Wednesday, May 21, 2008

How to become a cynic part 2

Here's another truism I learned starting a new company: a lot of people will say they want in on it and want to help, but when it comes down to actually quitting their job, or putting up money, they'll back off.

Actually I already knew that, because all the books talk about it, but I didn't really expect it in my case for some reason. But sure, people have different levels of risk they're willing to take, some a little, some a lot. So when it came down to it, no, my coworker couldn't quit and work with me for free for a year for a big chunk of the company if we hit it off, because he didn't want to spend his savings and 401K until we had income. Too risky for him and that was totally understandable.

What wasn't so understandable and was disappointing to me, was over the next several years as I took all the risk, finished the product, hit the road selling it, fretted over meeting delivery schedules, took out loans to pay for the equipment and hoped the customer would pay on time, after all that he finally wanted to join. Specifically after I told him I had finally landed a $4 million, multi-year contract with a large government contractor and was really ready now to expand and make it happen.

So being his friend and former coworker, having had lots of lunches together talking about how "someday" we would work together in our own thing and how great it would be with no dress code, work from home sometimes, work from the beach, flex time, no asshole bosses, all those good pipe dreams -- here I was able to actually offer that. I offered him a really nice salary (50% higher than the market), all those benefits, a nice bonus if we do well (and I'm generous with bonuses), and a year severance if it didn't work out. Little risk to him, either -- I had the cash flow and the contracts, no problem meeting payroll, and great momentum with new business opportunities. And we were friends and really worked well together. I really couldn't see how he could decline.

I was surprised though at his lukewarm reception. He seemed disappointed and finally said he expected he'd get a share of the company "since I'm one of the first employees." I asked how much were you thinking? He replied "I don't know, 30, 40 percent maybe."

Okay, if this were a startup with no product, no income, just some people willing to work hard for a payoff in the end, sure. Those were sort of the numbers we had talked about way before. But now? With a $4 million contract and already (by then) $700K a year in sales -- and an established, completed product able to win contracts that size -- surely he'd realize my company had probably what, a million or two in value? And he wants to just come in and I hand him 30 or 40 percent of that? Here you go, here's $500K just to join my company, on top of earning $150K a year salary and another $300K a year profit sharing?

And for what? He's a competent engineer, all-around good guy, dependable and trustworthy. But is that worth $500K a year in this world? Did he really think it was?

I was stunned by his request. I wasn't being greedy, I was being realistic. Paying someone effectively $500K signing bonus, plus $500K a year compensation all for a $100K a year job was just business stupidity. I pointed out how much compensation that would be, and sort of stammered a question asking how he might bring that much value to the business, and his reponse was simply "Well, you'll be making even more on this contract, so we both win!"

I realized then that there are highly intelligent, sane, well-educated people who still just don't... how to say this... "get it." Get business, I mean. I just sort of assumed everyone knew the idea of higher risk, higher reward, knew the idea of bringing value to a company or a project or a relationship and compensation would basically be proportional to that value. And prices and company income is proportional to the value you give to the customer so it all balances out and you don't get "something for nothing" in life. But some people just don't realize that and think -- apparently -- that sometimes people just give you stuff for free.

I wonder if that mistaken belief occurs because of the culture and idea (in the U.S. anyway) that you always have to be ready for an "opportunity" and seize it when it happens. But "opportunity" doesn't mean someone will be holding out free money for you and you just have to grab it when it happens. Come on!

No, opportunity I think means at some point in your scoping the business world you'll find a market ripe for a better product (as in my case), or opportunity means a family friend who runs a highly profitable restaurant is retiring and offering to sell it to you because he likes you and knows you'll work hard to keep it going, or opportunity means a friend of a friend knows this guy who just got a patent on some awesome product idea and is looking for help to build a prototype for free in return for a share of royalties if he sells it. All of those opportunities mean you have to do work and take risks in return for the reward. Opportunity is not "here's some free money for nothing." Again, some people apparently just don't get that.

I was saddened at this possible loss of a friend because of our wide disconnect, and told him his expectations were just too unworkable for me and maybe I really was just looking for someone to do a simple job for a simple salary. But maybe in the future we might still be able to team up "on something." He agreed and we parted amicably.

The next day he called up though and apologized for seeming greedy, that he really wasn't trying to get "something for nothing" but wanted to do it more "as an opportunity than just a job." To me, he still didn't get it. It was an opportunity when I invited him to partner when I first started out, when I had no sales and no money and he'd take the risk of the company failing and getting nothing, in return for the chance at a much higher reward. Now though there wasn't that risk, so it was just a job. I dunno though, I didn't want to lecture him on that. Maybe it was me, maybe I really was being an asshole about it, I thought. But my gut said no, it's just bad business and I went with that.

Today we remain sort of friends, although it's still a little strained.

But that was my lesson learned: some people simply understand "business," and some people simply don't. Not that one's better than the other -- there's a lot less stress just being a worker bee, for example, and maybe life overall is better that way -- but just don't expect everyone to understand business or have the same "common sense" as you. That concept though was new to me, and a little disappointing.

Sunday, May 18, 2008

How to become a cynic part 1

After I had spent five years on the side making my app to its first "releasable" state, sort of a "lite" version of what was already on the market (systems which sold for around $500K typically), I quit my developer job and went full time. My plan was to take up to 9 months -- all I had savings and credit card limits for -- and cold call and visit and market like hell to get the first sale. My idea was I could bid a third the market price for half the features, which seemed doable since they were the most important "core" features, and the rest the competitors had that I didn't I would hopefully convince them were just eye candy and polish and they didn't need it. Then with that first sale I'd be able to finish the rest of the app, after which I'd make a couple more sales still bidding cheap and use that profit to hire salespeople and really compete with the big guys all-out.

Maybe I was lucky or maybe I was skillful with my powerpoint slides and hyped up salesmanship but I landed that first sale only three months in, in a pretty big "coup" for my niche. The existing two competitors with millions in revenue and dozens of employees had bid $500K-700K, and here this "nobody" one-man show comes out of nowhere with some crazy new system for only $200K and steals it.

It was "only" about $200K but that was almost entirely profit. And the customer saved a ton and were really excited. Everybody seemed to win and my business plan was going perfectly! Easy money!

Except here's what none of the entrepreneur books I read had mentioned:

When something new and "dynamic" suddenly shows up in a stagnant, established old niche, everybody rushes toward it! Every two-bit huckster, industry consultant, employees looking to switch jobs, every vendor, the competitors trying to find out more, outside companies looking to maybe get in the niche and buy you out (for super cheap), all the industry trade magazines wanting stories, press releases and to sell ads, everybody it seems wants info and to know more! And they want you to email it all to them. Send us brochures! Send us specs! Send us more information!

Well for a former cubicle programmer not used to all the attention, I didn't know how to say no at first. The trade journal wants a press release and those take some time to write -- grammar, spelling, format it in PDF, on company letterhead or not? Then some other potential new customer wants "specs and any information" -- I can't turn down a sale, can I? So there's more stuff and cover letters to send, and specs to go over and rewrite. Then some "industry web site" wants me to write up content describing my company and product. I can't turn down free advertising, can I? More work.

I never expected all that and my delivery schedule slipped. I guess that's what they mean by having to "devote time to overhead" even though it was just me.

Here's another thing I didn't anticipate

For some reason I got inundated with all kinds of companies wanting to be "strategic partners" or form a "strategic alliance." No, they never want to buy anything, in fact they all would in effect be suppliers to me. But they still want to fly out and meet with me, and get my brochures and specs, and see demos, and have telecons, and talk about "joint marketing opportunities," and sign this NDA and that exclusive teaming agreement, and oh yea, could I help pay for some ad or some trade show booth with them, or help them put together a proposal for some bid. Huh? Yet for some reason at first I couldn't say "no" if it was just talking with them or trading information. I was a nice guy. I wasn't about to spend anything or sign anything, but when they'd say "we'll be out there the 22nd, how's 3pm sound?" what was I supposed to say? So there I was giving demos all the time and sitting on telecons about nothing and writing up this and that.

Soon all the overhead phone calls and emails and visits and demos with these wanna-be "strategic partners" I realized were a complete waste. None of them would bring me any new business -- they all just wanted a piece of my action. And that's a theme I encountered a lot and still do. It's widespread all through business and people themselves, and was really my first step to becoming more cynical about business.

My delivery ended up slipping because of all that unanticipated overhead, and though the customer was nice about it, my competitors snickered and used that against me. Lesson learned.

Friday, May 16, 2008

My story

I've decided to start blogging I guess because my story might be interesting to others trying to build a software company or who might be at the same stage as me. I've gone from a one-man "micro ISV" selling shareware for a few hundred bucks a month on the side, to building up into a 5-employee, $2 million software company. That's not a wild success, but maybe for fellow developers sitting in their cube watching the clock like I was just five years ago, it's a pretty good accomplishment and I think a realistic, attainable goal.

I was motivated for this because I've lurked at joelonsoftware in the "business of software" section for a long time now -- 4 years or so -- and have always been a little surprised at the misdirected advice and "conventional wisdom" there that developers seeking to make money should try to come up with some "widget" nobody's ever thought of before, post it to some shareware sites, advertise on google, and hope it takes off.

I think that model really misses out on where the money is. My own case is an example. Yes, you could come up with something none of the other half-million developers in the world ever thought of and end up with a runway hit, but the odds are there's probably a good reason nobody's made that product before -- there's no market for it.

It really comes down to, would you rather make a new widget with 99% chance of making nothing and 1% chance of making $10 million; or a 50% chance of making $1 million for the same amount of time and effort (for a remake of some boring business-to-business product but done better)? The former is what everybody seems to do, but the latter is what I did making my very niche vertical market software. It took me over a decade to build, but the money keeps coming in and last year my sales were just under $2 million of which $800K was profit. Not bad for under 200K lines of code!

I can't give a sure-fire formula for how to make a $2 million company with very little investment, but at least I can give an example of how I did it and maybe that'll help someone. So that's the purpose of this blog, I guess... here's another anecdotal story of someone who started a software business and makes good money with it.

My Company

I wish I could link to my company website, but I can't because it's such a small niche and my competitors and employees would read this which wouldn't let me be honest and truthful about things. Maybe I will eventually reveal it, but for now let's just say it's software for nuclear plant control room management. That is similar complexity to my product, a similar narrow niche, similar customer dynamics, similar sales pipeline, similar marketing issues, just similar all around. It's not that, but it's close enough -- so there's my metaphor.

How I developed it and got the idea: let's say in college I was a Nuke Engineering and Computer Science double-major for a couple years. Then I gave up the Nuke E part but at the college job fair my senior year a Nuke plant company recruited me heavily for a basically entry-level control room engineer position and I took it. I worked there a few years and saw a lot of crappy software they "had" to use because they had no choice. They also used a lot of manual techniques -- checklists on laminated pages stored in a binder, to be pulled out and thumbed through in an emergency, for example. Why not just have a monitor right there and page through some things to get it a lot quicker? Or tied to the sensors and immediately display the right checklists based on the situation in big bold text?

I saw a lot of problems like that. But the plant functioned okay with their crappy procedures and laminated pages, and people tend to make do with what they have. The software providers kept selling their crappy products because there was just not much competition so not much incentive to improve.

That's what you'd call a "problem needing a better solution."

I think there are problems needing better solutions still in a lot of niches. Entrepreneurs thinking big probably neglect the niches and focus on the problems of the broad mass consumer market, thinking volume. But so does everyone else, driving down the prices. In truth though though you can make as much or more servicing the small, obscure niches since few others do, so they're that much more desperate and willing to pay more. Simple "supply and demand" from microecon 101, but it's absolutely true. Businesses and government are out there, and they're willing to pay.

Although I soon quit and moved into software development at a large engineering company, I knew all along I was going to develop that app in my spare time and break away into my own business eventually. I also needed to gain development experience as well as build my savings, so having that day job and developing in the evenings seemed the best route.

Unfortunately, Much of Being an Entrepreneur Sucks

Now some of the bad side. I have to say despite making good money and having "freedom" as my own "boss," there's a lot of Entrepreneurship that really sucks.

The main thing is, I used to be really easy, always happy and always laid back as an 8-5'er working for the "man," but now I realize I have actually become sort of an asshole. Unfortunately, the realities of business make you that way. And you really have to be an asshole to be successful. I'll explain more about that in another post.

Second, my stress level is a whole lot higher in "charge" than being in that cubicle. That's really not the reason for turning into an asshole, that just comes with the job. I am responsible and take the blame for everything. Before I could care less, I did what I was told and went home at 5.

Third, turns out all along they were right, money doesn't make you happy. It's a number on some web page on my bank account online. Whoop-dee-do. No I don't worry about how I'm going to pay the electric bill like I used too, but back then I also didn't worry about blowing $100K on some new huckster employee who expertly covers how he does nothing all year and embezzles from the company. Or any of the other 100 things that could go wrong and make me lose everything.

So despite the potential for money, being your own boss can really suck sometimes and I'm not always glad I did it. Sometimes I am though.