Starting a Development Agency? The Reality Nobody Tells You About

Lately, I've been having some pretty intense conversations with several friends who are all at the same point: they want to start their own agency. Some talk to me about leveraging AI to build teams with junior developers, others are obsessed with automation, and some are simply fed up with being employees and want to start hiring staff to grow.

These are all super interesting conversations, but after chatting with them, I've realized there are important things they're not considering. And since I've been through this from various angles (working as a consultant for agencies, as a freelancer for agencies, and having my own "business" which is ultimately just me), I wanted to share my perspective.

Let me be clear that this is my personal opinion and I could be wrong about many things, but these are the reflections that have emerged after these chats and my experience.

Why Everyone Wants to Be a "CEO" Now

The conversation always starts the same way. My friend of the moment tells me: "Dude, with AI it's super easy now. I can hire junior people, train them quickly with AI tools, and start billing projects like crazy." Or the variant I've also heard a lot: "I'm going to start an automation agency because everyone needs to automate their processes."

And look, I totally get it. After years working for others, the idea of being your own boss and starting to scale by hiring people sounds amazing. But my experience tells me it's not as simple as it seems.

In the end, depending on other people has risks that I think aren't valued enough. That person can get sick right when you have an important deadline, they might not have the knowledge you expected (even though they sounded great in the interview), or they can become obsolete super quickly in our world where everything changes every two days.

And about the AI thing... I've seen cases where people who were supposedly experts at working with AI ended up spending more time fixing the bugs and problems it generated than if they had done the work directly. I'm not saying AI doesn't work, but you need to know how to use it well, and that also takes time.

The Math Nobody Wants to Do (But It Hurts)

Here comes the part that seems most important to me and that I see people aren't calculating properly.

When you're a freelancer and make the jump from earning, let's say, €2,000 net as an employee to billing €4,000, after expenses and taxes you might have more than €2,000 left clean. Perfect, you've improved your situation and feel like the king of the world.

But when you start hiring people... that's where things go wrong. To hire someone senior (which is what you really need if you want things to go well), you have to pay them a salary that compensates them for leaving their current job. And in Spain, this isn't cheap.

Let me give you real numbers so you can see what they cost you:

• Senior's gross salary: between €45,000 and €55,000 per year
• Social Security you have to pay: add 32% more
• Real total cost: between €59,400 and €72,600 per year

And now comes the million-dollar question: how much do you have to charge your clients for those numbers to add up?

I like to give this example because it's real: you have a small agency with 3 employees. Between gross salaries, Social Security, and other expenses, you're spending about €120,000 per year just on personnel. For this to be profitable, you need to bill at least €180,000 annually.

And that's assuming you don't have an office, there are no slow months, and you always have projects to keep everyone busy. Realistic? Let me doubt it.

Management Time: What Nobody Tells You

This is something I've seen that almost nobody takes into account and it's brutal. When you're a freelancer, you basically dedicate yourself to programming and managing your four things. But when you have a team, your day becomes something completely different.

Suddenly you have to delegate tasks, review the work your team has done, manage planning, track projects, solve internal communication problems... And you have to charge for all those hours somehow.

But here comes what seems most serious to me: I see people playing solitaire tricks and not counting their own management hours. As a freelancer you might have worked 10 hours a day, but when you hire someone, that person is going to work 8 hours (which is normal), won't do the work as well as you did (at least at first), and you'll also have to spend time managing them.

So you'll probably need more than one person to replace what you did alone, and at a higher price too.

And here comes something that seems key to me: it's not the same to calculate your income in absolute terms versus relative terms. The important question isn't "Am I earning more than before?" but "For the same amount of hours I dedicate, am I earning more or less than before?"

I've known entrepreneurs who work during the week doing technical work and on weekends take home invoices, bureaucracy, management... They can't keep up and are working more than 8 hours a day constantly. The result? If you do the real math of what they earn per hour, it turns out they earn almost like a junior when they have senior experience.

It's the typical trap of working more to earn more money in absolute terms, but losing quality of life and earning less per hour worked.

Cashflow: When You Become Your Clients' Bank

This topic seems super important to me because I've seen agencies sink because of this. You work before getting paid, and it can be months before you see the money from work you finished a while ago. Basically, you become your clients' bank.

The problem is that while you wait to get paid, you do have to keep paying salaries religiously every month. I've seen agencies that were profitable on paper but had to take out loans to pay payroll because their clients paid in 60 or 90 days.

Personally, I've managed to solve this problem by charging most of my clients for hour blocks in advance. This way, not only do I not have cashflow problems, but I have positive flow. I know some agencies that do something similar: they charge for project phases in advance. Not the entire project, but at least they secure each phase before starting to work.

But I still see many people who don't work this way and end up chasing the client to pay while having to take money from their savings to pay salaries.

And this becomes especially dangerous when you depend on one or two big clients. If one of those clients drops you or decides to delay payment, suddenly you're in the red for months.

As a freelancer, if there's an economic problem, it only affects me. In an agency, those workers have families and it's your responsibility that they get paid at the end of the month. That pressure and responsibility are headaches that, honestly, I don't want to take on.

Define What "Growing" Means to You (This Is Key)

Before getting into all this mess, you have to ask yourself what growing really means to you. Because it's not the same to grow in personnel, as to grow in profits, as to grow in number of clients.

I've seen entrepreneurs who started hiring staff, got many more projects, but in the end what they had left in profit was practically the same or even less than when they worked alone. It's a very common trap: you have 10 employees instead of being alone, but your profits are similar. In exchange, you have all the headaches of management, communication, people taking sick leave...

In my personal case, for me growing means more profits, not more problems. I prefer to earn more money working alone than earning the same managing a team. If to maintain my current profits I needed to have 20 employees and all the problems that entails, honestly it's not worth it to me.

My Alternative: Working for Other Agencies

This might sound contradictory, but what has worked best for me is working for other agencies. It's ironic, isn't it? Precisely because agencies have all these problems I've told you about, it's more convenient for them to hire freelancers than to take on employees for certain projects.

For me as a freelancer, it's much easier to work for an agency that can give me constant work on different projects. When one ends, they already have another new one. In contrast, working for end clients means that when you finish their project, that client no longer has more work and you have to look for another from scratch.

That implies constantly doing marketing work to attract new clients, and that exhausts me. Although working for agencies I might charge a bit less per hour, it compensates me because I dedicate many fewer hours (or almost none) to looking for new clients. Once you have two or three agencies as clients, they're constantly giving you work.

Red Flags I've Seen a Thousand Times

If you decide to start your agency or work for one, watch out for these signals that indicate things are going wrong:

Evident cashflow problems: constant delays in payroll payments, need to request loans to pay salaries, or having to negotiate with employees to postpone payments. If you see this, run.

Excessive dependence on few clients: if more than 70% of income comes from one or two clients, any problem with them can sink the company overnight.

Always working with urgencies: when everything is "for yesterday" constantly, it's usually a symptom of poor planning, overselling projects, or problematic clients who don't know what they want.

High staff turnover: if people are constantly leaving, something is failing. It could be due to bad environment, uncompetitive salaries, or impossible-to-manage projects.

Constant pressure to lower prices: when you always have to compete on price and can never charge for value, it's very difficult to maintain healthy margins.

Why I Still Prefer Freelancing

With everything I've told you, I think it's clear why in many cases it's better to continue as a freelancer charging well per hour and without the headaches of managing staff.

As a freelancer you can be more flexible with prices, you can better choose your projects, and if there's a slow month, it only affects you. You don't have to think about how to keep a team busy that costs you money every month.

Yes, you limit yourself in terms of the volume you can handle, but you also get rid of many problems that honestly I think aren't worth it.

My Conclusions After All This

After all these conversations with entrepreneur friends and my own experience, my opinion is that starting an agency isn't impossible, but it's much more complicated than it seems from the outside.

The numbers have to add up perfectly, you need to have an important financial cushion, and you have to be prepared to manage problems that you don't have as a freelancer. I'm not saying nobody should do it, but I do think you have to be very realistic with expectations and numbers.

It's easy to get excited about the idea of growing and hiring people, but managing a company is a job in itself, and it's not always the job you really want to do.

My advice is that before taking the leap, make sure you really want to solve the problems that come with an agency, not just enjoy the benefits you imagine it will bring you. Because in the end, as I've seen in so many conversations, reality is often very far from initial expectations.

In my case, for now, I prefer the simplicity of well-done freelancing over the headaches of a poorly managed agency. But hey, everyone has to make their own decisions.