Ask HN: Starting a Development Shop

[Ant_on_]

As a hacker with 15 years of experience, I think I'm at the point that the next logical step is to start a development shop/agency to help startups and companies grow.

There are are multiple questions I have: 1) How easy/hard is to find clients? 2) How much initial capital/budget is needed for starting a shop like this? 3) How much do a development shop/agency charge in order to stay in business? 4) Do checks really take 3-6 months to be received from clients? 5) Any recommendations/suggestions/hints/tips ?

Thank you!

[tobinharris]

I run a small-ish dev shop ($1.5m revenue) and there are a lot of things I wish I knew back in 2012 when I started.

1. Finding clients is hard. Think hard about what an awesome customer looks like and then figure out how to reach them. This is the most important thing IMO. I'm reading Standout of Die, it has good advice on this.

2. First attempt, I started with about $40,000 and blew it all quickly as I didn't have enough sales. Better to get the sales first then grow the rest. You can be transparent about this with potential clients.

3. If your costs are $400,000 a year, and you'll sell 44 weeks of the year allowing for holidays, sickness and wiggle room, then you need to sell $9,000 a week to stay in business. If you want to make 25% profit then you'll need to sell closer to $500,000 a year and $11.3k a week.

4. I'm in the UK, we pay someone to politely chase clients for payment. This was a game changer. Most agreed to pay monthly but never do without a good bit of nudging.

5. As for tips... There are so many good books and courses on building and running a service business, I wish they'd been there when I started. To name a few.

- Jonathan Stark.com - Hourly Billing is Nuts

- Gareth Healey - Standout or Die

- Jason Swenk - Agency Playbook

- Blair Enns - The Win Without Pitching Manifesto

- Blair Enns - Pricing Creativity

- Traction - Gino Wickman

Running a dev shop can be incredibly rewarding and fun, especially if you love the work you're doing. Building a business will be like learning a whole new career, so don't underestimate the learning curve the number of mistakes you can make (if you're like me haha). It's great that you're asking for advice, it will save you some headaches :)

[greatpostman]

Mind if I ask how much profit you make from that revenue? What’s the margins like when running a small dev team?

[tobinharris]

Not at all, we just finished our financial year and it was 14% operating profit.

The previous year was 29%, but last year was lower as I made some expensive decisions during the COVID period. Basically, I grabbed all the revenue opportunities I could without too much concern for profit

[anyfactor]

Would love to know that as well. I have worked with few agencies as a contractor. From what I heard it is very hard to have a decent margin doing software dev work unless you have offshore subcontractor connections or an offshore office. When you have a downturn it could be brutal with an onshore team.

[tobinharris]

You're right about the downturn, it's impossible to run a team for long without a full order book. That said, I think you'd have this problem for an offshore team too, perhaps with a much longer "sat on hands" cash runway.

I have a friend who's set up an offshore team and he saves 70% on developer salaries from what I can infer.

We employ within Europe and the UK, our average dev salary is around $65,000.

[anyfactor]

I forgot you are based in UK.

I don't think you are saving much by hiring outside of Europe or even UK. Many people had their fair share of trouble with Ukraine. Even a qualified latam dev's full time salary averages out at USD 30-40/hour.

Being in UK is perfect for an agency.

[Ant_on_]

tobinharris thank you so much for your great comment and advice! I imagine it is very hard managing such a large agency. I'll take your advice into account when starting.

[stef25]

Kudos for wanting to go down this route. What makes this business tough imho is the fact that it's in your interest to finish projects as quickly as you can, ideally in less time than what you estimated / quoted because that gets you more cash. But clients will always demand more, so that makes for a never ending challenge and will very much distract you from coding.

Nailing down the scope is probably the hardest part of every project and it takes several days of of meetings, analysis and back and forth. And that's just to come up with an estimation that the client might then reject, let alone not want to pay you for. So in the end you end up rushing the analysis and that will just bite you in the ass later.

One way I've found to get more money out of your clients is managing their hosting, if you're able to or can outsource it at a margin. Charge your initial fee to build the project and then charge a monthly fee to host it all. Most clients will be happy to pay a lot more than the actual cost for them to not have to worry about it. If you do it properly this will give you a nice stream of almost passive income.

Try to underpromise & overdeliver.

Good luck!

[Ant_on_]

stef25, thank you for your comment and hints! I think that I always try to "underpromise & overdeliver.", I've learned it the hard way. I like your advice or hosting their project, for having a steady recurring income.

[brudgers]

1. It is hard enough to find bad clients. As a new shop, that’s mostly who will reach out to you. Mostly who will consider you for projects.

Good clients already have consultants they hire, that’s part of what makes them good clients. Don’t expect to encounter them if you are asking these questions.

2. $0. If you start without any paying work, don’t spend money.

3. They charge nickels and dimes. Consulting is saying “yes will do it, it will cost a fourteen thousand dimes and one hundred and three nickels to get started.”

4. Three to six months is rare, after three months figure you won’t be paid for your cash flow planning purposes.

Good clients pay quickly, that’s part of what makes them good clients.

Bad clients (see above) don’t pay. That’s part of what makes them bad clients.

5. Starting a consultancy is not an obvious next step in any profession.

It is an obvious next step when potential clients keep asking you to do it.

Otherwise assume the market is efficient and there is an equilibrium between the number of projects clients are willing to pay for at a rate that sustains a consulting firm and the number of consultants doing that work.

To put it another way, assume nobody cares when you hang out your shingle except people who have burned a string of previous consultants.

It usually takes years to develop a roster of regular clients. And then continuous attention to keep them.

Good luck.

[Ant_on_]

brudgers thank you for your ideas and hints!

[oxml]

Most people vastly underestimate how difficult it is to start, run, and scale a profitable agency (dev shop, design studio, or similar). New business is the hardest part, and unless you're extremely well-networked, you'll soon run into problems.

The best advice I could give would be:

- Make sure you really want to do this. It's way harder than you think for reasons that have nothing to do with doing the actual billable work. (Legal, HR, payroll, management, new business, processes, etc.)

- Keep your costs as low as possible. Average agencies are in the 12-18% profit margin range. Agencies doing very well might be able to hit 25-35% or sometimes more.

- Become a recognized expert in one area.

- Use that expertise to promote and market your company to potential clients in that problem space.

- If you want a leg up on your competition, go hire someone like Blair Enns or David Baker to get you started on the right foot. (nobody does this, but it would save a lot of work in the long run if you can)

[Ant_on_]

oxml thank you for your advice!

[tluyben2]

> Do checks really take 3-6 months to be received from clients?

We resisted way way too long before using a factoring agency; it costs money but it takes away the chasing, stress etc and, very importantly, they make the contracts and invoices better. At least ours did (and this is over 10 years of being happy clients).

A good factoring agency also lets you negotiate % for outliers (we had mostly 50-1500k contracts and at one time we had a 10m one; they made a really nice deal on, with us and the clients, over payments were both client and them gave up % of payment to get to a deal that worked for all.

My only tip after running dev shops of different sizes is to believe in your own strength; clients try to work you; the bigger the company, the more they might be trained for this. And I mean have staff particularly trained for screwing/squeezing small agencies; it happens a lot. Make your own plan and don’t go for pots of gold; there is enough if you are good. And I don’t even mean at tech (which needs to be good in my opinion) but mostly understanding what the client wants and discussing that at a level they understand and like.

The hardest thing, and why I will never do that again, after having successful (in my country quite sweeping) companies, I will never do services again is; I do not like talking about things that are not the project. And clients do demand that of you; the bigger, the more time.

[Ant_on_]

tluyben2 thanks for your tip. Setting boundaries is very important, and not allowing bigger companies to squeeze you is also important.

[mooreds]

I'm going to sidestep all your questions and ask:

Do you really want to build a business?

Because that is what you'll be doing. You'll be focusing on marketing, sales, and whatever else needs doing, shifting your focus away from software development. Especially as it grows.

There's nothing wrong with focusing on business, but if you are a hacker of 15 years experience, you might really enjoy, well, hacking. And business, while it can be viewed as an interesting system to tweak, most definitely is not software development.

[Ant_on_]

Good point, I guess I would code, just in a lesser amount, and focus more on the big picture.

[notkurt]

I was in a similar position and found the following quite useful:

- Leaverage your existing professional network to find your first client. Go above and beyond to ensure they see the value of what you offer.

- Build your portfolio and testimonial base from day one.

- A referal client is going to be alot easier to land than an organic lead.

- Develop your processes, standard operation procedures etc as soon as possible.

- Stick with your current job until it's just not possible to manage both / it's clear you have enough income to sustain yourself / you're confident in your business to the extent where you are comfortable living off some savings for a bit.

- Keep your costs low, don't subscribe to every saas. In saying that, don't try to save a few bucks by forgoing something you actually need. Rule of thumb is to sit on something for a week before committing to a new subscription. Audit your subscriptions on a monthly basis.

- Get something like Xero to make accounting easier, keep on top of your invoices, outgoings etc to make the accountants life easier / cheaper at the EOFY.

- Finding clients is a mixed bag. Depending on your target audience, happy clients might refer more clients your way.

- Bad clients are most likely going to refer more bad clients.

- Once you are taking off, a proposal software tool like Better Proposals is going to be very useful.

- Poor scoping / agreements will bite you in the ass in the long run.

- Allowing scope creep will set a precedent for all future conversations with a said client. Alot harder to walk it back once it's been said.

- If you agree to something out of scope, it's now your problem. Ie if it's not up to scratch, you can't come back and say well it was out of scope, we did our best.

- Having a "gap" in your quotes will help you with scope change conversations. Ie. Sure we can help you with that, but that will eat into your gap. A gap is an extra % charged upfront, that is deducted from the final invoice if unused.

- Go for something like Office 365 for Business for your emails etc. Explore all of its features. Most people don't even know the half of what a ~$8 subscription can get you. Emails. Cloud storage. Client booking systems (Like calendly but better). Teams. Automated forms.

- Setup your Google My Business to collect reviews.

- SEO for your website. Very important. Not too hard to get right if you are not in a competitive space. Write relevant blogs with long tail keywords your clients might be searching, especially if there isn't much competition on Google.

- Find clients who will have multiple projects for you. Whether it be an agency, or large client.

- Try locate avenues for monthly reoccurring revenue as soon as possible.

- Working 7 days a week for extended periods of time isn't going to do you any good.

- Don't buy your domain name until you have registered your legal business name. Make sure you you can try get the dot com + your local tld.

- Most client emails can wait until Monday. Don't set the expectation you're there 24/7.

- Don't get bogged down in a persuit for perfection. We are a web development agency and our website sucks, the rebuild keeps being pushed back because we get bogged down in client work. Our new rebuild is alot simpler and will be done way sooner.

- If this is your first time in business, try find a business mentor. Doesn't need to be in the same field as you, although that might help. Just someone who knows how to run a business

Either way, that's my 2 cents. Classic case of do as I say, not as I do. Alot of these have stemmed from my learnings running a web development agency for a few years. Good luck!

[tchock23]

Great list, but why not buy the domain name until you have registered your legal business name? I haven’t heard that advice before…

[pph]

I'm just guessing, but it might be better to register the domain under the business entity instead of privately.

[notkurt]

^^ + At least in the case of Australia, you can't have the same trading name as another business. We've had a few clients jump the gun, buy a few domains and then realize they can't operate under anything remotely similar to the domain/s they've just purchased.

[Ant_on_]

notkurt, thank you so much for your advice!