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.”
“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?