Building a New Business

The Difference Between Service, Product, and Knowledge-Based Businesses

Nearly three years ago, just a few months before the economic tumult of 2008, I left the company that I had co-founded to strike out alone. It took several months to get a sense of direction. During that time, I got a good start on some new inventions - was getting fabulous traction on solving some tough problems and re-situating the fundamentals for my breakthroughs. (I had to make a clean break between the patented work that was now owned by the investors of my former company, and what I would do next.) And then, the bottom fell out just a little further.

Long story short, I had to regroup and focus on what I could do alone, without input, teamwork, or partnership from anyone. My core strength, aside from innovations and inventions, was in writing.

I had a choice of two books; one that had been "under development" for over fourteen years, and a new possibility; a textbook on cloud computing.

I did some demographic analysis, assessed the market and competing products, and prayed for wisdom. Ultimately, I went with the one that had been "under development."

(Side note: I also did a fair chunk of work on the cloud computing text. Taught two courses on it; one at Marymount and another at GMU. Had a whole lot of fun. Can't say the same for my students, who all reported doing a whole lot more work than they expected or wanted to put in. Put together a lot of chapter precursor material, which I'll transfer over to my science/technology/business website.)

But the demographics, and inner guidance, suggested that a book oriented towards women "of a certain age" was a lot more likely to have staying power than something that just rode the crest of the current technical wave. (Besides, I look on cloud computing as simply a "means to an end," and am more likely to write about technologies that I think have more long-term impact, such as predictive methods.)

So when I wasn't teaching cloud computing, or a course on "how to become a professional in the business world" (again, under various course names, at both Marymount and GMU), I tucked in my heels and focused on writing.

I learned a lot from the year of teaching "business professional" courses at both universiites. (The old adage, "We teach that which we need to learn," holds true.) I learned how to write a Business Plan. That has kept me busy all January, through the better part of February. And now, post getting a basic Plan into place, I've been busy executing it.

But I get ahead of myself.

The purpose of this blog post is to give friends and colleagues a chance to catch up with what I've been doing for the past three years, and to share some valuable insights gained while learning and teaching about business development, all while being an Adjunct Professor at one of our fine local universities.

Two years ago, I made a decision to self-publish rather than to go with the traditional literary-agent/major-publishing-house approach. The reasons were simple: Speed, control, and profit margin.

Having given up control of my inventions in two previous companies, I wasn't about to do it again. Not even to a publishing house. And I knew that the material in this book would be (at the very least) controversial.

More than that, I'd had my business-focus honed by over twenty years as an entrepreneur; first as an early-employee in a start-up, and then as the Co-Founder of my own company. In the last company, our investors taught us about the difference between being a "service" company and a "product" company. A service company provides, simply enough, services. If we are working for anyone on an hourly basis, whether we are a private consultant, a doctor or dentist, or a contractor with any one of the great number of Federal contractors (Booz, SAIC, etc.) in the area, we are a service company.

Service companies get "valued" (this is what CEOs and investors think about when they decide how much money should be sought/put in as investment) at about two-to-three times yearly revenue. So if a company (or even your own sweet self) is gaining revenue at, say, $1M/year, then the company (meaning possibly yourself) gets "valued" at about 2.5 times its revenue, or at $2.5M.

Then, if you're seeking an investment of $2.5M, the investors would say, "When our investment of $2.5M is added to your current value of $2.5M, and the total value of the company is $5M, we should own half the company, because we've put in half the value." Right then and there, your ownership (and control) goes down by half.

Now, if instead, you are a product company, your "valuation" is typically about ten times yearly revenue, or 10X. (This assumes that you have yearly revenue.)

The trick with being a product company? It has to do with developing the product.

I learned (the painful, hard way) that taking in early investment - attractive though it seems - is a "kiss of death." Control passes early to others, and you become an employee of your own start-up.

Much better to find a way to survive, with whatever pain and travail is involved, and get the product completed on your own, somehow.

Which is what I did, over the past two years. I built a "product," which in my case is a book. (To learn about it, see the blog for Unveiling: The Inner Journey.)

So what I thought was that I'd transformed myself into a "product company."

Almost, but not quite.

What really happened during this transformation?

A whole lot of lessons, and a lot of insights, and useful things to be shared. Stay tuned, see tomorrow's blog, and great to be reconnecting with you again!