Managing Innovation, Technology, and Entrepreneurship

Yes, we know Moses needed only two tables. We'll try to be more concise in our next book. Meanwhile...
 

Three enormously important decisions about your business's growth, positioning, and fundability are summed up in the three simple 2x2 tables that we discuss in this chapter. They will be a useful 'crystal ball' to look at again and again as you formulate a strategy for your software business.

Many software businesses have their genesis when a creative programmer decides a clever program he has written will be of use to other people. Suppose this program took "x" hours and "y" dollars to create. Figure 1 shows that creating a reliable and supportable software product, with hooks to other software products that make your product more useful to your customer, entails 9x and 9y as much development effort. This is not to mention marketing costs and the costs of supporting the product (as distinct from making the product supportable).

Fred Brooks' book, from which Figure 1 is taken, is a classic that is well worth reading. But it predated the Internet, and we shall see that it thus underestimates the cost of bringing a modern software product to market.

There are few alternatives to being in the lower right square of Figure 1. You may stay in one of the other squares - and reduce your development costs - by selling only on the shareware market, or by creating a product that is only sold as a component of someone else’s product. For example, the "add-ins" in Microsoft's Excel are generally written by third-parties, and Microsoft assumes the costs of integration, end-user documentation, and support.

Use Figure 1 as a reality check on the development costs you have built into your business plan.
 

Is your product a "vitamin"? That is, does your customer regard it as nice to have, something that makes a healthy customer even better? Or is your product a painkiller, meaning that your target customer must have it and must have it now? Generally speaking, venture capitalists (VCs) don't find vitamin products interesting.

The first anti-virus software on the market was definitely a painkiller. Screen saver software is pure vitamin. Various productivity-enhancing software products fall somewhere in between the vitamin and painkiller categories.

VCs also look for products that serve a large market, and they are happier if that large market is still growing quickly. From their point of view, the upper right square of Figure 2 is the place to be. If you want a company that can grow quickly while maintaining its independence, and perhaps issue a public stock offering, you must position your business in that square.

Vitamins for customers in large, growing markets might support considerable but much slower growth. You would be wise to consider the vitamin to be the first product of your company’s product line. What other products leverage your software technology and serve the same market? Are any of them painkillers? You may consider using FFF (family and friends financing) or going to business angels for to finance a product line of vitamins for an attractive market.

A painkiller for a small market (the lower-right square of the Figure) might be financed by FFF and your credit cards, depending on the ease of reaching (marketing to) customers in this market. Eventually, if you do well and if the market is not too terribly small, it will attract the attention of a large, diversified software company. The large company will offer to (i) buy your company, (ii) buy rights to your product, or (iii) hire you.

Entrepreneurial opportunities often arise because the entrepreneur knows a particular niche market very well and can serve it effectively. This probably explains the fact that more software companies are acquired than go public.

There are really only two payoffs to developing products for the lower-left square, vitamins for small markets. The first would be to prove your programming skills (by showing a high number of downloads of your freeware or shareware), with an eye toward getting job offers from viable software companies. The second would be to serve customers who have extremely specialized interests - interests that are so important to them that they are pleased to buy any and all "vitamins" pertinent to these interests. These markets would include people with unusual hobbies, or rare chronic diseases. If you are reasonably clever about marketing your product globally via the World Wide Web, you may amass enough customer base to make a living.

You have probably figured out that the first two tables speak to your attitudes and desires about growing your company. Figure 3 brings this home more explicitly. It is due to Rich Bader, a former Intel executive who is now CEO of Easystreet.com.

The left side of Figure 3 is "pre-Internet." In that era, some software entrepreneurs grew their businesses quickly, and others maintained the kinds of low growth / no growth companies that Rich calls "lifestyle businesses." These were sustainable, given the limits of marketing and distribution that existed before the WWW.

The diverse roles of the WWW in advertising and distributing software (and other kinds of information) have blown that situation wide open. By embracing the WWW and its capabilities, companies in far distant locations can compete effectively with non-Internet traditional software firms, and perhaps destroy them.
 

The right hand side of Figure 3 is called "software services" because companies making the transition to profitable use of the WWW do more than sell code and manuals. They offer online support, e-commerce transactions, or the hosting of customers' databases. They offer non-software "content" like newsletters and streaming-media entertainment. They include wake-up calls at your hotel, music downloads, and notification when the stock you are watching hits your strike price. Moving to the right-hand side of the figure requires re-thinking business models, and acquiring Internet infrastructure for your company.

As we have noted, lifestyle businesses serving small niches can survive through adroit use of the Net. Owners of these businesses can often hire an ISP (Internet Service Provider) and learn enough on their own to establish an ongoing, if low-growth, online enterprise.

But companies hoping to grow and survive in more competitive markets must migrate to the upper right square of Figure 3. The Software Association of Oregon has determined that its members need help moving to the upper-right hand quadrant of the Figure, and has changed its mission to make providing that kind of assistance its top priority. In addition to good advice, companies hoping to make the transition to the high-growth Internet-based software service businesses need capital investment and manpower.

Clearly, making this transition adds another 3x, or perhaps another 10x, to the effort levels suggested by Figure 1. Tomorrow's high-growth Internet-based software service firms must offer painkillers to large markets and have the funding depth to support the Net infrastructure, the hiring and the development effort that are required.

Software entrepreneurs must make the choice between the no-growth niche strategy and the high-growth Internet-based software service strategy. If you choose the growth route, your success will take a much higher level of will and determination than was ever before required of software entrepreneurs. It will also require the willingness to engage in diverse service and e-commerce lines of business that go well beyond the traditional software company's interests.
 
 

top of page

Use buttons in left frame, or your browser's BACK button, to return to General Informatics home page