How We Transitioned From a Digital Agency to a Product Company

It was Christmas 2013. I was at home, but talking to my co-founders, Luke and Mark on Skype. We’d started our digital agency, Codegent, in early 2004 and now, almost 10 years later, we were trying to work out what to do next.

By
David Hart
on
Dec 17, 2019
Category:
Startup

It’s not that things were going wrong particularly. I mean, things had plateaued since the 2008/2009 financial crisis, but we were still making money. Nevertheless, something had changed in us.

We were all tired of what felt like the endless treadmill of agency life. Tired of putting our hearts and money into pitches then not winning them. Tired of giving people the wisdom of our experience then being ignored. Tired of constantly having to chase work to replace the work we’d just completed. And we could see the writing on the wall: a lot of what we did was being commoditised; clients were developing their own in-house teams; offshoring to Eastern Europe and India meant that there was a downward pressure on prices we could charge combined with an upward pressure on UK developer salaries as in-house teams increased the scarcity of available resources. That’s not to say that there wasn’t a future for the agency, just that for us, we’d reached the end of where we wanted to go with it.

By contrast, we’d been taken by surprise at some of the early successes we’d had with a series of mobile apps we’d been building as well as a few other SaaS products and a couple of joint ventures. And the three of us were excited by the emerging possibility of being a company that made its own products: where we were the client, we took our own advice and could see that we were building up a head of steam and applying all the years of accumulated experience to creating something that worked. And as we started to understand more about the potential scale of these businesses and how compelling the metrics became at that scale, we were sold. We were convinced that we could create something bigger, more ambitious and world-changing than we ever could by continuing on the agency path.

But whilst making the decision that we wanted to become a product company was relatively easy, making that happen was not going to be plain sailing: we had no idea how we should get there, what it would look like and how long it would take. So we took a stab: it would take two years and at the end of that period, we would have replaced our clients with our own portfolio of companies. These would be a combination of Joint Ventures (like the successful ones we’d done with Tepilo and Big Clever Learning) and our own products, such as our mobile apps and Twilert. In this future vision, the staff we had in our agency would transition over to working on our own products and we would eventually be in a position where we would say no to any new client work and be able to sustain ourselves entirely with the revenues from the stuff we had built, or perhaps we would raise some funding and become a bit of an incubator/accelerator.

In reality, it didn’t work quite like this. We didn’t properly understand it at the time but there were some flaws in our fantasy future.

1. JVs

The problem with Joint Ventures, we soon found, is that people generally want to do a JV with you because they don’t have the funds to pay for development themselves. We’d had some success with Tepilo, but that was a fairly unique model in that the other Founder was both a celebrity and also not working full-time on the business. But for most businesses, they didn’t see us as a co-founder in the traditional sense, where we are an integral part to the decision-making and evolution of the business: they just wanted our developers to build them stuff. So, effectively what we ended up with was swapping fees for equity but not really having any different relationship. We were still “the agency”. We may have had a seat on the board, but we were still being treated like a supplier. In fact, it was worse than being a supplier, because we were doing all the work, taking the up-front risk, but not actually getting paid any money. Yes, we were building up a bit of a portfolio of companies we had a stake in, but we may as well have just looked for companies that we quite liked and offered to invest £50k and saved ourselves the headache. The outcome would have been the same.

2. Owned products

We had four decent products (three apps brands and one SaaS product), and a few others that were doing OK. We had no boss other than ourselves and we owned each product 100%. Sounds pretty sweet. We made the decision to give each of them a product owner from within the agency and invest in evolving them so they could grow. But the problem was, each of the product owners also had their day job: which was being part of the agency. When push came to shove, the external client would always win over the internal project. The products did OK but they were never able to graduate from being a “side-project”. One of them relied on an integration with Instagram the nature of which changed, making that product redundant. We sold one of them to a private equity company and we continued to support the others.

3. Becoming an incubator

We spoke to a few VCs about us being a kind of venture studio and creating a mini fund to invest in businesses that came to us looking for our help, but the reaction was lukewarm, especially as it wasn’t clear to them what we were; an agency or a product company. And as an investor/product developer, would we again end up being a supplier that people felt obliged to use because it came for free/with some money, rather than genuine founders? There was no real satisfaction in that for us.

A year or so in, what did we look like?

In 2014 and moving into 2015, effectively what we had was:

1. An agency that we’d decided we were going to back away from (long story short, we’d also acquired another agency along the way, Thin Martian and had moved all of Codegent’s agency work into that agency, leaving Codegent the owner of our other non-agency interests).

2. A mixed portfolio of our own products and JVs. There was some interesting potential here, but none of them were going to deliver the levels of income in the short-term that were going to allow us to sustain the rest of the company if we were to suddenly drop agency and double-down on products.

3. ScreenCloud. A fledgling idea that we were excited about, but were spending our own funds on and watching our savings account shrink every month.

A minor pivot

We needed a new plan. Although we had pushed as hard as we could on evolving ourselves to be a product-only company, it was clear that for our ambition to really work, creating a portfolio of OK products wasn’t going to cut it and we needed to bet on one thing. We agreed that we all felt that one thing was ScreenCloud.

37 Signals focused on BaseCamp, the guys that started MailChimp focused on an email delivery platform. We had to focus on ScreenCloud.

By the time we came up with the idea of ScreenCloud, we’d learnt a lot about building products and we’d concluded that without 100% commitment, the chances of it somehow becoming our ticket to fame and fortune were slim. On top of that, we also felt that of all the things that we had done, this was the one that excited us the most: it was solving a genuine and immediate problem, it was in a sector that we really understood and had empathy with, and the opportunities for future innovation were immense. So we took the decision to really go for it.

What did this all mean in practice? Well, for a start Mark and Luke moved onto ScreenCloud full-time. We also did the same for staff. Some of the agency staff moved exclusively into ScreenCloud: they were no longer employed by the agency and instead had ScreenCloud contracts. We also went out and raised some investment.

This was the summer of 2015. I’d say we were then at our most exposed. This was really the point where we were stepping from one side of the river to the other. It wasn’t all doom and gloom but it was a nail-biting experience. We’d gone from being able to sustain ourselves from agency revenue, to committing to letting go of that security in favour of something that was yet to prove it could even get one paying customer.

I tried to keep all the other plates spinning to give us the ongoing revenue until ScreenCloud could catch up. The new plan then was to try and slowly hand the spinning plates onto other people so they didn’t end up in a broken mess on the floor. But for the agency, two of the three founders were gone and the remaining founder (me) was stretched very thin: I was working one day a week for Tepilo and two days a week for Big Clever Learning. I was also doing a day on ScreenCloud, which left one day on the agency. On top of that, Thin Martian’s MD went on maternity leave!

But we stuck with it and mid-way through 2016 had a conversation with someone from a large media group about potentially selling the agency. This came to nothing but it showed us that there was a route to finding a soft landing for the agency, where, if we played our cards right, we could continue to grow ScreenCloud, slowly step away from our JVs without jeopardising our investments and find a home for the agency that would relieve us of that particular responsibility (and of course give us some additional funds, personally).

Did the plan work?

Actually, yes. By early 2017, three key things had happened:

1. After the initial raise, ScreenCloud launched and with the focus that Mark and Luke were able to give it, was able to grow quickly and solidly and we were able to go out and raise a subsequent, bigger round. The future is very exciting.

2. The key JVs that we had, Tepilo and Big Clever Learning, continued to grow and bring their own brilliant teams on board. I was able to step away, but we remain shareholders. Our other owned-products have carried on delivering small amounts of revenue without the need for much of our time.

3. We sold the agency. We realised that there wasn’t going to be a neat movement from having clients to having no clients. The real stark choice was close it down or sell it. If we were more decisive we probably would have just closed it down, but we’d built this business up for almost 13 years, had some great staff and some great clients. It was a good business. And so, we found a perfect home for it as part of a newly formed group called Konekt which brought together four related businesses and hopes to become a fast-growing new generation of digital agency. We’re now shareholders in the Konekt Group and so have an interest in its long-term success. And, after a couple of months of transition, I was able to step full-time into ScreenCloud and join my co-founders on our next exciting chapter.

All this means that we’re in a position where the three of us can now say, we did it. We transitioned from an agency into a product company. It’s not quite how we imagined it and it took a bit longer than we first thought, but we’re now absolutely focused on ScreenCloud as our immediate futures, with several ‘interests’ in some great businesses and a handful of legacy products that keep delivering small amounts of revenues every month.

It’s been a journey that I wouldn’t want to really repeat. Lots of sleepless nights and uncertainty along the way. At times it felt like we were so exposed and the individual moving parts were so fragile and tenuous, that if the wheels fell off any one thing, we could face some difficult decisions. But although the plan flexed and bent a bit along the way, we always had the end goal. And we had each other.

David Hart

Co-Founder and COO of ScreenCloud. Interested in how tech will improve the way we work and play.