How to start a company – all relevant ecosystems count service companies as one of their core components. Service companies focus on a specific step or set of steps in a product cycle and provide reliable services with high quality. In the following article, we will review the different aspects of starting, running, and growing a service company. Service companies are often neglected because they do not attract venture capital (“there is no hockey stick curve for their revenue”). However, statistics show that service companies are often at the origin of successful startups, either by spinning them out or by themselves moving up the value chain.
As we encounter design services companies regularly as part of our work (market analysis, corporate advisory, M&A, …), we do find it important to provide a better view of their role in the eco-system as along with some of the relevant aspects of their strategy and operations.
Many design services companies start from the perspective of a few talented design engineers solving a particularly difficult design problem for a first customer. Frequently, it concerns former MSc and/or PhD students who have researched a next-generation solution within the realm of IC design, EDA, FPGA programming, or similar fields. Once the first project reaches completion, the team will start thinking about the next project. They will take on those project(s) that usually cover similar challenges as this is where the team [and the company] is building its reputation. Although this approach will yield a (incidental) strategy that provides some focus, often enough cashflow requirements drive companies to take on projects outside of their natural scope and lead to a more generic service profile which makes it less distinguishable from its competitors. It also results in more zigzagging behavior which, once introduced, is hard to get rid of.
Fundamental therefore, at the start, is the focus on defining an ambition (revenue, company size, market, focus, customers) and related strategy. Equally important is to make room for supporting and maintaining that strategy by driving a clear marketing and sales strategy. This will impact the OpEx for the company as you need to make room for a marketing professional who drives the company’s branding in a consistent and professional manner. However, the challenge starts with defining the ambition and the strategy underpinning that strategy. This crucial step needs to be at the core of the startup. It is important to ensure sufficient (external) input for this process to avoid limited views on where the (semiconductor design services) future is heading. Equally important, once defined, is to ensure that the ambition and strategy are properly maintained and calibrated to match developments in the market and the underlying ecosystem. More than VC-driven product startups, design services startups, as they are driven by their own cash flow, are more susceptible to the changing winds of time. Being able to weather a storm (market downturn) is critical to the survival of the startup. More on this in the subsequent postings.
Underneath a partial example of a design services strategy board. In a separate posting, we’ll cover a full dashboard example.
One of the challenges that comes with design services is the cyclical nature of the services business. When the economy tightens and corporates are watching their operational expenses, the first step will be to halt any external contracts/contractors which are not deemed absolutely essential.
Whereas the earlier (staircase) model is a good approach in scaling up revenue and creating new revenue streams, the foundation of the company is still based on the service model: headcount continues to be the main driver (typically up to 60-70% of revenue). In terms of (enterprise) valuation the additional revenue streams, however, will already make a significant difference.
Design services companies typically start small (some exceptions when it concerns management buy-outs) and natural growth is a slow process as it requires hiring and training of engineers based on/driven by the revenue stream of the company. Growth of business is tied to growing the team and it is not always easy to find the engineers.