What prevents web studios from scaling up their business, and how internal projects can help with this?

What is the Russian web development market? Most of the highest paid projects for the largest Russian companies are mainly divided between about a hundred web studios, and among these hundreds, about 40% of the projects fall to 25 agencies . How to survive in this market young web studio? Growing web studios is difficult, and for several reasons. In this article, using examples from several web studios, they will talk about how web studios “get sick”, and market participants will tell how they managed to overcome the disease and solve all the main problems.

Each small web-studio has several conditional paths of development: it can turn into a large Internet agency, can work on unique projects to order, can “sift” its product / web service, or organize conveyor production of typical products. The nuance with the “birth” of your product is that the internal startup, like a real child, requires a lot of time and money. It is this development scenario of the studio that is of the greatest interest to IIDF as a venture capital fund, because in this case the web studio can think about attracting a third-party investor. Web studios are much more likely to create a quality product than individual freelancers or employees of large companies, but in practice these projects do not always meet the expectations of foundations. In this material, market participants will each tell their story about how they managed to create a separate product within the web studio, and develop it with or without investment, and the last part of the article will help you figure out what the investor is paying attention to when deciding.
')

A bit about the web development market in Russia

A source

The average cost of one project is 150,000 rubles, and there are 2,700 studios, they account for about 5 million working legal entities in Russia, already without fictitious and dead ones. At one web studio, it turns out, there are 3,000 potential customers - huge numbers, even taking into account the fact that most of these companies are very small. The structure of the arrival of money in the studio looks like the diagram above. If the company works correctly with the client, then there are some peaks - for example, when the studio does a large site reconstruction, and there is a regular influx of money into the studio, this is advertising and site support. That is, a fairly successful studio receives money from the client all the time. But a small web studio still needs to come to this. What do web studios face on their way to this?

The main "disease" web studios in the Russian market

1. "Fragility"

In the terminology of Nassim Nicholas Taleb, presented in his book “Anti-fragility”, there are people, things, systems and companies who, under the influence of disorder, stress and change, become only better and stronger, the author calls this property “anti-fragility”. Web studios on this scale belong to fragile things, as they are badly affected by any external influence. When the market is in a crisis, web studios, like most companies, have a bad effect. When the market, on the contrary, grows sharply, salaries grow and the web studio can become unprofitable.

2. Growth Disease

Firstly, young companies in the field of web development have to enter an already generally busy market, and this is always much more difficult. Secondly, small studios usually have several typical problems that prevent them from growing:

- Love for atypical unique projects. The more complex the product, the better and more interesting for its developers, hence the high costs of it. Most of the web studios stubbornly do not want to build pipelines for the production of standard products.

- Lack of financial planning in many web studios . Perhaps this is because web studios are often created by former programmers or former designers who have no experience with the financial part of the business.

- A huge salary weight : even a micro-team of 10 people needs to spend 700-800 thousand rubles a month, which at the initial stage is very difficult to produce.

And if the web studio has financial, managerial or some other problems, then trying to grow will most likely not result in anything but growing chaos, says Nikita Mikheenkov, head of the online agency Nimax.

Nat Gadzhibalayev from the Evil Martians web studio also mentions the problem of web studio growth. According to the simplified formula of Nath:
Profit in a web-studio = number of employees who are engaged in projects × for the price of an hour × 176 hours (rate of output per month).

Accordingly, the web studio can grow in profit, either hiring more people or increasing their value. But the price can not be infinitely increased, and here it is worth mentioning another problem, the “disease” that hinders growth.

3. Low cost ceiling of web development services in the Russian market

This problem follows from the previous one. When Russian companies donate to the development of outsourcing, they often perceive it as a way to save, and not as an appeal to an expert with high competence in web development. Therefore, prices for web studio services have a certain ceiling, and it is quite low.

Despite all these problems, web studios continue to emerge, grow and develop, and then we will consider one of the ways for web studios to develop - creating an independent product.

Product birth: where do “children” come from web studios and how can they be provided?

Why does part of the studios at some point go into work on a particular product or web service? Usually, a company simply has some kind of problem, for the solution of which there is simply no toolkit on the market, or there is one, but it is too expensive. Then the web studio can come up with and implement its internal solution to this problem, but it’s far from a fact that it can be decided to develop it into a separate project. A good decision can be buried for a long time in the depths of the company, if it does not make much money.

At the moment of birth of a certain domestic product, there is a temptation: can it be done on its basis a separate project? There are several ways: you can stop doing web development and direct all resources to work on a new project. To do this, you need to refocus the company and cash investments: if you close the business of web development, the money will no longer flow. Another option is to highlight the direction that was born in the web studio into a separate business. It has its own difficulties: to allocate enough resources to create a product, while supporting the main business, not every web studio can do it. Resources for the opening of a separate project need to spend enough - this is the creation of your own website, PR, staff salaries and so on. A few employees working exclusively on a new project is the maximum that a small web studio can afford. It is possible to do your project in the intervals between client tasks, but it is extremely difficult. Usually it does not work out well to do the main work or the new project.

Consider the second option. Suppose the web studio has extra money and other resources, and there are several projects to choose from for which these resources can be allocated. There is another difficulty - how to determine which project is promising? In the case of web studios, after one unsuccessful project, the second one may well not be at all: you will not want to risk money a second time. What to do if there is no extra money for a web studio? Ways of solving problems with the evaluation of internal projects and their financing for each web studio are individual. As an illustration of how to solve these problems, we’ll give some real stories about the birth of projects within web studios.

Case Nimax: new directions within the agency as startups

All of the above problems of web studios, this company felt the full effect. How did she manage to cope with the growing chaos and growth problems? When within the framework of one structure different divisions function, each of which has its own business model, it becomes difficult to understand the effectiveness of each of the areas. In this case, this approach may work: treat the launch of new directions within the company as start-ups and single them out into separate companies. In the interactive agency Nimax, they did this: they made a separate brand for each direction, appointed managers, made selling websites and formed teams for each of them, and this is what they did:



Usually, if different areas of activity are formed within a company, then departments are created for them. Each head of such a department is essentially the same employee. Nimax chose a system in which each manager of a lineup dedicated to a startup partially owns this company, and the company is completely isolated from the others. This gives the manager real motivation. On the one hand, resources are spent on the promotion of each individual brand, these are additional costs. On the other hand, with these companies you can then do something, for example, sell it. And several different areas of work create synergy: on average, every 8th visitor to each of these sites goes to another site from the group. This creates a rotation of customers, they make complex orders.

A couple of tips from Nikita Mikheenkov, director of development for the interactive agency Nimax, who will help the web studio to grow revenues without increasing the number of problems:

1) To keep the maximum “separate” accounting across departments, groups and projects, so that when a company is transformed it is clear which zone is losing money and which is being acquired;

2) Regularly count and plan receipt of funds.

At Nimax, these tips are followed through weekly sales plans, project payments, monthly general planning and performance appraisals, and cost accounting "to the last clip in the office."

What about new domestic projects and their financing? Several “business ideas,” which seemed to Nimax studios to be successful, cheap, simple, and risk-free, turned out to be expensive and hopeless, and some worked.



Conclusion Nikita Mikheenkov: to assess the prospects of the project need a critical assessment or external audit, within yourself to determine the prospects of the project is quite difficult.

Such an expert can be an investor: after talking with a professional investor about investments, you can get a clear answer from him, why this project is not scalable and not interesting for him, or vice versa. However, Nimax did not need investments: the agency managed to finance projects on its own.

RealWeb Case: Investments as a way to accelerate and overtake the market

The history of RealWeb is just about how a separate project appeared from the lack of tools on the market inside the studio (in general, this situation is not uncommon for any startup). Initially, RealWeb created websites for various companies that needed advertising. Some clients demanded from the agency what they simply did not have on the market. Thanks to them, a new product has appeared - Adhands, a system for managing contextual advertising. In 2001-2004, this product looked just like a set of scripts. The product had to be “sawn” with its own funds; at first, studio money was invested in it. At some point, the company decided that this platform could be well positioned in the external market, to which it began to be gradually withdrawn. Here the company did without external investment.

When the business of an online advertising agency became large enough, it took the tools to manage it. This is the case of the project from the internal needs of the studio. There were either no successful CRM solutions for an advertising agency in this market, or they were very expensive, and the company could not afford to spend several thousand dollars to automate the processes. In 2010, the majority of large market participants faced the problem of data management: a lot of money and large customers came to the contextual advertising segment, the amount of information from them became so great that it was impossible to manage them properly, and there were no accessible solutions on the market. Almost all more or less serious market participants began to "cut" some of their tools. At that moment, RealWeb realized that their set of separate tools - automation scripts - could become a separate independent project. This is how Garpun (an automated system for managing contextual advertising) appeared; during its development, there was also no thought about external investments in companies.

Why did the agency decide to attract investments for this project?

If in 2010 foreign competitors who came to the Russian market did not know how to work with Russian contextual advertising networks, in 2012 these solutions were already formed into localized Russian products.

“We realized that we could lose a segment, and made a strategic decision that we need to speed up development. Our competitors became more and more technological, and therefore in our development model we focused on technology and customer service in order to move faster and maintain competitive advantages in the market, ”says Vasily Lazuka, General Director of RealWeb.

It was obvious that since the development is long and complicated, there will be no quick monetization, so you had to tighten your belts, minimize other expenses and invest all your resources in this product. As a result, it was decided to attract third-party investments. The logic of making this difficult decision is outlined on the slide:



The main conclusion of RealWeb: no need to look at what is popular in the market now, and try to repeat this decision. First of all, you need to ask your customers what they would like to see, and create new solutions that will become popular in the future.

Case Amplifr: Accelerator as a tool to check project potential and investment risks

Nat Gadzhibalayev in the Evil Martians web-studio, which is engaged in complex and customized development, is responsible for sales, business development and internal projects. During his time at the web studio, Nat managed to work on Brainwashing projects (online courses for programmers and entrepreneurs) and OhMyStats (analytics system for internet marketers), but here we will talk about the first internal product of the web studio - Amplifr, where Nat is Co-founder and CEO.

Nat initially talked to the DFII Investment Director about attracting seed investments in the project (Amplifr at that time was a marketing platform for musicians and labels), but in the end it was decided to go to Accelerator , in which projects receive investments of the pre-seed round . “We decided that Accelerator is a good way to conduct due diligence, evaluate project prospects and possible risks,” Nat explained his decision.

During the acceleration period, the project founders found out that the business model on the Russian market was not working, tried to change it several times, but eventually went to the pivot (reversal of the business model).

“Probably, without an accelerator, we would have been doing this longer: before that, we tested each hypothesis for months, and in FRIA we had to“ shoot ”new ideas for a week,” Nat says.

Now Amplifr has restarted and is an analytics system for social networks, which is used by about 3 thousand people.

What conclusions were made on the outcome of this story by the founders of the project?

1) You should not be engaged in several projects at once, it is better to focus . If you engage in four projects at once, at best one of them survives.

2) The main motivation is progress , to see it is important for all team members. The feeling of “internal project” in the web-studio leads to the fact that the speed of work drops approximately twice.

3) To follow the progress, you need an open culture in the team. For example, this is manifested in the habit of the head once a week to write to the whole team, talking about what is happening with the project, and what the head himself did for his development during the week. Progress of the programmer and designer is easy to track, and what the manager does is not. When a manager writes daily / weekly statuses, which he achieved during this period, and discusses the results with the team, he does not have the opportunity to evade responsibility to his employees, and also this does not allow him to relax.

4) Analyze everything that happens in the company, it is better with the help of a system of metrics that everyone will know. For this you should use the most simple metrics. We will also have to agree on a tool that shows at what stage of business development you are. In FRIA for this is used Traction Map.



5) Programmers need to be turned into developers. The key difference in the version of Nath is that programmers are performers: they are given the task of repainting the button, and they perform. Developers themselves understand what to do, because they know where the profit comes from, and what metrics affect it. Looking at the indicators and thinking, the team understands what is important to do now and what can be postponed.

“We did with our programmers what FRII did to us, namely, forced us to perceive tasks not as units of code development,” says Nat.

What does it mean? When the team looks at the metrics and decides that it is necessary to increase the conversion rate, the developers say: "we need the site conversion to increase by 5%, so we repaint the button in green." Each such completed task is analyzed in order to reveal what exactly works for increasing conversion or other metrics that are important from a business point of view. If you want your employees to do something most of the time, which directly affects the increase in profits, you should explain to the developers which metrics in your case influence this.

It is clear that it is scary to change the system of work with developers: if you offer them to choose their own tasks for the next week, they may want to do only refactoring. But having learned to work with metrics and looking at these indicators at some point, colleagues will see that the company, for example, has money left for three months of its existence, and during this period it is worth doing something that will help grow sales. Then all employees will see the results of work and will be able to affect the profitability of the company. In this case, the developers will no longer waste time on something that is not aimed directly at increasing sales. If they decide to change the color of the button, then it will be important for them in the end whether the conversion increased after that or not.

Open access to the tool for working with metrics gives the team a feeling that they can help business development. The minus for the manager here is that there is no possibility to hide anything: the employees themselves see that the company can close in 3 months, and can react to it in different ways.

Now, when we have analyzed different cases of project development in web studios, we will try to reflect what is most important for an investor when one of such projects comes to him for financing.

What is important for a venture investor when making a decision?

First of all, you need to understand that the investor is a financial institution, he does not have questions of ownership of the company: he is not going to own its shares indefinitely.

There is a separate category of investors, which are represented by specialized companies. If another web studio invests money in a web studio, then here it really is a question of ownership. If you come to a professional investor for money, then he is interested in two other issues: project economics and control over it. Yes, a professional investor may not interfere in the company's operations, but corporate control issues are usually very tough, this is one of the reasons why many companies are afraid to raise money in the fund.

All professional investors have a limited lifespan, which is clearly fixed by people who have invested money in this fund. The investor will only look at the potential of your company within this period. He will assess whether he can earn on you until he needs to leave your company by selling his share.

The main question interesting to the investor is the potential size of the company , its ability to scale . The ceiling of the potential size of a company is the size of the entire market for which a company can claim. Simplified it can be measured by multiplying the number of potential customers who are willing to pay by the average bill. All other questions of the investor are of minor importance: whether the team will be able to achieve the capture of a significant part of this market, due to which, and so on.

Why the investor is not so important ideas genius and other important things in the opinion of the founders? The point is in the internal economy of the fund. Let's say the fund wants to earn 15% per annum for its investors. At the same time, he invests in the early stages, and he has a portfolio mortality rate of 90% per annum. Each company must have the potential to earn 150% per annum for an investor to recoup unsuccessful investments. What is 150% per annum? This means that the company every one and a half years should increase in value by 4 times. Therefore, the potential size of the company is so important - it is an opportunity for growth.

Unfortunately, venture investors, microsegmentation is currently taking place in the Internet industry: there are more and more products that can be used, for example, by 100 people. As an internal product for the company, these are normal numbers, but such a project is not interesting for an investor. Also, the investor is not interested in too small ones relative to the total amount of its financing of the transaction.

The most important factors for making investment decisions:

- The potential yield in% per annum is determined by the rate of development of the company ;

- income potential in absolute values ​​is determined by the maximum size of the company (calculated using the size of the potential market);

- investment capacity is determined by scaling .

To make the mechanism more understandable, let us give an example of how the incomes of venture funds of different ages are distributed. In this area investments are long, that is, some kind of income can be expected to receive only after about 5 years. When the fund is young, its distribution of money among companies in the portfolio is approximately even. When the fund is already old, it has 2-3 companies, the value of each of which exceeds all the other companies in the portfolio combined. Usually, only one or two fund transactions bring him a significant income, due to which all the others pay off. But you never know which one of the deals will be the one.

The task of the venture fund is to support the company, “push” it, increase its speed of development, foresee any problems beforehand and suggest their solutions. The acceleration program is aimed at accelerating the development of the company and the “pushing” of projects.



FRIA invests in several rounds at once: Accelerator on the pre-seed round (1.4 million rubles), at the end of the acceleration selectively on the seed round (up to 14.5 million rubles), and on round A (up to 300 million rubles). Accordingly, IIDF has the opportunity to invest in a promising company at different stages of its development, if it meets the expectations of the fund.

This material was prepared on the basis of the speeches of market participants at the round table "Web Development Market and Startups", which was organized by IIDF in St. Petersburg in late November. You can listen to their opinions live by watching the video:



We hope that the cases of web studios and the conclusions made on their basis will help you to improve business performance and create a truly profitable product that you can constantly improve with high quality using the money.