Don’t start a tech-enabled service

LLMs are going to enable a whole new crop of tech-enabled services. Here’s what you need to know before starting one. (Hint: it's a slog.)

1014  words • 5 min read

I’ve had several conversations with founders wanting to start the “Pilot of X,” and my first piece of advice to them is “Don’t start a tech-enabled service.”

Yes, I recognize the irony of that advice coming from the CEO of a tech-enabled service, but here’s why. There’s a lot to like about the tech-enabled services model. But it’s also punishingly hard—so make sure you understand what you’re signing up for before you embark on this journey.

Why are tech-enabled services the future?

The bull case for any tech-enabled service goes like this: $60 billion is spent every year in the United States on accounting for SMBs.  That $60 billion is earned by a long tail of small local and regional providers, and those providers currently do what they do entirely by hand, essentially, with the complete absence of technology.

With the advent of LLMs (or the cloud, or machine learning, or whatever you like), it’s now possible to do the vast majority of this job in software. And when you do it in software, it’s more accurate, more reliable, more consistent, more scalable, and cheaper. Better in literally every single way.

Best of all,  you can become the obvious national (and ultimately global) provider for the service—and those economies of scale will allow you to make your offering even better.

Here’s the image you’d show in your pitch deck/investment memo:

Yes, this is the limit of my graphic design abilities, and yes, I had to do a square root to figure out the right size for the big circle. I think it kinda looks like Jupiter.

Replace “accounting” with almost any other services business, and you see why the pitch is incredibly compelling to founders, and incredibly compelling to investors.

I absolutely think this is the future. There are massive industries today that, when tech-enabled, will end up being dramatically more efficient/effective, and a small number of players will emerge as the dominant providers of those services.

Sounds great, right? So… why am I telling you not to do it?

Why is it hard, and what can go wrong?

First of all, empirically, it must be hard: lots of smart people have started companies with this exact thesis, in various industries. Almost all of them have failed. (Pilot is quite unique in that it continues to exist—and continues to grow.)

Here’s what makes it tough:

You’re going to fool yourself with initial traction

Congratulations: your {law firm, accounting firm, recruiting firm, travel agent, executive assistant, SDR, website design} service just launched. 

You work your network to validate the idea, and you’re able to get your first few customers. You delight your customers by unscalably providing the service yourself, by hand, as you write the first few lines of code.

You continue to do this, it goes well, and you grow the team to keep up with demand—and one day you wake up and you’ve hit the holy grail $1M ARR mark.

You’re crushing it, right?

Well, yes and no. Congratulations: you have built yourself a nice accounting practice. The problem is that you’ve validated that you could start a small accounting firm. Unfortunately, it’s well-known that this is possible: there are literally thousands of small accounting firms in the United States.

The hard part isn’t the first $1m. It’s the first $10m, where you really start to feel the pain of scaling beyond where a normal services firm goes. Your initial signals of success actually lead you astray. You think you’re winning, but your early progress has nothing to do with whether or not you can achieve scale.

And the reason that achieving scale is hard is because…

You’re not going to achieve 100% automation

As you start to tackle the problem, you’ll learn that software can do a lot of the heavy lifting. You’ll also learn that it can’t do 100% of it.

That’s a problem, because your customer will not tolerate the problem being only 95% solved. Their alternative is “work with a legacy accountant,” which can, by definition, provide 100% of the service to them.

(Separately, my view on Pilot is: even if the computer could do 100% of the task, you’d still want a talented accountant in the loop, to provide a compelling customer experience for your client.)

So you are necessarily going to have to staff up a fairly large team of accountants.

Which means…

It’s the worst of both worlds

Imagine all the hard parts of running a B2B SaaS software company. Now add in all of the hard parts of running an accounting firm. Congratulations, this is your new life.

In addition to trying to bridge the divergent cultural expectations of your teams, you have an even bigger problem…

You’re going to have bad margins

Your margins want to be bad. By default, you’re a services firm, and services firms have bad margins. (They certainly do not have SaaS margins.) Those margins tend to get worse, not better, with scale—because scale requires overhead.

Unless you’re paying very close attention, you will be unhappy with the margin profile of the business. More importantly, your investors will be unhappy with the margin profile of the business.

The single most common reason that investors passed on the Series A, Series B, and Series C was “I just don’t believe that the margin profile will actually be good.”

They happen to be wrong in the case of Pilot specifically, but this is absolutely one of the main causes of death of this shape of business. You’re unprofitable and your margins are bad, but you continue scaling. One day you wake up without access to further capital and unsustainable burn, and you have to shutter the business.

Good luck!

I’m very bullish on this sort of company. (If I weren’t, I wouldn’t be running one.) I think a number of iconic, enduring companies are going to be formed using this model—and it’s going to be amazing for customers.

But it’s definitely going to be a slog.

To the founders of the new crop of “Pilot for X”—best of luck!