Secret strengths of product and service businesses

A recent survey completed by American University pointed out that, of the almost nine hundred cybersecurity-related businesses in our region, only five percent were product-oriented. To understand the implications of a mostly service-based cybersecurity economy, we spoke to John Funge, chief product officer at DataTribe, a local venture capital firm that describes itself as a “startup studio.” DataTribe has offices here in the D.C. region, as well as San Francisco, and they’re focused on funding and incubating technology product-oriented businesses.

ABERMAN: John, first of all, thanks for joining us.

FUNGE: Johnathan, it’s a pleasure to be here, thanks for having me.

ABERMAN: Let’s talk about product. What are the three biggest differences between a technology service and a technology product company?

FUNGE: The key thing is, when you look at the highest level of a product company, is that it’s really engineered and architected for repeatability, whereas service companies are really more oriented around servicing clients. And so, a product company is really trying to create value for a market, and service companies are really creating value for markets, but also highly optimized for delivery to individual clients. When that gets boiled down, it gets boiled down into a lot of operational, functional differences in the way that those different capabilities are actually delivered and hardened.

So, in a product company, the actual delivery mechanisms are more hardened, if you will. And so, that’s what makes it more repeatable, but it’s in that hardening that there’s a lot more strategic, roadmap thinking that you have to do, because you’re making significant investments in engineering, and product management, to understand the requirements and the product market fit. Whereas, in a services company, it’s very agile. If one client wants something that’s different from another client, you can easily adjust and adapt and do things that are custom to the different clients.

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ABERMAN: I always think of a service company as being similar to what we have here in the government contract industry. You’re providing a technology, but you’re providing it in a form dictated to you by a specific client, and you build what the client wants. So if you’re saying, with the hardening concept, is that a technology product company figures out, based upon what the founders see in the world of possibility, a product that can be sold to lots of customers without any specific modifications. There’s scalability. Those are very different things. Do you think it’s possible for somebody who’s developed a service technology business to become a product entrepreneur? Can you do both?

FUNGE: You can! It’s not that it’s impossible. I have firsthand story about this. My first company was a professional services business, but we didn’t start out as one. This was back in ‘95 in this area, around the very beginning of the internet. We had this idea for creating an arts and entertainment guide. So, think Citysearch, and Digital City, way way back in the early days. At that time, I was just a few years out of college, as were my co-founders, so we knew how to hack, we knew how to develop, but we didn’t know much about raising money or anything.

So, we went off and built a great system, and we launched it, and for a period of about six months in ‘95, we actually were even better than the city paper and the Post in terms of delivering local arts and entertainment event listings, kind of a Yelp type thing. We knew one thing: we were running out of money. We didn’t know how to raise money, but we were running out of money. And so, what we ended up doing is, we started tapping our contacts we had, and started doing, essentially, contract software work. This was at the time when client-server computing was still predominant, and web-based technology was very new. So we had a real kind of entree into a lot of big clients, doing that type of work. We always had some cognitive dissonance.

So, this was Clara Vista, we built Clara Vista to 60 team members. sold it to CMGI in 1999. It was a very nice outcome. But, we had a lot of cognitive dissonance, I and our founders, about whether we’re a product company or a services company, much like what we see today with a lot of the services businesses in D.C.. Over the course of literally two or three years, we made two or three different product attempts, based on things we were building with our various clients, taking things we built for clients and negotiating intellectual property terms, so that we could retain intellectual property rights, and then try to generalize them and commercialize them.

What we learned was that it just takes an enormous amount of focus. Like, the amount of focus you need to really do a product is very, very, very, very high. And so, it demands sometimes a level of capital, and certain operational functions, that are different. So anyway, long story short, we ended up after a couple years finally concluding that we were truly a professional services company. After we did that, and got that level of focus, our growth as a professional services company really grew.

ABERMAN: Speaking of growth, you mentioned earlier about raising money, that one of the big challenges is that service businesses grow largely on the basis of the billable hour, while product business grow by making something once, and then duplicating it again and again. So, product businesses that hit it right will grow thirty, forty, fifty, one hundred percent a year. Service business don’t grow like that. So, what are the attributes that enable a product business to grow quickly, and to scale, as we would describe it?

FUNGE: The thing of it is that, with a product business, if you get the product market fit right, and you have a compelling value proposition, you can start selling to many more customers, over and over and over, the same value proposition, in a much more scalable way. But when you pull back and look at the operations of that, it changes the way you sell, it changes the way you market. You have whole functional areas, product management and success management, customer care, things in a product company that are really not core to a services business. A services business is much more about billable utilization of your resources.

ABERMAN: Against the milestones in the contract.

FUNGE: Absolutely.

ABERMAN: You’re not doing customer discovery, the customer’s telling you what they want from you.

FUNGE: They’re telling you what they want. It’s very much about delivering, and becoming a really trusted partner for that individual client. So, it’s utilization. Recruiting is very important, the people, the culture—not that people and culture aren’t important in a product company, but literally, the asset you have as a services business are the people, and they come walking in and out of your office every day.

ABERMAN: So, these businesses are very different. They have different growth characteristics, they’re both very viable and interesting. But, if you want to get rich, let’s face it, a rapidly-growing product business is a good way to get rich, and also, investors tend to like product businesses. You’ve been in this region for quite a while now, you’ve built product business and service businesses. Why do you think that D.C. doesn’t have more software product businesses?

FUNGE: Yeah, I think that’s a really interesting question to ponder, and for sure we have the talent here, and a lot of elements of a strong ecosystem, and it’s interesting to see that ecosystem over the course of a couple decades ebb and flow in different ways. I think one of the things that we actually have here, interestingly, is that if you’re neutral, just purely neutral as an entrepreneur and you say, well, I’m just looking at opportunity, there’s actually nothing inherently wrong with the services business. If you own a significant part of a capable services business, that can be acquired, and you can become a very wealthy person that way. It’s just a very different model.

It’s not the model that’s predominantly what venture is looking to invest in, but it is a valid model. What DC has is a lot of confidence, and you’ve published some statistics about the number of entrepreneurs in our area, and the richness of companies founded, but the preponderance of those companies are services businesses. So, there is entrepreneurship here, it’s just that people are pursuing services businesses. I think part of it is that there’s an opportunity to. To create a services business in the D.C. area, it’s almost like a service business kind of competes for entrepreneurial mindshare in some ways.

But I don’t know if it would be as easy, I’m not sure, but if you’re in the Bay area, or some other ecosystem, to actually create a services business, because there isn’t as much of a ready market for that. So, if you’re kind of risk-neutral as an entrepreneur, and you’re looking at different options, it’s a very valid option, which many many people in our area have become very wealthy for assuming. It’s just a different model.

ABERMAN: John, thank you very much for taking the time to unpack this issue for us.

FUNGE: Jonathan, thank you for having me.