I Read 47 Articles on Starting a Consultancy So You Don't Have To
I Read 47 Articles on Starting a Consultancy So You Don't Have To
3 Takeaways from Reading Every Article in Vixul's Blog
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My favorite part of Vixul, the consulting accelerator I’m currently enrolled in, is the opportunity to watch how accomplished business leaders operate.
And one commonality I’ve noticed among them is that they all read a lot.
Every presentation at Vixul has at least 2-3 quotes from books the founders have read over the years.
This remains true even for the guest speakers in Vixul, who are always name-dropping books to read.
It seems that strong entrepreneurs view reading as a fundamental part of their job, rather than a supplement to it.
Bill Gates famously said he reads 2-3 books per week, and Warren Buffett is known for his voracious reading habit, dedicating several hours to reading every day. They all credit their reading as a key factor of their success.
As a result, I’ve started blocking off time every week for focused reading. And I started off this habit by reading every article in Vixul’s blog.
It contains 47 articles on how to run and grow tech consultancies. I spent last weekend taking notes on all of them, and summarized my top 3 takeaways from their blog including:
Why consulting is a medium-risk, medium reward option for entrepreneurs
The motivations for buyers when acquiring a consultancy
Key benchmark metrics to aim for in your consultancy
Consulting is a Medium Risk, Medium Reward Option for Entrepreneurs
My favorite article on their blog is one of their earliest ones, where they discuss why they are so bullish on investing in tech consultancies.
In this article, they discuss all the options an entrepreneur has on a risk-reward spectrum.
On one end, you have the highest risk, highest reward option for entrepreneurs, which is building a SaaS product. These types of startups fail 90-99% of the time, but in the case of a huge exit, can be worth billions of dollars.
On the other side of the spectrum are “typical lifestyle businesses that you see daily on the roadside.” Think brick and mortar stores, like restaurants.
However, they say that many entrepreneurs miss a third option in between these two extremes, which is starting a consultancy.
In their words, it’s a “medium-risk, medium-reward option” that has a “75% chance of success” and can typically “produce a $5mm-$100mm outcome for its founders” in a “5-7 year time frame.”
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They conclude by saying this is why they started Vixul. “The rising valuations and high demand” make it an attractive option for founders and investors alike.
Why I Would Rate Consulting Even Higher Than They Do
Obviously I agree with them. I’m betting my career on this, and have written about this before in another article, “Stop Building Startups, Start Consulting Instead.”
My only comment on their article though is that I would upgrade their evaluation of consultancies from medium-risk, medium reward to lower-risk, and higher reward instead.
Here’s why.
First off, consulting is actually lower risk than starting a lifestyle, brick and mortar business because it costs less and takes less time to start.
With a brick and mortar store you have extremely high initial starting costs before you can even get one paying customer.
Some other hurdles you face include:
Applying for a permit with the city
Regulation
High rent
Renovation costs
Equipment costs
And more. In fact, I spoke with a boba-shop owner who once told me it cost them $450,000 in starting capital to open their shop.
Compare this with a consultancy which requires almost no starting capital, and no wait time to start, which makes consulting less risky than opening a brick and mortar store.
Furthermore, they say that it’s a “medium reward” outcome because the payoff is “only” a $5 million to $100 million outcome” whereas product startups have potentially billion dollar payoffs.
I don’t know what world we live in where we call an 8 or 9 figure exit a “medium reward” because with that type of exit, you can retire and live off the interest for the rest of your life.
You don’t need an IPO to “make it” as an entrepreneur.
These types of exits are impossible for most other entrepreneurship options including “indiehackers” (who build their own small SaaS products), course creators, influencers, and coaches.
So while I generally agree that it is medium-risk, medium-reward, I would actually consider consulting as one of the less risky, and higher reward options for entrepreneurs.
Acquisition Scenarios for Consultancies
My second favorite article in their blog discusses different acquisition scenarios for consultancies, and why the best scenario is when you’re bought out for a specific capability that your consultancy provides.
In this article, they categorize the buyers of consultancies into different buckets including:
Private Equity firms - interested in acquiring companies they can grow
Competitors - trying to remove a competitor from their space
Consolidation plays - rolling up multiple smaller companies together into one larger company because they command higher multiples
Acqui-hires - who are more interested in the team than the company
And more.
But they mention in their blog that the “best acquirers are strategic acquirers.”
And that these buyers are often bigger businesses that struggle to innovate due to their size. So in order to keep up to date, they acquire a company in a space instead.
The best acquirers are strategic acquirers.
That way, the acquiring company instantly gets the staff, the processes, the implementation IP, case studies, and partner relationships to quickly gain a foothold in a market they didn’t have access to before.
What This Means For Your Growth Strategy
This was a very important article, because understanding who the acquirers of consultancies are and their motivations for buying your consultancy can inform your growth strategy.
In the article Vixul states,
“The buyer is usually acquiring a new capability. Anything outside of that capability would likely overlap with the existing capabilities of the acquirer and not be valuable to them.”
This only further emphasizes the need to niche down and specialize. If a buyer buys a generalist consultancy offering 10 services, they are likely only interested in one of those services to add to their capability, not all 9.
So instead of focusing your attention on adding as many services as possible to your consultancy, this means a founder’s attention is better spent focusing on the one capability that other businesses will be most interested in acquiring.
This also emphasizes why your consultancy should try to offer services particularly in the early stages of a technology adoption curve rather than the later ones.
Your big acquirers that are slow to move are likely already serving the “late majority” and “laggards”, which is why they were slow to begin with. So your value is in serving the innovators and early adopters.
Founder, Ali Hussain states,
“When you’re entering the early majority stage you should either start experimenting on your innovators with the next big thing or plan to exit.
Because this is the most lucrative stage of being an Emerging Tech Services company and you want to make sure you don’t become yesterday’s news as the world of technology changes.”
This was the case for the founders of Vixul, who built Flux7, a consultancy that specialized in helping companies adopt trends in Devops, containerization, and Docker from 2014 to 2019 before they were acquired.
Had they waited any longer, these areas of expertise would’ve already become the standard for larger companies, making them a less attractive acquisition target. But it was the timing of their acquisition while they were still in the “early majority” that made their exit a huge success.
Key Benchmark Metrics for High-Growth Tech Consultancies
Lastly, I wanted to share a couple key metrics to help you judge how your consultancy is doing from their blog. A healthy tech consultancy should aim for:
45%+ gross margins
50%+ YoY growth rate
3-6x revenue multiple valuations
85% bench utilization rates (aka percentage of billable hours)
EBITDA percentage + Growth Rate > 40 (rule of 40)
<6% of fee base should be allocated to fixed facilities costs
To be fair, the 6% rule for facilities costs is actually from another book I read called The Business of Expertise by David Baker, not from their blog, but I found it a useful metric so I included it anyways.
Final Thoughts
Dedicated reading time should be a requirement, not an option for entrepreneurs.
If you’re interested in starting an independent consultancy, I highly recommend reading all the articles on Vixul’s blog to start.
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