The difference between
a Vendor and a Partner

The difference between a Vendor and a Partner

Companies require software to grow their business, whether it's a website, an app, an online shop or a digital platform. But, for CEOs and founders who are not technical, this presents a challenge: They need software, but lack the expertise to lead it themselves.

One common solution to this problem is hiring a digital agency - a firm that provides software design and/or development services. The firms that focus primarily on software development are often referred to as "dev shops." The dev shop market is saturated with options - from bespoke shops to low-cost offshore shops - there are hundreds of choices where the differentiation between firms is challenging to ascertain, particularly for a non-technical management team that does not know what quality means in this highly technical domain. As a result of the competition for projects, cost is frequently the factor that drives the dev shop market.

Cost and quality are at odds in software development. While non-technical customers have high quality expectations (given their personal interactions with market-leading consumer digital experiences), dev shops are focused on making their business work on a project-by-project basis, and each project must be closely managed for scope, duration and cost. The customer will be focused on quality, while the dev shop will be trying to limit time and cost. This inherent conflict is impossible to escape in a dev shop relationship, and is the reason that most VC's or seasoned entrepreneurs don't support this route.
Dev shops are also rarely focused on product. Non-technical management teams need help on digital strategy, product management, and product design, which are essential components of creating software that will drive a business. Most dev shops are focused on engineering and lack true product expertise. Many dev shop relationships result in an environment where non-technical management teams are asked to provide digital vision, strategy, and product requirements so that the dev shop engineers know what to do. The common citation is that the result often times does not meet expectations. Working with a dev shop, non-technical management teams learn the hard way that getting help with product is equally (or more) important to getting help with engineering.

A dev shop is, by definition, a vendor not a partner. They are not invested in the long-term success of their clients. And their short-term, project-to-project focus is not the right solution for every business.

Another option is to hire a CTO, alongside a small team of engineers.

In-house teams certainly combat the concerns that accompany working with a dev shop, but bring different challenges. Hiring, retaining and incentivizing them usually comes at great expense and can be non-linear. As a non-technical management team, it's very challenging to even know what to look for in technical leadership. As a result, many months can be burned going down this path to end up with a relatively weak team.
Venture Services: The Middle Way
Somewhere between a dev shop and an in-house team lies venture services. These firms badge themselves as 'product partners', offering the benefits of a managed service in addition to the long-term strategic outlook and commitments of an in-house team.

Venture services firms seek partnerships that can generate return on investment. The output of the partnership may still be to deliver new software features, but the structure and orientation of the relationship is long-term and focused on creating value together.

Venture services firms are not investment funds - but they are focused on making investments. Their investments are made by structuring relationships that involve some cash fees to pay their working capital plus equity in lieu of profit margin. As a result, the only way these firms make money - is to see a return on their investment.
Somewhere between a dev shop and an in-house team lies venture services
This investment orientation forces long-term, careful thinking. A venture services firm can not take on any work that walks in the door. Similar to a VC, a venture services firm has a criteria that maps to its expertise and investment thesis, and every engagement is measured against this criteria. Applying this filter results in partnerships that make sense for both parties. The non-technical management team gets a partner that knows their business, thinks long-term, and is vested in generating value.

The venture services firm is the closest thing to building the awesome in-house team that is the VC/PE playbook. It matches closely in comparison: 1) the team is experienced and high quality; 2) the team is committed to the long-term; 3) the team is foregoing current income for future gain.

What that means for the client is that they're working with a partner committed to the success of their product/company over the long term, not a vendor working for monthly profit.

Today, all companies compete on software. The challenges of recruiting, managing, and retaining an in-house team have grown exponentially, but outsourcing to a vendor means interests are rarely aligned.

In an economy with those two competing trends, venture services offers a middle-way — and for the non-technical management team with big visions but limited capital and digital expertise, the middle-way is exactly the solution they need.
Castle Digital Partners
Castle is a digital partner for management teams of software-driven businesses. We team with management to envision, design, develop and operate digital platforms, products and services that drive growth, market differentiation - and ultimately enterprise value.

We are a venture services firm operating as a true partner and investor in our portfolio businesses. We focus on software-as-a-service, digital commerce, and tech-enabled services companies that have strong management, solid business traction, and a clear opportunity for digital product creation or transformation. We then partner on the execution of the digital thesis with creative deal structures involving equity investment and/or fees.

To date, we have executed over 50 digital platform programs and invested in 17 of these companies.