The first stage of the Life Cycle of Agencies framework developed by Upsourced is Create Mode.
You’re a small agency trying to build a going concern. You haven’t hit your first $1M in revenue yet, but you’re working towards it.
During this phase, the agency doesn’t live separately from its owner. It’s likely getting a lot of business through organic and referral means. The owner is instrumental in managing client relationships and/or delivering the services directly, and their primary “job to be done” is perfecting the positioning and the go-to-market in order to grow revenue.
So you’re trying to get your business to your first million; what should you be prioritizing at this time? What are some of the bigger risks you’re going to face during this stage?
One of the biggest challenges you’ll come across at this stage is - I’m sure you’ve guessed it - generating revenue. The business is new, you don’t have brand awareness, and you have to build your client base. No matter what industry you’re in, this phase is all about sales. After all, without a client base, there is no business!
Oftentimes small agencies under $1M are comprised of a small handful of large clients, each of whom represents a real risk. Putting all of your eggs in one basket - or having what we call a ‘whale client’ - can be dangerous, so be wary and diversify as fast as possible.
Staffing is also a complicated area at this stage. If you sell multiple services or products that require multiple skills, it’s hard to generate enough revenue to pay full-time workers for each offering or find the right mix of freelancers.
But these are the areas of focus. Sales and service. No need to over-complicate anything else. A common trap of first-time entrepreneurs is “playing business” - doing the things that feel productive, like acquiring trademarks or building 5-year plans, instead of the things that truly matter, like selling services and perfecting your service model. Continue to ask yourself - what am I providing, and who am I providing it for?
That isn’t to say you should neglect your finances. The main thing we suggest agency owners do when first starting the business is to get a separate bank account. Get a debit card, and from that point forward, if it’s related to your business, use that account. When you earn money from your business, deposit it into this account. Keep all business-related expenses and revenue in one account rather than trying to pick out expenses and revenue from your personal account. This will save you a tremendous amount of stress during tax season!
As the business begins to generate meaningful revenue along its path to $1M in revenue, we suggest managing to a break-even revenue target. No need to try to predict future sales - revenue is not predictable at this stage, so this is a waste of time. Instead, understand your expenses and make sure you’re generating at least enough in AGI to cover it. If not, reduce expenses, reset your revenue target, and begin again.
Wait, but what is AGI?
AGI stands for Agency Growth Income. To find your AGI, take your gross income (revenue) less your out-of-pocket costs (ie, project expenses and freelancers). Gross income is a vanity metric - AGI is what matters.
“As long as you have a clear idea of what your monthly obligations are and how much AGI you need to pull in, or even simpler, how much do you need to collect from your outstanding invoices, you can intuit your way through the finances until you get to the half million dollar range”
Stated Ryan Watson, Partner at Upsourced, during his interview with Edgar Allan on EA Live.
Tune into the interview where Ryan gets into the weeds with Mason Poe surrounding the priorities, risks, and struggles of starting your agency and building it up to its first million!
The path to $1M isn’t easy. Many agencies fail to make it. But if you focus on the things that matter - sales and service - and manage everything else as light and lean as possible, you’ll put yourself in the best position to get there.
For more, check out our podcast: Creative Outcomes.