Monday, September 5, 2011

Update coming soon!

Thursday, July 31, 2008

How to hire an idiot

Wow, I remember how idealistic I was when I was about to bring on my first employee! After dealing with bad bosses over my career, after doing a whole lot of thinking about how I was going to be a great boss, and after doing a whole lot of reading about how to hire effective people, I was really looking forward to it. I was going to:

-- Hire people smarter than myself, who get things done!
-- Trust them to do their job, let them do their job and give them enough resources to do it!
-- Pay them WELL and offer great benefits! Work at home! Sure, why not?
-- Give people second chances! Don't throw out resumes because of lack of buzzwords! Or disjointed writing! Or lack of education! It's all about Smart People who Get Things Done, not interviews or resumes or formalities! Have an open mind!

Only problem was, I couldn't quite afford an employee yet. By then I had been working a couple years by myself, earning good profits in the $200K range but it was based on just one or two sales a year, and each sale took 6-12 months to finalize. With so few customers I could easily go a year without sales, I feared, so had to set aside my profits to cover that. And if I were going to hire someone, I'd really want six months or a year's payroll set aside for them as well. I just couldn't afford that yet.

But of course without more employees, I couldn't make more money to pay for them. I was really at full "capacity," spending around six full-time months to land a sale, then the next six months servicing that sale before starting over again. So I knew my first employee would have to be a salesperson, but I just couldn't afford it and couldn't see how I'd be able to at my current rate...


Serendipitously, I was approached a little while later by a former VP of my big competitor, at my industry's main exhibition where I had a small booth. He was a friggin' VP of a $100 million a year company! Well, their former VP, he said. Wow though, I was flattered. I demoed my product to him, explained my company, and his mouth dropped open. He started gushing about how incredible my product was (well, it was, I guess) and asked why the "fuck" wasn't I selling $100 million a year?! I said well, I'm sort of at capacity... and... errrr... I'm more of an engineer, and, uh.... I don't know why. I didn't want to tell him what I feared, that it was just this thing I made on my own, some of the code was crap, and things like that just don't sell for millions.

Then he told me "Shit man, I could sell $10 million of this a year!" His informality in that professional business setting I thought was a little strange, but...

Was it possible somebody could really do that? I sure couldn't, but maybe I was on the wrong path? I wasn't a business expert, so what did I know? He was a friggin VP of business development for a $100 million company! He must know what he's saying, right?

We talked a little more and I couldn't believe when he asked to work for me for free! Well, on commission. But hey, that's money I wouldn't have made anyway. If he brings in a million bucks a year in profit, he's worth 10% of that, certainly!

We settled on 10% and I'd pay for travel and some other expenses. No problem... if he could make the sales he insisted he could, he'd be well worth it. And with very little risk to me for all the work he'd be doing!

Just to make sure I wasn't being bullshitted, I called the competitor to ask about him. They verified that yes, he was a former VP there. Awesome, this guy was for real. And if he was good enough for them, he's good enough for me! We soon signed a deal.

Alarm Bells

I mentioned to my uncle (an experienced big-ticket salesperson) about this new guy I was bringing on board, and he told me to be careful because "guys like that will do anything to make the sale and don't care if they leave you high and dry. I've seen it LOTS."

Whatever, old man! Because I had the deal structured to account for that: he didn't earn commission until payment was received! It simply wasn't in his interest to do just "anything" to make the sale, because if the product wasn't as promised, the customer wouldn't pay and he wouldn't get his commission! Beautiful scheme. And I'd have all pricing authority so he couldn't sell it at a loss, either! Ha ha, nothing could possibly go wrong with this.

So I set off on my promises of being a great boss. I let my new sales guy do his thing, trusted his judgement, didn't ask to be CC'd on things, gave him the resources he needed, just set him loose. $25K in stuff he said we absolutely needed -- slick brochures, sponsor some conference, ads in the trade journal, coffee mugs, pens with our logo -- I readily paid for. I wanted him and us of course to succeed.

And really I was pretty damned honored having someone with his experience -- a friggin VP of a $100 million company -- working for me, and for free! Wow!

Okay though, this one thing didn't make sense: I had told him our cost for a particular solution we were giving an estimate for. I did that so he could figure out his commission, which was based on gross profit. I then got cc'd on a mail where he turned around and told the customer our exact cost, and "that means there's a lot of wiggle room on the price. I'm sure Bill will come down on it."

WTF? Why would a salesperson tell the customer our cost?! I mean, isn't that just common sense? I asked him and he said something about "don't worry, they know we make a profit."

Well that didn't make sense -- that seemed pretty stupid actually -- but this guy was a friggin VP of a $100 million company! I was honored to learn business from him!

Then there was this other strange thing: a customer asked if they could see a demo, so he asked me to approve the travel cost. Just knowing how the sales process works, I told him I didn't like spending money on demos until we were sure they had money and were really ready to buy. So he emailed them (cc'ing me) "Do you have money? Are you ready to buy? We don't give demos unless you are."

Why in the world would you say that to a customer?! But... he was the VP of a $100 million company, after all! He must know these customers extremely well, and maybe it's... maybe some kind of inside joke thing? Just how executives talk to each other?! Wow, I had so much to learn!

Hmmmm, then there was this other thing that didn't make sense either: he sent me a sales forecast, and in the "absolutely certain" column he had $5 million in sales over the next three months alone (!) I mean, holy shit! But wait: that one company on there -- I could have sworn they told me just six months ago they didn't have anything in the budget, but maybe in a couple years? And suddenly now they're ready to buy? Just like that? I asked him and he assured me that yes, they have money now and are definitely buying from us. Definitely! 100% certain.

Awesome! I mean this guy was a friggin VP of a $100 million company!!! There was so much I would get to learn from him!!!! $5 million in sales in three months!!!!11!!!

Hold on. Then he sent me a proposal he had been working on over the past month, for final review and "second set of eyes." I had previously sent him all my boilerplate proposal and price quote templates to show him what's worked for me in the past. I figured he could just fill out with the customer's particulars like I had done over the past couple years, and save a lot of time. But no, he said he was going to write a totally new awesome proposal package guaranteed to win. That's what he used to do as VP of the friggin $100 million company, after all! I told him great, I can't wait to see!

I started reading this thing and my face dropped in horror. It was the writing of a grade schooler. I'm no professional writer either, but... it was absolutely awful. Simplistic writing, full of cliches, full of grammatical errors, and absolutely lacking in any structure. It was just random thoughts strung together, topics bouncing around from idea to idea from one sentence to the next. There was no exposition of the customer's problem and how we were going to solve it, it was just him gushing about how "great" our product is and how "lots" of people like it. It was dizzying to read because there was no logic behind it -- it was along the lines of "This product is great. You will like this product, guaranteed. It has feature A. Feature C is great because it's so easy to use! It has feature B. The other great thing about feature C is tons of people told us they love it. Tons. It has feature D." (New paragraph)... on and on for 15 pages.

Okay, how could a friggin VP of a $100 million company read something like that and think "That's it! Yea!"?

I didn't care whether he was an experienced VP or not, I had to ask him WTF he was thinking, hopefully without offending him (too much). "Ummm, it was... interesting," I carefully offered, "but I'm just curious: did you proofread this at all?"

"Oh sure, I ran it through spell check and had my wife check it out too" he proudly replied.

"Ok, well... uhhhh... hey, didn't you also used to write proposals at [former company]?"

"Yep! Well, not exactly... other people wrote them I guess, but I oversaw it."


"So -- what do you think? Kick ass, huh? I think this is a shoe-in for us! I really do, I can feel it."

Here unfortunately I sort of lost it. $100 million VP or not, that document was shit. No, I'm not a writer either, and no, our customers aren't English teachers, but what the fuck? I can't put my company name behind that! It was shit. I told him that. I asked him what the fuck he was thinking, why would he even set out to write a proposal if he knew he couldn't write -- I mean, why bother? A whole month to do that?!

He apologized. He said he was trying to do well, and he really thought he could write well, but "apparently I can't, and I accept that."


I left to cool down and think about it more. Okay, no problem. So what, the guy can't write. We can use my previous templates and I'd just modify them for each new customer. We're talking about $5 million coming down the pike, after all! I'd write them myself all day for that kind of money! Woo-hoo!!

I stayed up all night rewriting the proposal, and we moved forward.

Well, the three months came and went. No sales. The proposal I wrote? Turns out they had never asked for it and didn't have money but thanked us for sending it. Uhhhh...

And the other $4.5 million in sales we were getting that month? A couple others "suddenly lost their funding." Another "got delayed by other problems but they're buying next month." Another was "I don't know what happened... I'm trying to find out."

But any week now! Any week was going to be the first big order! Just have patience! I mean, this guy was the VP of a $100 million company, after all! Who was I to question him? I was just some programmer who found myself in sales only because I had to.

Six more months went by. Not a single sale. Okay, well, it's a long sales cycle. I always figured I might go a year without a sale, so give the guy a chance. VP of a friggin $100 million company working for me for free! Woo-hoo!!

Still, I got more and more concerned. Something wasn't right. I suggested we start working "together" on sales since we both wanted them, after all, so could he start cc'ing me and we'd brainstorm ideas with each of these prospects? He thought that was a great idea.

So he started cc'ing me. And Oh My God. This guy was awful! Holy shit. His "sales technique" for the first new prospect I sent him consisted of literally begging the customer to buy "because our company is about to go in the shitter." Huh?! WHY WOULD YOU TELL OUR CUSTOMERS THAT?! And use obscenities in that kind of correspondence?! To a CUSTOMER?! I demanded an answer.

"Well, it's true, isn't it? Believe me, I've been in this industry for 30 years and they can handle it. That's just how these people are," he explained.

Okay, friggin $100 million VP or not, I was calling bullshit. My company does not correspond to people like that, that's not how you sell this product to these customers, that's not how people respond positively, that's not how to build a business! Bullshit.

And everything over the past almost 12 months, all the other bullshit started to come together. Really I felt awful, awful at being conned somehow, awful at myself for not checking up on him, for not even interviewing him, for not watching him, for just setting him loose and trusting him without "verifying." Everything he had told me was bullshit, all his forecasts, everything looking back at our correspondence about who had money, who was buying, everything he promised. All bullshit.

I took him out to dinner and we had a heartfelt Scooby-Doo reveal moment (you know, at the end of the show when all the masks would come off and the mystery would be explained):

Aha. Turns out the guy was a High School dropout. Got into drugs, booze, crime, turned his life around and got his GED. Went to work at a utility as a lineman and worked his way up. He had great people skills, remembered everyone's names, and that's really how he made the connections to keep getting promoted. Delegated everything to subordinates. Retired from that near the top and worked as an industry consultant because he knew everyone in the business. Did some work for the competitor. They liked how he knew all the top people at all the top customers, and offered him generous employment. He really wanted to be a VP so they said sure, how about assistant VP of business development. ("Whatever, just set appointments for us," was actually probably more like it).

He got fired within the year, he admitted. He said it was a "personal disagreement" but I wouldn't doubt it was utter incompetence.

And nope, he'd never done sales in his life. His job used to be setting appointments, mingling with customers at conferences, and getting their sales team in the door to make the sale. But he himself didn't do sales. Had no clue what was involved, had no clue what process customers go through to make a purchase, had no clue about techniques like "consultative selling" or who you have to convince in a business or institution to close a sale. No clue. But gosh, he was eager and willing to learn and felt great about this opportunity I was giving him!

Well, at least he was honest. He wasn't trying to deceive me, and he really thought he could do it, he explained. No hard feelings. But I didn't need an entry level salesperson, I needed an experienced salesperson right now. I told him he had to go, and he understood.

Sadly, I could have found out all of that by simply asking him before offering him the deal. I just never did. I mean, he was a friggin' VP of a $100 million company, after all!


Every time I relate this experience, I get a lot of head nods. I guess it's pretty common among business owners and anybody involved in HR, to get employees who just don't turn out as promised. But damn, I didn't think it would happen to me. I mean, I was prepared! I read a lot of books! I knew all about bad employees and how to avoid them! I was smart, dammit!

Well, my company survived. I went back to basics with my old way of selling and soon landed another nice sale. Then my next hire was a salesperson again, but thankfully this time I knew to check up on him before the hire, and knew to have him explain his strategies and techniques in the interview to make sure he knew his stuff. Thankfully, he's turned out to be a really good guy and so far has been doing really well.

And unfortunately what I really learned from this is something I actually already knew from my first year of employment right out of college: business executives are sometimes just full of shit!

Friday, June 27, 2008

How to sell your software for $20,000

I guess you can either sell $20 software to 10,000 people a year, or $20,000 software to one business a year that buys 10 seats, and either way have a pretty good lifestyle business. I don't know which is easier, but I did the latter. When it was just myself and I just needed to get that one customer a year, I thought it was a pretty good life.

So here's my ideas if you're thinking of going that route:

1. Find software out there that sells for $20,000 a copy

The idea is you don't want to try to come up with something new. Every business problem has been thought to death, and if there isn't a product for it already, it's probably because there just isn't a need.

Also with something "new" you have to convince businesses or organizations they need it, and that takes marketing money and extra time overcoming their resistance to a new concept.

That's why I think it's easier and cheaper to start with a "better" version of an existing product, because customers will already know what it does and know they need it.

And the fact they already might have your competitors' products doesn't matter -- you're going to sell it when they decide to do a "technology refresh" or otherwise update to the latest and greatest. Or when they decide they can't stand their current software provider and need better support or just something different than the junk they currently use.

As for finding software that sells for $20K a copy, I don't really know where to go. For my product idea, I happened to be working with $20K (actually more like $50K) software on my job and found out that's how much they paid for it. I knew I could make it better so that's where I happened to get my idea.

I also know when I was working for a large tech company/contractor, we had stuff selling for $10K or $20K a position. And I've seen people on other boards mention theirs sells for $20K or $30K a seat, so it's definitely out there.

However, $20K software isn't going to be advertised on the web with a price next to it, I don't think, because it's usually sold as a custom-quoted "solution." So it won't be as easy as doing a web search.

I think then the best way to come up with a $20,000 B2B product idea is to focus not on "what kind of software do businesses really need?" but "what kind of businesses depend on technology to operate their business?" And behind that technology is probably going to be a computer, and you can write better software for that. If the rest of the technology is off-the-shelf specialty peripherals, you can easily provide those too and sell it as a "turnkey solution." That's what my company does.

Here's an example B2B idea: automated parking garage software. I was thinking about this the last time I had to pay $100 at my local airport. They certainly depend on technology to run their operation -- you punch a button, it prints a ticket with the time, takes a digital photo of your license plate, then 5 days later you exit and hand the attendant your ticket (or stick it in the automatic box), they feed the ticket into the reader and calculate the price and probably keep all kinds of stats and make all kinds of reports. The software running that can't be that complicated, can it? Yet they use it all day long every day and depend on it to operate. I bet the software portion of those systems easily sells for $20K, or $50K, or $100K. Think of all the money they take in... $100K is nothing to them if it saves them just 10 seconds per car times 5,000 cars a day.

And what would be involved in a "turnkey solution?" Besides the "terminals" in the ticket booths (standard PC's, maybe with touchscreens?) and maybe some central computer in the main office, you'd have the network, automatic gate things, ticket printers, those kiosk things you press the button on to get your ticket, some kind of camera pointed at the license plate... network switch... what else? I don't know but all those things you can probably buy "off the shelf" from whoever makes them. So you integrate it all together and your software runs it and prints out nice reports and alerts the boss when the garage is getting full or whatever it is they need. You sell it as a turnkey system for let's say $200K, of which $50K is your hardware cost and the rest all "profit" from your software. I have no idea if it sells for that but I'd certainly research that industry if I was looking for new ideas.

But my idea to possibly look into that product and market comes from considering businesses that depend on technology, not just considering what software they need. There's more out there than stuff that runs on an office PC or a web browser, so I'd suggest don't limit yourself by asking "what software should I make?"

2. Pick the products that are supporting a handful of million-dollar companies.

If the main providers are multi-million dollar companies, obviously it's supporting them or important enough to them which means it's a viable market and there is probably room for you. You only have to get 1% of a $100 million market, or 2% of a $50 million market to make a million a year, for example.

Also, those million-dollar companies are going to spend lots of money convincing any new customers why they need their (and by extension your) products, which means you don't have to. Your competitors will spend all that time and effort convincing them to buy, then the customer will get quotes from everyone and might end up buying yours instead, at no real cost to you. When you don't have any money, might as well ride your competitors' coattails!

3. Build the product but only with the core features

You only have to make a "lite" version initially, which you will sell for less to get your first customer. The idea is to get that initial customer and use that money to continue to build it, continuing to make it less "lite" and higher in price until it's similar to the existing products on the market and hopefully at that point better.

A "lite" version is probably still useful to the customers because the current software on the market will almost certainly be bloated with bells and whistles. That's just what happens to software over time. Their core product sells when they first get in the market, then they need to upgrade it and add new things as the competitors do, both trying to make something unique. Yet the core software sold before just fine without all that, so you can possibly get away with just the basics.

Your strategy is going to be make just those core features, and price it a lot less. Customers don't always buy on price, they buy on value. Maybe they can buy your software for $5K a seat with a handful of features that are the main ones they use, or buy the mature, market-leading, proven software for $20K a seat with five times the features although they're not all needed or used.

That may not be an easy decision for customers and some will go one way and some the other. But the important thing is sometimes it'll go your way, especially with the segment of the market that may have had previous bad experiences with the existing products or companies, or are looking for something different than what their own competitors use. Remember you only need 1% of a $100 million market, you don't have to take it all over.

Naturally, you need to figure out what are the basic core features you need to build. That takes knowledge of the domain. I was in my domain already and knew what the core features had to be, but maybe being outside the domain looking in might be a good thing too, since you might approach things differently and come up with something new.

I know if I decided to make automatic parking garage systems, I'd at least want to hang out at some garage and shadow the workers for a few days. Not to figure out what they're doing wrong and how my software could fix it, but just to learn their job, learn what their current system does, and find out what they like and don't like about what they currently use.

Now, of course it's easy to say "make a lite version of the product with just the core features" but what if there are a whole lot of core features and required basic functionality? It took me almost ten years off and on (part time/nights & weekends) to make my "lite" version. Maybe that's an extreme case, but if it's $20K software I doubt the core functionality could be slapped together in six months or a year, because a lot of people would have already done it. Wouldn't they? Maybe not, I don't know. It took me a long time though. I'd expect to spend a couple years at least on it, which also helps keep out potential future competition (barrier to entry).

I think too many people though want to get rich quick slapping something genius together in a month. I say let them waste their time making a handful of shareware apps in the same time you're building up a real product!

4. Get your name out in the industry

$20K software is certainly going to be "niche" software, with not a whole lot of customers out there who buy it. Maybe it's in the dozens, or hundreds, but certainly not tens of thousands. So it's probably likely they all gather at some main industry conference, or all subscribe to their main industry trade magazine, or a list of all of them can be bought from their industry trade association or their trade magazine publisher, and it's possible to call every possible customer directly.

At this stage you want to just get your company name out there so everyone knows you sell your systems and could be an alternative to what they already have. You don't have to sell them your systems yet, just get your name out. You can email, mail or cold call all potential customers just to say hi and introduce yourself and company. They're in a niche and they probably don't get a lot of sales calls so it's not the same as general cold-calling, in fact they may be glad to hear of a new supplier in their business. But do normal marketing here, which is beyond the topic of one post, but for example you can also get a booth at their trade show, take out ads in their magazine, get their industry magazine and websites to print your press releases, etc.

The idea with just getting your name out versus trying to sell is when one of them is looking to upgrade, or they hate their current system and want to try something else, they know to send you a request for proposal or ask you for a quote or demonstration. That's when you'll do the selling. For now just make sure everyone knows you exist so you get those requests for quotes and proposals.

(Obviously, once you're ready to sell you have to have your product finished, basic business set up, brochures ready to send, etc which are their own topics. This is just illustrating the steps.)

5. Present yourself as consultingware -- it won't matter that it's you against big companies

Don't assume your product requires an army of a company behind you to sell, even though that's what your competitors do. Consider:

  • Any software that's used a lot is going to have a segment of people who hate it
  • Any company that "owns" or has a large part of the market will have people who hate them
  • In some markets, business customers may not want to use the same things their competitors use, and will be willing to try a new or unproven system in the hopes of getting an advantage (better productivity, lower overhead costs...). The unproven product may fail, but some are willing to try.

So you will have at least some segment of the market that will be open to something new or at least consider you even though it's a sub-complete product and a one-man show.

So, how do you sell it?

Firstly, the fact you have a "lite" version is covered by your reduced price. You're going to sell your lite version for $5K or $10K a seat or something well below the competition, to account for its being a basic product. At the same time though you're going to sell them on its value, convince them that it doesn't need all the bells and whistles like the other products, so why pay for them? Etc.... sales is beyond the scope of one post here but you can use standard sales techniques to convince them the value of your features versus the price they pay.

The bigger issue is the company being just you. They're going to ask you outright, or you'd better address up front how you expect to give them the same service and support the 100 person competitor would give, and recognize that it's a key technology or product for them and what if you get hit by a bus or disappear? What do they do then?

Here's how I've addressed the common questions about a one-man company:
How can you give the same level of support?

You tell them your business approach is different -- yours is "consultingware" and you're only selling to one business at a time. That way you become dedicated to them and their exact needs. And of course it's true! If they're paying you $150K for your "turnkey" system, it should be no problem to check on them weekly, fly out to their site monthly, really hold their hand, put in requested new features for free, really get their feedback over the year. They'll love it and be your champion for your next customer.

Ask them if they're getting that from their current provider now... probably not.

Also point out they would be a major customer and a really big project for you. With the big competitors they're just a number. They'll like that idea too.

As for getting hit by a bus, well your competitors could go bankrupt tomorrow too. Who knows? But assure them you're fully insured for liability and performance ("errors & omissions insurance"), and point out once software is installed and running, it doesn't change. Software doesn't wear down, it'll keep running the same way forever. And they don't pay until it's installed, running and accepted, so if you got hit by a bus or your company went away, they'd still have it and it would still continue to work.

How do we know your product works? You haven't sold it to anybody yet.

You say yes it is a new product, and the bad thing is it's not established, but the good thing is they're getting the latest and greatest technology has to offer. Then you reiterate how they don't pay until it's installed and proven running and they accept it, so there really is no risk. If it doesn't work as advertised, they don't pay. And you're confident enough and have tested it enough you're willing to spend the money to do all that installing, training and demonstration of functionality before they accept it.

You should also admit that sure, there will be things that will come up, but that's also why you're running your company as "consultingware." You'll be there on call and devoted to them and how they're using the product. If there's something major, you can be on the next plane out, will have it on your laptop and can make changes right then and there. Do the large competitors do that for them now? Most likely not.

See? A one-person company is actually a good thing!


Well, my first customers all responded really well to the above, anyway. And I wasn't being deceitful at all, I really did hand hold them and was devoted to them, because after all my first customer was my only customer!

So that's one way you can run a big money software company by yourself. Many customers really do care more about support and quick responsiveness more than how many millions your company sells a year. And remember, you don't need to win over 100% of the market, just 2% maybe to make good money. Target those 2% who hate the current products and companies on the market and they will probably be glad to give you a chance.

Then with that first happy customer, you use them as a reference and build up from there. Or more likely in a small niche market they'll rave about you to everyone and everyone will want to know more.

I know with my first customer, I did all the above and flew out probably 10 times that first year and spent easily $20K on travel and stuff I didn't have to do contractually. They needed more monitors? Sure, I ordered them from Dell and they had them two days later, for free. They loved that kind of thing. It was a $140K sale so that year I think my net was only around $50K because of all that kind of stuff, but they really became my champion and paved the way for many more future sales.

Government Follies

My last post about government contracting might have given the impression I was somehow gouging the government by pulling some price out of my ass. You can't do that and exist for long in business or certainly government sales. Nope, it was market price for my product, established market, commercial items, and the competition was sealed bid, fair and open with multiple companies competing. With an open competition and sealed bids it's in nobody's interest to inflate the numbers because your competitors will undercut you easily.

I think now my conversation with that contracts guy happened because he was thinking it was time & materials when it was actually firm fixed price, and I just didn't know enough about contracting to realize that was the misunderstanding.

So to you government contract guys who criticized me, I really don't care. Don't buy from private industry if you think the open, free market is too expensive. How about instead, you buy from my competitors for 30% more? Or just hire Mega Contract Corp to build it for you for three times the price, then spend another five years and another $10 million fixing it when it doesn't work?

Meanwhile I'll just keep selling to private industry who don't bitch about every single line and every single dollar like you government types do. Yea, I know it's to prevent waste and fraud, but it's still annoying.

(Actually no, I love you government types... keep those orders coming in!)

Tuesday, June 24, 2008

Government Whore

Even though I once worked for a defense contractor, I never thought about federal government contracting until a government contractor approached me about subcontracting on an extension to a contract they had. I looked at the requirements, which my product met off the shelf, and thought wow, that's a lot of money I could make if we win! 500 seats at $10K a seat (the off-the-shelf discount price), means easy government contractor money! Woo-hoo!

Hmmmm, doesn't quite work that way, at least for a product company like mine. For whatever reason, the contractor (the "prime;" I was a "sub") just didn't understand how a subcontractor could exist that simply sold products. They just couldn't fathom it, for some bizarre reason!

Well, by "they" I mean the mid-level project manager lackeys that were running the contract.

I admit there was confusion on both sides though because I just couldn't fathom how anyone could think otherwise, and I was new to government contracts. I mean, isn't buying products from a vendor very simple? You order the product, the vendor ships it to you, and bills you. I kept telling them this but they kept asking for a "cost breakdown." I kept saying "look, we're just a vendor of a product and we sell it to you and you resell it to the government. Isn't that all it is?"

Then they'd say no, we want you to be a subcontractor. We need a cost breakdown.

Our initial conversation went like this:

Prime: "Send us a quote for 500 seats with cost breakdowns"
Me: "500 x $10,000"
Prime: "Okay, but how did you arrive at that price?"
Me: "That's the market price -- that's what I and my competitors charge."
Prime: "You can't price it like that. I need you to break it down by material cost, and labor."
Me: "That's all included, it's turnkey, we install, train, provide support for one year, everything."
Prime: "I know but I need you to break it down. I have two columns here: material cost, and labor. What are those numbers?"
Me: "We don't break it down that way, we have a firm fixed price. $5 million for everything."
Prime: "You can't do it that way on this contract. You have to break it down."
Me: "Okay, material cost is $5 million, labor is zero."
Prime: "You can't have zero labor. About how many hours does it take to install and train those locations?"
Me: "Ummm, 300 hours?"
Prime: "Okay, and the labor rate for that is $97.65 an hour, times 300 is $29,295. Is that all the labor? What about one year help desk support?"
Me: "Hold on, where did you get $97.65 an hour from? We don't price that way, I'm telling you it's very simple, send us a purchase order and we'll..."
Prime: "Sorry, but that's how you have to price it. How many more labor hours are involved?"

Well that all seemed stupid but I didn't want to lose a $5 million sale over some lackey contracts guy wanting numbers to fill in his boxes, so we came up with some "labor" estimates and "travel" estimates, and "project manager" labor estimates, and "administrative labor" estimates, then it got to materials cost which I presumed would be for the actual software. So I took $5 million minus the above computed labor and said that's the material cost for the software.

Prime: "You can't do it that way. How much do the materials cost you?"
Me: "What do you mean -- the CD's and binders?"
Prime: "Yes, if that's what's involved."
Me: "I don't know, are we delivering one per seat or what? $2500 maybe?"
Prime: "Okay, and this contract allows 13% markup so we'll put down $2,825."
Me: "Fine -- put the rest as the software license."
Prime: "We can't do it that way. You have to get quotes from three vendors."
Me: "We are the vendor! That's the price."
Prime: "You can't charge that. You have to charge it by labor or materials. How many hours does it take you to make?"
Me: "Zero, it's already made."
Prime: "Then you can't charge for it."
Me: "Yes I can."
Prime: "No you can't."
Me: "Yes."
Prime: "Sorry, no, that's not how this contract works."
Me: "Well that's our price."
Prime: "Sorry but no, it has to be labor and materials."
Me: "Sorry but yes, it's my company and that's how we sell it."
Prime: "Doesn't matter. You're the sub and we're the prime, you have to price it how it's allowed in the contract."
Me: "No."
Prime: "Yes."

There was a lot more detail but that was the gist of it in so many words. This was all before we had signed any agreement, too, so I didn't have to do anything -- who were they to tell me how I had to sell it to them? It was bizarre and confusing to me because we were just on different pages. I "had" to sell my $10K software for five bucks because I was only "allowed" a certain profit level above the physical material cost? Screw that.

So I did some research and asked around. I just wasn't clear on how government contracting worked (and I'm still really not, there are entire professions devoted to understanding it)! But the way I believe most these big government contractors work and make their tens of billions annually, is they're simply whores to the government. They don't make money creating and selling things. They sign up to be a whore and do whatever the government tasks them to do, and they simply get paid by the hour and reimbursed for expenses plus pre-agreed profit markup. The rates are already set or are established in the contract. For them, income billed minus salary paid to the employee = their profit.

Build you a widget transducer you say? Okay.... whew, that took us 10,000 hours. Here's your bill. What do you want next? Build a new missile? Okay, that took us X hours times the labor rate, and $10 million in materials. Here's your bill. On and on for billions of dollars.

So the confusion between me and my prime was they assumed my business was the same as theirs -- that we simply whore ourselves out to provide whatever the government wants, or in their case whatever they decide to task us with. They assumed I knew they knew this, but I didn't because I didn't know anything about that. Recipe for mutual confusion.

The "confusion" got cleared up though after talking to the VP in charge of that division, so the project manager reluctantly massaged their numbers ("wellllllllllll, we'll make an exception this time but that's not how it's normally done here...") into whatever format their boxes required, and we agreed on the $5 million firm fixed price.

Oh and we won, yay! (Although it turned out to be "only" $4 million because the government revised their needs... and wanted it installed over multiple years).

My lesson from that though was "no, people don't necessarily understand what your business does. You have to explicitly tell them sometimes and sometimes refuse something when they insist."

Actually I still encounter that kind of confusion. Like they then sent a "subcontractor agreement" to be signed and returned. To me it had a lot of weird non-applicable clauses, left out key important things like ownership of the product, etc, and our lawyer had the same and other concerns. I told the prime we were reviewing it because it had problems, to which the contracts guy seemed baffled. "What do you mean? Everybody signs it... we've never had problems with it."

"Maybe, but we're not a labor company like this agreement assumes. We're a product company and just want to sell you our product. Don't you have a vendor agreement or something?"

"No, this is what we use -- everybody signs it."

"Well I'm not signing it because it doesn't cover what we're providing. Here's our revisions and my signature at the bottom."

After lots more back and forth: "Fine...we'll make an exception this time."

They signed it and so far it's going well. But wow, you'd think they'd have a better clue. Is all of federal contracting like this?

What's with these customers, anyway?

Other than federal customers I also sell to institutions (sort of "public utilities"), some for-profit businesses, and local and state governments. Institutional and government selling is its whole sub-art form from regular consumer sales, so some of what I've described is unique to that. But businesses I've found are pretty good customers because they "get" business. It's the government and institutional customers that can be a pain because sometimes they just don't "get" how businesses work, I think. Maybe 30 years in a government office will do that to you, but I have to deal with it a lot.

One issue I keep having with them and is really, really annoying is the whole "request for proposal" and their requiring anything they want in the proposal. The customer has their procurement process and like the anal projects guy above has specific boxes they need filled out, and if they're not filled out they will simply throw your proposal away. Just like that. All my competitors know that, and so does anyone who sells to government entities I'm sure, but I didn't know that at first and found out the hard way.

It was a request for proposal that required audited company financial statements showing sales and profit, and breakdowns of the product price showing costs and profit. Huh? I'm a privately held company and am not about to give that out. I politely put down "company confidential/privately held" and of course they promptly threw away my proposal without even looking at the rest. We had the lowest price and were truly best value I think, yet they just threw it away, just like that. Fail.

Huh? What gives a customer the right to demand that and expect to get that confidential information? So I asked them that afterward, in so many words. They said they needed to know our costs to make sure we weren't gouging them. That was just their procurement rules which they were required to follow. Oh, and they generally "allowed" no more than 20% profit.

Uhhhh, okay, but this is a free market we have, isn't it? I mean, if this were a communist country I could imagine justifying prices, but the market price in a free market is simply the going market price. Or am I way off base here?! Do western countries tell OPEC "sorry, you can't charge $135 a barrel because your costs are only $5 a barrel. Therefore you have to sell it to us for no more than $8 a barrel."

Well of course a customer can ask for whatever they want and demand whatever they want and throw out whatever proposal they want. Fine, but it's "their loss." I'm just mystified why some organizations operate that way, but they do.

Unfortunately, I soon found out all my competitors bend over backward and kiss any customer's ass and give any and all requested information, so now I have to as well. Whatever. Another thing I get to gripe about, like they probably do too I'm sure.

Next Time

I'll try to start posting some positive things about running a small software company eventually... it's not all bad!

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.