Why I Like Boring Service-Based Businesses

As human beings, we are designed to seek status and novelty in experiences.

So it’s no surprise that when people consider entrepreneurship, they go for big and shiny business ideas. Ideas like creating another big social media network or marketplace for a particular niche, or some AI-enabled fintech company.

These kinds of companies can become very large and profitable, without a doubt. But I would not recommend 99.9% of first-time entrepreneurs to build these kinds of companies.

Unless you are a serial entrepreneur who is financially secure, I would suggest you find yourself a boring service-based business to operate.

I'm referring to businesses based on people performing particular tasks for others. This includes landscaping, electrical maintenance, design agencies, and pool cleaning services.

Why do I suggest starting a boring service-based business? I have five reasons:

1)     Elimination of market risk

2)     Elimination of technological disruption risk

3)     Day 1 profitability

4)     Low initial investment

5)     Local defensibility

Let’s dig a little deeper.

1)     Elimination of market risk

Risk comes in all kinds of flavors, but when starting a new business there are two risks that are most pressing – market risk and execution risk.

Market risk revolves around validating a product and finding product-market fit. This risk is typically present when new markets are being established.

If a product does not solve customers' problems in any meaningful way, then product-market fit does not exist. According to CB Insights, c.41% of start-ups fail because of no product-market fit.

The Ansoff Matrix is a great way to visually display the riskiness of a business venture by looking at two factors: the product and the market. These two factors are judged against whether they are existing or new.

Exciting and novel businesses almost always involve new products that are being introduced into new markets. They are the riskiest to start.

First-time entrepreneurs have no experience in running a business and will ultimately face a high level of execution risk. That is, they face the risk of not knowing how to get things done and keep everything moving forward smoothly.

Introducing new products to new markets is challenging even for established companies. Google Plus, iTunes Ping, Friendster, and Google Glass are a few of the names in the new-product graveyard.

If the risk of failure exists for companies that are cash and talent rich, imagine how high it is for a first-time entrepreneur.

By establishing a boring service business, you are offering needed services to an already existing market.

First-time entrepreneurs can eliminate market risk with a service business. They can then spend their efforts on managing execution risk by learning how to operate a business.

2)     Elimination of technological disruption risk

Technological innovation poses a significant risk to businesses that are built on technology. These 'disruptors' have the potential to make existing business models and practices obsolete. Service businesses are more isolated from rapid technological advancements that might render other technology-based industries obsolete.

This risk can be eliminated with service businesses. Businesses that require human beings to:

1) interact with other people, and

2) to perform semi-custom tasks,

3) within different environments,

are more sheltered from technological risk. This is even better if these tasks need your physical presence.

Patient care, coaching, maid services, pool cleaning services, and HVAC services are examples of such services.

Personalized patient care demands a human touch that technology struggles to replicate. Professions like coaching thrive on empathy and human connection that only a human professional can offer.

Physical services (like pool cleaning and HVAC services) requires practical expertise and on-site execution. They are less susceptible to being replaced by technology.

Service businesses can and should use technology for efficiency, but they are not reliant on technology to complete the task at hand.

3)     Day 1 profitability

Boring service-based businesses require the shortest period to achieve profitability.

This is because capital expenditures and fixed costs are either negligible or non-existent. Heavy machinery, furniture and fixtures, and lease expenses are unnecessary.

The primary expense for service businesses is labor salaries. These expenses are often passed through to the customer.

Businesses also typically pay salaries at the end of the month- you can charge your client upfront and pay salaries 30 days later.

Gross margins are usually high and positive for any service project. Since operating expenses are low, a service provider can be profitable with only a few service contracts.

For big-ticket services, this can happen with only one contract.

Service businesses usually have good cash flow economics.

They require cash to be paid in advance or immediately after the service has been rendered. This makes cash flow management relatively easy.

4)     Low initial investment

As mentioned above, the primary expense associated with service-based businesses is people. This means that you can start with a relatively small amount of seed capital.

Agencies require some of the lowest amount of upfront investment. Consider the case of an aspiring entrepreneur who wants to start an interior design. He can build his agency using freelancers, and a pre-owned computer. In this instance, he can get started with as little as $200.

Of course, these costs will grow with the company. The point is that with service businesses you can start small.

Physical service businesses, like pool cleaning or HVAC services, have higher initial investment requirements.

These businesses often need full-time staff members, some equipment, and a vehicle. In this case, it would be prudent to have a few months of operating expenses to start.

That brings the initial investment amount to at least a few thousand dollars if the owner is also an employee of his own business.

5)     Local defensibility

Service businesses are less likely to grow into large national companies with competitive advantages that deter competition from stealing market share. Those traits are usually seen in technology and manufacturing companies.

However, service businesses can build local advantages within their geographic or product niches. The end result is that they can be the biggest fish within a small pond.

This can be done by doing a few things well for a focused niche or geographic market. Service businesses should focus on building strong customer relationships, having a reputation for delighting customers, and growing their share within a constrained market.

Would-be competitors would think twice about competing. Large national businesses would not be able to execute at the level of competence, speed, and personalization that a local incumbent would.

Exceptions and cautionary points:

I recommend that first-time entrepreneurs start service-based businesses. However, I do have a few caveats.

Service businesses are hard to scale for the same reason they are easy to start: Anyone can do it, and it is reliant on labor.

Managing labor at scale is a challenge, and there are limits to how much you can grow outside your desired market.

And even though you can eliminate a lot of risk by starting a service-based business, it's still not easy. There is still a steep learning curve involved.

Also, I have an exception to the ‘service-based’ business rule. My recommendation is to not go into the food service business by opening up a restaurant.

I am against going into the food service business, especially as a first venture. I’ll write more about my personal experience with this in another blog post.

I hope you enjoyed and benefited from this blog post.

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If you have any questions about this post or anything I’ve written about on my blog, feel free to reach out to me on LinkedIn.