This article was published in May 2014 issue of SiliconIndia.
Date: Thursday, May 01, 2014
Having started my entrepreneurial life as a software services entrepreneur, I faced this dilemma whether to transition myself into a software product entrepreneur or stay with services business. In my experience, entrepreneurs with product experiences usually do not find it challenging to grow software services businesses. As you delve deeper down inside the soul of an entrepreneur, I believe its this strong desire to build that magical software that sells millions of copies or has millions of customers using it via Software as a Service (SaaS) business model nowadays. It does not further help when you see these categories of companies enjoying multiple times enterprise value compared to a software services company and churning out high gross margins due to lower cost of delivering the software. The main difference being developing custom software a customer by Service Company vs. making re-usable software by the product company. The latter one is more risk prone though with a much higher upside potential. The revenues can sky rocket if the product is adopted by customers rapidly. In general, its an uphill battle for a service company to switch to a product company. As you begin to think about going into that direction, here are four key take away (4KTA) points based upon my own experiences.
1.What, Why and How
The key question to ask yourself is what it is that you would like to develop. Why do you feel that this is a rare market opportunity that you feel passionate about? How are you going to develop and how will you find resources and capital required? Now, when I founded Ukiah Software, Inc. to develop security software, the idea came to us while this euphoria for the internet to be the next big thing was already set in motion. My co-founder and I began brainstorming about all possible pain points and hence, came up with the idea of providing secure access and optimized bandwidth to internet users. We were convinced that this was a huge opportunity. As we got seed funding, I decided to focus fully on this product company and began to wind down my services company started two years earlier. Not only I was really excited about this opportunity but also, had clarity of our mission. Now to execute on this great idea, initially I used partial investment from the profits coming from the software services business as well as creatively leveraging few employees from services business to work part time on developing prototype of initial concept. Luckily, it led to several award winning Ukiah products, NetRoad FireWALL and NetRoad TrafficWARE etc. barely within couple of years since inception. Developing a product can be very risky in many dimensions like lack of customer adoption, need for higher capital, different skillsets than your team has and many others. Many entrepreneurs choose to invest using their own savings. This shows their strong faith in it. You need to be aware of risk with this approach.
In general, software product companies raise money from investors quite early on. Investors want full commitment, focus and assurance that you are sincerely protecting their investments. The typical investor belief is that software services are not scalable and the market will not reward for services revenue. It wont attract the premium enterprise value compared to a product company. Scaling a services business has its own challenges. You can only scale linearly in proportion to the number of people serving the clients. Now, a product company incurs lots of investment upfront. If successful, it can, however, deliver exponential results that can grow rapidly. Many experienced investors understand that great products do not just roll themselves out. You need to implement them. This often means integrating with other existing products per specific customer needs, providing training and monitoring usage to encourage adoption. It is key to remember that until sales volume is sufficiently large, no third party system integrators are going to commit resources to making you successful. Each project should be related to rolling out your solution and include only software installation, training, rollout support, integration, configuration and optimization. Savvy investors when explained this understand and appreciate that your focus is to ensure that customer has a delightful experience. I highly recommend getting venture investors. Some VCs are really smart and have huge networks. By partnering with right VCs, you can benefit immensely as they push you to become better and beyond your own limits to a significantly higher level.
When you are doing custom software development, customers typically own the resulting intellectual property. Without customer authorization, you do not have a product to sell as you can\'t reuse or resell that code. Another challenge is usually the project and pertinent use case is customer specific and is of no use on a broader scale. My experience is that it can be challenging to turn a custom development project into a product.
4.Focus, Team and Trade offs
Focus, Focus, and Focus! You need to single mindedly pursue the path once chosen. Use minimal amount of money to get the prototype ready. Test the water with customers and investors to get feedback early on for its usability, market potential and acceptance. Make changes per relevant feedback. Remember the team you need for a software services company is good at doing custom programming jobs, whereas the team you would hire for a products company is good at creating working software and meeting a release date. There are a series of other tradeoffs when developing a software product. The development team must be highly talented and insightful at making the choices that are optimal for creating a packaged product. There is low risk involved in software services business as you get paid based on hours spent or milestones reached. Once you have completed the work, you are going to get paid. When you try to switch to a products company, the financial needs of the company change dramatically and there is upfront investment needed.
In summary, the four key take away points are knowing what, why and how, understanding investor\'s perspective, understanding intellectual property rights and understanding where to focus, what kind of team to have and what tradeoffs are involved.
The author is Co-Founder of AURISS TECHNOLOGIES INC., a serial entrepreneur and Board Member, Chair Programs, The Indus Entrepreneur (TiE) organization, based in Silicon Valley, California. Learn more at www.4KTA.comand follow Naveen on twitter @Naveen_4KTA