Entrepreneurship in the Software Business

1. Entrepreneurship in the Software Business Robbie Allen and Dharmesh Shah December 9, 2005

2. General Rules Of Thumb • Ed Roberts' data show the odds for MIT-based startups are much better than the Nesheim numbers • Follow your passion. Don't do it for the money. Try to solve a user problem. • Determine realistic capital needs and investigate possible VC alternatives including bootstrapping, angel funds, etc. • You have to be adaptable: Flickr went through 3 business models and 3 product ideas in a couple of years • Diversified founding team increases odds of success • Most mistakes are business-related (not technology) • Failure is part of the process • A business plan just gets you started

3. Product Startups • It is cheaper than ever to start a software company • Software-as-a-service is becoming more attractive • Acquisitions are happening earlier • IPOs are much more difficult (so acquisitions are the primary exit)

4. Service Startups • Lower risk than product companies, but margins are more modest • Very people-focused; attract, develop, retain, and deploy • From Imran: Very few service companies can justify raising venture money. Not what they’re designed for and difficult to create VC-like returns.

5. Hybrid Startups • Usually start as a service or product company and become a hybrid over time • Service companies often strive to become a hybrid (or product) company (e.g., FogCreek, 37Signals) • Product companies are often forced to become a hybrid company (Cisco, Oracle, etc.) • Don't let one cannibalize the other

6. People • The “team” is the most important aspect of a startup • Critical to have clarity around roles, responsibilities and terms • Equity allocation among founders is often challenging – “equally dividing stock” is rarely the right choice • Strive for diversity and ensure complementary skills • Early employees are crucial to success

7. Development Strategies • Avoid sequential “waterfall” schedules • Agile and XP practices are well suited for a fast-paced small startup • Evolve requirements incrementally • Choose platforms and languages suitable to the business • Synchronize-and-Stabilize!

8. Marketing and Sales • Startups often fail by not having good sales and marketing vision and people • Advertise the brand, not the technology; but have features that back up the brand • Get customers to try the product, however you can • Get customers onto the upgrade (maintenance) cycle: Provides recurring revenues, and lessens probability that customers will switch • Do what is necessary to get customers to refer other customers – this dramatically lowers customer acquisition cost.

9. Outsourcing • Good for creating initial prototypes or farming out work of non-critical tasks • Not so good for small startups that need to innovate quickly, grow, and create a tight-nit culture • Outsourcing isn't a panacea - still requires close supervision • Many startups make the mistake of not recognizing the “real cost” of the outsourcing path (fail to factor in risk and co-ordination costs).

10. Open Source • Using OSS products internally makes a lot of sense • Jury is still out on releasing commercial products as open source • More opportunities for OSS services companies

11. NetNumina Lessons • Differentiation in services is key • Domain, technology, business process • Quality is extremely important but needs to be tangible • Client references • The right balance is important • Between new and existing clients • Between needs of clients and employees • Between selling and delivering • Between experienced and “high-potential” managers • Hiring & Retention is the single most critical function • Intelligence, attitude, communication, and willingness to travel • Invest in star employees • Timing and luck play a part in every start-up

12. Q/A