Unfortunately many people in the start-up space do not understand the difference between PRODUCT and SERVICE start-ups. User/revenue traction, i.e. “how many users do you have or how much revenue do you make”, is the standard investment criteria used by most investors, be it individuals, VCs, or family offices. Product start-ups come with inherently higher risk, and investors don’t like risk even though they want to have high returns. This is the reason why we don’t see product start-ups like Facebook, Linkedin, Twitter coming out of the UK. Start-ups that get funding are usually service start-ups. We at CityFALCON have had to spend 9 months on building our product!
So what’s the difference between a product and a service start-up. Think about someone starting an airbnb rent-to-let model, an outsourced development, or a design agency – all of these are service start-ups. Typically you can start making money from month 1 or 2. With a product business, you have to “burn” some cash to be able to build a product, and some product companies that are successful today didn’t make a penny in their first year of operation. At the same time, I’m not saying you should just build something for one year without any customer development and feedback. You have to make sure that what you are building solves a problem and that customers will use your product when it’s ready. What you can’t do until the product is ready is to market and sell – an incomplete product is not going to get you many users and revenue.
So why build a product start-up when you have to burn cash for so long? It’s the upside and scalability of the project. With most well-built products, the entire team can be on the beach and you can still get new users and revenue. In a service start-up, you may need to hire more people or add more resources for every required increase in revenue.
In summary, due to the lack of resources, product start-ups in the UK are forced to chase users and revenue even before the product is ready. If I were to build a start-up again, I’d be more inclined to build a service start-up or move to Silicon Valley because UK is no country for a PRODUCT start-up!
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