I think if you are thoughtful about it, using an agency/services business can be a great way to bootstrap your way into a SaaS business. I’ve invested in Logikcull and been an advisor to Showpad, both of which are very successful and did just that. Mapistry has also done something similar, where I am the largest investor.
The challenges include obvious ones such as relative scale and resource contention:
- Do you kill the services business once the software business takes off? What if that’s the one way to pay folks’ salaries?
- How do you share resources? This is almost impossible.
- How do you justify investing all the profits into the software business, if that doesn’t really benefit folks on the services side?
- Can you easily sell, spin-out, or shut-down the services business once the software business has even 10 or 20 customers?
- Can the top execs in the services business only work on software and basically drop services? If not, everyone is split too many ways.
So the best ones, one way or another, go cold turkey. They slowly wind down the services business and stop investing (e.g., Logikcull), spin in out and leave it with some of the employees, or just shut it down entirely. Sometimes, it’s possible to evolve the services business to be your professional services arm (Mapistry). That can work, but again, all of these are hard.
But everything is hard. What doesn’t work is not going all-in on the transition from services to software.