Ask HN: Any tips to get VC funding for a consulting business? - googlycooly
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davismwfl
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.

~~~
googlycooly
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?

~~~
davismwfl
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.

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svennek
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..

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

~~~
detaro
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.

