This document discusses how to successfully spin off a product from an agency. Some key challenges include assembling a dedicated product team separate from the agency with its own P&L, developing a marketing and sales plan to find customers beyond existing agency clients, and giving the product sufficient time and independence to gain traction. It notes that agencies are low-risk cash cows while products require more investment upfront for potentially higher rewards but also higher risk of failure. Setting the right cap table to motivate the product team is important to avoid the new venture still relying too much on the agency.

1. How to spin off the Product
from the Agency

2. Traction
Divante
250+ ppl, eCommerce, R&D company, double digit
YoY growth, double-digit EBITDA.
Vue Storefront
The fastest growing eCommerce Frontend Tool.
№1 Open Source PWA for eCommerce.
Backed by 2 VCs (1.5M USD)
Part of Y-Combinator 2021.
Open Loyalty
Headless Loyalty software, build for large-scale
projects, proven by partners, API first approach.
Backed by R&D Grant of 2,5M EUR.
Callstack.io
React/ React Native Tools. Co-founders of the React
Native Community. Double digit YoY growth,
double-digit EBITDA.
Meet Sales
Meet your clients on-line. Show them products,
discuss prices, and complete orders. Backed by 10
amazing Business Angels & Berlin-based VC.
Catch The Tornado
eCommerce needs new tools. Composable Commerce
is re-tooling the whole industry.
Startup Studio focused on Enterprise eCommerce
Software.

3. Building a successful product in an agency
What product to build?
Problem you know
Can generate project for the Agency (worst case scenario: marketing tool)

4. Building a successful product in an agency
Is that a product or not?
open-source projects are not products as longs as there are no clients eager to pay for them
Monetization idea or even strategy
PO in charge of design development
Marketing and sales plan.
Dedicated Team

5. Building a successful product in an agency
The Founding Team
We’ve heard many stories of really good agencies going broke because they started building a product and
forgot who is paying the bills.
Product Owner and a Product Team which will focus 100% on the product.
When we decide to build a product, we know who is responsible and these peoples are 100% responsible.

6. Building a successful product in an agency
Separate and independent
If the Product Team is not separated from other projects they will never finish the product.
We separate the Product Teams, create separate P&L files (Profit&Loss) and even a separate room for
them.

7. Building a successful product in an agency
Whom to sell
We know that our clients just like us and they would have a hard time saying NO to us.
We decided to create marketing and sales pipelines from the ground up.Thanks to this approach, we found really interesting
niches and geographies. For example, Open Loyalty is really popular in Asia among financial institutions. Before that, we’d
never worked with financial institutions nor with clients from Asia.
The same goes for Vue Storefront, whose commercial version is getting popular in the U.S. and not so popular in Europe.
This is another argument to invest in separate Product Teams. For every product, we see a reasonable minimum of two
marketers and two people responsible for sales operations.

8. Building a successful product in an agency
Traction and time
Crossing the Chasm, The Tornado and Escape Velocity are three great books about building new products
The authors say that for VC-backed startups it could be hard to cross the chasm and address a market which is just
starting.
VCs create the urgency that pushes these companies into hard selling even before they really understand the market.
Especially when you start in a new market, traction at the beginning is great because you address enthusiasts who are
looking for innovations.
When you want to sell more, you must move to the next group that needs some business proof of the value you
deliver. This shift is super-hard and usually takes much more time than expected. If you build a product for yourself, on
a market you deeply understand, you will have more patience and understanding.

9. Why is it not a good idea to develop Products in an
Agency?
Agency
● can generate high EBITDA even with a relatively small
business, 30% or even 40% EBITDA margins are nothing
uncommon with a good agency business,
● can pay dividends every year, cash-cow strategy,
● growth is linear but not so risky, you can grow 20-30%
YoY for many years,
● value you create is around 10xEBITDA,
● it’s quite hard to sell the whole business. Of course if
you design an agency the right way, it’s perfectly
possible,
● no VCs or BAs interested in funding it, possible exit to
Private Equity or a Strategic Investor, but you don’t
need exit as this is a cash-cow.
Product
● you need a lot of investment for the first couple of
years, no positive EBITDA, no dividends, a lot of
stress,
● high risk of going bankrupt during this phase,
● usually you need some effect of scale to build your
EBITDA, which could go up to 90% eventually,
● the value you create is around 10-20x REVENUE (so
this is basically a lot higher than for a services
business),
● it’s relatively easy to sell it (many more options),
● it’s quite easy to find external BAs, VCs interested
in financing growth.

10. 3 Problems of spinning off the product from the agency
The Team - for every company you create, you need a Management Team.
Usually agency owners are not able to leave the agency business.
Building two companies at the same time is super hard. You need to decide where to focus.
Despite what you choose, you need some new managers that will run the agency or the product business.

11. 3 Problems of spinning off the product from the agency
Cap table - this is somehow connected.
If you introduce a new management team for the product company you need to be sure these guys are
motivated and will feel fully committed to the new company.
This is still a startup and the team is much more important than anything else

12. 3 Problems of spinning off the product from the agency
Independence - is this product able to be successful without any further support from the agency?
You should think about cash-flow, clients, maybe some additional services are needed.
You need to make this independent.
At some point there will be a gray area in which the new company can compete for talent, clients etc. with
the old company.

13. How to solve these problems
Pre-product - prototype is built already, but the product is not finished yet. No clients. Here you need some smart money from the people
that will also help you figure out your strategy. Business Angels love this stage. Usually rounds start from 250k eur/usd.
Pre-money - the product is live already and.. despite the name, usually there are some first clients. Maybe you don’t see a clear pattern
yet. Someone is already paying but the whole pricing needs to be figured out. Here you can ask for the first VC money. Usually rounds
start at 1,5m eur/usd.
Close to the Break Even Point/Scale Up - basically you have a lot of clients and you know what you are doing. You can realize your
margin achieving the BEP or you can decide for further growth to win more of the market. This is the moment where everyone is
interested in giving you money - starting from VCs and ending at PE Funds, debt financing, you can IPO, you can do whatever you like
because you could be profitable

14. Cap-table
● Pre-product/Business Angel Stage - 70% of the shares in the hands of the Team.
● Pre-money/VC Stage - 50%+ of the shares in the hands of the Team.
● Break Even Point/Scale Up Stage - ESOP around 10-15% is usually fine.
Technically you can think about ESOP (Employee Stock Ownership Plan) or other instruments. These
shares could be vested, still, you need to think about these levels as only this makes the company
investable.
One of the biggest mistakes that Agency owners make at the early stage is they don’t give away enough
shares to the Team that will actually run the new company. Then they end-up with a company still at a very
early stage of growth that is not investable. This is a trap.

15. Tomasz Karwatka
tom@catchthetornado.com