Thread by @Nicolascole77

When I was 26, I started my first company with one of my closest friends. 10 months later, we had a dozen full-time employees and crossed 7 figures in revenue. By 18 months, we had a team of 20 and crossed $2M. Here are the big 7 lessons I learned scaling a service company 👇

1/ The company was called Digital Press, and based on my own specialized knowledge of writing online. We grew very quickly because I'd spent years refining my own process, building credibility, mastering growth hacks, and being able to "guarantee success." This = unfair advantage

2/ The pro here was also the con. Service biz's are very hard to scale because they require specialized knowledge. Spec Knowledge can only be gained thru experience. As a result, training costs a lot, and even harder for those employees to train new employees.

3/ Lesson #1: If a business is based on YOU, then YOU will forever be the bottleneck. Every new hire we made, I was still working 10+ hrs per day training new hires, continuing to train old hires, etc. I was trying to replicate myself (a process that took years).

Unlike venture-backed product businesses, which rarely have any revenue in the beginning, Digital Press was profitable Day 1. As first-time founders, my cofounder and I fell into the trap of chasing top-line revenue more than bottom-line profitability.

For the first year of us running the business, we were growing so fast that every single month's profits were reinvested into new hires to anticipate the 5-10+ new clients we expected to close. We barely banked any cash just trying to keep up with future growth.

Lesson #2: Top-line revenue is not as important as bottom-line profitability with service companies. Product cos are different. Venture-backed cos are also diff. Overleveraging ourselves to anticipate future growth put us in a very vulnerable position: entire payroll > $$ in bank

Very quickly, we realized that adding more clients meant needing more employees. More employees meant more overhead. More overhead meant more need for constant sales, and so on. The bigger we got, the more strain & effort we needed to put forth to maintain growth.

Lesson #3: Without technology or a non-human product, there is nothing (zero) exponential about service companies. 1 new client in = 2+ new hires. It doesn't take long for your overhead to balloon, your risk to go thru the roof, and your profitability to incrementally improve.

At a certain point, my cofounder and I started to realize the trap we had gotten ourselves in. We were growing like crazy, but we were both taking humble salaries and $0 out of the business. For either of us to "get rich," the biz would need to be 5x larger.

Lesson #4: The "valley of death" for service cos is very real. When you're really small, you can play with pricing, dramatically increase margins, and make great money. Medium-size doesn't work for service cos. Once you cross a certain point (5+ employees), you're stuck...

...and you need to then get through "the valley of death" to reach $4M/$5M+ year for it to really be worth it. But the $1M/$2M/yr zone is largely unprofitable, extremely taxing, and difficult to rationalize as being "worth it."

Seeing some of these flaws in what we were building, my cofounder and I tried often to think of ways to get out of "Service" and into "Product." We had ideas, had investors interested. But they all pointed in the same direction: can't build a service co & product co at same time.

For almost an entire year, we tried running the company by day and brainstorming pivots by night. We even had a product idea we felt confident pursuing. But we couldn't ever make meaningful progress on it because the service co kept pulling our attention back.

Lesson #5: The advice "do both" is bologna. Worthless. Horrible, terrible, non-applicable advice. "Do both" is a death sentence to an early startup. You can't do both. We could barely do 1 thing really, really well. If someone suggests "do both," ignore this advice at all costs.

Around the 2 year mark, I started being brutally honest with myself. We had gone through 8 straight months of speed hiring, followed by a massive drop in clients and needing to layoff 1/4th of our staff, to another rollercoaster up again. It was exhausting.

Lifestyle and stress aside, I started having a hard time rationalizing the opportunity cost that came with building the company. We weren't building anything proprietary. Our service was great, but hard to scale. There was no end-game in sight. "What am I doing all this for?"

Lesson #6: Service companies very rarely have a path to an exit. This had been our goal, but we were too young and uneducated to realize our path wasn't taking us there. Looking around, I realized other service cos that got acquired had built tech to seem "more acquirable."

...but even still, you need to be past "the valley of death" for it to make sense for another co to acquire you. And every week that went by, it became clearer to us we weren't going to make it. We had 60+ clients, 20 full-time employees, and the biz felt stretched to capacity.

Then, my girlfriend pushed me to take a trip to Mexico. I worked remotely for a month. And our last weekend there, I found myself lying in a lagoon "seeing the truth." I had wanted to build a co to give myself financial freedom, and instead I'd spent 2 yrs postponing...

...any and all financial rewards for the "hope" of this exponential outcome at the end, which I was starting to realize didn't actually exist. Our current path was not going to take us there. I was a stressed-out small business owner, and that was the truth.

I came back from that trip, and my cofounder and I made the hardest decision of our lives: we decided to scale the company back. The service we were offering was a specialty skillset. It was never meant to be scaled. Understanding this completely shifted my view of startups.

Lesson #7: Not every idea is meant to become a business. Not every business is meant to be scaled. Not every business is meant to become the next high-growth, massively explosive, TechCrunch-cover-story startup. Knowing which game you're playing > relentlessly playing the game.

At the end of 2019, we scaled the biz back. My cofounder and I went back to working with a small handful of clients. 10x lower less. More financial reward. More freedom. And most importantly, more time to consciously choose what game to play next.

Service companies are very easy to get started, and very easy to see instant validation/success with. But that's also the trap. You start down the path, and don't realize what game you're actually playing until you end up in a lagoon in Mexico 2 years later, burned out.

Founders, take the time to question 1) what you're building, 2) why you're building it, and 3) how long you're OK building it for. Vague answers will mislead you. Be honest, check-in on these questions often, and have fun. digitalpress.com