The Business of Software

I saw this link in another post here:
http://www.marktaw.com/Work_and_Business/Why-Businesses-Fail.html
Am I alone in thinking this message is negative almost to the point of being wrong?
There must be something extremely wrong with Mark's
business aptitude to have such failures and not want to bounce back and try again?
I'm not sure exactly how to express my dislike of such negativities in a short post here, but it
is so far removed from my experiences and those I read on this forum.
I know the failure statistics quoted are "accurate", but I have a different slant on failure -
If I write 5 complete apps that fail before the 6th one succeeds, I didn't have 5 failed businesses,
because the lessons learned were all part of the making of the succesful One.
Does anyone agree?

I didn't get the same impression as yourself. I felt it was a cautionary tale to try and help people starting a business go into it with their eyes open.

I suppose it depends if you are a "glass is half full, or half empty" person. Me? I'm a "Damm! The glass is full, I'll probably knock it over" sort of person ;-)

The problem I have with his graph is that it focuses on the wrong thing: increasing sales should be the primary focus, not reducing costs. Even if you reduce costs to zero, you still only have sales at $1/month increasing slowly.

Second, you need to know when to cut your losses and get out. You also need to be able to understand why you failed and learn from the mistakes (your point).

Sure, he's being negative, but so what? In order to succeed you need to be able to motivate yourself in the face of thousands of people failing every day.

The problem is too many people only see the upside.  You need to look at both sides realistically.  Resent posts on this forum show very few if any see the downside.

I just followed the link to the coffeeshop business and I almost laughed out loud. "...we would never start a Laundromat" At that point I already knew they were doomed to failure.

Revised business plan:
Start the Laundromat and get a couple of college/HS students to staff it for minimum wage.
Take profits from Laundromat and start your cute bohemian coffeeshop where you can now afford to barely break even (or take a loss to  offset the laundromat profits).

Or just start a *drive through* coffeeshop near a freeway onramp like the more sensible people do...

Ian: "Everyone is arguing if glass is half-full or half-empty, but noone stops to ask if it's a glass full of WHAT?" --Douglas Adams (as in Dilbert)

I liked the list of tips towards the end, but I agree that the graphs are contrived.  Nobody would keep a business going for 96 months if you were only making $1 per month in sales!

If nothing else, the graph shows the folly of spending too much before you have sales.  I don't think bootstrappers do this, but I guess it would be a necessary model for businesses with a higher cost to enter.  But in those cases you would be better off raising capital from angel investors or venture capitalists than with debt, I suppose.

As for me, I would prefer to always keep revenue ahead of expenses, but then again, I've yet to run a real business, so YMMV.

That's Scott Adams, not Douglas. ;)

He's right.  Don't quit your day job till you have reasonable revenue coming in.

Trading your free time for progress on your product* demonstrates that you're really serious and that you LOVE what you're doing. It's also non committing, so easier to keep it fun.

*Create the product first, then the company. The product is the fun part and the business part isn't necessary unless the product is finished and people will pay for it. You don't need a flashy website to do a beta trial. And if you don't ALREADY have beta users lined up, you've made your first error:  always have close contact with a sample of the customer.

Mark has a very good point about the quitting your job... everything he says there is right on the money.  Quitting a job is automatically taking away your salary from your businesses bottom line.  IE, if you quit a $50k a year job to run a $30k a year company, you've still not broken even (Not counting the potential increased happiness of running your own business, which is also largely a myth).

However, the other things he mentions, including his graphs for "evidence" seem to just be pulled out of thin air.  He does not explain how an "internet business" going to rack up $95k in debt, yet that debt level is part of what makes his case for a long or impossible break even point.  Has Mark started a business?  Is he a business analyst?  It would just be interesting to know where the ideas came from besides speculation.

Why are the graphs (c)2007 ?

I don't know.

Quitting the day job really depends on your situation, motivation, character, view and so on.

I don't think it makes sense to generalize this.

For two people in the same situation it can be the best thing to do, or the most stupid one. Look at people's biographies, you will find plenty of examples for both ways.

Most of those tips are just entertainment, there's no golden rule.

I think this is excellent because one thing that we tend to do is ignore failure.  It is almost like if we think about it that makes it happen.

This goes back to those people who say go ahead and get 35K in debt (or more) because you can pay it off with your first 100K sale (that's what I did).  They are missing the larger point of what if you never have a 100K sale.

Some would say that is just negative thinking and you will never get anywhere with that.  I disagree, you have to consider everything before taking this step.  If you bear in mind the price of failure then you will do your best to minimize it.

My problem with that graph is that in my oppinion, at least we software developers, normally at least, don't really work that way. We usually spend 6-12 months developing a product, and if we don't moonlight, we have 0 income for that time. The expenses are living expenses, which vary depending on your lifestyle of course. But after the product is done, you expect to sell a lot more than $1 per month, if you spent about a year in a product, you can expect for it to sell for more than 20 dollars. If you sell 5 copies a month, that's 100 dollars. If you assume a 10% increase per month, you will see that it takes a lot less time to be profitable (of course, depending on where you live, 100 dollars can be your coffee bill at the end of the month, or all your expenses) But still, it is a lot better that what is projected.

Oh, and in my oppinion, If you spent a year on a product, and it is a good one, you will be making a lot more than 100 dollars a month.

> This goes back to those people who say go ahead and get 35K in debt (or more) because you can pay it off with your first 100K sale (that's what I did).  They are missing the larger point of what if you never have a 100K sale. <

Isn't this just common sense? Do I really need to read hundreds of books, blogs, tips, charts etc. to understand this?

Please, no offense. I'm just wondering if people stopped thinking for themselves in this time of information over-supply...

==> There must be something extremely wrong with Mark's
business aptitude to have such failures and not want to bounce back and try again?

You've really, really got this wrong. For most folks it doesn't even take a single failure to put 'em out of the game. For the AverageJoe, just the thought of a failure --the *potential* for failure -- keeps 'em out of the game from the get-go.

The folks who want to try, fail, bouce back and try again ... These folks are a rare breed, indeed, and are few and far between.

"Isn't this just common sense? "
Actually, you would think so but I am not sure that it is.

"Please, no offense."
None taken

"I'm just wondering if people stopped thinking for themselves in this time of information over-supply"

You assumption here is that it is the SAME information.  But there are plenty of people on this forum and most likely blogging with an all or nothing approach.  They believe you must quit your day job and go into debt and that is the only way it works.

This conflicts my "common" sense but really there is no such thing.  Some people might read this and be swayed and start taking risks they probably shouldn't.

People screwing up their lives with credit debt really bugs me.

i agree with the "don't quit your day job" philosphy. I'm starting an ISV with 1 biz partner.

Regarding start with the product or start with the business aka chicken or egg dilemna. here are my initial steps:
(1) read bob walsh's book
(2) Register domain names
(3) Read books on starting an LLC
(4) 1 page overview of goal of the company. This was recommended by Bob. In other words, where is the pain?
(5)(a) Product
(5)(b) Business registration

Background:

I believe that your business should spring into existence as soon as it is profitable.  However, that should be really, really quickly.  My current situation is that of a small consulting operation (just me).  That's my "day job."  I am working on several shrink-wrapped products as well (isn't everyone on this board?!). 

The Article:

The article is negative, but that shouldn't obscure some of his points.  He contrives an example where you lose $95,000 before you start to break even with the business.  First off, $95,000 isn't all that much money to start a large, employee having business - assuming you want to jump right to that level.  I think it is more prudent to design your company to produce the exact amount of product that is required by your customers. 

Secondly, I believe his analysis of profit increases to be unrealistic.  Joel even talks about a series of doubling of business revenues over progressively longer and longer time periods.  In Joel's example though, the 1st month is X, the second month is 2X, the third or fourth month is 4X.  That sort of pattern is much quicker to reach the break even point.  In the article X is $1 - but redraw his graph if X starting is $500.  You get to break even a lot quicker.

Finally, what are you spending $1000 per month on to get a return of $1 the first month, $1.10 the second month, etc.?  Hosting is like $10 per month, and producing software is largely a labor intensive situation.  That means the major cost is your time.  Your time is effectively free to your business with the possible exception of opportunity costs arising from you working on your business when you could be working at your day job or whatnot.  So, $10 per month for hosting, free IDE software for almost every programming language (even C# has Mono, and C#.NET version of Visual Studio is only $100, once), maybe $50 more per month for hooking into credit card transactions - where the heck is the other ~$900 per month going?  Admittedly, not everyone can turn their labor directly into a product, and the article isn't focused on producing software, but it seems to me that spending $1000 per month is a bit excessive, particularly if you are only making $1 with a 10% increase per month.

I enjoyed the article. I do get the feeling that a good many people do focus on the upside while paying scant attention to the attendant risks.

Should you be interested there's an interesting essay by hugh Mcleod over at gapingvoid.com. I think its something like how to be more creative. Its a worthwhile read for the micro isv community.  He also highlights the fallacy of quitting your day joy. 

Admittedly I have often sworn an oath to my self that I will quit at such and such a time but in all honestly the more I work on my software the longer I see it taking.  I'm just going to hunker down and maintain my fire and motion framework.

All the best y'all

I've NEVER failed at businss, never, ever, ever.  And I've started a few.

Here's my secret:

Keep the startup real cheap, and then always make more than you spend.

If my gross is 100 bucks a month, my expenses are going to be around $75 bucks.  When my gross ramps to 200 bucks, then I'll ramp the advertising, etc. to $150.  It's slow pick and shovel stuff, but it GUARANTEES success.

Now, I've got out my crystal ball and not liked what I saw and folded the tent.  Done this several times.  But I was always money ahead.  I never started something where I wasn't absolutely positive of at least enough customers to break even.  How do I know?  I look at my competitors, I already knew the market, I had the inside track with a supplier, I knew my expenses were going to be next to nothing.

What's "fail"?

Did Thomas Edison fail at light bulbs?  Even he said he learned 999 things that didn't work.

I'm kinda sorta pulling the plug on one business model--I am physically unable to produce enough product in the time allowed to me to make an ongoing profit.  So that makes this business a "failure," according to the article.  But I have a book on Amazon from it; I have a respectable body of work, I have coverage in several regional magazines, I have the ability to continue to make said product--I just don't think it's going to fund my quitting my day job.

Some people have boats, and they're not even tax deductable.

It's a free country.  Assuming your mortgage is paid and your kids are fed, what you do with the surplus is up to you.

Quitting the days job? I don't even intend to ever _enter_ that realm in the first place! Wish me luck. No, don't---luck is the opposite of achievement.

"This goes back to those people who say go ahead and get 35K in debt (or more) because you can pay it off with your first 100K sale (that's what I did).  They are missing the larger point of what if you never have a 100K sale."

I think that was me that said that originally because that's what I did. And the answer is that you always have to take a risk to get a reward. For me it was an intelligent risk because I studied the market and the competitors and knew I could do better and what it would take. I was prepared to fail though, and that kind of debt was manageable to me because I owned a home that was rising in value by that at least that much a year. Oh well, I wouldn't get a new car and would take out an equity loan if I had to.

Regarding ideophoric's "what you do with the surplus is up to you" that is a good point and reminds me of all the little trinket shops in my midwestern hometown. There was no way anybody could make a living selling that junk, so I asked my parents (who knew everybody in town) and it turns out almost all are run by retired or bored housewifes who don't make any money but for $300 a month rent and ten thousand in inventory play money they get to run their dream trinket shop. Gives them something to do and they like it... wonder how many other businesses are like that!

Bill,

You and I have a deep disagreement here but I am happy for your success.  I think by giving your anecdotal success story you are setting a bad example.

The vast majority of people who are going to do what you did ("hey it worked for Bill") are going to fail.  Some of them are going to screw up their lives but good in the process.  It is a huge risk that I don't think should be encouraged for others.

That you took it...fine.  That it worked...great.  That you should intimate in the slightest that others should do it really pisses me off.

I know you don't have any real responsability for people who would follow in your footsteps...and that is why you should never even suggest it.

By the way, I appologize for bringing up what you said in this thread...it was inappropriate.

" It is a huge risk that I don't think should be encouraged for others."

Starting a business is a huge risk that shouldn't be encouraged? Well maybe for you, but I don't think everyone's content working in a safe office for "the man" and are willing to take risks with a business even if they fail. People will make up their own minds, I think, despite what anonymous posts on the internet might say.

And borrowing $35K to invest in a business is nothing, so why would you consider that a "huge risk?" It'll cost you an easy $50K to open up a little diner, and you have the same risk -- what if nobody comes? Well then you're out your $50K. That's a risk some people are willing to take. No risk, no reward as they say.

There are only two business risks: the economy collapses---or yourself. Everyone too worried about "the risk" is probably right in that kind of self-assessment.

>>It is a huge risk that I don't think should be encouraged for others.

So where do you stand on student loans?

I know two people with > $100,000 in loans and no degree.  Unsecured debt on the order of a mortgage, and no salable skill, given they flamed out in fields that required the PhD for entry.

I know plenty of other people with school loans that paid for education that was no-where near as valuable as an honest attempt to run a business.

I also know someone who cleared considerable credit card debt by dying early.  There are no guarantees and there are risks everywhere.

"Starting a business is a huge risk that shouldn't be encouraged?"

Again you are being completely disengenous because the point is 35K in personal credit card debt.  That is what we are talking about.

"And borrowing $35K to invest in a business is nothing"
At those interests rates for personal debt it is.

"There are only two business risks:"
This isn't a business risk this is a personal risk.  And I think it is huge and unnecessary.

"So where do you stand on student loans?"
Actually I am not a big fan but the difference here is that you don't lose your education.  You are right, people fail to get it but I would say the failure rate is much lower and the interest rate is much better.

People also fail to use it but that is just stupid.

Besides it is a symptom of the same problem...getting 100K in debt is NO BIG DEAL.

"Again you are being completely disengenous because the point is 35K in personal credit card debt.  That is what we are talking about."

Then I misread, but I don't understand your animosity toward credit cards. The source of personal loans are irrelevant, it's still a personal loan. And it has to be a personal loan because nobody's going to loan money to a new corporation with no assets. As far as interest rates, most "gold" cards are in the 8-10% range but if you shuffle your credit card balance between promotions you pay 0-5% interest. If you get an "unsecured personal loan" from your bank you're probably going to pay 14%. And a second mortgage, probably 10%. That's why it's better to go with credit cards.

If you're against any kind of borrowing to start a business, to each his own I guess but the proper leverage of debt is how you grow a business. Witness the entire field of Business Finance. And currently, credit cards are the best and least expensive source of unsecured financing for an individual starting out (other than interest-free loans from relatives, I suppose).

My assumption is you're doing everything you can to increase your sales. Have you ever met a business person who wasn't concerned with this? The problem is, you can spend months trying new things and never knowing what's going to work.

I readily admit (in the article) that the graphs are completely contrived. $1 a month to start might seem unrealistic, but how many people are convinced they can start their business with $0 a month income? How many people who are two paychecks away from the street think they can quit their jobs tomorrow and start their own business? You might be surprised at how many people that is.

Regarding an earlier poster, how many businesses start with $500 a month income? You might say "I didn't start my business until I had $500 income" but that's just pedantry/playing with the starting line.

Some of the feedback I'm getting is that I got it right on. Some of the feedback is that I got it all wrong. If I've polarized people so much, I think I'm probably on the right track. Maybe it's an unpopular message, and maybe I fudged the numbers and wasn't quite as articulate as I could have been. But I wouldn't be surprised if a more realistic attitude towards business meme caught on in a few months time.

The thing is, I think a lot of people see starting a business as the _easy_ alternative to the daily grind. For those of you who are out there slogging away and tweaking your Google ads, you already know what it takes. This article probably isn't for you, or it's just an interesting thought exercise. But for all the people I've known through the years who were convinced that their current business idea would allow them to quit their jobs and retire in 10 years, this article is for them.

As for the OP's assertation that I fell on my ass & never picked myself back up, I'm one of those people who believes that you're not a failure until you give up. On the other hand, when someone comes to me and says "Let's start a business" I have to look at them and think "Do they have what it takes, or are they looking for the easy way out?"

I also believe that for every 1 success that gets glorified, there are a 999 failures that nobody ever hears from. Business isn't *just* about the will to keep on working. Tip #7 - most business books have the message "work hard and hope for the best." We all know people who just don't get "it," but who keep trying anyway, no matter what the endeavor. People who play the lotto every day. Wanna be actors & actresses. Day traders. People who pin their dreams on something that's remote & out of their control. They want the reward without the work, or they're willing to put in the work, but lack the finesse. They hear the story of Sylverster Stallone and how he went to every studio as an actor and everyone turned him down, so he wrote his own screenplay and everyone turned that down, and eventually, through sheer persistance, got his movie made, and convinced the studio to let him star in it and direct it against their wishes, and went on to become a major success. They hear that story and think "You see, all it takes is persistance."

If your friend was an actor and was pinning his hopes on becoming a famous actor, what advice would you have for him?

Why do you think that advice is any different for someone who wants to quit their job and start their own business?

PS - the images are copyright 2007 because I'm a moron, and I'm a moron who doesn't care enough to change a mistake I knew I made if it doesn't impact the overall message of the article.

OK, I read MarkTAW's article and it is a fine article. I don't see any flaws with it, it's all true.

If you can't make $500 in your month of actually having a product, then you are doing something wrong.  Correct it and make $500 the next month.  It is not very difficult to make that amount of money.  What is more difficult is making $1000 the 2nd month, $2000 the third, $4000 the fourth...et cetera.  After all, $500 is somewhere between 5 and 10 hours of consulting time depending on your rate. 

Am I advocating you quit your job and go for it - heck no.  You should have 6 months worth of funds saved.  You should continue to work your day job.  Afterall, even if you were free of your day job, you would still be programming on something, even if it isn't your business product.  Program at work, program at home (presumably with a better language!!) and save your money.  When you earn your salary for a year, keep working, take that money and buy something that is going to make you more money the next year.  Build your assets (where assets is defined as something that gives you positive cashflow over a reasonably short period of time) and once you get to the point where your assets provide the same amount of income you make at your day job then retire.

Bill,

Actually, it is not just credit cards I am really against the general idea of financing your business with personal debt.  I think it is a bad idea because when you fail you not only spent 35K, have very little or nothing to show for it, and you now owe 35K with interest.  Won’t that be a pleasant reminder every month?

Some of you seem to think it is acceptable to take this kind of risk with your personal finances because “you have to take risks in order to succeed.”  Although I will stipulate that you have to accept some risk, I believe, the smarter move is to try and reduce risks whenever possible.  Taking out a large personal debt like that is an unacceptable risk.

I don’t know about you but I feel sorry for people who have 35K in personal debt.  It really does not matter how they got there but I am pretty sure that, by and large, it is a miserable way to exist.  Maybe they got there by partying too much, buying too much consumer electronics, or, as in this case, they have a gambling problem.  In any case it is equally sad to me.

And yes, starting a company is a gamble, for everyone, so the smart move is to reduce the amount of your financial future you are putting on the line.

Now, as for this: “The source of personal loans are irrelevant, it's still a personal loan.”

First off, my guess is that someone who can qualify for 35K in an unsecured loan probably doesn’t need it.  The reason why you won’t qualify for that much is because the bank is smarter about money than you are.  They are not going to take a risk with you.

You maintain interest rates for credit cards are better than that for personal loans.  I would say that not only is that historically completely untrue I think it is untrue today.  I think that personal loans have higher interest rates than the “introductory rate” on credit cards.  But last I checked nearly all credit cards have variable interest rates and the terms are very favorable for the credit card company.  That you are enjoying low rates right now really doesn’t help you if they raise them on tomorrow. 

Think about it empirically, why would a bank be willing to extend more credit card debt to you than they would for a personal loan if they get better interest rates on a loan?

I think personal loans are better (but still not good) for a whole host of reasons.  Here is what I can think of right now.

    1. Interest rates are fixed
    2. You have to pay on a schedule and part of that
      payment includes principle
    3. You are forced to work within a budget…you only
      have X amount to spend.  I suspect you didn’t
      charge 35K the first day you were in business but
      instead worked your way up to it.  It ended up
      being 35K but it could just as easily end up being
      40K or 50K or 60K for someone else.  You are not
      working from financial discipline but instead
      spending what you NEED to.
    4. Take 2 and 3 and add them together and you will
      only get a loan that you can afford to meet every
      month.  You may even come to your financial senses
      and say gee, I can’t afford to do it this way.

“Witness the entire field of Business Finance”
I am guessing a someone in business finance would tell you NOT to do this. 

There is no personal risk in what they do.  They are leveraging debt to try to improve a company’s bottom line.  That is an existing company with assets to secure against debt.  If they fail the company goes out of business, they lose their jobs, and the assets get sold to pay off the debt.  But that’s the end.  They are not paying on that debt for the rest of their lives.

35K at 2.5% minimum payment is $875.00 a month.  How long will you be paying that?

WOW! I love you people! I'm now completely addicted to BOS. (not good for a new ISV with limited free time).
You are all such mature well-manored articulate debators. Thank you to everyone, I enjoyed reading all points of view.
Mark, re-reading my original post, I realise that my critisism sounds like a personal attack - not intended. Hopefully the extra traffic I've generated for your site is some compensation!
PS. In a less diplomatic mood, can we move all the "35k on credit card" threads to it's own forum, they are becoming boring - I sum it up as: We're running a business, not a picnic, so use common sense.
PPS. I know my spelling & grammar sucks.

You're right Michael, I screwed up your thread and nobody cares about my soapbox speech.

Sorry about that.

Mark Flory,
Sorry, that's not what I meant. I & nobody else here "owns" a thread. I appreciate yours & everyones time spent writing here, and enjoy reading 99% of it.
What I was trying to say was that I'm struggling to keep up with the volume of posts here lately and I'm not reading or
 learning anything more on the "35k credit card" angle because you are all starting to repeat yourselves.
I know I & all the other lurkers owe all you regulars a lot for the good ideas we get here. Please keep it up. This is all a relatively minor annoyance. (There's my diplomatic hat back on!)
Good luck with your projects.

I know that you don't own this thread but I was feeling bad about it anyway. Truth be told I have more important things to do with my team then preach the gospel of good credit ;).

As far as quitting the day job is concerned ... for me that's the only way I'll ever get a software business off the ground.  I can't get myself to do any significant coding after already spending 40-50 hours/week doing it for The Man, and if I did, I would risk them claiming ownership of my work.

However, unlike many others who might think of quitting their day job, I am single with no kids, my car is fully paid off, and I have enough saved to pay my expenses for at least 2 years without earning a dime.  Each additional month I spend working for The Man just buys a little extra time that I can go without income.

I've been working full time for almost 8 years. I've been doing a little work on the side for most of that that time, too- mostly unix administration, network consulting, etc. About 4 years ago, I started a web development company with a few other guys. It's highly profitable. I make close to 6 figures at my day job as an engineer, and another 30K to 40K a year from the side jobs.

Not bad, considering I'm single.  I have about 5 years of living expenses saved up. There aren't many people my age making this kind of coin.

The real problem is you can only go so far with these service / consulting businesses. Without an actual product, the only way to make money is to trade time for ot. Whether it's working for myself, or sitting at an office doing work for someone else, it's the same. Sure, you can hire employees and expand the service/consulting business.. but that is not what I really want.

I have concluded I need a product of some kind.
I have several product ideas in fairly niche areas with some limited competition.

The problem is finding the time to work on them. I constantly finding more work on the side, some of it by accident, so I don't get a lot of time to work on my own ideas.

I also procrastinate constantly, and waste lots of time browsing the internet. If I managed my time properly I could probably double my income AND keep my regular job.

I'm thinking of going "part time" at my regular job to try and free up some time to work on my own ideas... has anyone ever tried approach?