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Business Owenership: Services vs. Products

In a previous thread, "I want to start my own business because..." several business owners talked about the problems and difficulties of business ownership.  I noticed that the business owners who responded seemed to be in the custom software market (consulting).  I was wondering if ISVs who provide shrink wrap or semi-custom software have had an easier life (for lack of a better description) than ISVs who are purely custom software shops.

The highly visible ISV successes that I'm aware of, such as Fog Creek and SourceGear, seem to have started as consultancies, but quickly evolved into "shrink wrap" or semi-custom software businesses.  Is the life of a shrink-wrap or semi-custom software ISV easier than the ISV who is purely a consultancy?

Ewan's Dad
Thursday, July 22, 2004

Someone else mentioned the book "The E-myth"  I bought it.  1/2 way done.  You need this book.

Formerly someone else
Thursday, July 22, 2004

I don't think it's a black and white comparison or maybe it is.  An ISV's problems are much different than a consultants with respect to customers, marketing and even coding their product (controversial I know...)

In order for an ISV to be successful it has to have product that meets a broad demand.  In order for a consultant to be successful they have to be able to market their services successfully.

So I wouldn't necessarily say that ISV's have it easy.  They have to have the capital and the "goods".  (I think Joel and Eric were millionaires when they started their businesses, though I don't know if they invested personally in each business.)  Consultants simply have to have the time and the people skills.  Of course luck never hurt either one.

BeeBop
Thursday, July 22, 2004

And before someone calls me on the "coding their product" comment I would just like to say that it is a rare occasion that I see a consultants code with exception handling or error trapping throughout the whole thing.  The robustness of the application is simply not the same as a commercial application.  OTOH I have seen commercial apps that have very little to no error checking either.  Maybe consultants use this to collect a little more money.

BeeBop
Thursday, July 22, 2004

I started my business consulting and have moved to selling products over the last two years. There is a significant difference between the two.

Financially I would almost certainly be better off if I had stayed with the consulting. I'm not that far short now but it has taken a long time to establish the software sales. I did expect this and as I don't spend much it hasn't worried me.

To sell my software I have to spend a lot more time on product marketing than I ever did selling my consulting services. As a consultant if you can develop a good reputation work comes looking for you. There is so much other software out there that you have to become a good marketer or you will not have enough sales to sustain a business.

Development changes as well, you have to be much more aware of the different platforms your customer is running and how you will handle support issues. I spend a lot of my time developing the product to avoid customers raising support tickets or issues in my forum. If I didn't then I would be swamped doing tech support rather than building my business. I guess some of this comes from me as well, I'm not happy unless my code is of a high quality, most of my consulting customers just need something that works asap.

Personally the thing that drove me away from consulting was the normal big business stuff like long hours, too much commuting, petty bureacracy, etc. Even as an independent you can't avoid much of this stuff.

Tony Edgecombe
Thursday, July 22, 2004

I was not a millionaire when I started SourceGear. 

In fact, depending on your definition of the term, I'm not a millionaire now.  I define a "millionaire" as someone who holds at least one million after-tax dollars in liquid assets.  My ownership share in SourceGear is worth quite a lot, but it's not liquid.  My house doesn't count either.  Using my definition, I have never been a millionaire.

Yes, I did very well on the Spyglass IPO.  At one point my stock was worth well over 2M.  By the time I actually sold it, I cleared about a million.  After I paid my income taxes, gave some to charity, paid off my home and wasted some money on a few stupid decisions, I had well under 200K left.  I'm not complaining -- I was very blessed and very thankful.  But I wasn't a millionaire.

During the first six months after I founded SourceGear, I went without salary and I invested another 25K in cash.  It is definitely possible to start a company with less.

You don't have to be a millionaire to start a small ISV.

Eric Sink
Thursday, July 22, 2004

Eric, these numbers fit what I suspected. It's nobody's business what you have but an overview is very helpful. Thanks for providing some detail.

It seems to require perhaps $100K or so in liquid assets to start an ISV (in the US) and to be able to live off of savings for awhile in order to develop your market. It's something that the frugal can do, not restricted to "the rich". I would not feel comfortable trying to do it with much less.

Of course, you have to have a nest egg to consider doing this. Those (numerous) geeks who have no savings and rely on their employer's salary week to week are never going to be in that position. My observation is that a "programmer with savings" isn't very common.

The reason I haven't tried is that I don't feel that I have had a solid enough idea to consider "going dry" for an extended period of time.

Bored Bystander
Thursday, July 22, 2004

I think some people are suited to the shrink-wrap side of business and some are suited to the consultancy side.

I understand that many start out doing consultancy (e.g. Fog Creek), then move into shrink-wrap, but I suspect that was more to do with generating cash than anything else.

This is a good tactic, as it gives you some money to burn while you bring your product(s) to the market. That is, it saves the founders having to mortgage their house and/or use their savings.

Of course, it is possible that you'll just get so much work on the consultancy side that you never actually get around to releasing any products, but that's fine.

Nemesis
Thursday, July 22, 2004

Eric,

Your statements don't add up.  You either did or you didn't make a million dollars on the Spyglass IPO.

From this thread:

http://discuss.fogcreek.com/joelonsoftware/?cmd=show&ixPost=98236

"I made just a little over a million dollars on the Spyglass IPO."

From the current thread:

"By the time I actually sold it, I cleared about a million."

In my book, at one point in time, you were a millionaire.  Yes I'm being a pedantic prick.  Having all of that money gave you the confidence to start SourceGear.  You had deep pockets.  Even after taxes and whatever else you spent it on you still had deeper pockets than most.  This allowed you to make the mistakes you talk about.

No you don't have to have deep pockets to start an ISV, but it sure as heck helps.  Now would you have had the same confidence even if you hadn't paid off your house and had some 200k laying around...

BeeBop
Thursday, July 22, 2004

The shrink-wrap software business is inherently quite risky because of the high fixed costs of development.  It's not like you can ratchet down those costs significantly if you end up with one customer instead of three.  (or 10 instead of 15.. think proportionally here)

But that's also the high reward and high margin aspect of the business also.  The marginal cost of one more sale can be pretty darn small so gross margins on each additional unit are huge.  That's how Microsoft can earn 80+% gross margins on Windows and Office.  What's the marginal cost?  Burning another CD?  Of course there are support costs also which are significant but I'm simplifying a bit.

So the consulting and then a product route (Fog Creek, et al.)  makes sense both from cash flow and risk management points of view.

Jeremy
Thursday, July 22, 2004

==> Of course, you have to have a nest egg to consider doing this.

Not really. We (partner and I) started our shop with $1,500 each. That's it. Nothing more. No nest egg. No pile-o-money to live on. That covered the legal bills for the partnership agreement and some contract work, and some office supplies.

What we did have, both of us, at the time, was a second income -- both maried with wives making a decent professional income (mine - a CPA, his - an engineer) , and no kids. "DINK" for those familiar with the term. Things are different now <grin>. This allowed us both to simply cut back a bit and survive on the wives' income until we started generating our own revenue.

It was a risk, but it worked -- without a "nest egg" to start.

==> It seems to require perhaps $100K or so in liquid assets to start an ISV (in the US) and to be able to live off of savings for awhile in order to develop your market

We did ours with a grand total of $3K. See above.

Once bootstrapped into bringing in some cash, we reinvested the first $35K earned -- invested it back into the company. I guess you can say that it really took a total of close to $40K (initial 3K to start plus the $35K) to make it through that first year. Agood chunk of cash, but hardly $100K in liquid assets. Bottom line -- we started with $3K in liquid assets.

Now, if you don't have another source of income like we did, then, yes, you'll probably need close to $100K to finance both the startup and your living expenses.

Sgt. Sausage
Thursday, July 22, 2004

Sgt. Sausage,

Based on what I've read in some of your other posts, I've assumed that your business is a consultancy and you don't sell any software products.  Have you ever considered a creating and selling a shrink wrap or semi-custom product?  In your consulting engagements, do you ever come across unfilled business needs where you think it might be possible to create a marketable product to meet the unfilled need?

Ewan's Dad
Thursday, July 22, 2004

"In order for an ISV to be successful it has to have product that meets a broad demand. "

That's not true at all -- almost all software in the engineering, manufacturing and utilities sectors for example are very narrow vertical markets where almost every sale has some kind of non-recurring engineering cost. And that's where the huge money is for a one-product ISV like myself -- I net $500-$800K on most my projects, selling my "semi-shrinkwrap" codebase, plus the required NRE which I do myself, contracting out everything else. (I get about one project every 18-24 months... the app is probably similar in obscurity to "power substation monitoring and control", though it's not that).

And it hardly takes any money to get into a vertical market like those, since you can leverage in by rolling some of your NRE costs into developing your codebase. The customer doesn't know or care what's in your core or not, since you just give them the total quote and time schedule, then deliver.

Startup costs are mostly just living off savings while  making the prototype and maybe core code, brochures, powerpoint presentations and other documents (white papers, detailed features, etc), then having to wait until you can make a presentation and get selected, which isn't hard since there's very little competition to begin with, and competitors are often not able to deliver in the customer's needed timeframe if there's NRE involved because they're overloaded with other customers' projects. Talk the industry lingo, show a nice GUI and slick presentation, and you've basically got the sale.

I don't know why start-ups or individual consultants even bother with broad markets and shrinkwrap (or even the retail or business sectors)... I'd think there can't much money in that, unless you start out with a lot already.

ISV Bob
Thursday, July 22, 2004

>> We did ours with a grand total of $3K. See above.

Sarge, you are not an ISV, unless something has changed. As I recall your company is a consultancy in the (cough cough) Am*l*a area of (cough cough) Greater *inci****i.

Point being - when your money comes from services, the income is immediate. As mine was when I started doing contracting/consulting (I call it consulting when I want to ennoble myself to my true station in life, and contracting when I need to kowtow to some PHB that wants a precise line item definition of my status.)

Of course, it's really m/l a job because when YOU stop, the income stops.

As an ISV you have to develop your own IP, and that means you have to either hire someone or DIY (sweat equity) since few clients will allow a consultant to walk out the door with IP that *they* commissioned.

I do know some lucky and somewhat clueless types who built companies around contract projects they were allowed to keep by the client. Each such success story is pre-1990. But since everyone and his brother know about "riches" in software, that is a long gone dream...

So I say that to start an *ISV* - a nest egg, or perhaps a working spouse as Sarge opined, is absolutely necessary.

Bored Bystander
Thursday, July 22, 2004

In my opinion, a product company is much better- it persists without you, it sells for a higher multiple, the margins are better, it is much easier to scale, and on and on.

I started out doing consulting, and after one year of that started doing product development. Less then six months later, the product was selling and I quit consulting. My consulting income covered my living expenses and the very modest original budget for product marketing. My liquid net worth at the time- under $5K.

I have learned that there is really no point in trying to convince people who go around saying it can't be done, or you have to be a millionaire, or whatever other excuse they like.

These people will never be my competition. They will always grouse that the ones who made it were special cases and it had nothing to do with their hard work, initiative, or desire to succeed despite limitations. So I just say, you're right- it can't be done- don't even try.

Doing it Well
Thursday, July 22, 2004

Six years ago I veered off and started as a ISV, delevoping shrink wrap products. It has taken this long for the product to get good enough, for the marketing to build up, and for revenue to start coming in. This is a pretty typical time to profitability in IT - at least three and up to ten years.

During this time I have lived very frugally. My personal monthly expenses still run around $700 total. This includes food utilities and rent. Part of my plan was moving to a very economical part of the country where I can rent a small office for around $100 a month.

I've spent about $30k of my own money, and about $100k of loans from relatives.

You have to think long term if you want to have a chance of making it work owning your own company in IT.

Scott
Thursday, July 22, 2004

I began my consulting firm after I was laid off from a great job.  At the time, I had little savings.  Doing freelance development work was the fastest way to make income happen.

It cost me nothing but time.  I already had a computer and development tools at home.  My marketing expenses consisted of a phone bill, some time and some postage.  Hell I still don't have a business card - my website is my sole marketing piece, and it's a conceit to even call it that.  Everything I do comes from word of mouth.

I imagine that selling an actual product is probably a very different experience.

www.ChristopherHawkins.com
Thursday, July 22, 2004

BeeBop,

Define a millionaire however you want.  I gave you my definition.

You wrote:

"Having all of that money gave you the confidence to start SourceGear.  You had deep pockets.  Even after taxes and whatever else you spent it on you still had deeper pockets than most.  This allowed you to make the mistakes you talk about."

Yes, that's obvious.

"Now would you have had the same confidence even if you hadn't paid off your house and had some 200k laying around?"

No, obviously not.

I was just trying to give a sense of scale to the resources I had available to me.  I thought the actual ballpark numbers might be helpful to others thinking about starting their own company.

You seem to really want to argue with me, but I agree with what you're saying, so I'm not sure how else to respond.

Eric Sink
Thursday, July 22, 2004

Liquid net worth is not how most people define Millionaire or their well being.  I suspect most Millionaires really don't stay that liquid.  Why should they?  Staying liquid is about the worst thing you can do with your money.  You are far better off to say invested. 

If you have a house that is paid for in cash, that makes it easier to start a business than someone that has to pay a mortgage.  The house might not be liquid, but it is certainly a huge asset. 

Also let's say that you paid for a life time health care plan with your stock option windfall, while it might not be liquid, you know that you'll never have to pay for health care.  There is value there. 

christopher (baus.net)
Thursday, July 22, 2004

> After I paid my income taxes, gave some to charity, paid
> off my home and wasted some money on a few stupid
> decisions, I had well under 200K left

As far as the money wasted on other ventures, some would say that this is the loss you take when starting a new business -- you will probably fail a few times before you succeed.

Per the definition of "millionaire" -- it sounds like you're trying to exclude things in order to find a reason not to call yourself one, so that you have the motivation to become one by the new definition :)

Joe
Thursday, July 22, 2004

"Per the definition of "millionaire" -- it sounds like you're trying to exclude things in order to find a reason not to call yourself one, so that you have the motivation to become one by the new definition :)"

Maybe so, but I found my definition during the dotcom bubble.    Basically, as the dotcom millionaires started to pop up everywhere, an informal standard got created.  It was explained to me thus:  You're not a millionaire until after you sell your strock AND pay the taxes.  :-)

And that idea has stuck in my head ever since.

Eric Sink
Thursday, July 22, 2004

Sounds reasonable to me.

www.ChristiopherHawkins.com
Thursday, July 22, 2004

"You're not a millionaire until after you sell your strock AND pay the taxes."

Eric is obviously correct in that statement. Even a basic analysis of assets and liabilities shows that.

In certain circles, only liquid assets (i.e. cash or that which is easily/quickly converted to cash) counts. For example, if you want to join the HNW (High Net Worth) circles, you need over one million in liquid assets.

Having a house that is worth two million and "only" half a million in cash doesn't count.

Nemesis
Friday, July 23, 2004

>> In certain circles, only liquid assets (i.e. cash or that which is easily/quickly converted to cash) counts.

Didn't you rip off this quote from Tony Soprano?

Oren
Friday, July 23, 2004

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