There is nothing wrong with solely building products for clients. In fact, it's one of the best ways to gain a lot of experience and attain specific knowledge that can be leveraged to build your own products. However, the agency model is not a great business model and unless you truly enjoy every part of it, it's wise to avoid scaling an agency. There are benefits to remaining small by design. At a smaller scale, it's easier to make a profit, you are free to pick projects that bring specific knowledge and new opportunities, and handling your operations can still be done without it requiring too much of your attention.
Next to that, building software products means you have the majority of the skillsets in house to build digital businesses with far more interesting business models. To be able to do this you need to create an environment for yourself where you can take risks, without risking going completely bankrupt. This means you need to keep things lean, avoid lifestyle upgrades, and hire people who want long term benefits over short term benefits. The former is beneficial in two ways. People who choose long term over short term tend to have a more entrepreneurial mindset, which comes in very handy when you build your own product ventures. Secondly, if needed it's easier to keep your employee costs lower by compensating partly with equity.
Let's talk about how to run a product studio that works both with client projects and its own product ventures. We'll break it down in a list of rules.
The majority of agencies have tried to build their own ventures, and the majority of these failed. Why? Because these internal projects were always put aside as soon as a client comes along that is paying to use the same hours. As Warren Buffet says, investing in yourself is the one investment that supersedes all the others. While he speaks to the individual with this, the same thing works on a business level.
Make sure you have enough money in the bank to take the risk of starting your own product venture. If not, try to raise money from investors or work on client projects until you have earned enough money to start your own product venture.
Let's say you are building your own product. You and your team have finally finished it, you've posted it on every startup platform you know, spread the word via your network, and then... crickets. Building a product is one thing, but making one work and gain traction is a game of persistence.
We at Eli5 have found ourselves in the situation described above with our first product venture called 'Sally'. These mistakes are heavy to swallow and costs you a lot of money and opportunity. To avoid this situation you need to focus on the extra layer around your product, the business layer.
Make sure you're not just hiring experts in building software products but also hire people who want to become entrepreneurs and want equity instead of salary. If you're going to build product ventures, you're going to need someone who will operate in the business layer and focus on strategy, marketing, and acquisition. Someone who is going to push this thing forward and is dedicated to make success out of it.
Putting a product out in the world without it, would be like pushing a boat into the water without someone to steer the ship.
While working on client projects you need ones that pay the bills and make you profit. However, there are two types of project you can work for. Ones that are just turning your time into money, and the ones that are turning your time into money and specific knowledge. Specific knowledge, a term coined by Naval Ravikant, is the knowledge you attain through experience. The more specific the experience, the more specific the knowledge. And the rarer the experience, the fewer people have what you have. Check this out for Naval's explanation of it.
So, there is a massive difference between building a product where the sole purpose is selling shoes, and a product that is solving a complex problem for a certain industry. The first one will likely pay your bills, make you profit, and if you're lucky it will bring you similar opportunities. But there is not much in there that brings you specific knowledge which gives you an edge over others, since it's something done many times by many people. The latter, however, is likely to bring you both money and specific knowledge. The latter is your extra fuel for product ventures.
90% of startups fail and almost every new entrepreneur is convinced they can beat the odds. There is also a massive difference in the type of business you're building. Playing the game to become a unicorn (a company with at least $1B valuation) has less interesting odds than playing the game to build a successful company with a $1m, $10m, or even $100m valuation.
Many entrepreneurs are fixated on the unicorn game, all in the race to build the next food delivery app or social platform. Which is all fine if you do, but understand the odds. There are numerous opportunities many people are not paying attention to. Andrew Wilkinson, founder of Tiny, describes this very well in this blog, where he compares this to McDonalds and In-N-Out Burger.
Building companies that are more comparable to strong horses than to unicorns comes with its own set of advantages. The need for venture capital is lower and your chances of building something successful is higher. It enables you to focus on your customers and yourself, instead of pleasing investors.
As a Product Studio it's wise to build multiple product ventures to increase your odds of success. Find those niches that other people are not looking at, leverage the specific knowledge you attained in other projects, and recruit the people who are capable of running a venture and want to have skin in the game.