Lessons from building a 7-figure digital agency
š“business philosophies with 'August' CEO Chris Spoke.
The Come Up highlights successful business ownersā & operators ācome-upā stories in an easy-to-read, written interview format.
All content is transcribed from live interviews (this one - October 2022) and edited to be more concise.
Iāve removed the interviewer's questions and replaced them with headers reflecting the topic discussed, because letās face it, this isnāt about me!Ā
For the second edition - an interview with āAugustā Founder & CEO Chris Spoke.
August Quick Stats:
š¤Business Model: Agency (Digital Products/Client Services)
š°Annual Revenue: $2.1M
šTarget Profit Margin: 20-25%
š§¾Avg. Deal Size: $75k - $150k
šBest Performing Quarter: $205k profit
šWorst Performing Quarter: $116k loss (-$166k over 4 months)
š„Headcount: 19 employees & contractors
ā³Time In Business: 4 years
ā©Best Growth Channels:
Agency Partnerships
Client Referrals
#ļøā£Businesses Started Prior to August: 10+
šHow Many Times He Almost Quit: None
šRead the full interview belowā¦
Why start an agency?
There are two answers - the first is that it kind of happened by accident. I had been managing small digital projects with freelancers for a few years, and the opportunity arose to formalize that structure when my brother needed some extra product help for his startup.
The question then becameā¦
āShould we take on a second client?āĀ
then a thirdā¦
and a fourthā¦
Before we knew itā¦we had an agency.
The second answer is that I have started many product businesses over the last 15 years and none of them have worked ā certainly not enough to make any real money.
So the agency ā something that was working - was the path of least resistance.
How many businesses failed before August?
Maybe a dozenā¦
Projects I've spent years on that failed, and some I spent weeks on that failed. I just couldnāt get anything generating enough money to support at least one proper salary for me as an operator.
I think the theme of all the failures was that I was pretty good at building products but never great at distribution and sales.
Ā So, like, the idea guy who struggled with execution.
I like tinkering on products, so I just spent way too much time on that, but the āgo-to marketā is really where you make it or break it, right? āIf you build it, they will come,ā never actually happened for us - we built it many times and they never came!
Keep in mind too, with those failed experiments - weāre talking between, like, 2008 and 2018 - the cost of acquiring customers on platforms like Facebook was WAY cheaper.
We didn't know how good we had it - we just didn't push hard enough.Ā
Whatās different now?
With the agency, sales has to come before the product, because the products we build are defined and paid for by clients.
The only thing to build with an agency, really, is better systems and processes.
Our only āproductā is our website, which weāve just very recently updated after a few years of neglect.
The other issue was that a lot of those failed product companies were always on the side - either I had a job, or was doing some freelance work, so it didnāt have the same exposure to the downside that I does nowā¦where if the agency stops making money, I stop making money.Ā
There is much more focus now - every problem is much more pressing.Ā
I have three kids and a wife who all insist on eating three meals per day!
Year 1 challenges & a slight detourā¦
There were challenges around streamlining operations, but that wasnāt major - it was just hiring the right people. Most of our systems I carried over from my experience working at Plastic Mobile, so I already had some experience.
It was really a business development issue - trying to find new business, but also not trying too hard, because 90% of our capacity was used up servicing our main client.
We knew we needed to diversify and not become too reliant on one client, but since I didnāt have a long history of business development or account management, it took a long time to build a network.
We did a ton of small projects, but ultimately, moving up the value chain and being able to close larger clients was and remains a big challenge.
And for some additional context - within six months of having started the agency, I was offered a full-time job in real estate development. The offer was interesting enough, and in an industry I really wanted to learn, that I decided to accept. I ended up calling my friend Jeff and said āI need you to quit your job and come run this fledgling agency I just started.ā
He said, ācool, no problem.ā
Jeff, has been my partner on various projects going back 10 yearsā¦maybe even longer than that, so I trust him completely, but it meant I was part-time at best on the day-to-day for the first few years.
I stayed with the real estate development firm for about 3 years, before I ended up quitting the job and coming back to run the agency full time in January of 2021.
So for the first couple of years of Augustās life, I actually wasnāt around that much.
Biggest challenge or setback so far?
In June of 2021 - just 6 months after deciding it was time to leave my real estate development job and go full time with August, and shortly after having my second kid - the worst case scenario happened and we started losing big money every month. Our monthly expenses in April 2021 were just over $100k, but our revenue dropped to about $55kā¦
We lost over $50k that monthā¦
and we lost another $36k the next monthā¦
and we lost another $30k a month after thatā¦
and $50k a month after that.Ā
And I thought to myself, shit, Iāve made a huge mistake. *laughs*
We didn't have much cash in the bank - we had been running for a few years and had built up some reserves, but we were burning through them quickly.
And again, this is not a product business, where you're at least investing in building something proprietary - this was just straight up lost moneyā¦
It might as well have been spent at the casino.Ā
The reason was, our client, who just a year before was responsible for 75%-80% of our revenue, cut their spend by a lot. They hired internally and didn't need an outside agency to support them as much anymore.
The risk we had been aware of in the early days - an over reliance on one client - materialized without having diversified quickly enough.Ā
Climbing out of the holeā¦
I actually don't know how we managed to get through that, because it could have easily gone the other wayā¦
It was just business development, all day, every day.
When you are burning through so much cash, unsure of where the money's gonna come from, you quickly become a proper business person, don't you?
Youāre not just a product guy anymore.
Typically, you might pitch potential clients with a couple of ideas, pricing and a timeline.Ā
We were showing potential clients almost the end state of what we were supposed to build for them, already fully designed. Because none of our employees were laid off, we had a team available to do a lot of work on spec.
It wasnāt ideal but it allowed us to spend a bit more time really overdoing our pitches - coming up with full design concepts and wowing potential clients with the quality of the work.
It became easier for them to say - āoh yeah, letās do that.ā
And sure, there is more than one example where we saw potential clients build the product without us using our design, but at that point you just chuckle and say, āwhat are you gonna do?ā
It's part of the gameā¦you don't love it, but, what are you gonna do?Ā
How many times have you thought about quitting?
Pretty much never since leaving my real estate development role because I just decided - āI don't want a job.ā
Yeah there were questionsā¦
āHow much do I have in personal savings?ā
āWhat is my runway if this goes to zero?ā
āHow many months until I have to figure out the next thing?ā
But it wasnāt deciding whether or not we should quit - this had to work.
Also, my personal runway was largely correlated to the price of Bitcoinā¦.
It was like,Ā
āOkay, Iāve got a yearā¦ā
and then a month laterā¦
āf***, Iāve got four monthsā
and then a month after thatā¦
āoh actually Iāve got seven monthsā¦ā
*laughs*
Itās a very volatile asset to tie your runway to.
I have some other stuff going on in real estate investing as well, with small scale development projects but Iāve never been willing to eat into that.
Things like that crossed my mind, but there was never a thought of shutting the door early - it was basically, keep doing this unless it goes to zero and then figure it out.
Thereās of course always the opposite thought which is to incubate a product that ends up eating the service business. Weāll see how that goesā¦
Thoughts on hiringā¦
Weāve grown from 8 full-time people to about 20 between December 2021 and June 2022.Ā Ā
Weāre still a small agency, but our rate of growth has been significant.
The big challenge for us was, as we grew, hiring quickly enough and maintaining the level of talent we were used to representing us. We had to hire quickly, and while we came to expect working with an āA team,ā we had some āB playersā, and maybe even a couple of āC playersā squeak through our vetting process when we first expanded. It was tough - the market was so competitive at the time, people would show up on an interview call, and they would be walking down the street with a phone flopping in front of their face or something ridiculous.
Now, our team is as good as it's ever been, and I think it'll continue to get better because our process for finding, vetting, onboarding, and retaining talent has dramatically improved.
It's not just that we got lucky with the right people, we now know how to hire and retain well.
Present day challengesā¦
I think we have 80% of our playbook in place for project delivery, but maybe only 20% for marketing and business development.
So far we've really just grown through brute force - just harassing people until they give us work, but itās not really how we want to do things.
We need to win projects large enough so clients arenāt cycling in and out every few months. Projects where we can really dig in, focus for a long time and build something we can be proud of to have as a great case study.
Really, we need to take our current best client, and make them our average client - that's the focus over the next year.Ā
We also have to ask ourselvesā¦
āhow do we build a reputation within a certain niche?ā
A lot of the ways in which you design and develop digital products is becoming standardized across the industry - there aren't as many technical choices to be made compared to 10 years ago - which means you lose a lot of what makes you unique.
So a big challenge is figuring out, āhow do we differentiate so people think of us specifically and want to work with us?ā
We think about this a lot, though the trade-off you face by specializing is closing the door on other potential clients. I think a lot of agencies can relate to this - you may want to specialize so you become a magnet for a certain type of client, but you need to do it in a way that doesnāt cut off the current inbound flow.Ā
It's an ongoing process and there are answers to the question, itās just a matter of executing it effectively.
Thoughts on margins & pricingā¦
I think overall we're targeting 20%-30% margins.Ā
There have been months where we've done much better - around 40%-50%, and obviously weāve also done much worse too, but weād like to average out around the 20-30% mark.Ā
There are a few variables, one being your rate card - how much are you charging per hour, per resource?Ā
We price ourselves to be competitive, but itās interesting - when you compare our scope of work for projects against other agencies of the same quality, the competition usually comes in WAY higher on price.
Itās not because their rates are higher, they just tend to assign many more people, and more hours to the project.Ā
There have been cases where we've under scoped the effort required, and that's been a tough lesson - but even still, we find other agencies with very comparable rates come in like, honestly, 50-500% higher than us.Ā
Maybe other firms know they can charge way more, but weāve seen SOWs where we would go in around $200k and other companies are pitching anywhere from $300k to $1M for the same work.
It can be a great competitive advantage, but it can also be bad if they say āwhy are you so low?ā Maybe you're doing something wrong, if youāre the outlier and everyone else is so expensive.
Maybe youāve under scoped, but usually, if someone is charging THAT much more, even if the quality of the product ends up being the same as what we do, the quality of the project management and client management will be much higher.Ā
They can then afford to do things like take clients to more dinners or have more people assigned on their file to handhold them, whereas we have to remain pretty scrappy and lean.
They're inviting them out to parties.
They're flying them out to conferences.Ā
They're doing all this other stuff they can afford to do because they're billing for it.
So, the client could feel like they're getting taken care of better even though the product ends up in a similar place with someone like us.Ā
That said, I like being the no frills option.
I like being the $200k bid going up against a $350k bid, and telling them ālook, they'll have a nicer office and a receptionist when you go to visit.
We wonāt - but we're almost half the price.ā
I'm comfortable in that place.Ā
Itās the right strategy for the moment because we don't have the pedigree to win too many $1M+ contracts right now. At some point weāll want to ramp up, when we can afford more non-billable staffā¦
I was just reading a story by the way - there's a company in Ottawa called GC Strategies and they got the contract for the ArriveCan app. Theyāre a firm of like, 5 people - all they do is get government contracts and sub it out.
That was a 54 million dollar total budget.Ā
Maybe Iām just not hip to the game, but I don't know how you spend 54 million dollars on an app.Ā
Thoughts on never exitingā¦
August is doing well, growing, and obviously paying me and the team our salaries.
So that's all good.
I think that we can get to a point pretty soon where it's really cash flowing well, and I wouldn't want to trade that as an asset for a one-time lump sum that would inevitably involve a four-year earn out or something similar.
Remember, I really don't want a jobā¦
Plus an exit is a taxable event, right?
And cash flow aside, it's really great to have top design and development talent around and available to tinker on new product ideas. It's a great resource and a lot of fun.
If we were to sell August, I would probably want to recreate that, and it might not be with the same great people that form our current team.
So, yeahā¦we're not selling.
What do you wish you knew 5 years ago?
Honestly, less than I would like - one of the main things that has served us well is just the fact weāve been around this long. Itās four years of reaching out to people, telling them what we do, showing them past work. You can't just learn that lesson and accomplish it in four daysā¦itās a function of time, right? Maybe you could condense it, but to some extent, it just takes time.
There are thingsā¦
Talent recruitment, retention, better project delivery, but theyāre pretty small in comparison to just being around long enough for people to know you exist and that you arenāt going anywhere.
Most effective growth strategiesā¦
We spent a lot of time in the early days specifically working on partnerships with other agencies - Public Affairs, Public Relations, PR, Advertising - all sorts of companies who donāt do digital design or development, but service clients in other ways. From there, just by letting them know who we were, and what we do, we were able to come on as a partner when one of their clients had a big campaign coming up.
That led to a good amount of our current client roster.Ā
The other one, which was maybe just a function of a particular moment in time, was the huge run-up of Web3 and NFT interest. We were well positioned to take that on since we had the skills and experience within that niche.
It might be less relevant now, because the market has cooled down, but it was a really strong niche that led to a lot of business for us.
The future of digital agenciesā¦
I think a lot of services will become more commoditized as no-code tools and Copilot-like AI assistants get better, which means we might want to get into more complex projects and specialize more. Maybe firmware for robotics or really complex bitcoin or machine learning work.
Weāll need to become more specialized to maintain the value proposition - I think you see more agencies doing that.
Now actually, I'm going to contradict myself, because at the same time we could still monetize basic digital tools since more and more of the economy will be asking for them.
Right now, if 1 of every 10 retailers has a website - eventually all of them will need one. So even though it will become easier, the demand should increase and there might still be room for good businesses to operate at that mid-range of services.
For us though, I think we want to get more specialized and more technical.
Tech stackā¦
Slack is the office.Ā
Jira for project management.
Github for our code repositories.
Github Copilot as an AI pair programmer, which is really cool.
DigitalOcean and AWS for hosting.
Notion for knowledge management and client proposals.
Quickbooks for accounting.
Humi for payroll and benefits.
Favourite resourcesā¦
Itās not a book or a resource, but I really look up to Andrew Wilkinson and how he built MetaLab, and then built his holding company to launch new products with some of its profit.
Just his general temperament and approach to business I think is really cool, so heās become an unrequited mentor - he's the mentor that doesn't know I exist.Ā
Business principlesā¦
I think a lot of people want to jump to doing the *big thing* in business - which is what I've always tried - but starting a cash-flowing business to establish a baseline and de-risk your lifestyle has so far proven to be a better approach.
I should have started my agency when I was 20, and by now I think Iād be well past the point where I couldāve hired a CEO, fully delegated, and wouldnāt have to think about it, but would still have some cashflow coming in every quarter.
Service businesses in general are underrated because you can start them up with no cashā¦theyāre immediately profitable, and there doesnāt appear to be any obvious limit to demand if youāre good at what you do.Ā
Itās an awesome stepping stone to the next thing.
Thatās it for issue no. 2!
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