Should You Start An Agency Or A Software Business? (Neil Patel's Contrarian View)

Why did you do an agency? So me and Sam always talk about like, uh, we have many mottos on this podcast. Um, for example, we don't do public math. For example, you don't say you're rich, you say you're post-economic. Uh, these are things we've picked up from, from guests along the way. And one of the, one of the motto, one of the mottos that we say is, uh, uh, you know, agencies suck. And, uh, it's like, and, and the reason we say it's not because they, uh, like they do well. There's not that they suck. It's like they suck as a business choice. Like if I could, I've always thought if I could choose between software or an agency, I'd choose software because it's like, oh, it's not a services business. It's gonna work while I sleep and it can scale up and I don't have to open up offices in Poland and Brazil and all these other places. But you chose that, you did software and you chose agency now. Um, why'd you make that choice and what's great about agencies that I'm kind of like not giving enough credit for?

So you, you're looking at business as in software's more scalable, it's more desirable by public markets, e.g., HubSpot versus, uh, Accenture. Accenture has way worse multiples than HubSpot. Accenture's a bigger company from a revenue EBITDA standpoint. But now take a different approach. Okay, HubSpot's a publicly traded company. You guys are both HubSpot employees, I'm assuming still. Is that correct?

Kinda.

Sure, well, whatever your guys' deal is, right? But you guys are pretty much at HubSpot. Now imagine creating a business and you don't plan on going public. You don't care for the limelight, you don't care for any of that. In business, what's a successful business? Good revenue growth? And good revenue and profitability, right? All that really matters at the end of the day, whether you grow or not grow, is how profitable are you? Would you guys agree with that statement? Assuming you're doing something that's ethical and you're not selling drugs.

No, I wouldn't agree with that. I would say there's a third thing, which is like, is this enjoyable? And like, do I like my day to day? And with the more people you have, most people would say that's just a little bit more headache than, Then that's not software or consulting.

Anytime you build a big company, you tend to have a large amount of people, whether it's HubSpot or whether it's Accenture. Everyone has—

Yeah, but you can have, you can probably have a much higher revenue per employee with software versus let's say you own a massive landscaping business. You're going to have to have tens of thousands of people.

But what's the difference from dealing with— how many people does HubSpot have? Like 6,000? I don't know, 5,000, 6,000 is probably a lot. I'm guessing on the number, but what's the difference of dealing with 5,000 or 6,000 people and 20,000 people. There's a point where it doesn't matter and it's a lot of people either way. Like, it's not like you're at 50 people. You still have thousands of employees to deal with and you need managers and layers and all that kind of stuff.

Yeah, but you're hiring some— good or bad, you're hiring a different type of person. So for example, if you're VaynerMedia, they're based in New York, they can probably only afford to pay some of their lower-level employees $70,000 or $80,000 a year. And so you just have to get a ton of people like that and have to have higher churn versus say a bigger company where you're able to pay a significantly higher salary because the revenue per employee is, is much higher. So perhaps there's a, a slightly different day-to-day with, because of that.

Not necessarily. Let's say you're VaynerMedia. He could be doing it to optimize for profit. What if I told you his LTV was 6, 7, 8 years, right?

And you have to—

then at that point you can still hire high-quality people and pay them an arm and a leg.

Okay.

You get what I mean, right? Yeah. Like you look at Accenture, they're charging accounts so much money and their contracts are long. And I don't know what VaynerMedia's LTV is, but there's a lot of consulting companies that have LTVs of 6, 7 years for clients and their clients are spending, you know, a HubSpot. Yes, there's more revenue per, you can say potentially in software you can get to more revenue per employee. But I know consulting companies that only take on contracts that are like $5, $6 million and upwards. So you have high margins and you can have a high revenue per employee, but either way, no matter what, as you build a big business, you're going to need more people and it's a headache to manage whether you pay them $70,000 or whether you pay them $150,000, it's still more of a headache. And the notion that if you hire someone for $150,000, I'm not saying you're saying this, it doesn't necessarily mean they're a better employee, right? And do you—

No, it just means different types of headaches.

Correct. Exactly. Engineers, for example, are very expensive in this economy, right? So the point I'm getting at is a consulting company. I had the demand for it. A lot of people wanted to pay me for marketing and there was just so much demand. It would've been silly not to do. And if I'm not trying to go public or I'm not trying to sell, money's money. Green is green. As long as you're happy doing what you're doing, take the cash.

Will you ever sell the company?

I wouldn't say I would never sell the company, but I don't care to ever sell the company because I love what I'm doing. We also have good growth too, right? Like, I don't know what we'll grow this year, 60-something percent, which isn't bad, you know, with the market going up and down and fluctuating. 60-something percent is my guess at our size. It's decent.

Yeah, the part I was actually talking about was a little bit more like, uh, I think you're, you're totally right that like if you're going to win big, you're going to end up with a bunch of employees and like You know, it might look like 150, it might look like 1,000, it might look like 10,000, but like, you know, in either case you're gonna have managerial work and headaches and it's just different types. The part I was really talking about is like, you know, I've now built, let's say a media company content, and then it's like, um, done educational stuff. So courses, which are like, you know, a different thing. And then there's like, I built software company and, you know, we ended up selling that one. And then it's like, and then there's, um, services, which is like client services, like with like consulting or agency model. And what I hate, what I, what I love about content media is it's actually pretty fun to create and it's cool because a lot of people consume it. So the kind of, you know, you get that like hit. Um, but you gotta like, you gotta bake the cake every day, right? So like, you know, The Hustle or like the Milk Road or this podcast, it's like we have to come on and create the content again. Uh, you know, for the most part we, we're not doing like super long evergreen stuff. Uh, so, you know, like with the Hustle, the daily newsletter, Milk Road, the daily newsletter, it's, we gotta bake that cake every day. Whereas software, it was like we built one product and yes, we might, we will improve it over the course of a year. You know, every year we're gonna improve it. But like fundamentally, um, we didn't have to like recreate the product, come up with a new viral story or a new great content segment, uh, that would like require like a new genius. Uh, with software it's like you come up with one genius moment. And then you sort of refine it, make it work better over time and get rid of bugs and things like that. So I preferred that part of software, which was like making a product rather than making kind of like a disposable, uh, you know, consumable piece of content or like I have an e-commerce company and like it's a pain in the ass to have supply physical products that are supply chain constrained. And like we have a warehouse, we got warehouse problems with our e-commerce business. And so I'm like, man, digital was sweet compared to e-commerce, but e-commerce is quite profitable. Like kicks off a bunch of profits. That's nice. So every business has these pros and cons. And I always thought agency was like, um, the part I always thought was a pain in the ass was like the client services. You are reinventing the next campaign and the next winning marketing, you know, formula for them. And you have to keep clients happy all the time. And clients are sort of like never satisfied in a way that like, they, if software, it's like you can have nameless faceless customers that like, yeah, some percentage of them will, will write into your help desk that's in the Philippines or whatever, but So like you're not having to like, you know, send account reports to your, you know, your, your big clients to keep them happy.

Yeah. But you, everyone has their own problems in software. A lot of people have churnless issue and they can't figure it out, or they have competitors who come into the marketplace and just undercut 'em on pricing for the same features cuz it's cheaper and cheaper to build software these days, right? So they all have their own problem. To me, I look at it as if you can find the right people. So every time I start a company, I find people to put in place that have already done it multiple times before. Because your risk of failure are lower and they already know everything to do. So I don't have to deal with client relationships. I don't have to deal with customer service or anything like that. I get to do what I enjoy doing, which is go and create content, be the face, et cetera. And my wife enjoys what she gets to do, right? She gets to donate the money, although we don't really consider it as donations. We look at it as investing. We're investing in people, although we really don't ever collect any money back. It's more so, You're investing into making the world a better place or people's lives a better place or whatever it may be.

What's a, who were, who were your first 3 clients at this, at this age?

Because I don't know, they were small companies.

And right now, who's an example client?

Like a Fortune 100 software company. Like that is a typical company. Think of any big large corporation in B2B, that's a great example of one of our customers, or even B2C. Actually think of any Fortune 500 company, that's a prime example of a customer.

What's, and who's the CEO of your agency? Are you?

No, I'm never the CEO. I'm a terrible manager. I'm one of the worst managers ever. His name is Mike Gullickson. He was the CEO, no, he was the president of iProspect. Which is an ad agency owned by Dentsu. I believe in iProspect, maybe they had 4,000 or 5,000 people is my guess.

And what— when you— how early into the business did you have a hired CEO or hired leader?

Day one. I won't start a business without a CEO from day one.

And what did you pay them in the first year?

First year as my co-founder, so like $100 grand.

And that's because you basically went and drummed up $100 grand worth of business and you're like, hey Mike, I got this client to give $100 grand. Do you want to run this thing for me and help it get deployed?

No, our business didn't start off that way. I probably put in total of $5 million into the business of my own money. So it was bootstrapped but not really bootstrapped, if that makes sense. It's kind of cheating. And it gets easier and easier as you're an entrepreneur, right? The more the more successes you have, and I'm not saying I'm successful by any means, the more capital you have to deploy into the next thing. So reduces chances of failure. And when it's your own money, this is just my thesis and I could be wrong on this. I have no data points. When it's your own money, you're much more careful than when if you raise like $15, $20, $30 million of venture capital, right? You really look at every single dollar. But Mike was the CEO from day one. He's a great operator, has no agency experience. Eventually we got in a president and then eventually from there we got in a CEO.

And have you guys crossed $100 million in revenue yet?

Yeah, we do 9 figures.

That's crazy, man. So, well, I mean, that's just pretty wild that you were able to like parlay this blog that was already all always kind of a juggernaut, but this blog into a, 9-figure-a-year business. I mean, that's amazing.

Yeah, it's been a good run. I hope it, I'm knocking on wood, although you probably can't hear it 'cause of Chris, but I hope it keeps going. And more so we're just having fun. Like for me, what I enjoy doing is building a business. I know I have an expensive lifestyle. I generally don't do stuff for the money. Like I overpay like house staff, like nannies and stuff like that. When I say overpay, I drastically overpay, not by like 10, 20, 30, 40%. Like I really mean drastically overpay. Because I look at people, I'm like, if you're cleaning a house, how are you going to live on this? Like I'll give someone 6 figures to do that. I know that sounds kind of crazy or stupid, but like I'm not giving my kids money. So might as well take care of other people in this world who need it more than we do.

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