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July 2, 2008

Venture Capital for Service Consultancies

Full Disclosure – I have never sought venture capital for a service consultancy; but I have had a try at doing it for a technology concept I once had. Seemed to go very well actually, unfortunately I wasn’t in the right situation to take advantage of it.

But you see VC news every day; many blogs are built on it in fact. (Check out Venture Beat or Xconomy for example) But in all these posts I rarely, if ever, see VC news for a consultancy firm.

Astadia (SaaS industry) is one company that could dispute that, so could MarketWork. (RSB industry - Which means Really Small Businesses, cool eh?) But the fact remains that they are the exception and not the rule.

After some discussions with some industry experts via LinkedIn (I do love that tool) the answer became very clear. It’s all about risk, and for an investor a service based consultancy is filled with them.

  1. The assets are not very own-able. That is, they are generally in the form of a few talented individuals, or an obsessive and half-crazed founder. (You know who you are!!)
  2. Consulting IP is often not saleable. Processes, methodologies, techniques or documentation are not the stuff of a Venture Capitalists dreams apparently.
  3. Generating the 5 to 15 times return on investment is difficult for the founders to do in a short time, let alone to try to convince a VC.
  4. Often there are no exit strategies,

Memet Matthew Yazici went on to add that conditions where a service consultancy could secure financing is when they have secured a large contract or client – but then they generally don’t need it.

Capital injections, at the right time, can yield amazing results, particularly in taking the idea out of the box and into the global market space. So looking at the two champions above, I drew up a list of what may just reduce the risk enough to attract a VC to invest in a service consultancy.

  1. Secure and saleable IP. Something that is in demand, is demonstrably a commercial property, and has started to create its own brand outside of your own company. The best work management processes in the world are no good if they are only on paper – they need to be out in the market place.
  2. A robust track record. If it hasn’t been sold then why should they take the chance on it? Sounds fair, I wouldn’t. So you need to be able to show several quarters of good sales, continued pipelines, strong marketing to sales conversion rates and so on. People will invest in something that can forecast a future before they would in something that just promises one.
  3. A company that doesn’t need the founder. You know the saying, “…teach a man to fish…” This needs to be the founding principle of your service firm. You need to be able to systemize your services in such as way that your employees become the people you are teaching to fish, and then they can do it whether you are there or not.
  4. A niche market. This is by no means compulsory I don’t believe, but it will undoubtedly get you more attention. Being one of many is far different from being one of a few. Particularly if you can show you are ahead of the curve and that others are starting to rush into the space. (which you have protected through your very cunning use of IP)
  5. Have an exit planned – There may be some flexibility in it, but at some point you need to show investors that there is a time to harvest the investment in this business and allow everyone to profit in the exercise. (More about that later)

The 5 – 15 times return on investment needs to be drawn from the combination of your track record, the growth of your market and your realizable aspirations for that market, as well as your very cunning exit strategy.

These are only my observations, and as stated I have never done this before. (Yet) So if you have anything to add, either from the VC side or as a service consultancy who has successfully obtained capital, then please, be my guest.

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