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Here, I've seen almost all the discussions are related to startups offering some kind of a product. It looks like a de-facto standard when anyone talks about a startup on this forum.

Is there anyone on this forum who has got his/her feet into starting a software service company? Why is it that it's a less discussed topic here? These questions make me wonder whether a service company is treated as a start-up in the first place.

In India, the scene is a bit different. When someone is thinking about starting a software company, he/she is thinking about starting a software service company.

Let me explain what I mean by a 'software service company'. A service company is the one who gets software development assignments that are outsourced to it. These companies don't 'own' or offer a product, they just develop it as per the specifications.

Has anyone tried his/her hand at starting a software service company? What are your experiences? Given a choice, what would you prefer, a product offering or a service offering? What are the pro's and cons of both of them?

regards,
Sandeep

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6 Answers

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I'm echoing what Alex, Jeff and Sebastian are saying about the time/cost/revenue implications of having a software service company.

As for why service-based startups are less discussed on this forum, and whether such ventures are treated as startups at all:

Vivek Wadhwa wrote a very interesting and informative article last week on entrepreneurship for Techcrunch: you can find the article here.

In this article, he makes the distinction between "replicative entrepreneurs" (i.e., those who start a new business in an established service or field) and "innovative entrepreneurs" (i.e., those who create an entirely new product, service or technology).

Product-based startups fall into the latter bucket. Service-based startups in the former.

Speaking primarily for the SF Bay Area (including Silicon Valley), the emphasis and interest has always been on innovation - new ideas, new products, new businesses, new ways to change the world. That's the mindset and the motivation here - people build new companies to scratch an itch.

My fellow posters have already covered the pros and cons of a service-based startup. As far as product-based startups go, the pros clearly are:

  • The ability to create game-changing or world-changing products

  • The possibility of getting modestly (or even unbelievably) wealthy in doing so

The biggest con is that your product may be a failure, and you are forced to look for gainful employment :-)

This is where the Indian psyche and mentality clearly shows through (I'm not being disrespectful here, because I'm from India too) - we definitely value a steady paycheck, and while we are risk takers, we only do so in fields where we are certain of returns. So the risk we take is to start a company, but we hedge that by building a company that has a high(er) probability of getting established, and a high(er) probability of steady revenues.

It's a proven model - you only have to look as far as Infosys, TCS, Wipro and any number of other Indian service-based companies who have made it really big.

However, because of the issues of scale and also because of the perceived lack of innovation, this isn't appealing to a lot of people. Here in Silicon Valley, you'll hear the "two guys in a garage" story ad nauseum, because out here that is an inspiration - HP, Apple, Yahoo, Google, Facebook, Twitter et al.

I hope that answers your question - neither product-based nor service-based startups are "better" than the other, and I'm not taking sides. It is all a matter of perception. Different types of people get passionate and enthusiastic about them, and it's up to you to choose the path that makes you happy!

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Creating custom software for others is definitely better than creating an application that does not sell. – JeffO Mar 23 '10 at 19:59
Absolutely! What I didn't add in my already verbose post was that doing a product-based startup takes far more groundwork and market research/analysis. – Seenu Mar 23 '10 at 20:02
Hey Seenu, That's one of the best answers in my opinion. Thanks a bunch! – Sandeep Satavlekar Mar 25 '10 at 6:52
up vote 4 down vote

Basically there is a money-implicated difference between offering services and products.

When you as a company offer services, you sell your time. The restriction with this method is, however, that your time is limited and therefore also the possible money you can make. Of couse you can employ more people, charge higher rates etc., but at the end of the day, it is still limited.

When selling software, on the other side, the only limiting factor is how fast you can send the invoices (theoretically. Of course you need support, marketing etc.) But these things scale a lot easier than time.

So this might be a reason why so many startups lean towards products over services.

I, for myself, started my company and we did services at the beginning to earn our own "VC" money. We did not want to get any investors or anything. We wanted a self-financed, bootstrapped company. So this is why we did services. But eventually we will use that earned money to develop our own product.

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Thanks Sebastian, you have given good thought about both the sides of the coin. – Sandeep Satavlekar Mar 23 '10 at 18:11
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From what I've read (e.g. this) and the interviews I've seen (this for example), it's often easier to grow and develop a product-based company. If you're providing services, it means that you are selling time, so in order to increase revenue you probably need to hire more people, which increases administration overheads, office space requirements, eventually requires establishing management layers and so on. I guess that's why a lot of people try their hand at creating products.

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That's a great observation, Alex. I agree with you. Nice links, too! – Sandeep Satavlekar Mar 23 '10 at 18:05
up vote 1 down vote

Interesting observation about this site; I don't why it leans towards selling apps over services. When I wrote software for other companies, I saw myself as a contract programmer and not the creator of a startup. Maybe if I would have reached the point where I had so much business I could hire another programmer, I would have looked at it as a startup.

As Alex mentioned, creating a product can scale a lot more. Providing services usually deals with hourly billing, so you can't leverage what you've already built as much.

I hope this doesn't limit your usage of this site.

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Hi Jeff, It surely won't affect my usage of this site. I'm here not just to get answers, but also to answer other's questions too. I posted this question based on a real observation of Indian Software industry. I hope it gives an additional angle for the patrons to think about. – Sandeep Satavlekar Mar 25 '10 at 7:09
up vote 1 down vote

I quit my job a couple of years ago and built a small service company to be a bridge to becoming a product company. I didn't really have a product idea yet but knew I needed to get out of the 9-5 grind and figured I'd turn something up once I got out there and started meeting/working with new people.

Development services is a very tough and very competitive business. To achieve any stability, you have to go for larger projects, and those can take a while to close. Biggest challenge for me is I'm an ops/tech guy, and running a service company selling larger development initiatives really requires good business development and sales skills. I can do both, but I don't enjoy that aspect of being an owner as much as working with clients and building stuff. If you're not a biz dev guy, consider partnering or bringing one on-board who can help you find longer term, stable clients.

I spent my first year getting clients, and my second year shedding all but one because I/my team just wasn't enjoying the work and a few of the clients were a pain and not worth the extra revenue. We make enough off that one to fund our product work.

We launched our first product a couple of months ago and now that we've shifted more to the product mode, I'm enjoying it a lot more. As others have said products scale easier than selling hours. My daily challenges are still in biz dev/marketing/sales but it's around a product which I find much easier. People call me every day to ask about our product, and it was virtually impossible to get people to call us about development services. We have a much larger sales funnel to fill, but we picked a good market without much competition so I'm finding it an easier challenge.

You can do either, and you can do both for a while ... your talents and how you want to spend your time will dictate what is better for you.

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Thanks Scott, for sharing your experience about a software service initiative of yours. That would certainly help a bunch of guys here. – Sandeep Satavlekar Mar 25 '10 at 6:58
up vote 0 down vote

Service companies are easier to bootstrap and get started. You don't need to wait on revenue for product development to complete.

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