Episode 149 – Why Professional Service Firms Should Never Become SaaS Companies – Member Case by Nathan Kievman

Many professional service firms foolishly think the path to scalability is to become a software company. However, founders of service firms make more money than founders of software firms, generate more wealth for themselves at exit, and succeed much more often. In this session, we will help you avoid making the devastating mistake of trying to become a software company.


Greg Alexander [00:00:10] Hi, everyone. This is Greg Alexander, the host of the Pro Serve podcast. Brought to you by collective 54, the first community dedicated to the unique needs of thriving boutique professional services firms. On this episode, we have a very interesting topic. Today we’re going to talk about the problem of having too much cash. Most of us have the other problem, which is not having enough cash. But today we’ve got an interesting story to tell you. And I’m joined by a very well-liked, long tenured, well-respected member, Nate Caveman. Nate, it’s good to see you. Please introduce yourself to the audience. 

Nathan Kievman [00:00:58] Thanks, Greg. Great to be here, guys. My name is Nathan Kievman. Nate Kievman is what my friends call me. So please call me Nate. I’m the CEO of a company called the Link Strategies Group, and we are a 12 year firm that has been in the marketing and consulting space and helping organizations grow. Helping them schedule meetings and connect with their executives. They’re at their most ideal market. And in doing so, we’ve been obviously able to grow our own company and it’s been a fun journey over the past 12 years, sending over 86 million emails, setting up 100 over 100,000 meetings for our executives over the years, working with big firms like BlackRock and Nasdaq for the world that a single person browser company. So we’re great. We’re grateful to be here and thanks for inviting me. Okay. All right. 

Greg Alexander [00:01:48] Fantastic. So, Nate, I asked you to come on the show after you and I had a very interesting conversation and I would like you to tell the story of the problem that you had by having too much cash. 

Nathan Kievman [00:02:03] For sure. So I never expected this whole story and experience to happen in my whole life. But after the fact, Greg and I had some fun, fun, fun, fun conversations and some lessons to learn from it. But now you all get a benefit from my band. So basically towards the end of 2022, our firm was looking for ways to raise capital because, you know, in short, we had gone down a path as a as a services firm to build a technology and to do the technology piece require more capital. We had quite a few developers and so forth, and I’ll walk through with the learnings from that as well as part of this journey. But we had effectively between two sources with the SBA and a private lender, were able to finance $1.8 million that into our $3.4 million business. Right? And so the prior year we had 3.4 million in revenue as an organization and we raised those 1.8. And the purpose of the raise was to stand up the technology and to stand up a sales organization within our firm and really get that functioning and going. And so I moved over to the sales side of the house, focused mostly on that. Our CEO had handed the reins over to do a lot on the allocation of resources and so forth side of the House and working with our CFO to manage that. And I really, you know, quite honestly thought much of it, and I didn’t pay a whole lot of attention to the distribution of cash and the changes and team members and the increase in team and the increase in salaries and pay and so forth. And all of a sudden six months into it, the money was gone and we really didn’t have a whole lot to show for it. And I was like, Whoa, what just happened? And that’s like the start of the story. Greg, do you want to jump in here, too? I’m going to continue through on with what that what what happened from there? Well. 

Greg Alexander [00:04:01] So the spend 1.8 million bucks in six months is I mean, that’s crazy. So where did the money where did it go? 

Nathan Kievman [00:04:11] Well, yeah. You know, so. Where. When the big money came in, all of a sudden we went from two executives to five. That’s a big part of it. Our executive payroll became the next year. It was equal to the next year’s total revenue. The IPO taken off the ball of serving our clients. Our client retention went down by almost 50%. Our cost went up by 100%. And my next year was a total reverse of the year prior. Right. And it went in executive salaries. We went from a team of 30 to 50 now, and we were outsourced. So it wasn’t super expensive. Like you might think that’s a lot, but we were able to leverage that. But if the people that manage half that number of clients were so firm, right? Imagine 25 or 35 at any given time. I think we were up to 40 at that point, but still we didn’t need 50 people to manage that. Right. And so those are where most of the extra developers, couple extra executives, all of a sudden that money is flying out the door. Yep. 

Greg Alexander [00:05:18] Okay. So that that helps explain it. So tell me kind of what was the short term implications and then what did you do to course. Correct. 

Nathan Kievman [00:05:32] So as the CFO came over and had a private conversation with me, this was all that money was spent between about March and September. So in September, I had a conversation, a really very candid you’re going to the doors are going to shut here, buddy. Let’s make some changes. And and because he didn’t he wasn’t a CFO at the time. He’s now my CFO, but he was like a director of finance. And he was kind of being directed by the single point of direction of all the capital. Right. So we what the biggest mistake I made is I didn’t have. Two roles vetting out the decisions for where money. What? I had one person that was able to do it who was maybe not experienced enough to do so. I wasn’t paying attention close enough. I was focused on selling deals and trying to get new things in the door. I’d sell new deals and they’d be leaving shortly thereafter. And so we had this like week happening in the business and I was like, Wait, what? So so we had a retention that we had to fix, and that was really a culture issue. That’s a different story. We can talk about another time, but you know, there is one singular, very toxic person in my company that I had to get rid of. So the learning that we had to go through, Greg, was that we didn’t have good a good process for managing the money. We didn’t put good controls in place, although we did build a budget for it and we did have that plan. It was it was undercut from the sales side because everybody’s focus needed to move over to retention. So then sales were down, then retention was down to the double. It was like a double whammy. It’s just like, this is like a yeah, what do you call that? One of the drain holes in the large sorority was getting sucked down into the vortex. Yeah. So, yeah, it was, it was a vortex. Exactly. And so we had a big team made up, our team made up in, in October and said, All right, we need to, we need to cut the fat. Everything’s got to change. So that forward six months, we cut $2 million of cost out of the business. We eliminated most executive roles, move most roles into functional delivery roles with a couple management roles of oversaw, but not senior executives. We had two senior executives, I’m sorry, one myself as a primary senior executive. And then and we kept two as part time fractional and the rest were non managers and doers. And so we cut to $1,000,000 between that. We also canned the technology build. It was just a drain on profits. We focused back on our core services model, which saved us about 1.1 million a year between the developer cost and then all the technology that we were spending money on with NWC and other other, you know, non people costs. And then we got really lean. So we went from the here’s the math, we went from a $3.4 million profit and $1.7 million cost in 2122 we flipped it 3.4 million in cost and 1.8 million in profit and revenue. And then this. And then in 23 we’re going to end up and around. Right now, we’ll do about 3.2 to 3.4 million and 1.4 million across some of you. Yeah. So he just totally flipped it around. So but it was hard and it was a lot a lot of people transitioning. Yeah. So. 

Greg Alexander [00:09:09] Well, listen, I appreciate you being vulnerable enough to share the story because, you know, there’s people going to be listening to this and they’re going to avoid this painful mistake because of your willingness to share. I want to highlight two things. First, if I had a nickel for every time I’ve heard the story of a service company trying to become a tech company and screwing themselves up in the process, I’d be a multi-billionaire. So I want to be very clear to members that are listening to this. If you’re a services firm, do not try to become a technology firm. Everything is going to cost twice as much as you think, and it’s going to take twice as long as you think. And it’s not who you are. Your services firm. So don’t do it. And there’s a lot of misconceptions out there. You know, people say, well, if I become a SAS company, you know, the valuation of my firm is going to go through the roof and I’m going to make a ton of money. That’s actually not true. If you look at exits of founders of services firms, they end up making more wealth than founders of technology companies. And why is that? It’s because of capital intensive intensity. Services firms don’t really require any capital, so you don’t have to take on debt as a needs case. You don’t have to dilute yourself by selling equity to people. You can bootstrap and fund the firm yourself. So upon exit, you own 100% of the firm. If you’re trying to become a tech company upon exit, you’ve got to pay the back. You got to pay the equity person and therefore your net proceeds from the sale is much less. In fact, I wrote a blog article on this. You might take a look at that. I think it’s titled Why Services Firms Should Not Try to Become SaaS Companies. But that’s a huge mistake that I want everyone to avoid. The second thing is, is that, you know, high powered senior executives that cost a lot of money and services is also not a good idea. I mean, you want everybody to be billable, either in total or partially. So their expense and running the firm, the on the business stuff is covered by revenue that’s coming in from clients. So two huge lessons there, you know, from Nate. So, Nate, let me ask you a little bit about the debt. So you raised it from the SBA and you raised it from private lenders. It’s all gone. I’m assuming you haven’t paid off the debt yet. You’re still on the hook for it. Is that true? 

Nathan Kievman [00:11:16] Yeah. Yeah. So now. But now I have to go pay that off. You know, that’s the airline’s super, super generous of the 30 year term on 3% and not paying it back yet. But that’s awesome. 24 right around the corner. So I want to add to my path of of in the business, like my my bachelor path and and and it’s just that particular. That’s just I mean, like, I’m really if something happens, I’m going to have to take care of it. So now I remember the text message and cost me $2 million at a minimum, probably like about 2.5 over a three year period of my profit. That’s out of my profit. Yeah, it would have otherwise been profit. And now the debt that I used to pay for those people, I’ve got to pay back on top of that. So I mean, that’s a really heavy cost. And Greg, stay with me. Like, this is the direction we went this way because Greg and I had a very candid conversation. He just wrote the article that week when we had this conversation on the tech. But at the end, and it was a hard decision because it’s like you’ve grown a baby for three years, you kind of want to see it through. But the end of that path was death. So I said, okay, let’s stop this now. And, you know, lesson learned. Hopefully you all can hear this because I really resonated with Greg’s story. And now we’re a super profitable company if we’re a very healthy company. But I decided to be stupid and follow these these shiny objects which, you know, can be part of our founders problem occasionally. So, you know, lesson learned. And yeah, I’ll be paying off, you know, $1.8 million of debt over the next while that’s a little less now but over the next many years. Yeah. 

Greg Alexander [00:12:56] So you know, the one good thing about your story, Nate, the mistake that you did make is you didn’t sell any equity. That would have been a real kick in the teeth because equity you can’t get rid of. I mean, you can pay off the debt. You know, it sucks that you have to do that, but you can pay it off and get back to zero and then grow again from there. If you had take on an equity partner, now you got somebody owns 20, 30, 40, God forbid, 50% of your firm and you can’t get rid of them. So thank goodness that that you didn’t do that. And that’s another lesson. So, Nate, lastly, you know, if you were to kind of summarize, maybe, you know, for those listening, any other words of wisdom or advice that you would share with people that we haven’t discussed today regarding this issue? 

Nathan Kievman [00:13:39] Read the boutique and follow the instructions. I mean, if if I had read it and had some of the insights prior, that would have saved me millions of dollars. Yeah, right. And and and it did it still, even though I only did it halfway through, it still did save me. Possibly my company, actually. Yeah. You know, I would say definitely take the word of wisdom. Greg’s been a great resource for me and an advisor and from an experiential level, but also the community. I mean, I’m very involved in the community. I talk with members, I learn from members all the time, the the board board program we have. We have great value contribution to each other and insight. Um, but I would actually say my biggest takeaway of all of this is. Before you start giving away executive seats or partner seats in your firm. And then there’s the equity part of that, because I did have Greg, I did give and I brought it all back. I was able to retrieve all my equity back, but I almost lost 34% of my company while in the process of all of that. And and I would say that to. To have controls in place. So for me, the biggest thing was if I had a proper reporting mechanism that I could see weekly of what the money was going towards. I could have stopped it, but I didn’t. And I trusted really poor people more than I should have trusted them. And they abused money that they had never seen before. Right. So it wasn’t their money. It was easy to go increase everybody’s pay by five or ten grand. And then, I mean, we had a board session with with the CFO for board. And in that session, but the context of executive pay norms came up and I was like, what is what is normal for everybody? Well, I got quoted from two different people in my company that I trusted that this was normal pay for people. And when we heard the numbers on the board were like, no way down here. They’re quoting me like billion dollar corporate normal pay structures and our normal pay structure as a start up boutique. I’m like, I’m like, Oh my God, I’m paying way too much for all these different roles. And when it just it just didn’t the math didn’t work, right? So I would just say, make sure your controls are in place. Trust, but verify, especially with executive teams, have double points of control that check against each other, especially when it comes down to the money part of things. And those are my big takeaways. And don’t do that. Like you’re going to detect them on a separate entity. Go raise money for that person. Just leave your services business as its own cash cow. Awesome. I hope that’s helpful, Greg. 

Greg Alexander [00:16:25] Yeah, Super helpful, man. All right. I got three calls. Action. One for members, one for candidates for membership, and one for tire kickers. So, members, look for the meeting invite. We’re going to have a private one hour Q&A session with Nate. I’m sure all of you got a thousand questions because you either have made this mistake, which I have myself in the past. That’s why I can speak so authoritatively on this. Or you might be getting ready to do some of these things and speaking and it will be really important. So eyes open for that. Candidates for membership. If you want to become a member, go to Collective 54 Adcom Fill out an application. The membership review committee will look at it and get back to you. And if you’re not ready for either one of those two things and just want to learn more. Go to Amazon, buy the book called The Boutique How to Start Scale and sell a professional services firm written by yours Truly. But Nate, on behalf of the community, every time you make a deposit into the collective body of knowledge, it’s dead on. So thanks a bunch, man. I really appreciate it. 

Nathan Kievman [00:17:24] For sure, Greg. Appreciate you. Community is great. And for anybody considering joining Giant, it’s worth its weight in gold. 

Greg Alexander [00:17:31] Thanks for saying that. 

Nathan Kievman [00:17:31] That’s all I can say. 

Greg Alexander [00:17:32] Okay. Take care, buddy.