets.
From the HR point of view, things get different at the end of this garage phase. Where the HR model of a tech startup tries to keep things flat and build “project clusters” that work like mini-factories inside the same pool of competencies, an agency is wired to construct an account management and production management team that, most of the time, are pyramidal models. This is where the two separate in a complex way: while scaling your R&D for a tech startup is directly connected to your economic expansion, scaling your agency depends on b2b marketing inside small or corporate players. We will address that point in the next paragraph.
Another thing is the turnover. Where a tech startup is inclined most of the time to “incentivise shares” to its core employees, the agency is working most often with the model of partnerships when you need to earn your ranks after X years or to bring a substantial business volume to the firm.
From the customer and sales perspective. Let’s assume we talk about b2b corporations; it is hard for garage stage agencies to get a big average basket as procurement usually runs risks assessment on a billable volume. The tech company selling a b2b service could easily license a product and find relevant networks of distributors, such as IT companies, with enough customer traction. This is where an agency would work out relationships well, sometimes taking months to close a deal. Bringing back metrics, comparing the LTV or Life-Time-Value vs CPA (Cost-per-Acquisition) vs CPR (Cost-Per-Retention) is interesting. So applied, this is where you will realise that in 2019, building an agency for scaling is a tough job on paper. This was perhaps not that true. For instance, 20 years ago, agencies provided “innovative ideas” as part of their package. Ideas are now products you can buy out-the-shelf to startups.
In the next part of this article, we explore several scenarios that have been emerging for years now.
Scenario 1: agencies running like a startup
As we have seen in the intro, you can design your agency like a product. However, this requires you to set up the proper culture and mindset. The product promise is, for instance, a successful brand launch, including all the value chain of activities behind it.
Once you have mapped it, you can package it better.
You will organise your shop better, pivot more efficiently, as well as organise your staff better, as not everything needs to have a headcount. It may change how you sell and open opportunities for more extensive collaborations. Moreover, this model will likely help you spot unmet needs and help you build new solutions. Last but not least, if you design your business like a product or a range of services, it is easier to prepare it for financial expansion, M&A or a pure exit.
Scenario 2: agencies producing startups
Agencies are in the front row of many industries. They see customers evolving and could easily take ideas and package them as products. Again, more accessible to do when as a business, you already work like a startup (cf. scenario 1). For a marketing agency, spotting a new trend in media planning or social advertising could lead to a neat mar-tech product to develop. They already have clients, so that the business magic could happen fast.
Here the agency is its threat. Removing resources who work on clients’ projects, even 20% of their time, is unrealistic, as a startup’s beginning is a black hole in planning. It is also true when it comes to seeking funding. Most of the time, investors invest as much in the idea as in the people running it. So when they hear you have your eyes on something else 80% of the time, even if you have proof (LOI) that customers would buy your tools, they probably think twice.
Solution: spin it off.
Please take one of the founders, take him out of the daily business and take calculated risks. In the last example, two people from the firm could work in their spare time to build a prototype, seek funds and, once secured, drop out and run the show. This happened for the startup www.lesroisdupq.ch, where my partner Alex took its idea live and went all throttle to launch it. If you need the people internally, then find a partner! We also did this by offloading Kumo, a file transfer tool, to an external partner for development and re-selling. Finding the right platform to develop an idea takes time, but once you do, you have fewer trade-offs to deal with, as your existing business can continue without being polluted by new problems.
Scenario 3: agencies becoming a startup
From a bottom-line perspective, an agency might discover that offering services are not attractive anymore. In that sense, evolving to a SAAS CMS product if you have built websites for a living could be interesting. It is especially true if you compete with emerging markets where quality is high, and costs are down. Many tech products today are agencies that evolved into them, packaging their creativity and innovative ideas.
Scenario 4: agencies evolving into a new model of services
In this scenario, an agency thrives through its relationship and impact with its customers. This is where agencies and consulting firms positioning is getting blurry. To survive, agencies are now asked to be orchestrators, from tactics builders to strategic thinkers. For instance, they are increasingly requested to prepare a recipe for the perfect brand launch and become project managers more than asset producers. This is also because the value perceived by customers to handle specific tasks is evolving. Many customers, small or big, are thinking of internalising some activities, such as social media marketing, as it is mature enough to deal with them. The reality is that the agency offering is now morcellated into tiny parts of tactics. If you already have a critical mass, you can’t be an expert in everything. In this scenario, agencies of small sizes are also getting either grouped into collectives to offer a 360° range of services or being bought by more considerable advertising or consulting firms. Some corporate clients are even considering buying their agencies to internalise competencies. In this last point, it is also interesting to witness agencies flirting with becoming HR placement vendors, where they delegate resources for a fixed amount of time to customers.
Scenario 5: tech products evolving into agencies
This one is more reserved for scale-up and more prominent players as a critical mass of adoption is required. We see that some products developed by startups are becoming so complex that they now provide internal agency services to help you run them. It is the case with Google, for instance, which is helping more small businesses get into their Advertising suite. It also increases the average basket of a customer, as licenses are usually an easy get-in. You want to optimise your LTV, and usually, setup costs, consulting, campaigns, projects, audits, maintenance and training are some ideas that come to your desk quickly as a customer. A recent trend is helping you innovate by selling open innovation services or internal programs running on a tech startup suite of tools or software.
Where to go with all of this?
It depends, on your goals, like always. Do you want to build a long-lasting business or something you want to sell in 3-5 years? Do you see yourself managing 5 to 10 people, or are you thinking big? Most importantly, do you know the difference between a startup and an agency?
Coming back to the title of this post, I foresee the danger of founders painting themselves into something they are not, impacting their credibility. Running a consulting firm or an agency is a skill very different from running a tech startup. Trying to name yourself a startup for bringing an innovative flavour to your offering is dangerous if you do not live up to your promise or are in one of the scenarios above. Knowing who you are and what you want to be as a business is one thing; How you are perceived and how your customers see the world is something else. I would recommend avoiding self-calling yourself a startup if you are an agency. These are two different beasts to tame, and you can be as successful and as proud of running either of them.