Movies like The Social Network and TV shows like Shark Tank have entrepreneurs convinced they need to start the next big thing. Everyone wants to chase that sexy new idea that’s going to scale up to infinite.
But did you know that famous Shark Tank investor Chris Sacca’s first real business was actually a boring, slow growth, consulting business (Salinger Group)? He used it to create a base for himself before jumping into riskier businesses and making riskier bets.
If you’re making the jump, the types of business you could start are endless. It’s quite overwhelming.
If your goal is to build wealth through entrepreneurship, then a service business is a great option. This is especially the case if it’s your first business and you do not have much capital to invest.
Let’s dive into why a service business makes such a great foundation for building wealth.
What is a service business?
To put it short, a service business is any business in which you trade your (or your employees’) time in exchange for money. They come in various forms, but here are some concrete examples:
- Online – digital marketing agency, software development shop, SEO agency
- Professional – law firm, bookkeeping firm, dental practice, real estate brokerage, consulting firm
- Labour – HVAC contractor, plumbing contractor, landscaping
Bottom line, you are providing a service for a client, as opposed to selling a product.
My first business was a PPC (pay-per-click) agency called ClienFlo, and we provided campaign management services to clients. We typically charged a fixed monthly retainer, but in essence, we were selling our time for money.
Predictable, product-market fit
The services mentioned above all have high demand and are well sought after. You will never need to wonder whether your business has product-market fit.
It really just comes down to execution. If you have a bit of expertise and willingness to work hard, the growth of your business becomes quite predictable. Your success largely depends on your ability to generate sales and your ability to service clients.
It’s a simple linear formula: hours in = money out.
I knew there was a demand for PPC services when I realized how many companies were hiring PPC specialists. Our services were in high demand, so all we had to do was invest the time to grow a client base.
Low investment, easy to get started
Service businesses don’t require much capital to start. In fact, you really only need a laptop, a cellphone, and a website. Assuming you don’t already have any of the above, it would cost you no more than ~$2-3k to launch and start generating revenue.
It doesn’t require much on-going capital expenditure either. There are no inventory costs, large overhead, or rent it you work from home. Eventually, once you have too much revenue to handle on your own, you’ll be able to hire employees. Growth sounds like a good problem to have!
After purchasing a laptop for $500 and using my existing cell phone, I start cold calling clients right away. Within just a few days, I closed my first deal and my PPC agency was generating revenues.
Learn the basics of running a business
Running a business is hard. People underestimate the importance of basic things like accounting, hiring, legal, delegating, and admin.
It’s a lot easier to learn how to manage cash flow, clients, and employees when you have revenue coming in. You should be able to close your first deal fast, so you’ll start the learning process quicker.
The learning continues beyond business basics. Whatever you’re selling, you will learn more about the craft. Becoming an expert at your service, and the best part about it is, you learn on the client’s dime.
Once you’ve learned the basics, you can easily transfer your skills to all future business.
I learned more about running a business within a year of launching my PPC agency than I did from my 4-year Bachelor of Commerce university degree. I couldn’t imagine trying to learn what I learned while if my business wasn’t generating any revenue.
Build wealth
A service business is a surefire way to build wealth. It’s a business where you can achieve a high level of owner earnings fast. Sure, most couldn’t scale to $100m, but you can easily generate a few million dollars within 5 years.
This is enough to build a solid foundation. You can reinvest the cashflows into hard assets like real estate stocks and bonds.
After you have built this base, you can keep building if you are satisfied with the linear growth a service business provides. The power of compounding over long periods of time can produce some amazing results, even at modest rates.
If you prefer to switch to a business that can scale faster (SaaS, eCommerce, apps, etc), you have the luxury of doing so. The base you created can sustain your expenses while you pursue a riskier business.
Creating this kind of optionality for yourself is a win-win in terms of building wealth.
I spent 5 years running my PPC agency. It was a grind, long hours, and a lot of hard work, but it resulted in great cash flow. I heavily reinvested this cash flow into real estate, bonds, private debt, stocks and built a base.
The base built allowed me to pursue much riskier businesses and investments as well as provided me the luxury of time and patience to generate outsized profits.
Final thoughts
I see many entrepreneurs criticize service businesses because of the lack of ability to scale. Everyone wants to jump straight into building the next unicorn that’s often glamorized in the media. Despite the low odds, many people still prefer chasing the unicorn dream over what’s typically considered a “boring” service business.
I know a bunch of SaaS, eCommerce, and tech startups that aren’t generating any money or helping founders build wealth. But I have never come across an accounting firm or HVAC business that wasn’t making money. In fact, some of the wealthiest people I know built a service business.
If you prefer to take a more steady and predictable path to build wealth, a service business is a great place to start. Once you’ve learned the ropes of running a business and built a little nest egg for yourself, you can easily jump into building the next big unicorn.
Hi there! I’m Jay Vasantharajah, Toronto-based entrepreneur and investor.
This is my personal blog where I share my experiences building businesses, making investments, managing personal finances, and traveling the world.
Subscribe below, and expect to get a couple of emails a month with some free, valuable, and actionable content.
6 thoughts on “Why Service Businesses Make Great First Businesses”