Should You Start An Agency Or A Software Business? (Neil Patel's Contrarian View)

Shaan Puri

Why did you do an agency? So, Sam and I always talk about our many mottos on this podcast. For example, we say, "We don't do public math." Or, "You don't say you're rich; you say you're post-economic." These are things we've picked up from guests along the way. One of the mottos that we often mention is, "Agencies suck." The reason we say this is not because they don't do well; it's that they suck as a business choice. I've always thought that if I could choose between software or an agency, I'd choose software. Software is great because it's not a services business. It can work while I sleep, it can scale up, and I don't have to open offices in Poland, Brazil, and all these other places. But you chose to do software and then you chose an agency. Now, why did you make that choice? And what's great about agencies that I'm not giving enough credit for?

Neil Patel

So, you're looking at business as in software being more scalable. It's more desirable by public markets, e.g., HubSpot versus Accenture. Accenture has way worse multiples than HubSpot. Accenture is a bigger company from a revenue and EBITDA standpoint. But now, take a different approach. Okay, HubSpot's a publicly traded company. You guys are both HubSpot employees, I'm assuming? Is that correct?

Sam Parr

kinda

Neil Patel

Sure, well, whatever your guys' deal is, right? But you guys are pretty much at HubSpot now. Imagine creating a business and you don't plan on going public. You don't care for the limelight; you don't care for any of that. In business, what's a successful business? Good revenue growth and good revenue profitability, right? All that really matters at the end of the day, whether you grow or not, is how profitable you are. Would you guys agree with that statement, assuming you're doing something that's ethical and you're not selling products?

Sam Parr

I wouldn't agree with that. I would say there's a third thing, which is: is this enjoyable? Do I like my day-to-day? With the more people you have, most people would say that's just a little bit more headache than...

Neil Patel

But that's not software or consulting. Anytime you build a big company, you tend to have a large amount of people. Whether it's HubSpot or whether it's Accenture, everyone has a lot of...

Sam Parr

You can have a much higher revenue per employee with software versus, let's say, if you own a massive landscaping business. You're going to have to have tens of thousands of people.

Neil Patel

But what's the difference between dealing with how many people HubSpot has? Like, 6,000? I don't know, 5,000 or 6,000 is probably a lot. I'm guessing on the number, but what's the difference between dealing with 5,000 or 6,000 people and 20,000 people? There's a point where it doesn't matter. It's a lot of people either way. It's not like you're at 50 people; you still have thousands of employees to deal with, and you need managers and layers and all that kind of stuff.

Sam Parr

Yeah, but you're hiring some good or bad people. You're hiring a different type of person. For example, if you're VaynerMedia, they're based in New York. They can probably only afford to pay some of their lower-level employees $70,000 or $80,000 a year. So, you just have to get a ton of people like that and have to have higher churn. This is versus, say, a bigger company where you're able to pay a significantly higher salary because the revenue per employee is much higher. So, perhaps there's a slightly different day-to-day because of that.

Neil Patel

Not necessarily. Let's say you're VaynerMedia. He could be doing it to optimize for profit. What if I told you his LTV (lifetime value) was 6, 7, or 8 years? Right? And you have credit as a comp. Then, you can still hire high-quality people and pay them an arm and a leg.

Sam Parr

okay

Neil Patel

You got what I mean, right? Like, you look at Accenture. They're charging accounts so much money, and their contracts are long. I don't know what VaynerMedia's LTV is, but there are a lot of consulting companies that have LTvs of 6 to 7 years for clients. Their clients are spending... you know, HubSpot? Yes, it's more revenue per employee. You can say potentially in software you can get to more revenue per employee, but I know consulting companies that only take on contracts that are like $5 to $6 million and upwards. So, you have high margins, and you can have a high revenue per employee. But either way, no matter what, as you build a big business, you're going to need more people, and it's a headache to manage. Whether you pay them $70,000 or $150,000, it's still more of a headache. And the notion that if you hire someone for $150,000—I'm not saying you're saying this—it doesn't necessarily mean they're a better employee, right? No, it just means...

Sam Parr

different types of headaches

Neil Patel

Correct. Exactly. Engineers, for example, are very expensive in this economy, right? So, what I'm getting at is that I had the demand for a consulting company. A lot of people want to pay me for marketing, and there was just so much demand. It would have been silly not to do it. If I'm not trying to go public or I'm not trying to sell, money's money. Green is green. As long as you're happy doing what you're doing, take the cash.

Sam Parr

will you ever sell the company

Neil Patel

I want to say I would never sell the company, but I don't care to ever sell it because I love what I'm doing. We also have good growth too, right? Like, I don't know what will grow this year, but 60-something percent, which is not bad. You know, with the market going up and down and fluctuating, 60-something percent is my guess. At our size, that's decent.

Shaan Puri

yeah the part I was actually talking about was a little bit more like I think you're you're totally right that like if you're gonna win big you're gonna end up with a bunch of employees and like you know it might look like a 150 it might look like a1000 it might look like 10,000 but like you know in either case you're gonna have managerial work and headaches and it's just different types the part I was really talking about was like you know I've now built let's say a media company content and then it's like done educational stuff so courses which are like you know different thing and then there's like I built software company and so you know we ended up selling that one and then it's like and then there's services which is the client services like with like consulting or agency model and what I hate what I what I love about content media is it's actually pretty fun to create and it's cool because a lot of people consume it so they kinda you know you get that like hit but you gotta like you gotta bake the cake every day right so like you know the hustle or like the milk road or this podcast it's like we have to come on and create the content again you know for the most part we we're not doing like super long evergreen stuff so we don't like with the hustles the daily newsletter milk road the daily newsletter it's we gotta bake that cake every day whereas software it was like we built one product and yes we might we will improve it over the course of a year you know every year we're gonna improve it but like fundamentally we didn't have to like recreate the product come up with a new viral story or a new great content segment that would like require like a new genius with software it's like you come up with one genius moment and then you sort of refine it make it work better over time and get rid of bugs and things like that so I prefer that part of software which was like making a product rather than making kind of like a disposable you know consumable piece of content or like I have an ecommerce company and like it's a pain in the ass to have supply physical products that are supply chain constrained and like we have a warehouse we got warehouse problems with our ecommerce business and so I'm like man digital is sweet compared to ecommerce but ecommerce is quite profitable that kicks off a bunch of profits that's nice so every business has these pros and cons and I always thought agency was like the part I always thought was a pain in the ass was like the client services you are reinventing the next campaign and the next winning marketing you know formula for them and you have to keep clients happy all the time and clients are sort of like never satisfied in a way that like they if software is like you can have nameless faceless customers that like yeah some percentage of them will will write into your help desk that's in the philippines or whatever but like you're not having to like you know send account reports to your you know your your big clients to keep them happy

Neil Patel

Yeah, but everyone has their own problems in software. A lot of people have turned to this issue and they can't figure it out. Or they have competitors that come into the marketplace and just undercut them on pricing for the same features because it's cheaper and cheaper to build software these days, right? So, they all have their own problems. To me, I look at it as if you can find the right people. Every time I start a company, I find people to put in place that have already done it multiple times before. This way, your risk of failure is lower and they already know everything to do. I don't have to deal with client relationships or customer service or anything like that. I get to do what I enjoy doing, which is creating content and being the face of the company, etc. My wife enjoys what she gets to do as well. She gets to donate the money, although we don't really consider it donations. We look at it as investing. We're investing in people, although we really don't ever collect any money back. It's more so investing into making the world a better place or people's lives a better place, or whatever it may be.

Sam Parr

What's a... who were your first three clients at this agency?

Neil Patel

I don't know they were small companies

Sam Parr

and right now who's an example client

Neil Patel

Like a Fortune 100 software company, that is a typical company. Think of any big, large corporation in B2B; that's a great example of one of our customers. Or even B2C, actually. Think of any Fortune 500 company; that's a prime example of a customer.

Sam Parr

what's and who's the ceo of your agency are you

Neil Patel

No, I'm never the CEO. I'm a terrible manager; I'm one of the worst managers ever. His name is Mike Gullickson. He was the CEO—no, he was the president—of iProspect, which is the ad agency owned by Dentsu. I believe iProspect had maybe 4,000 or 5,000 people, is my guess.

Sam Parr

And how early into the business did you have a hired CEO or hired leader?

Neil Patel

day 1 I won't start a business without a ceo from day 1

Sam Parr

and what did you pay them in the 1st year

Neil Patel

1st year was my cofounder for like a $100

Sam Parr

And that's because you basically went and drummed up $100 worth of business. You're like, "Hey Mike, I got this client. So, to give $100, do you want to run this thing for me and help it get deployed?"

Neil Patel

No, our business didn't start off that way. I probably put a total of **$5,000,000** of my own money into the business. So, it's bootstrap, but not really bootstrap, if that makes sense. It's kind of cheating. It gets easier and easier as you're an entrepreneur, right? The more successes you have—and I'm not saying I'm successful by any means—the more capital you have to deploy into the next thing. This reduces the chances of failure. When it's your own money, this is just my thesis, and I could be wrong on this; I have no data points. When it's your own money, you're much more careful than when you raise like **$15,000,000**, **$20,000,000**, or **$30,000,000** of venture capital. You really look at every single dollar. But Mike was the CEO from day one. He's a great operator and has no agency experience. Eventually, we got in a president, and then from there, we got in a CEO.

Sam Parr

and have you guys crossed a 100,000,000 in revenue yet

Neil Patel

yeah we do 9 figures

Sam Parr

That's crazy, man! So, I mean, that's just pretty wild that you're able to parlay this blog, which was always kind of a juggernaut, into a 9-figure-a-year business. I mean, that's amazing!

Neil Patel

No, this has been a good run. I hope that I'm knocking on wood, although you probably can't hear it from the crisp. I hope it keeps going. More so, we're just having fun. For me, what I enjoy doing is building a business. I know I have an expensive lifestyle. I generally don't do stuff for the money. I overpay for house staff, like nannies and stuff like that. When I say overpay, I drastically overpay. Not by like 10, 20, or 30%, I really mean drastically overpay. I look at people and think, "If you're cleaning a house, how are you going to live on this?" I'll give someone six figures to do that. I know that sounds kind of crazy or stupid, but I'm not giving my kids money, so I might as well take care of other people in this world who need it more than we do. In private business, it's easy to fall into forcing sales, but HubSpot helps us treat our valued customers like people. Good conquests, Susan! How's your tavern? I brought you a case of rum. HubSpot: Grow better.