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Finding Funding for Software company?

Hello, all!

I'm posting here because I know some of you work for (or have started!) relatively small software companies and may well have some advice.

I'm currently looking to start a company with a few developers and other employees (four-five people in all will handle development and support at first, and I'll focus mostly on management and some development).  We don't need much in funding (about $50,000 US), and have had quite a bit of trouble finding someone interested.

We seem to be trapped in something of a catch-22 -- we aren't asking for enough money that the VCs would be interested and we don't have a working product to show because we don't have money.

We've got a pretty solid business plan, have drawn specifications for our first three products, and are pretty much ready to go -- we just need this funding.

So, how do small software companies get started?  We don't want to max out credit cards and we don't want to lose control of the company; a buyback option would also be preferable.

What is the small company that thinks it can turn a profit within a year to do?  It strikes me as strange that the VCs aren't interested in us because we won't be able to lose enough of their money. ;-)

Suggestions, contacts (;-)), etc., are welcome!

David
Friday, November 14, 2003

If you are serious, and you'll need to be, mortgage your house, your car, max the cards, sell your clothes, organs and gold fillings.

oh, and when you reach shore, burn your ships!

Nothing is as motivating as stark terror.

I know from whence I speak
Friday, November 14, 2003

5 people huh? each one of you could potentially get a 10 grand line of credit right? stay away from stinking VCs. They're smelly and they suck your blood young TM (radiohead)

o'my
Friday, November 14, 2003

Consider the "Three Fs" of startup investment: friends, family, fools.

Another option is to do the Joel thing: bootstrap yourself with consulting to get cash flow with which to develop your products.

If you are that confident that you can be profitable in a year, should you really rule out credit cards? A cash advance at, say, 3.9% APR won't kill you with interest payments.

John C.
Friday, November 14, 2003

You're stuck.  Traditional VC firms aren't going to look for you with an investment of 50k.  Its not a buy in at that point.  You could try to find an Angel, but the Angel VC are really selective and likely won't want to give 50k to a company that isn't willing to risk any of its own capital.

Speaking of which, without capital its nearly impossible to get capital.

You might want to investigate a small business loan from the small business administration.  They have a few bucks (I think its 2-3 billion but I don't remember) to invest in small companies.  They work through banks though, and let the bank do all the legwork.  The problem is the bank will insist that you put your house up as good faith.  You'd lose your house if you defaulted, it would go to the bank and the goverment would walk away.  For 50k it isn't likely to be worth it.

I agree with the above, get everyone to take out smaller lines of credit, pool the resources and go from there.  You might not be able to launch in 1 year if you have less money or a longer period of consulting or smaller side projects or side jobs, but it gives you the ability to build capital over time.

Lou
Friday, November 14, 2003

You can max out your credit cards, or get a 2nd mortgage. You'll have to finace it yourself. If you don't believe in the preduct enough to risk a paltry 50 grand distributed among 5 people, then you must know something the VCs don't -- that the product won't work. So if you really believe it will work, spend the money to develop it.

Provided you come up with a written business plan, the SBA will guarantee your loan if you default. They don't loan you the money themselves though, and getting their approval is no guarantee whatsoever that any bank will lend you the money regardless.

Tony Chang
Friday, November 14, 2003

Also, go back an refigure how much you need. You need to plan for the worst case - what if it takes twice as long to develop? What if sales are slower then you expect? What if MS comes out with an identical product?

A lot of people seem to only plan for the best case and end up running out of money long before their plans are complete.

RocketJeff
Friday, November 14, 2003

Go rent "The First $20 Million Is Always the Hardest" (cute movie - not a bad waste of time) if you want to understand why you don't want anything to do with VC's.

Invariably, your goals are diametrically opposed to those of VC's. They want big money fast, then they're gone. You want to grow a company slowly and intelligently, hoping for the large payoff in the long term.

The problem with the VC approach is that they'll be reckless - they want to run the company up big, juice it with an IPO or by selling it, then they don't care what happens afterwards. This is a high-risk approach - that's why they invest in a large number of companies, to diversify their risk. But you don't get to do that - you have one shot, and you're handing over the reins to someone else.

Invest the money yourselves.

Philo

Philo
Friday, November 14, 2003

You're planning to roll out THREE profitable products within a year with 50 K?

Aint you dreaming?

o'my
Friday, November 14, 2003

Thanks for the comments.  You've kind of confirmed what I thought.

I'm off to the bank on Monday and then Visa will be getting a call. ;-)

And o'my, we're not planning to roll out three profitable profits within a year.  We think we can be profitable within a year and have drawn specifications for those three; basically, they're ready to go whenever we are.

That said, we're not ready with all of them; we have one we hope to release in Q1 '04, and two slated for '05 (first and fourth quarters, tentatively).

And Philo, I'll check out the movie. ;-)

David
Friday, November 14, 2003

If you are all working and have the product speced, hire someone to code, and keep working!

the artist formerly known as prince
Friday, November 14, 2003

Check out the Autodesk File:  http://www.fourmilab.ch/autofile/www/autofile.html

It's the complete set of documents and meeting notes from the makers of Autocad. A group of friends originally started Autodesk in their spare time, funded from their friends and family. Slowly, one by one, each member of the group left their own job to go full time for Autodesk.

Matthew Lock
Friday, November 14, 2003

First of all, $50K is not enough to pull it off, unless you plan to pay yourself and your employees zero, pirate all your development tools, steal all your hardware, and spend money only on marketing.

By far your biggest expense will not be the money you're laying out, it will be the money that you're _not_ making (either as an employee or consultant elsewhere) by using your time for developing and getting paid zero. Some would call it being a speculator, investing your valuable time into something that may or may not pay anything, when instead you could be selling your time at $100+/hr on the open market.

> Nothing is as motivating as stark terror.

The problem with that approach, especially if you're married, is that pretty soon you'll be looking in the classifieds for a full time job or consulting gig.

> Bootstrap yourself with consulting to get cash flow with which to develop your products.

Easier said than done. Especially if you're doing 40+ hours a week at a large client. I was trying to do the same thing when I was doing consulting at a large financial services company. It's very hard to focus on "your shit" when you're in the mindset of a cube mole worrying about the next round of consultant cuts.

my.pov
Saturday, November 15, 2003

I am also skeptical about the $50K requirement to get rolling.  And I also completely agree that the biggest expense in a sweat equity startup will be forgone income.

My hypothetical question, then. While I am not a fan of outsourcing - would it not make some limited sense for a startup to concentrate on billable local consulting work, and farm out development of their own product to hand picked offshore developers?

And not farm out the entire product, either. I mean farm out disconnected segments of software.

Just an idea. I expect to have my google links to posts from quark.co.in thrown back in my face with napalm...

Bored Bystander
Saturday, November 15, 2003

> Would it not make some limited sense for a startup to concentrate on billable local consulting work, and farm out development of their own product to hand picked offshore developers?

Sounds good in theory. If I had to outsource, I'd rather do it with local college kids than with anyone offshore. That way I can keep an eye on their work and help them out. IMHO if you keep a very tight loop between you and your developers, you can minimize the risks. I'm not saying micromanage them, but rather keep close to what's happening on a day-to-day basis.

The biggest risk in outsourcing is that your project will become a runaway mess, and that you will be spending more time trying to "manage" the process than it would have taken you just to code it yourself, even if only during your off-work hours. IMHO this risk is far higher if your developers are on the other side of the world.

Remember, if you outsource to India, you will be competing with clients with bigger pockets. So you may not be able to find the best developers. In fact, you may end up hiring the dreggs, because the best ones are out billing Citibank or American Express for their time and effort. And you yourself will be spending much time cleaning up code filled with GOTOs and bizarre errors.

my.pov
Saturday, November 15, 2003

Sweat equity is how I did it.

I wrote our first 3 programs in my spair time.


There are numerous benefits to this:

1.  Money from friends, family, etc. is the hardest money to lose. You're risking relationships.  And you're putting all your eggs in one basket. If you fail, who will be there to comfort you if you owe everyone money.

2. Puts time on your side. 

It took us a few years to learn how to sell our software. If our burn rate had been 5 programmers ($250k a year) we'd have NEVER made it.

3.  Keeps you with 100% ownership.

If you get your money from a VC, you've traded your old boss for a new one, but a new one who is short sighted (as described so well by Philo).

4. The money is the EASY part IF you have a good product.

SUGGESTION: PICK THE LOW HANGING FRUIT
Figure out what the most profitable 30% of the most profitable of your 3 spec'd programs.

Release it as shareware to TEST THE MARKET. Goal is market testing, not making  money.
Let users know that it's "regularly $X but temporarily offered at $X/5".

If you can't sell it then you need to figure out how to sell it before putting any more time into developing more products.

I

Entrepreneur
Saturday, November 15, 2003

Oh, and read the EXCELLENT articles on this by a successful software author:

http://www.dexterity.com/articles/

Entrepreneur
Saturday, November 15, 2003

Entrepreneur, great stuff.

Bored Bystander
Saturday, November 15, 2003

Modern tools on modern platforms make it possible for two guys in a garage to get to 1.0 on a product in 3-6 months.  That's most true for Cocoa on Mac OS X, but I think it's also close to being the case for C# or VB.NET on Windows.

A team of five developing three profitable products in a year doesn't sound too unrealistic.  (I worked for a company that once did this, so there's existence proof.)  On both platforms you're seriously restricting your target market, but for specialized products it's most certainly not impossible.

The funding, though, isn't all that realistic unless the founders are willing to live entirely out of their savings while they work on the products and the products are going to be sufficiently hot sellers.  Do all the founders have six months' salary saved?  Then maybe another $50K to handle non-salary and non-rent operating expenses might be sufficient.

Here's what the original poster needs to do:  Put together a very detailed business plan, one that includes both pessimistic realistic and very pessimistic worst-case numbers.  Include a big spreadsheet going into all of your various costs and potential costs.  Then determine if it's a worthwhile venture and if so, how much money you'll really need.

If you do that, you'll at least be prepared to talk to people about funding; if you start asking about funding without that kind of detail, you'll just be laughed at.

Chris Hanson
Sunday, November 16, 2003

You can expect a small startup to burn about $10-15k/month. It depends on how many people, what types of marketing you're going to do, etc.

You have five people, all developers. Where's the money guy? Where's the sales guy? Where's the marketing guy? Where's the operations guy? I'm not saying you need 4 more people, but you need someone who can do these things, and they won't be able to do development once the company is up and running, because sales and marketing are full time jobs, not to mention dealing with the operations and finances (you're going to need to raise money).

I'll echo what everybody has said: $50k isn't enough. Even if your product is perfect, it will take a lot of work to find the right market and right marketing technique to get interest, and it will take a lot of sales work. The runway to get profitable, with a finished 2.0 product in hand, is probably at least 6 months, if not 12.

I'd recommend: (1) make sure some of those 5 can move off of development at some point, and if nobody will, then drop some, and get people who can do it; (2) start out working in your spare time, and then your monetary investment will be deferred salary; (3) get a couple referenceable customers before seeking financing.

If your product is good, and you have customers, and there's a long product life, it shouldn't be too hard to get anywhere between $250k and $1m, even in this tight market. Everything hinges on the product and the potential customer base.

Brad Wilson (dotnetguy.techieswithcats.com)
Sunday, November 16, 2003

I forgot half my sentence. You can expect a small startup to burn $10-15k/month, plus salaries.

Brad Wilson (dotnetguy.techieswithcats.com)
Sunday, November 16, 2003

I'll speak to the "$50k is not enough comment" just because a lot of people seem to share that sentiment.

To be frank, I'm confident that it is.  I do have a detailed business plan prepared and we have considered the consequences of putting out a product that just flops.

Most of our stuff (at least at first) will be Web-based or will have a major Web component.  Our developers are going to be continuing with their jobs while we work, at least at first.  We are purposefully *not* asking for large amounts of money -- we think we're better off with slower, organic growth rather than going the way of the dot-com'ers.  We think our first product can pay for a certain amount of continued development.

Development costs really won't run that high, trust me on this one.  I've completed projects with this team, so I know what they're capable of and I think I'm pretty qualified to judge.  I can tell you that our first product will be very easy and cheap to promote, but I can't tell you why.

So, anyway, $50k will be *more* than sufficient for just development; we really don't need or want much in that department.  Most of that money will be going to design and branding (about $10k), marketing (the same), and other random expenses.  That gives us money for a rainy day and to continue with development if we find our first version not successful.

I appreciate the comments!

David
Sunday, November 16, 2003

Sorry, one more.

Just to liken it to something, consider the amount of money it would have taken Joel to get FogBugz off the ground.

Probably next to nothing, and he's making pretty decent money off it currently.

David
Sunday, November 16, 2003

Why do you even need $50K? Aside from sweat equity, I just started a software business, and my initial investment was nowhere near $50K

- Desktop/laptop computer: already owned
- Web Site: $30/m
- Web Site software: $0
- Development Tools: $1200
- Incorporation: $600 (www.bizfilings.com)
- Lawyer consultation: $500
- Quickbooks: $300
- Accountant: $150/yr
- NetBank Business Account: $500 to start, $2500 min balance
- Business cards / logo: $500

My first customer already paid for licenses such that I have already broken even.  Now I just have to do some marketing (more sweat equity) and I'll be doing fine.  If I sell just two copies of my software a month I'll be making enough to survive. If I sell 10 copies per month I'll be making more than most developers.

boots
Sunday, November 16, 2003

boot

Just curious what's your product?

o'my
Monday, November 17, 2003

o'my, my email's not working, it's late, and I'm sick, so I'm not going to get around to sending you an email tonight.

However, I'll send you an email through the board here tomorrow to answer that question.  I'd rather not announce anything publicly just yet. ;-)

David
Monday, November 17, 2003

an extension to sharepoint.

boot
Monday, November 17, 2003

boot

People actually buy the sharepoint extention thingy from you?

o'my
Tuesday, November 18, 2003

yes

boot
Wednesday, November 19, 2003

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