Recently I’ve had the chance to talk with two different entrepreneurs who were building software consulting firms to fund product development. Software engineering is in high demand and a number of businesses, especially startups, are hiring contractors to rapidly prototype new products and ideas.
Here are a few thoughts on consulting to fund product development:
- Consulting work, with an emphasis on billing time and materials, is very different from product work
- Whenever possible, team members who do product work should not also do consulting work so that they can iterate on the product and interface with customers
- With new products, one of the most important early milestones is to decide if the product is worth continuing to pursue (e.g. a go/no go decision), and working on it part-time makes it difficult to achieve enough progress
- Ensure that there’s not a have/have not situation where the engineers doing consulting are jealous of the engineers working on the product
Consulting companies that turn into product companies can happen, albeit rarely. One of the most successful examples is Mailchimp, based in Atlanta (280 employees). Entrepreneurs building consulting firms to fund product development would do well to recognize the fundamental differences between the two types of businesses and plan accordingly.
What else? What are some more thoughts on doing consulting work to fund product development?
David Cummings on Startups 
We did it with 360i and ignition one and at BLiNQ too. Unless your software is selling and you know the market inside and out, my preference is a consulting business turned tech then vice versa. It is possible to both simultaneously and bootstrap your way to riches with no VC or OPM- other people’s money. Don’t let the VCs fool ya otherwise!
@David, I’m missing your point. Of course that it’s desired to focus. But sometimes there’s no other way. If the entrepreneur wants to get his idea and develop a product but can’t raise the capital, he must work.