Ask HN: Any tips to get VC funding for a consulting business?

https://news.ycombinator.com/item?id=21669702

by googlycooly • 7 years ago

6 6 7 years ago

news.ycombinator.com

svennek• 7 years ago

Venture Capital and consulting businesses are incompatible by nature.

Venture capital is about scalability (i.e. cost per unit goes down when number of units goes up - preferably considerably...)

Consultancies are unscaleable business by design, because they sell "hours". Every employee can deliver a certain number of hours only, so per-unit (marginal) cost is flat.

And therefore VC and consultancies does not match... at all..

googlycooly2• 7 years ago

Yea but some companies like Gigster, Pivotal managed to raise VC funding, even though they work in the same model. Any idea why?

detaro• 7 years ago

Gigster is in many ways a market place, connecting Customers to Freelancers.

Pivotal does services, but also has products they offer the services around, makes the majority of money from licenses.

davismwfl2• 7 years ago

So I agree with svennek that VC and consulting businesses are not generally compatible but I disagree with the logic used. Marketplaces being the exception, but in those cases those businesses aren't even categorized as a consulting business, just a broker. e.g. what most of SV calls a marketplace has for generations been brokered business, just a new/different term.

I built two different consulting groups and both were successful and made good money. One even took a modest outside investment at a point to grow faster, just not VC dollars. You can absolutely scale a consulting business into the billions of dollars of revenue, hello KPMG, IBM Global Services, etc etc.

What makes consulting businesses non-compatible with venture capital is that VC's are looking for leverage on their investment, they don't care about "scaling". Founders get hung up on "scaling" cause it is the term we use when growing the business as a catch all, scale people, sales etc. But financially speaking VC's generally look at leverage on their dollar not scaling, in fact, they want you to stay as small and lean as possible but leveraging their money to make more money while spending the smallest amount reasonable.

I am not trying to be argumentative, and I get the difference is subtle but it is a critical difference. You can research this and you will find they are different. For example, you could scale out your sales and team yet remain unprofitable, which means you didn't leverage the investment very well.

I point this out because if you can show an investor how you can leverage their dollars into more dollars, generally that's how you can get an investment. VC's don't play the game in this way for valid (and sometimes invalid) reasons but high net worth individuals do, and frankly for a consulting business a few HNI's are always a better source of funding.

googlycooly2• 7 years ago

Good point. But if we notice, there is no new consulting company that has grown big like KPMG, Infosys, etc in the last decade. Is it because achieving that scale as a consulting company is no longer possible?

davismwfl2• 7 years ago

Yea, I think that is a reasonably fair point.

But depending on how you want to measure growth and define consulting, HP grew its services division in the last 15 years (so did Dell ~20years) or so and it went from nearly 0 to billions in revenue. They always had a little services revenue/work but not like they developed in the last 15 years or so. A lot of large consulting companies you never hear about because they stay private and aren't in the "tech" sector. IBM GS grew in the billions during the last 15 years, even as they laid off people, proving the work is there to support that value.

One thing to note, consulting does best when economies are doing poorly to moderate. When economies are booming and employment recovering consulting actually goes down, when employment levels off at "fully employed" then consulting starts to pick up a little during a boom period. It makes sense if you think about it: it is much cheaper to hire a consulting agency to work on a project or add a feature when the economy is down as hiring FTE's would increase the burden on the business permanently. Both of my consulting businesses grew the most when the economy was doing poor, dot com bust was one time and the housing & overall market crash the other. We grew massively during those times and never did as well when companies came back to feeling good about the economy and growing internally. I say this because the last 10 years has been a more or less booming economy so consulting isn't doing as well during that time period, although it is picking up now with employment numbers being so low. But if you go back into the downturns you'd see differently.

Also consulting is a big field right, if you remove the SV/tech only bubble and look at the economy as a whole tons of defense businesses are purely consulting in nature and grew from 0. And quite a few hit over a billion dollars in the past 15 years. So just depends where you look.

I think if you look at the number of new product companies that come out that do ok but never reach a billion in annual sales and compare that to consulting agencies you'd find a pretty similar trend with similar percentages.

One other point. A lot of tech is defense phobic right now for whatever their reasons are, but if you look at almost every major large consulting firm that is large they had a staple of defense and government work, both within the US and outside. Ignoring one of the largest employers because you feel principled in doing so is completely fine, but you only add to the complexity of growth at that point.

Ask HN: Any tips to get VC funding for a consulting business?

Related Stories