Ten Myths of Starting a Software Company
1. Building the software is the hard part.
While it might be complicated, building the software is not the hard part of building a software company. Software exists to magnify human resources. It automates or enables productivity of human tasks. This poses two distinct problems. The first and largest is sufficiently replacing or dramatically improving a manual human task. The second is convincing those currently doing this task that your product is worth the effort to try out and then buy.
If you know what you want to automate, know how it works, and know a basket of customers who are ready to pay you it, then building the software will be easy.
2. Someone will steal my idea.
See myth number one. The hard part is the hustle of capturing the workflow (what the product must ‘do’) and the client base (those who will pay you for it). If the benefit is obvious and an adequate off-the-shelf product does not exist, then there is something hard about the hustle. So be encouraged, hustle hard, and talk freely about your idea.
The worst thing that can happen is to cultivate an echo chamber of service providers who are self-interested and self-motivated. Talking freely about your idea and having faith in your hustle is the surest way to battle test your idea and get good insight. The people who can add the most value to you early on are unlikely to find it worth their time to do so if you require them to sign a legal document...
3. My idea is viral.
No idea is truly viral. All sales require hustle and effort. It would be great if the benefits were obvious, the customers easily segmented and discovered, and the product self-distributed; but such fantastical unicorns don’t exist in real life. Your ‘viral’ idea will require a lot of un-“scalable” hustle to kick off and it might not ever truly become ‘viral’. Don’t bank on viral and know the costs if you start a viral process. Users cost money to acquire and money goes fast in a startup. PayPal had a viral strategy that was consuming more than $10M per month in cash. Viral and internally-financing ideas don’t exist.
4. All I need is to fund the build and my idea will self-finance to profitability
The Pacific Crest Survey reports on various metrics across software companies each year. Valuation levels ebb and flow for exits and for liquidity available for growth. But the constants each year with remarkable consistency are the user acquisition cost per dollar of annual revenue and the amount of funding required to get to $5M in revenue. These are $1.2 and $8M respectively. The former lends itself to the later after initial startup costs are factored in.
Does your model predict $10M in revenue with $1M in funding? Don’t worry, everyone’s does early on. But be wary about not hustling the funding side of your business. Growing software companies consume a lot of money. And it is the founder’s job to find it. Unless you are personally blessed with mountains of cash, it will be a long lonely hard journey to find the cash to survive.
5. My idea is ubiquitous; everyone can benefit.
Whoa there... Even shotguns concentrate. Focus your effort on specific people. Get as granular as possible. Be a big part of a small group of motivated customers and ignore everything else until you are hitting metrics. Launching a product requires convincing people to experience the benefits. This becomes easier when you can point to others who are similar that are getting the benefits you are promising.
6. I am the idea person; I can find a CEO
Wrong. If you are the idea person, you also must be the executor of the idea. High integrity and impressive professionals who will unquestioningly execute your ideas don’t exist. Seasoned CEOs bring strategy with them. It isn’t impossible to find a partner or an executor to join your team, but be careful expecting that you can withdraw from a rapidly growing company and sail off into the sunset while someone else grinds out a success. There isn’t another person who cares as much as you do about your idea to grind through difficulty and pain. Building a company is hard work. And hiring someone proven to do hard work is expensive...
7. I need all functions in house from the beginning.
There are several functions that really should be internal. In the early stages, you can save valuable funds by leveraging experts. You can often get a much more experienced CTO or CFO on a fractional basis than you could by hiring direct. And early on, funds should be preserved as much as possible and directed toward convincing customers to explore the benefits of your product. Be smart. The goal isn’t to have a ‘team’ that investors will fund, but to show customers who are experiencing benefits and, better yet, showing acquisition of revenue that costs you less than $1 per dollar of annual recurring revenue. Showing actual metrics and actual cash results will open more doors than having an in-house ‘team’ of has-beens.
8. My software is self-installing and doesn’t require training.
Service is provided by people not machines. And people buy more service than content. Think about your own purchase decisions. Upgrading to Pandora Premium at the ‘hefty’ price of $8.99 per month takes more effort and brain trauma to you (the customer) than a decision to pay a baby-sitter $50 for a date night for you and your wife. Service sells better than software. Can you add service to your idea? Can you enable service with your idea? Even better, can you sell service for a while to build revenue and ‘win’ on the merits of this service and then build software to automate portions of your delivery and gain margin in a traditionally low margin business?
9. This will take me a few years and then I will be free to do my passion.
Building this company needs to be your passion. Don’t put a timeline on your growth or on your exit. Have enough cash in the bank account and stamina in the emotional gas tank to survive double or triple your longest expectation. The activities of building a software company are hard and the journey long. If you stick with it and if it is your passion you might be able to hue out of this mountain of effort a gem of great value.
10. The best product will win.
The best sales pitch wins; always. A good sales pitch can be weighed down by a bad product, but it takes years for new customers to react to a bad product that is sold well. This doesn’t diminish the importance of a good product, but rather suggests that the delivery of the product to customers and their experiencing the benefits to them is just as important as a new feature or a ‘better’ product. Be careful of expecting customers to come to you just because your product is better than the dominant incumbent. Changing behavior is really hard and really expensive.