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Question for ISV founders/owners

"Nameless" brings up a point that I have been wondering about for a little while over here: http://discuss.fogcreek.com/newyork/default.asp?cmd=show&ixPost=5560

The basic question is how do you maintain your revenue stream or even predict it for that matter?  The bottom line of Joel's answer to this question is along the lines of you take a guess but you can't be sure.

I just finished taking a course on small business where we went through the construction of a business plan.  Part of the business plan was (obviously) market research and sales forcasts and all that and I went through the process for that but at the root of it I pulled all the estimates out of my ass.

I understand that at some level there is a bit of a leap of faith that must be taken to start working for yourself.  If you want the rewards of being your own boss you have to take  the risks that go along with it.  So I guess my question is how did the ISV people that frequent this board make that leap of faith?  Did you have good, solid market research that convinced you to make the leap?  Did/do you have a couple years worth of expenses to get you through or were/are you 'living paycheck to paycheck'?  Have you been surprised by your sales (on the upside or the downside)?

Ray
Thursday, April 29, 2004

I would say part of a good business plan would be contingencies - how will you deal with lower than expected revenues? What are your options for adding revenue? Do you have methods for building revenues while your long-term plans are building (like Fog Creek offered consulting services while they were writing CityDesk, then started selling FogBugz)

Philo

Philo
Thursday, April 29, 2004

Goodness Philo, that was fast.  Thursday night and no Apprentice? :)

Ok, I agree that having a solid plan to deal with 'slowness' is a prudent thing to do.  The problem still exists with that plan though, how do you know what to expect in terms of revenue?  Even if you do the consultant thing you could still end up like those restaurant owners in the Simpsons that have an empty restaurant and are just bickering with each other until Homer and family walks in...

Ray
Thursday, April 29, 2004

I second Philo's comments. There are no certainties in setting up any business. The only real way to get a feel for this is through experience. If you currently work for an ISV, i suggest trying to get involved in the sales side of things to get a feel for the business. It does not give you all the data you require to make an completely accurate prediction as each business and the products you will deliver will be different, unless of course you have worked within that particular market previously, but the more info you have the mroe accurate your predictions become. Otherwise, you have no option except to guess and follow Philo's advice regarding worst case scenario and giving yourself options.

Its all about managing the associated risk. If the worst case scenario happens, can I survive/what can i do to survive. Risk management at its core is guesswork. Experience can, however, make this process more accurate.

In the end it comes down to....do I want to accept the risk, or not.

Good Luck.

Crack_Kat
Thursday, April 29, 2004


This is long, but I think you'll find it all interesting.


"If you currently work for an ISV, i suggest trying to get involved in the sales side of things to get a feel for the business"


Yes, yes. Be a sponge.

I've been an ISV for about 9 years. Shrink wrap software for language therapy.


I was always interested in all aspects of business. But now I wish I'd paid even more attention. I didn't have the confidence to even imagine I could run my own company.  So I wasn't planning for that.

Recommendations

1. Learn your skills on someone else's nickle.
My college digital engineering professor (Dr. Huner) gave me that advice. His father had done that. State geologist for years then started his own company.

This is especially true of DOMAIN knowledge. I think it's easier to aquire programming skills on your own than it is to aquire domain knowledge. The latter involves knowing HOW PEOPLE work. Because people will (probably) be the ones using yoru software.


2. Start small : write the program in your spare time.

3. Two sales=customers

Sam Walton said the SECOND time a patron buys, THEN he's a customer. Likewise, the second sale you get indicates you have a sellable product. This assumes they both bought on merit, not b/c they knew you.

4.  Treat feedback from biased people (friends, enemies) as ... biased. Friends will be too encouraging, jealous people will be too discouraging. All that matters is what the customer thinks.


5. Market, sell, and gather requirements AT THE SAME TIME.

Here's a FANTASTIC article about  a serial entreprenuer who did that:
Greg Gianforte, founder of $30-million RightNow Technologies Inc., learned that bootstrapping is not simply about pinching pennies and cutting costs. Smart bootstrapping is about turning your lack of resources into a competitive advantage.
From: Inc. Magazine, Feb 2002


Greg Gianforte thinks he knows the single best way to launch a business. Here's his secret:
http://www.inc.com/magazine/20020201
(may require free registration).
Inc. magazine is GREAT btw.

6. At this point, when you have SOME revenue stream, you'll probably have to go full time and take the plunge. When I did, we had revenues of $2k/month.  A third of my regular salary. Revenues grew steadily (and continue to do so, though only at 5% or so a year now).

7. Business success requires moderate success in EACH of these areas:
a.  Product pleases customer at price customer is willing to pay.
b. You make plenty of money to cover all expenses (not just programming)
c. SALES:  You can communicate the benefits to the customer.
d. MARKETING: You can REACH the customer (marketing) with your communication : advertising, etc.


If you ignore ANY one of these it doesn't matter how well any of the others do.  They are each necessary but not sufficient for success.

Very few companies get all 4 of these right.    Most techies can't do much beyond A.

So... don't quit your day job till you have SOME indication that your have a saleable product.
But... eventually you may have to go full time to give the business it's proper attention.

Also check out:
http://www.dexterity.com/articles/
for GREAT articles on being an ISV


Also,

www.softwareceo.com
As good as JoS but focuses on sw BUSINESS.

If you're smart, can put your ego aside, and are willing to solve hundreds of problems moving toward your goal of profitibility, there's not reason why you can't succeed.


Good luck, drop me a line if you want more advice or suggestions.  Boy, I wish these resources had been around when I started 9 years ago!

Mr. Analogy
Thursday, April 29, 2004

Oh, and I guess I should answer your questions:


"  Did you have good, solid market research that convinced you to make the leap?  "

Best kind of research:  actual sales, with no advertising. As I said, $2k/ month.  But that doubled almost immediately when I started working on marketing.
A. Wrote programs in spare time.
B. Developed website in spare time.
C. when I went full time, I worked 100% on sales and marketing: creating a brochure then catalog. Then after that got started, i worked on more products. 


Did/do you have a couple years worth of expenses to get you through or were/are you 'living paycheck to paycheck'?

Yes, but wasn't counting on that. My wife and I had long ago decided to live with the means of ONE paycheck. So,
A. We'd been saving for a while.
B. I didn't have to generate income.

" Have you been surprised by your sales (on the upside or the downside)?

Yes. Matter of expectations. Surprised at how LOW sales were for a few years. Learned the importance of marketing. Then surprised at how many times sales doubled.

A. In the first year or so we thought we'd be millionaires. But the program...sucked... <g>. Reworked it.

B.  2 years later: (3) programs are very good. So frustrated with my day job that i'd be happy to make $30k a year on the programs.

C. Quit day job. Making $30k/yr within a year.

D.  Steady sales increase for 7 years or so.  I think that once our kids are older and my wife can help more, we should be able to double our sales with more programs.

Mr. Analogy
Thursday, April 29, 2004

Mr. Analogy thanks for the great info.  I have read all the Dexterity articles, I also read that Inc article about RightNow; that one was pretty impressive. 

If I were to start a business (which I haven't decided about yet) I think I would probably take a very similar route to what you took.  Develop version 1 in spare time, start generating some sales and see what happens while setting up my family's lifestyle to be able to live off of one income and then work at growing sales and updating the product.

One of the things that really boggles my mind is the number of companies out there spending huge amounts of money on overhead that still seem to survive.  This is one of the things that Nameless touched on in his Ask Joel question; the revenue figures for some places just seem so much bigger than what would seem reasonable. 

Nameless gave the example of a retail clothing store pulling in $4k a day and on really busy days pulling in $15k a day.  I know of a small company locally that were paying their developers over $100k with $100k bonuses for meeting some deadlines (which weren't all that difficult to meet).  That company ended up laying off developers but is still surviving. 

Then I look at the company I work for.  Not a small ISV (actually a IHV and a relatively big one) and I have heard stories of the same level of bonuses paid for getting things done during some critical times when the company was quite small, before my time here.  Now that we are a larger company I see the massive amounts of money that are really wasted on stupid stuff.  I also see all the silly Dilbert type things going on all the time, people doing dumb things to justify headcount, HR setting up dumb policies, people getting recognition for playing politics and not for real contributions and crap like that.

So I imagine that starting a business is a little like first starting out in the 'full-time' work force.  When I first started in programming right out of school almost 7 years ago my starting salary was a little more than half of what it is now.  At that time I had slightly fewer fixed expenses than I do now but I wasn't paying as much attention to retirement savings as I do now (read: I wasn't contributing very much at all to my retirement savings).  I had to be pretty carefull about every $100 or so that I spent.  My wife wasn't working, she was going to school so there were expenses to cover there as well.  Basically there wasn't much financial breathing room and if something went a little bit wrong it took a little while to get out of the hole that it left.  Now my expenses are only marginally higher, but there are two incomes and as a result there is a whole lot more breathing room and the retirement account is getting much more attention.

Anyway, I think I am rambling now.  Again thanks for the input, I have found it interesting.

Ray
Friday, April 30, 2004

"boggles my mind is the number of companies out there spending huge amounts of money on overhead that still seem to survive."


The benefits of a product company is RESIDUAL INCOME.  Now that I have my advertising set up, I just have to answer sales calls and occassionally tweak my programs. It's probably a 15 hr/ week job. And I make 2x what I used to make.

BUT... you have to work to expand that business or it'll likely contract. Nothing is static. So, those companies are lookign for ways to expand.  (So I spend 20 hrs a week working on new program designs, improving the website, etc.)


BUT... as a company gets bigger, it gets less efficient.  You hire cheaper, less skilled people. You have 5 mediocre programmers doing the job of one superstar.

Example: I understand programming, tech support, marketing, sales, and finance. I can integrate all of those. So, I know what sort of message box my software should have to encourage sales. I know what features I need to sell. Etc.

To replace me would cost $150k a year.

(I'm not meaning to be bragging, it's just that I've learned a lot working very hard and it's tough to find a replacement).

Mr. Analogy
Thursday, May 06, 2004

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