Even startups with great products need to seek external funding. Whilst these funds may be deployed towards product development, they are typically deployed to drive growth.
The "growth at all costs" model, associated with venture capital in particular, is a contentious one.
The logic implies that, by growing faster than the competition, a startup can capture a disproportionate percentage of a market in the long term. But venture capital, like Hollywood, is in the 'hits' business. Most funds prosper from outsize returns in a very small number of investments.
The majority of startups lose money or barely break even. It's the handful of blockbusters that represent all the profit within the industry.
Not all founders want to forgo profit in exchange for growth, and not all businesses are setup to grow at all costs, especially through taking on debt. For the cohort of founders who prefer to grow slowly and enjoy the reassurance of profit as they progress, a new category of investment is emerging.
Known as "venture services," these providers act as partners, not vendors. Part product developer, part investor, they add most value to startups at seed stage by providing non-technical founders
with on-demand product teams in exchange for a mix of equity and cash.
Venture services combats the fees-for-service arrangement — an arrangement that creates a project-centric (not product
-centric) mindset - which rarely delivers the strategic thinking necessary to scale a software product through multiple iterations.
Because the firm's goals align with the client's, its team must consider the product's lifetime, not just its immediate requirements.
A good example is Castle's recent partnership with Trey Gibson, founder of Spotio, a Saas company that supports the door to door sales industry. Trey grew Spotio to over $1m ARR without a dedicated product team or CTO in less than 3 years.
A salesman by trade, he quickly found that product was holding his business back and consuming a disproportionate amount of his time.
Instead of growing his customer-base and talking to customers he was firefighting outages and persistent bugs.
By partnering in exchange for a 50/50 mix of cash and equity financing, Trey secured the committed product team he needed, without the non-linear challenges an inhouse solution presents.
By sharing risk and potential upside, venture services firms are properly incentivized to collaborate and take intellectual ownership of the startup's strategic and business goals. Their goals are the startup's goals. And when those goals align, the business gets to create the product it actually wants to — not the product an investor wants to see.