Dissecting SourceBits’ exit – Lessons for services startups

Being an entrepreneur myself, any exit that isn’t a bloodbath, is a great exit. Then, there’s an implicit satisfaction of having built careers of many, delivered world-class work and those nice things that don’t appear on a balance sheet.

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For all of these, a big salute to SourceBits (more context on SourceBits getting acquired). They executed well on those counts. I loved the apps they built and the brand they painstakingly crafted, one radio ad at a time, one ad spot on techcrunch at a time!

Beyond the warm and fuzzy feeling, however, is also a feeling of having been let down – Let down by my expectations that SourceBits would become a billion dollar enterprise. In the infrequent conversations I had with them, I had a clue of how they were aspiring to build a billion dollar services company, while trying various organization model innovations.

I was skeptical even then but still wished that some of their attempts will hit a homerun.

But, looking at the numbers today, it’s a bit underwhelming – At $8.2 Million annual revenue for 160 employees, they were billing at approximately $25 per hour (based on 2000 working hours per employee per year). That was however not how SourceBits positioned itself in the market. It was positioned as a design-led product engineering firm that competed with the top firms globally. Adjusting for pricing parity and comparing with how similarly positioned players were pricing themselves out of India, they should have been realizing at least $40 per hour (billing rates pegged at $50+/hr, based on our own price-benchmarking studies and non-billable overheads creeping into that billing rates, leading to the number quoted).

Now this begets a few questions:

1. Is it possible to organically grow a 160 member team in India over a 8 years period, in the services business? Yes, it takes less time actually!

2. Is it possible to get a realization rate of $25/hr at that scale? Not an impractical ask but needs very tight execution

3. Do you need a big marketing budget to get to this run-rate? Perhaps not, given that there are companies that hit this run-rate without any marketing spend whatsoever (other than content marketing or hitting conference-circuits )

4. Do you need $10 MM in investments to get to a $8.2 MM run rate as a services company? The numbers reveal the answer.

If the rate realizations are half of the billing rates advertised, it could be due to the following reasons:

1. The sales engine was not keeping up with the scaling ambitions

2. The non-billable overheads – Primarily marketing and product attempts in this case, did not convert to sales.

We may never know if the money raised was fully deployed. If it indeed was, then it makes the case for an even sombre situation on the returns on the cash deployed.

Whatever the case might be, it’s a timely reminder to services companies that scaling a services organization is hard and funding does not move the needle a lot, unless you’ve figured the growth engine. It might seem like stating the obvious but in a product startup, you can expect non-linear growth and adoption that can be achieved with some financial muscle but that’s not how it pans out in services.

But like I said, any exit brings closure to the entrepreneurs involved and as long as their time and effort are well spent, beyond the numbers, it’s a legacy worth telling!

AshwinAbout the author:

Ashwin is the founder of ContractIQ – A service that makes it super easy for entrepreneurs and enterprises to find credible outsourcing partners for their mobile initiatives.