Agencies are wildly underrated

What's up, everyone? This is Alex, the host of Founders Journal. As you may know, I built Morning Brew from my senior year of college until we sold the business in 2020. And now I'm building a variety of businesses in different spaces and different stages. I'm basically averaging 1 to 2 new businesses per year. And because of that, I have had the opportunity to test a ton of different products and services, ultimately landing on a core software stack that serves as my business operating system whenever I start a new company. I have my go-to banking service. I have my go-to formation service. I have my go-to domain hosting service. But probably the most important of them all is my HR service, Gusto. If you're a longtime Founders Journal listener, you know how much I think about people in the context of business. A business is nothing without its people, which means a platform that helps me manage and take care of my people is invaluable. And that means I've tried every HR platform under the sun, always with the same exact goals in mind. First, I want a product that's intuitive and delightful to use. As a non-HR person, I find the intricacies of payroll, benefits, taxes, compliance, and expenses to be painful. So I just want something that makes my life easier. Second, I want it to be affordable. I'm a bootstrapper at heart. I started Morning Brew with $0 and I started StoryArc with $0 as well, which means I don't have infinite dollars to drop on SaaS products. And third, I want a platform that acts as my one-stop shop for all things people. I want it to handle payroll, benefits, hiring, onboarding, and taxes, all while integrating with all of the other tools in my business stack, whether it be QuickBooks, Slack, or Google Workspace. Well, Gusto hit the trifecta, which is why I am a customer and use it for every single one of my businesses. Yes, this is a paid sponsorship by the amazing team at Gusto, but I would sing their praises even if I wasn't being paid to do so. So if you're looking for a platform that takes the pain out of payroll, benefits, and HR, I highly recommend you check out Gusto. And if you sign up at gusto.com/alex, you will get your first 3 months free. Now on to the episode.

What's up everyone? This is Alex Lieberman and this is Founders Journal. For those who are longtime Founders Journal listeners, welcome back. For those who are new to the show, here's the deal. Founders Journal is my audio diary made public for the world. My goal is to increase your odds of success as an entrepreneur by sharing the stories, lessons, and tactics that I experience as I build my businesses. You can expect the podcast Monday and Wednesday with episodes that are under 20 minutes in length. And if you want to get notified when a new episode comes out, make sure to subscribe wherever you listen. Today on the pod, I am talking about agency businesses and why I think it is a great time to be building them. Let's hop into it. Agencies are wildly underrated today. They're unsexy. VCs won't touch them. And people are ashamed to say that they run an agency business. But I think that there has never been a better time to be an agency owner. So let's start with the why. Why are agencies considered to be bad businesses? First, you have to hire more people if you want to grow your business. Obviously, that is different from why software businesses are considered attractive, which is you get leverage because you don't have to keep hiring people. Software does the work for you. Number two, because of that, agencies are known to have lower margins. Number three, on top of this, the perception of agencies is that they are closer to project-based work than subscriptions, which means the quality of revenue is considered to be worse as well. And number four, put this all together and you see that agency businesses trade on a multiple of EBITDA when they sell, let's say two to twelve times EBITDA, whereas sexier SaaS businesses trade on multiples of revenue. Which, just to use a recent example, in the case of Cursor, the AI IDE, it just raised a $300 million round at a $9 billion valuation, which was 45 times revenue. For context, an agency business would never get anywhere in the vicinity of a multiple of 45x revenue. So these are some of the reasons that agency businesses are kind of treated like a second-class citizen. The lack of quality in revenue because it's not recurring. You have to hire more people if you want to scale the business. And I would say historically, these are very valid reasons for why agency businesses are valued less highly when they sell, because the margins aren't as good, the revenue is less predictable, and you have to keep hiring people. So with all of that, why do I think that agencies are underrated? And why do I think that perhaps more founders should consider starting an agency before defaulting to software? And also, why do I think that software and agency multiples will converge? Short answer is I believe the business, the agency business, will look a lot better in the age of AI. I believe that competition is going to crush retention in software businesses. And I believe that agencies offer freedom, and freedom is your lifeblood in entrepreneurship. So let me break this all down. First point, AI is going to have a massive impact on the margins of agency businesses long term. As this technology being AI lowers the cost of intelligence, agentic workflows that support smaller agency teams will start giving these businesses the type of leverage that software has historically given technology companies. Because if you think about it, agencies have historically needed people because people needed to do work that software couldn't do because it lacked intelligence. Now that software can be intelligent with AI, even if not as intelligent as, let's just say, a 10x employee, some percentage of knowledge work can be handled by technology in a way that was never possible. So let me just give you a quick example with one of my agency businesses, StoryArc. So at StoryArc, we help B2B, high-growth B2B companies stand up and execute an always-on content motion so that we help them create long-form playbooks on their website. We help them create editorial newsletters that are either weekly or biweekly, and we help them create social content from their company and executive social handles to drive distribution and traffic to their newsletter or their long-form playbooks. So in the case of StoryArc, you know, we are going to always need our kind of 10x employees that have great taste, that are creative, that are great at building deep relationships with clients. But it is a very specific remit within our business, like where we literally have company goals to set up agentic workflows, that will give all of our existing employees more leverage. And so one example for this is right now, the way that we basically create all, all of our content is we interview subject matter experts that are in the industry of our client and who have perspectives that our clients' ideal customers would get value from. So we do these 60-minute interviews with subject matter experts, and the goal is to basically get a tactical playbook from these SMEs that can then turn into the long-form playbook on our client's website. That can be the headline story of their editorial newsletter that can be turned into social content for LinkedIn and Twitter. And so historically, before AI, the way the process would have had to go is we would interview the SME, then a junior writer or content coordinator would take that interview, would transcribe it, and would create drafts of the first long-form playbook. the editorial newsletter as well as the social content. And if we didn't have a content coordinator or a junior writer, a senior writer or editor would have to do that whole process of creating these drafts. We think there's an opportunity now where imagine that right at the very end of interviewing a subject matter expert, an agentic workflow is triggered where automatically based on a prompt that we have, you know, tested and refined over a period of time, it automatically creates a first draft of the long-form playbook, of the editorial newsletter, and of the social posts in kind of the exact format that we would want to put them in onto the various content channels that we're talking about. And even let's just say it only gets you 70% of the way there where it has the basic structure of the playbook or the newsletter we want to create. It has pulled the most important key quotes from the subject matter expert. It has maintained high specificity of the numbers, the metrics, the results, that the subject matter expert called out so that now a more senior writer can really focus on making sure the story flows and is compelling and has a strong point of view for the reader. You know, this person can focus actually on acting more like an editor and really kind of punching up the draft that has been created. Basically what that means is, let's just say historically a junior writer or a content coordinator could only handle, you know, let's just say 5 clients. That basically means that this workflow can basically do the first 4 steps of a content process for at least 5 clients, but really more than that for, you know, dozens of clients where maybe for every 4 or 5 clients we need one less employee than we needed before. And it, and it gives our more senior employees or even junior employees who can now do higher leverage knowledge work It gives them the space to not do kind of lower knowledge work that they would've had to do prior. So I think there's 2 ways that, that creating this workflow is valuable. One is it literally just decreases the number of employees you need per client, right? To basically do great client work. And the second is, is for everyone on the team, not only are they given more leverage, but they can work on the tasks that require higher leverage. Human knowledge. And so this is one small example, but I think there are dozens of ways that we can apply this within StoryArc. And I think the same thing really goes for any sort of agency business and really any business whatsoever. And so this example kind of illustrates why I think that agency business leverage is going to start creeping closer and closer to software company leverage. Now let's talk about the second point that I called out earlier, which is competition. The barrier to build software has never been lower with tools like Cursor, Supabase, Vercel, Replit, Windsurf. The cost to build software and the time it takes to spin up software has collapsed completely. And I believe that this is going to cause a few things to happen. Like the oversupply of content on the internet, you will have an oversupply of software that is one more specific and niche than it's ever been. So there's going to be this whole long tail of software products that are created for the first time ever.

Some—

and actually, I would say more than some, like the majority of software that is created is going to be kind of mediocre slop, like just mediocre software that's not well-built or that has poor user experience. And then I think because of this supply glut with software, there is going to be a lot more competition for a way more fixed set of users, right? So there's going to be the same number of mouths to feed and there's going to be a lot more food. This acceleration of competition is going to hurt software margins in 2 ways. I think retention and marketing— acquiring users will be more difficult than ever before, which means that spending on paid marketing or employees to do organic marketing will become even more necessary. It's why also you hear a lot of people talk about that distribution has never been more important. And because consumers are going to have more choice between software products than ever before, I think we are going to see far more customer churn, especially for non-enterprise software. So that's the second piece, which is competition in software going to be more heated than ever before. And so I think what was typically considered to be a more quality recurring revenue stream in software products is going to be less true than it's ever been. The final piece to this agency versus software argument and why agency businesses are attractive today, especially the last piece about this, is freedom and flexibility. I value freedom more than anything as an entrepreneur, and I think this is the case for most entrepreneurs. The ability to choose my path, control my speed, and not have to take orders from someone else is a huge reason that I became a founder. While some may say that venture capital not being interested in agency businesses is a bug of the agency business model, I think it's a feature because you have no choice but to start cash flowing your agency on day one and be default alive, as Paul Graham says, because you're not going to have the good fortune of being able to raise money for an agency business. And then because you have to cash flow from day one, you have the freedom to choose from day one how you plan to use the excess cash that is being spit off by your business. One year it can be putting more money in your family's pocket to create greater stability. Another year it can be to invest that cash flow in turning one of your internal AI tools or workflows into an actual software business. And that is the other point I wanted to make about flexibility in agency businesses. Building an agency does not mean low ambition. Just remember, you have multibillion-dollar agency businesses, whether it's BCG, Bain, McKinsey, and Accenture, or WPP, Publicis, and the big advertising giants. But also on top of that, like you, not only do you have massive agency or service-based businesses or human capital businesses, but also non-agency business models can be born out of agency businesses. And so I think about Mailchimp, right, which started as a digital marketing agency before turning into an email software giant. I believe agencies are going to be ground zero for new AI tools and workflows to be built. And if agency owners are ambitious, long-term minded, and commercial enough, they can use the cash flows of their businesses to incubate non-agency products. Said differently, they can turn their internal AI tools into external AI products, software products, if they want. And by the way, that is the goal of one of my new businesses. So I'll just give you another example talking about my new business. I started a new company called 10x, and 10x is an AI technology consultancy. And basically the thesis of 10x is that basically every company on Earth, but let's start with the US, is going to need to rescaffold their company with AI. Like, they're going to have to work AI into the foundation of their business because AI is a supercycle. It's collapsing the cost of intelligence. And so there will be like those who build with AI and those who don't build with AI. And I really believe that businesses that build on kind of the foundation of AI are just going to be fundamentally better businesses. And so you will be at a competitive disadvantage if you don't do that. Right. So, okay, that's assumption one. Assumption 2 is most businesses, I don't believe, are going to have the resources internally from either a knowledge or a time perspective, because unless it's someone's full-time job to do AI transformation in a company, it will never get done. So I don't think companies are going to have the resources to do AI transformation and reinvention. Because of that, I think there's an opportunity to be a partner to companies. And 10x is focusing on mid-market and enterprise businesses to help them understand where is the lowest hanging fruit to work AI into their businesses. So that's kind of the strategy part of our business, which is like to diagnose where can AI be applied in your business that takes the least effort but has the highest impact from a cost savings or revenue generation or efficiency perspective. And then we actually have the engineering resources in-house at 10x to actually build these agentic workflows and train up your organization on using them, right? So that is, that is 10x the agency, which is we help mid-market and enterprise companies transform themselves with AI by identifying opportunities and then actually building those solutions. That's the short-term vision. And again, I think 10x just as a, an agency business can be a $100 million a year business because I view the opportunity for AI transformation to basically be the GDP of the United States. Long term, though, the way I think about it is what's going to happen with 10x is we're going to basically take a look under the hood of, let's call it, $50 million a year to multibillion-dollar-a-year businesses. And I suspect we are going to kind of find the same challenges, the same relative opportunities to apply AI. And so I think what we're going to find is as we start building, quote unquote, custom AI solutions for a $100 million a year manufacturing business, as an example, we're going to see that that same agentic workflow could probably— 80% of it could be applied to another business with a very similar challenge. And so I think what we're going to find is these custom AI solutions are going to start as custom. But over, let's call it, the course of the next few years, we are going to see that actually these solutions are not that custom in nature and actually they can really be generalizable software that other businesses can use. And so I think there's an opportunity for 10x to start as an agency business that is both project-based and also retainer-based. But then I think we are going to be able to, using the cash flow of 10x, incubate some of these custom solutions for clients into actual software products and businesses that can sit under the 10x holdco. And what's beautiful about it is 10x at its core and consultancies at their core are really relationship businesses. And so what will be amazing is we will then long term have the distribution of tons of mid-market enterprise clients that we can sell our software solutions to, where said differently, we will have built-in distribution. And going back to what I said earlier, distribution is going to be the biggest differentiator in the age of AI. And so that is an exact example of how I'm putting my money where my mouth is. And I think 10x is not only going to be an amazing agency business, but it will also be the foundation for a portfolio of software businesses that we have built-in distribution for. So to summarize it all, I think agency businesses are not given the respect they deserve, especially at this moment in time. AI is going to make them look more and more like software. Software is going to look more and more like agencies. And agencies offer you the freedom and flexibility to control your destiny and be as ambitious and entrepreneurial as you desire. That is it for today's Founders Journal. As I always mention, please hit me up. I would love to get a conversation going with my listeners. Shoot me an email to alex@storyarb.com, S-T-O-R-Y-A-R-B.com. Say what up. I'll get the conversation going. Also, if you ever have any feedback for the show or any ideas for episodes you want me to talk about, definitely let me know. One last ask. If you enjoyed this episode, please share it on social, whether it's Twitter or LinkedIn. If you tag me, I will amplify it. I'll retweet it, repost it, comment on it. It's the best way for other people to find out about the podcast is when it gets shared on social. So please do so if you don't mind. Thanks as always for listening, and I'll catch you next episode.