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.<p>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.<p>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.
There's a hidden glimmer of wisdom in here, which is to let your (cash) customers contribute to funding your (equity) business growth.<p>My theory is a niche consulting firm can perform services to make enough money to build out a product, and better yet, they're being paid to learn about user requirements along the way.<p>I'm on a similar journey right now, and it's always difficult balancing the dopamine and temptation of a short-term cash injection at the expense of development time spent on the core product we're scaling.
Not exactly the same but this reminds me of Joel's Strategy Letter I [0] regarding knowing what kind of business you operate, and consequently how you should grow it.<p>[0] <a href="https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-ben-and-jerrys-vs-amazon/" rel="nofollow">https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-...</a>
Or just … enjoy your cash business? Be your own boss, make a good amount of money, do it as long as you can.<p>Seems aggressive to look at a 5-6 person agency pulling in $1M a year and give the advice “now it’s time to start your _real_ business”
The usual value of equity is the cash it can generate. This is a wordy way of saying:<p>1) that some businesses will be profitable short term, and some in the long term and it can be worth sacrificing one for the other as you end up with a more valuable business, and,
2) sometimes you sell a business for a lot more than its value as a standalone business, for various reasons - for example it lets a big business fill in a gap in their product line, or remove a potential future competitor, or remove a low cost alternative to their existing services/products, or help them sell more of something related, or gather more data..... or are just irrational at times.<p>The phenomenon in two is common in technology businesses, but is not common elsewhere. its most common during bubbles.
<i>A cash business can have quick linear growth, whereas an equity business will have slower but exponential growth.</i><p>...or not. Businesses do fail. A cash business and an equity business are just as likely to fail as one another. Working in the cash business means you're realising the value when it happens, rather than 'banking' it to realise a compounded value later. If the business fails for any reason you'll have been <i>much</i> better off working in the cash business. This is the downside risk of working for equity.
An investment strategy focusing on cash flow versus equity growth is also an important difference between most people who invest in businesses and venture capital.
I think a good chunk of services I receive from small businesses are underpriced due to people not realising the business they're starting has an upside similar to being an employee but with much greater personal financial risk and working stress. There's really not that much scalability to something without franchise potential.
Equity business is thoroughly inaccessible to the vast majority of people, especially the IT people. It requires being an insider at least to a degree, and it requires apart from knowledge and skills, at least some luck.<p>I've seen a lot of extremely bright, talented and hardworking people trying to play that game - all failed, some ruined their entire lives simply for refusing to give up for too long. While those who went into cash business - as simple as an outsourcing shop - are almost all doing fine.<p>Nudging people to try for "equity business" is a dangerous advice to give.
It never fails. If someone mentions “selling courses” as one of the best examples of a business they can think of, their line of business is “self-help guru/grifter”.<p>He even has the “how to have better sex” book out there for you to buy.
What are some indicators of the type of business one is running? Consider that in a short period’s assessment both styles (cash and equity) might generate cash, both might grow over the interval… But what matters is what happens 5 years or 10 years or 20 years later. What indicates, in the first few months, whether or not you are planting a tree or planting perennials?
You can also have fast equity and slow cash. This is kind of oversimplifying business accounting. Learning some basic accounting may quite literally pay dividends for any project.
The article kind of conflates multiple factors and oversimplifies. Equity is great, but it's only as good as the EV (enterprise value) of the company. All things being equal, a company that generates free cash flow is worth more than one that doesn't—regardless of whether it's a software business or not.<p>Taking a long time to get to "break even" is not inherently a smart or long-term business play. It could just ruin you. In business, cash is oxygen.<p>Some businesses (especially platforms and marketplaces like Kit) simply take longer, because it takes time to build brand awareness, develop network effects, and basically hit critical mass.<p>However, the upside of a platform is that the growth is naturally exponential—the more people on the platform, the more valuable it is to its users.<p>Because this is so time-consuming and difficult, a platform business commands a premium over a more straightforward SaaS product.<p>One path isn't inherently better than another path—there are just tradeoffs. And hopefully you go into it with eyes open and make those tradeoffs deliberately.