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Entrepreneurship in the Software Business. Robbie Allen and Dharmesh Shah December 9, 2005. General Rules Of Thumb. Ed Roberts' data show the odds for MIT-based startups are much better than the Nesheim numbers Follow your passion. Don't do it for the money. Try to solve a user problem.

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Entrepreneurship in the software business l.jpg

Entrepreneurship in the Software Business

Robbie Allen and Dharmesh Shah

December 9, 2005

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General Rules Of Thumb

  • Ed Roberts' data show the odds for MIT-based startups are much better than the Nesheim numbers

  • Follow your passion. Don't do it for the money. Try to solve a user problem.

  • Determine realistic capital needs and investigate possible VC alternatives including bootstrapping, angel funds, etc.

  • You have to be adaptable: Flickr went through 3 business models and 3 product ideas in a couple of years

  • Diversified founding team increases odds of success

  • Most mistakes are business-related (not technology)

  • Failure is part of the process

  • A business plan just gets you started

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Product Startups

  • It is cheaper than ever to start a software company

  • Software-as-a-service is becoming more attractive

  • Acquisitions are happening earlier

  • IPOs are much more difficult (so acquisitions are the primary exit)

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Service Startups

  • Lower risk than product companies, but margins are more modest

  • Very people-focused; attract, develop, retain, and deploy

  • From Imran: Very few service companies can justify raising venture money. Not what they’re designed for and difficult to create VC-like returns.

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Hybrid Startups

  • Usually start as a service or product company and become a hybrid over time

    • Service companies often strive to become a hybrid (or product) company (e.g., FogCreek, 37Signals)

    • Product companies are often forced to become a hybrid company (Cisco, Oracle, etc.)

  • Don't let one cannibalize the other

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  • The “team” is the most important aspect of a startup

  • Critical to have clarity around roles, responsibilities and terms

  • Equity allocation among founders is often challenging – “equally dividing stock” is rarely the right choice

  • Strive for diversity and ensure complementary skills

  • Early employees are crucial to success

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Development Strategies

  • Avoid sequential “waterfall” schedules

  • Agile and XP practices are well suited for a fast-paced small startup

  • Evolve requirements incrementally

  • Choose platforms and languages suitable to the business

  • Synchronize-and-Stabilize!

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Marketing and Sales

  • Startups often fail by not having good sales and marketing vision and people

  • Advertise the brand, not the technology; but have features that back up the brand

  • Get customers to try the product, however you can

  • Get customers onto the upgrade (maintenance) cycle: Provides recurring revenues, and lessens probability that customers will switch

  • Do what is necessary to get customers to refer other customers – this dramatically lowers customer acquisition cost.

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  • Good for creating initial prototypes or farming out work of non-critical tasks

  • Not so good for small startups that need to innovate quickly, grow, and create a tight-nit culture

  • Outsourcing isn't a panacea - still requires close supervision

  • Many startups make the mistake of not recognizing the “real cost” of the outsourcing path (fail to factor in risk and co-ordination costs).

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Open Source

  • Using OSS products internally makes a lot of sense

  • Jury is still out on releasing commercial products as open source

  • More opportunities for OSS services companies

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NetNumina Lessons

  • Differentiation in services is key

    • Domain, technology, business process

    • Quality is extremely important but needs to be tangible

    • Client references

  • The right balance is important

    • Between new and existing clients

    • Between needs of clients and employees

    • Between selling and delivering

    • Between experienced and “high-potential” managers

  • Hiring & Retention is the single most critical function

    • Intelligence, attitude, communication, and willingness to travel

    • Invest in star employees

  • Timing and luck play a part in every start-up