Software Startup Myths Debunked
When it comes to software startups, it seems there are a lot of common misconceptions floating around. I’ve sat idly by and watched as these misconceptions are repeated as fact time and time again. I’d like to take a few minutes to dispel the top five myths of software startups.
Myth #1: I need to get VC funding to make my company successful.
This isn’t true by any stretch of the imagination, and I’m not the only one who thinks so. In fact, it calls into question the very meaning of ‘successful.’ What constitutes a ‘successful company’? Does your definition of a successful company involve getting VC funding, working for a few years, and then selling it off for gobs of money, never to return to work again? If so, then this is true…for you at least.
Venture capital is one method of getting a company off the ground, but it’s not the only method. Venture capital is also not a guarantee of success. Venture capitalists invest in multiple companies because they know that not all of them will succeed. Some will fail quickly, others will flail for a while, and a few will succeed. The goals of a venture capitalist are to maximize the return on investments that pan out and minimize the costs of investments that will not. In the end, this hopefully results in a profit for the venture capitalist.
Most people think that VC’s won’t throw money away on companies they don’t think will succeed. This is true, but it’s also true that VC’s can’t see the future, which is part of the reason they invest in multiple companies; to hedge their bets. Company founders don’t have the luxury of ‘diversifying their portfolio,’ so to speak. They work at their company until funding is pulled, it goes bust, it’s sold, etc… It’s hard to be the founder at multiple companies at the same time. But VC’s depend on the founders thinking that a VC wouldn’t let them go down in flames. Plenty of VC’s watch the companies they helped fund go down all the time.
The misconception of needing VC to be successful is likely propogated by Paul Graham more than anyone else. I don’t think it’s his fault mind you, it’s just the vibe that he gives off. In fact, I think he’d agree that having VC funding is certainly not a guarantee of success. VC funding gets you startup capital and a chance. It’s up to you and the people leading your business to take that chance and make the best of it.
Myth #2: I need to have a perfect product.
This is another popular misconception that has been proven false time and time again. Often, you will see a large company put enough marketing muscle behind a mediocre product to generate a profit from it. I could point to countless examples of mediocre software being unleashed upon the general population, after which people like you and me have to help replace it with something decent.
Let’s turn the tables and think about an off the wall question: Do you even need a product?
Go ahead and laugh, but over 95% of Moon River Software’s revenue this year has been from consulting services. The software I sell has made up less than 5% of total revenue in the past 12 months. And as I pointed out in my last article, I’ve made enough money to keep up with all business expenses for the next six months with zero additional income.
If you want to start as a consulting company and transition to a software company, you don’t need a software product in the beginning. In fact, not having one can be more helpful than anything else. As you do work for your clients, you can get a firsthand look at their pain points, and use that information to help decide on the products that you should build.
Paul Graham says:
“An advantage of consulting, as a way to develop a product, is that you know you’re making something at least one customer wants. But if you have what it takes to start a startup you should have sufficient vision not to need this crutch.”
This may be true, but not everyone has a vision of the products they want to make when they start. Joel of Fog Creek says:
“We didn’t start with a particular product in mind: our goal was simply to build the kind of software company where we would want to work, one in which programmers and software developers are the stars and everything else serves only to make them productive and happy.”
Myth #3: I need a partner.
I see this falsehood more than any other. This is regurgitated frequently because there are so many examples of a dynamic duo who have made it big with their companies. Really big. Bill Gates and Paul Allen. Larry Page and Sergey Brin. Filo and Yang. All of these men are listed in the category of Forbes Billionaires. And who wouldn’t want to be listed there?
It’s a common belief that having a partner allows a company to become more successful because the duo can feed off each others’ ideas and make them better. Venture capitalists seem to further this idea. Look no further than the requirements of applying to the Y Combinator program for proof of this. The tell you up front that they won’t work with individuals.
I certainly understand the mentality. Partners can not only feed off each other, but they will help bolster one another when the going gets tough. Having more sets of eyes on any project ultimately makes it better. Someone has an idea, someone else has suggestions for tweaks to make it better. In the early stages of a company, this can be critical. Unfortunately, it’s also possible that having a partner can ultimitely lead to the downfall of a company. Many companies founded on partnerships ultimately fall apart due to friction between the partners, be it over money, power, direction of the company, or something else. Nobody talks about those because they failed. They never made it anywhere, so you never heard about them. If they did, then you’d see the founders listedin Forbes and we’d all be talking about how so-and-so made it big on his own.
People forget that there are some very successful companies out there whose founders built them without a partner. The accomplishments of these people are easily overlooked in the shadows of Microsoft, Google and Yahoo founders. And why? It’s because they are listed far less frequently in Forbes Magazine. When you have $20 million in the bank, would you really notice plus or minus another $1 million? Since most of us aren’t going to clear $5 million over the course of our entire lives, I’d have to say the answer is no, you probably wouldn’t notice.
Myth #4: Selling the company is the: quickest/best/easiest path to success/freedom/fame/fortune.
It’s been said that nothing worth doing was ever easy. This includes being successful, obtaining personal freedom, gaining fame, or getting rich. I know more than a dozen entrepreneurs who have spent a great deal of time and effort working on their respective businesses. They are all successful, have a great deal of personal freedom, and are all financially well off. Some gained success very quickly. Others took several years, but they all ended up with those things. Wait, did I miss fame? Well, there are plenty of millionaires whose names you don’t know. In Massachusetts for example, there are 82,007 millionaires. I can name perhaps 3 millioniares who live in Massachusetts whom I know personally. The other 82,004 millionaires? I have no idea who they are, excepting professional athletes, some public figures, and the Kennedy’s. Which begs the question:
If you sell your company and make $20 million, are you really going to become famous?
Probably not. But the point of selling the company is for financial and personal freedom isn’t it? The dozen or so entrepreneurs that I know enjoy those things I mentioned, yet still own their companies. Selling the company will result in a one time payoff, but owning the company can pay dividends for years. Over time as the company grows, it is worth more and more. Would you trade a company that’s worth $150k/year in your pocket right now for $20 million if you knew it would be adding $2 million per year to your wallet in 10 years? It’s a difficult question to answer, and depends on your short and long term goals. It also depends on your willingness to invest that money back into a volatile stock market and hopefully not lose your shirt doing it.
The bottom line is that you may not need to sell the company to meet your goals.
Myth #5: I need to have an office to be taken seriously.
Per Eric Sink, the number one cause of companies going out of business is a lack of cash. It’s pretty difficult to go out of business when you have money in the bank (amazingly enough, it appears GM may somehow manage this feat). In the very early stages of a technology company, one of the biggest unnecessary cash sinks is office space.
Some people feel that an office is absolutely necessary and won’t work without one. If you’re not willing to make some sacrifices to get your business off the ground, you’re not going to make it. So unless you have a legitimate need for an office, skip it until you do. My company just started renting office space in downtown Worcester. I’ve been operating the business full time for 10 months now and only recently felt the need to move out of my basement. What changed for Moon River Software? Well, the computer to employee ratio of 15 to 1 combined with my home’s older electrical system that can’t handle more than four computers running at a time had something to do with it. I also ran out of room for all of my equipment, and the power goes out for an excess of 5 hours almost once a month. The need to hire another employee meant the need for another desk, another computer, and more equipment that my home office simply couldn’t handle. So, yes I think I had ample justification for getting an office.
If you’re profitable and others will vouch for the quality of your work or products, then working out of your basement isn’t going to hurt your image. Don’t forget that some really well known and profitable companies were started in basements. Google’s first datacenter was in Larry’s dorm room. Apple started in Steve Jobs’ garage.
Still think you need an office?
Special thanks to Rob Walling for reading preview drafts of this article.
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I think you should strike Larry Ellison off the “made it without a partner” list.
Bob Minor wasn’t an equal partner financially, and may not have been all that valuable as a contributor and manager past the start-up period — but he was a partner nonetheless until the day he died (which was in 1992 or 1993, if I recall correctly).
I don’t see how his contributions to Oracle were any less than Paul Allen’s contributions to Microsoft.
CAM
Great points. Agree with all of them.
I would add:
Myth #6: I need to go after a broad market with millions of potential customers because I then only need to get a small percentage of them to succeed.
All in all, this is some good advice that would-be entrepreneurs should read.
However, it could be more complete. There’s a missing myth #0: “If my company is successful and I’m making a good salary and my equity is worth millions, I will be happy.”
Plenty of people enjoy creating and building things more than they enjoy managing companies as they get larger. Heck, some people just enjoy managing the engineering effort, which is a tiny part of building a successful company. And $2m/year in ten years is worth nothing to someone who wants to move on to the next project in 2-3 years.
So I think the first thing would-be entrepreneurs should think of — before whether or not to chase VC, before deciding on partnerships — is “what am I trying to get out of this?” The answer to that will inform the other questions.
Great article seem so true in what I am trying now.
Re: Number 3. – I could not agree more.<br.<br>
Partners are great for providing ‘bounce off each other’ energy, but these relationships can get a bit manic and an ‘imbalance’, (equity or otherwise) can prove fateful to the venture. <br>If they work well then such partnerships are fantastic, but do not wait around for the right partnership to present itself. It is likely to never appear.<br><br>
In the absence of the ideal partner look to business ‘partnerships’ to bolster your own offering. Other entrepeneurs (established and startup) will happily assist and lend weight if its mutually beneficial.
<br><br>
Dan
Great summary.
I would never, ever have an equal partner again. There are always hard feelings by both partners that they are the ones working the hardest.
There are other ways to get the benefits of partners such as unequal partnerships (key staff member gets 5% of shares on top of their salary). That’s more for set up companies.
The other way for true startups though is entrepreneurial colleagues in related industries (childhood/online buddies) or boards of advisors (your old college prof, chambers of commerce etc.). Works for me. And it works for them too — as long as you pay back with your time, your respect, and sometimes fattening their wallets wallet.
And there are other benefits — it was one of my “entrepreneural colleagues” that sent me this article.
disagree re the office.. I suppose it depends on the business you are in, but not having an office means you are either a startup or unsuccessful. (not to me of course, but to other businesses)
yep, you are blagging, but you quickly learn that companies rarely choose other companies based on ability or quality of product. This comes right down the list (the larger the company you are wooing, the further down the list).. other factors that are far more important
1)how large is your company? – larger companies prefer to work with large companies (ego)
2)how much do you charge? – general rule is that large companies like to piss away money, they arent interested in value. The larger the client the more you charge. (for an identical job). Too low quote = bad quality (it doesnt, but thats how it is seen)you want to price yourself in the upper end of the middle of the other quotes. this is ‘good value but not overpriced’
3)how many large clients do you have, the more large clients the easier it is to get new ones.
4)who you know. If you know somebody in the company you are wooing, this is the most important thing. (if a competitor does, youre sol)- I know somebody whos entire company is based on one such connection.
5)how good do you appear to be? – squeeky wheel gets more grease and all.
In short, dont believe that people in business act rationally. Where money is tighter people make smarter decisions, a big company with a set budget will want to spend this budget. (esp government agencies amusingly they want to spend all their budget cos otherwise they get a reduction next year!). Small business invest wisely, its their money, an employee in a large business doesnt give a shit, its not their cash
as my mate who runs a pretty successful marketing agency said once
‘we may not be the best, but were the most expensive’
“Often, you will see a large company put enough marketing muscle behind a mediocre product to generate a profit from it. I could point to countless examples of mediocre software being unleashed upon the general population, after which people like you and me have to help replace it with something decent”.
I agree that a large company can get away with a mediocre product but do you think that applies to entrepreneurs as well?
Seems to me your point#2 is really about product vs. consulting.
Mike,
I think you should reconsider your theory that you need that many machines in your space to be in business. I bet many of those are “development” machines/servers.
Your business will be better served by using hosted services for all your needs not just production. Your development and staging servers should also be hosted. They never lose power and it is worth every penny to not have to take up your precious time during this critical phase in your business. A hosting company can have you up in hours with no more effort than filling up a web form.
With hosting, you also gain the time and experties of the hosting company – it is like expanding your staff for a few dollars a month: nothing beats the return on that.
As for the reaction I often get when I suggest that all development machines should be hosted packages – “no, I absolutely need to have the machine near me because my app is super duper and it pushes all this data..”
I say this to people who think this:
– No it is not.
– No you don’t.
– Stop pretending you are building Amazon.
– You have a false sense of security.
– I bet you are not backing up.
– I bet you have no disaster plan besides “it’s all in Subversion”
Larry
Larry, in most cases I would agree with you but in my case, most of what you say simply doesn’t apply. Most of the computers I have are different hardware platforms. To answer your question, with the exception of my web server I do use them all for development purposes.
I have HPUX, AIX, Solaris SPARC, Solaris x86, Windows x86, 64 bit Windows, and numerous variations of Linux (Red Hat, Fedora Core, SUSE, etc). I have multiple versions of each of those as well so the 15-1 ratio is measured only in terms of physical hardware. If I started counting virtual machines as well, the ratio would be far higher.
I use virtualization to handle most of my x86 needs, but there aren’t any ‘hosted’ or virtual solutions out there for AIX, HPUX and Solaris hardware. None that are cost effective anyway. Buy a SPARC Solaris machine off eBay. Then price out what it would cost to lease a dedicated box. I need root access to these boxes, so a hosting solution wouldn’t work. I need dedicated access.
Part of the problem is the business I’m in. I develop enterprise security implementations for large companies that use wide ranges of platforms and I often need more than a couple of machines running at a time. By large companies, I mean the security solutions I implement typically run against thousands of computers. Upwards of 80,000 in some cases. And yes, I absolutely do need access to specific versions of most operating systems.
Why? Well, did you know that the ‘find’ command on AIX 5.3 operates differently than on AIX 5.1? The solutions I implement need to run equally well on both of those platforms and have no way of knowing whether it’s 5.1 or 5.3 before it runs. Trust me, it can get ugly when you’re dealing with financial companies and they want to know why it works on some machines, but not others and have no clue what is actually different between the machines.
Typically, running only two or three of these boxes at a time isn’t a problem, but when I go out on the road, I need my development lab up and running so I can VPN into it and test customer solutions on my network. It’s not often that I’m allowed to plug my laptop into my clients’ corporate networks, and I’m certainly not allowed to VPN into their networks to do testing overnight. Flying home to hit the power button and turn boxes on and off isn’t an option either.
There are certainly other alternatives. I know for example, there exists power cycling equipment out there that you can log into via a web browser to turn on and off different electrical outlets. That still doesn’t hit the power button though to actually turn the machines on.
In any case, I expanded into an office for more than just needing space for all my servers and the fact that I have so many servers is a business requirement. I don’t have them all because I somehow think the business will look cooler, don’t know about virtualization, or how to use host providers. Heck, I bought rackmount machines and dedicated them to virtualization to cut down on the hardware that I would need.
Again, most of what you have indicated is generally true, but simply does not apply to what my company does or the line of business that I’m in. There are solid business justifications behind having that many machines.
Totally agree on the partners thing.
I’ve had some pretty bad experience with equal partners. It does more harm than good.
Especially if there are 2 equal partners or 4 equal partners.
This is because if there is a disagreement on an issue, there is no 1 person who can make the call and let the company get on with things.
Partners can get really passionate about important decisions that affect the company – and when there is disagreement where each party is sure that what they think is best for the company … most of the time the resolution won’t be pretty.
And the big problem is the “being locked in” effect. In which if you start to feel the company isn’t what you want to do with your life anymore, you can’t simply walk away without any repurcussions. You will definitely feel obligated to your partner(s) to some level. This works in favor of the company and is why Venture Capitalists like it. The point is that you can’t just simply decide on your own that you don’t want to do it anymore. Having parters locks you in to sticking with the company. Even though you can still walk away if you have the guts to, it won’t be a pleasant experience.
Also getting VC or investors also creates this “lock in” effect. In those cases your obligation is even bigger.
So imagine what if you were a year into it and things start to look bad and you can forsee that it will get worse and you don’t want to continue anymore. Maybe after you started you realised you don’t like the industry as much as you thought you did. And maybe you have other ideas about what you want to do with your life. But you can’t! Your investors and your VCs and your partners are pressuring you to stick with the company. Leaving it now might tarnish your reputation for a long time. So you just have to stick with it.
Most Startups go wrong (remember the 9 businesses out of 10 fail in X years statistics) .. imagine being stuck in one that you don’t want to be in anymore wasting a few years of your life.
I didn’t go through all that myself, but after my experience with partners/almost getting investors, I could see how it could happen.
I wanted to add that:
Most people want to start a company because they want to be free, they want to be their own boss.
But the end result of starting a company and getting VC/investors/partners might actually turn out to be taking away your freedom in life.
If you had a job that you didn’t like, you could just quit at any time.
But if you were the founder of a company with VCs/investors/partners and you didn’t like it any more … you can’t “just quit at any time”.
Black text on a BLUE background? Is this some kind of test?
Bye forever…
Huh? Where do you see that and which browser are you using?
I agree you don’t need many of these things to get started. In the world today companies are not that sensative to where you office. I work for a company of 16,000 employees and I still office out of my house.
To the guy who said that big companies care more about show that they do about value, I simply disagree. I have been involved in 7software startups since 1986 running sales and marketing. I spent Sixteen years doing board meetings and dealing with ever watchful VCs as a sales VP. I know from whence I speak. In most sales envoronments I have been in, at the end of the day value (or the perception of value) usually wins. We were often the new startup, not too many references, pinching pennies, crappy collateral, even weak SLAs, etc. However, when we could convince the decision makers that we could deliver greater value (for them , the company and usually both) we got the deal.
I would contend that the guy who buys the biggest, most expensive or most often bought solution is quickly being replaced these days.
The idea that nobody ever got fired for buying IBM is an idea that really doesn’t fly anymore. The procurement process in the F-500 by IT, individual departments, or a general corporate procurment oversite group is too transparent today. You can buy from the big guy, your buddy, or the bosses friend, but the due dilligence or lack of it will kill you. Perhaps it’s the effect that SOX legislation has had throughoutl public companies. Or perhaps it’s the effect that technology has had in making it easier for companies to collect productivity information and flags, slice and dice that data and identify the results of good or bad decisions. What ever it is, I can tell you it is the rare company that doesn’t care about value in the IT procurement process.
I hear this idea that companies “don’t care about value” most often from companies that – 1. don’t really have the value edge in a given beauty contest or – 2. don’t know how to imprint the prospect with the perception of value.
The first is a marketing/product management issue, and the second – a sales issue.
Two cents.
Interesting, but it seems more like objecting a set of examples with another set of examples. Each case has its own context, it’s hard to get conclusion simply from result.
i don’t think being a millionaire isn’t that special (I say from a position of definitely NOT being one). For example, I know a humble butcher who has two shops – one of which the mortgage is paid off. With a number of lucrative hotel and restaurant contracts the business + property is easily worth >1M
Hi Mike.. Let me first thank you for the wonderful points you have elaborated here. These, perhaps, would enlighten hundreds of losers who think money and support are the only way to succeed in business. Continuing on my acknowledgement on your enlightening article, i would like to interact with you. I have a few business issues which i think we should talk about. Drop me a line on gmail. You can also add me on skype: shashank.shalabh
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