* The Business of Software

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Andy Brice
Successful Software

Doug Nebeker ("Doug")

Jonathan Matthews
Creator of DeepTrawl, CloudTrawl, and LeapDoc

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BreezeTree Software

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host, Startup Success Podcast author of The Web Startup Success Guide and Micro-ISV: From Vision To Reality

Patrick McKenzie
Bingo Card Creator

Failure of a MicroISV

So this guy in town runs a ISV, doing website design and database work for a really big bank here in Canada through some connections he had. Being not really technical himself, he hired some people.

The business is successful and had steady amount of work. The owner decided to trim back the number of employees to increase profit. From 5 employees, he went down to 2 programmers and 1 manager. The amount of work stayed about same. The owner does the power lunch, manager manages, programmers program and so on.

After a couple of years, the manager is pretty much doing all the business side of the work so he asked for profit sharing.  The owner refused. The manager left.

Now the 2 programmers are left doing all the work. They asked for a raise considering they haven't gotten one in years and were taking on more and more work. The owner begrudgine gave some small raises and complained about it whenever he has a chance to make the programmers feel guilty for "taking money out of his pocket". The programmers are pretty ticked off.

One day the programmers find some financial documents on the server they work on. It showed the owner had been raking in the dough (close to a million last year)while being tightfisted and complaining about cashflow. The programmers quit in anger and don't look back. The owner is left with an empty shell of a company.

True story

Success is hard, failure can be sudden. Do your best to protect what you build.
Orick of Toronto Send private email
Tuesday, July 18, 2006
 
 
It sounds like the owner didn't really grasp the concept of seperating business finances from personal finances, and this is extremely common in small businesses throughout the United States, not just Toronto, microISVs or software development.

For those of you that are trying to avoid going down the same path, a good rule of thumb is that you want to get (in profit) about a 20% return on your investment. If you have excessively more profit than that, you should consider reinvesting or starting yet another company. If you have significantly less profit than that, you need to seriously consider whether investing in mutual funds and the like is a better vehicle for your money.

Please don't take this suggestion as financial advise per se, just some rough guideline as to when you need to start asking questions. For example, in this scenario, if the owner was paying about $250,000 in business expenses (salaries and the like) and taking home the other $750,000 as pure profit, he's not only wasting a lot of opportunities to grow the business, he's setting himself up for exactly this problem.
TheDavid
Tuesday, July 18, 2006
 
 
If that is a fair and objective assessment, then its hard to feel too sorry for the owner.
Andy Brice Send private email
Tuesday, July 18, 2006
 
 
Wow.  The perception I get is that the worst cases of this sort of manipulation and greed are all in the financial market. 

Now the two programmers and the former manager are sitting on a golden opportunity to rake in the millions from their former customer.  They have the know-how, so the next question is do they start a business enticing new customers, or as a maintenance firm for their old one?  The previous owner is down, but give him time and he may get his business back up and running (with a new manager and two new programmers, no doubt).  Now would be the time to act.

I hope it all works out well for the programmers.
Drew
Tuesday, July 18, 2006
 
 
What a fool.  If the margins were really that good, he should have given in a few % raise when they asked and then waited a month or two and given them another few %.

They would have been ecstatic and he'd still have a business.
KC Send private email
Tuesday, July 18, 2006
 
 
How financially sound can a company be that has exactly one customer?
FullName
Tuesday, July 18, 2006
 
 
They should have kept looking and found something the IRS would have been equally enraged about.
namehere Send private email
Tuesday, July 18, 2006
 
 
There you go:

Our people who don't know what's going on will talk to your people who don't know what's going on:

We'll pay those guys a lot, to hell with the smart people.

A common scenario.

I guess that's what a lot of people here detest and want to destroy.
Mike Gale Send private email
Tuesday, July 18, 2006
 
 
Acording to my understanding "doing website design and database work for a really big bank" is not the activities of an ISV. 

I would describe it as a "small IT consultancy".

My understanding is that an ISV by definition sells software, as in product(s), not custom work for individual clients.

I'd be interested to know whether people agree on this.

I don't think it's a small point, the product Vs project division seems to me to be the biggest division in software.

90% of software organisations do projects, which are low margin and income is linked to man-hours. The small number of successful product organisations make large profits. 

Yet the project companies have a real problem breaking into products, not realising the required order of magnitude increase in quality required.
samh Send private email
Tuesday, July 18, 2006
 
 
This is an excellent story.  I want to read more stories like this one.  Here's why:  you never hear about the uISV (setting aside whether this is a consultancy or uISV for amoment) that failed and why.  I would rather read 1,000 stories of failure than have my uISV be one myself.  Let's learn from our mistakes people.
Joshua Volz Send private email
Tuesday, July 18, 2006
 
 
I think it's the other way around.

Fogbugz is a perfect example of a company that started out as a project and successfully turned it into a product. As Joel says, the transition occurs when you realize that your project can support one customer or five million customers equally easily.

It's large companies like Oracle, Microsoft, SAP, Novell, IBM, etc etc that have a hard time switching from a product (such as tools) to actually doing a project for you and just you alone. There are a variety of reasons but the biggest is that the economics just don't scale down.

Regardless of the definition of an ISV (which I agree has something to do with software), the point of this whole thread is that if you chase profits at the unfair expense of your employees, you will loose them and you will loose your business. That is more or less a universal truth and has nothing to do with whether you make software or widgets.
TheDavid
Tuesday, July 18, 2006
 
 
Trust JOSer's to argue about what ISV means in a thread about success and failure of business in general. :)

I personal think ISV stands for independent software vendor so if you sell software, whether as a product or a project/service, you are ISV.

Anyways, good point on 20% return, thedavid. I can easily see a lot of people falling into the trap of trying to reap as much profit as possible right away. I can't blame the owner for that since it must have made sense at the time.

But there are so many lessons to be learnt from this. Focusing the whole business on one customer, leaving others to do the vital work, neglecting employees, not growing the business, not taking care of financial information.....

For the record, the manger and the programmers got together and is going after the owner's business. They may have the technical skills but the client was a connectoin through the owner so it may not work out. The owner hired 3 programmers who have to pick up the piece and try to catch up. It's not going to be easy since they have no domain knowledge. I guess the two sides will be battling it out. It will be interesting next few months. I can post an update in future if you guys care.
orick of Toronto Send private email
Tuesday, July 18, 2006
 
 
this type of shitz is everywhere with small biz owner. big corp. doesn't seem to give a damn maybe big corp. understand that people drive profit without labors, it won't matter how many works/deals you got 'cause no one is going to run it.

IMO, small biz owners are usually cheapo.
...
Tuesday, July 18, 2006
 
 
So what's the owner's side of the story?
farmboy Send private email
Tuesday, July 18, 2006
 
 
If I had to guess, I would say the owner got into this business as a favor to the client. Basically, the client said "Hey, I've got a problem, can you fix it?" and the owner said, "Give me some time, some moolah and yes I can."

Once the owner had a solution in hand, I don't think he was interested in doing anything further with that solution. A better analogy. I hire the kid next door to cut my lawn. He doesn't have a lawnmower. So I basically front him a little money so he can go out and buy a cheapo lawnmower. He does just that, cuts my lawn, does a great job of it and is happy with the money, but has no real interest in soliciting additional business from my neighbors.  Too many cute girls at the pool. (And quite frankly, if the owner is taking home $750k in profit, I don't blame him.)

If there was anyone we could pin the blame on, it would be the original customer. It's hard to believe the bank would pay $1 million for what appeared to be $250k quality work.  I mean, if I was that big of a bank and the owner told me he needed 20 employees people to create product X in 12 months, I'd expect something pretty damn solid and slick, not something that looked like it was made by two programmers working at minimum wage.
TheDavid
Wednesday, July 19, 2006
 
 
I'm wondering how many people at MSFT or GOOG decide to leave when they realize how much money their CEO get. Oh and they do not even have to search the internal network for *private documentation*.

Yes, the boss in the story was maybe an a..hole, but the 2 programmers were the same.
CS'
Wednesday, July 19, 2006
 
 
I left to start my own ISV just because of that.

I was doing a lot of work, while my boss was just relaxing all day long, had almost no stress, and raked in a hell of a lot of cash, had a very nice car and house, he kept and paid a female secretary arround just for snogging, etc. :)

Now I have my own company, rake in the big cash, but I'm very stressed and work twice as hard as I worked at the previous company. No time for snogging. :)

Why this difference?

I think that he was the laid-back type while I am more of a "cut-throat competition" type.

He also had lots of connections which brought him business without having to make a big effort.

I hope that some day I will be as relaxed as him and that business will grow effortlessly, but that's just a dream. :)
Romanian ISV guy
Wednesday, July 19, 2006
 
 
>Now I have my own company, rake in the big cash, but I'm
>very stressed and work twice as hard as I worked at the
>previous company. No time for snogging. :)

>Why this difference?

It's a warrior thing. A Norman knight would rather be lord of a stockade in a muddy Welsh valley, surrounded by angry natives, than live in comfort on his brother's French estates.

There are different flavours of stress. It's better to be stretched and in control, than to feel you're thowing your pearls into the outer dark, and hearing only the grunt of disdainful swine.
Documentation Doctor Send private email
Wednesday, July 19, 2006
 
 
I don't know the owner's side of the story since I only know the programmers. Thedavid's guess sounds pretty good; a great opportunity fell on the owner's lap and he took advantage of it. Once he raked in some money, he just enjoyed it and didn't bother work "on" the business.

I just posted about what happened musing about how easy it is to fail. I mean, like other here, I have been thinking hard and working on achieving success. This remind me that achieving success isn't the only goal, you still have to work hard to maintain it.
Orick of Toronto Send private email
Wednesday, July 19, 2006
 
 
One customer, two programmers and profits close to a million Canadian dollars last year, there's no way, BS story for sure!
Mellowman Send private email
Wednesday, July 19, 2006
 
 
> It's hard to believe the bank would pay $1 million for what appeared to be $250k quality work.

You probably haven't seen the billing rate for the big consulting firms.  I worked at a large consulting firm for two years and the average rate billed to Fortune 500 clients was $250/hr.  The clients would pay roughly $1 million for about $200,000 of work.
newb uISV Send private email
Wednesday, July 19, 2006
 
 
Pure speculation on the other side of the story - spurred by this comment:

"raking in the dough (close to a million last year)while being tightfisted and complaining about cashflow."

How good are those programmers at reading financial statements, and who was the intended audience of the statements?

Small businesses are NOTORIOUS for having poor cash flow management.  So you can be making money, but simultaneously be on credit hold with all of your suppliers and be on tenterhooks as to whether or not you are going to make the payroll.

Small businesses are also really good at making their financial statements look good for the banks (so that they can get better credit lines, so that they can improve the cash flow situation).

Not that the owner might just be a greedy dork; but it is also possible that said owner is not just sitting on all that cash, particularly if cash flow was specifically cited as a reason for tight pay.  Having watched a number of companies work through cash flow issues - I can say that it is much more common than the average employee might think, it is much more stressful than you can imagine until you have been through it and there is no business justification to making that situation worse if you can help it.
A mean boss
Wednesday, July 19, 2006
 
 
Let's assume for the moment that your suppositions are correct, i.e. the owner was "making millions" while the workers were paid average wage.

Now, there were a bunch of posts sniffing on how "wrong" this was, how "greedy" the owner was.

I thought to myself, how wrong these people posting here are about the situation.  For one thing, the "owner" owns the company, it is his money to do as he wishes.  He is under no obligation to share the profits or expand the business.  It sounds like he is making lots of jack, which is why any sane individual gets into business in the first place.  You can always donate it to charity later if you must.

If I was that owner, and I wish I was, I'd hire two more programmers who took their employment contract a little more seriously, and who didn't intentionally rifle through my financial records, and I would continue making piles of cash.
shareware programmer
Wednesday, July 19, 2006
 
 
Wait a sec.  3 people (manager +2 employees) were consulting and bringing in over $1.1 M per year?  (The million profit + a minimum of $100k overhead for the 3 employees).

The real skill here was the owner's ability to hoodwink the bank into believing that was a competitive price for the amount of work. (The moral of the story still holds true, of course).
Mr. Analogy {Shrinkwrap µISV since 1995} Send private email
Wednesday, July 19, 2006
 
 
Again, I don't know the owner's side of the story. The programmers told me there was close to a million in revenue last year. I don't know how close.

And yes, I agree that it's the owner's profit to take and do as he wishes. I am only musing about how easy it is to fail when you are not working hard at it; ie taking care of the employees, expand your customer base and so on.

I was just thinking running a ISV is like riding a bike up the hill - takes a lot of effort to get started, once you get some momentum it's not too bd, but if you stop peddling, you will soon stop and fall down the hill.
Orick of Toronto Send private email
Wednesday, July 19, 2006
 
 
The numbers sound reasonable to me.

Funny that some people here want to try to make the programmers out to be greedy. The issue sounds to me like they are being saddled up with more work than they can handle, working overtime for free probably if they went from 5 programmers and a manager to 2 and no manager with no change in the amount of work. And 'no raises' at all in several years? Have you seen the price of gas lately? And some people think the developers should just accept this without looking for something better?

Leaving and competing with the old company sounds like the right thing to do. That's the opportunity with the best payoff.
Art Wilkins
Wednesday, July 19, 2006
 
 
"...particularly if cash flow was specifically cited as a reason for tight pay."

I want to emphasize this point. This is actually very common in the hospitality industry (restaurants, hotels, nightclubs and so forth) where there is an ebb and flow to revenues.

Start ups that have not built up a steady cliente will suffer from the same problem - and the generally recommened advice is to pay the minimum on bills and attempt to keep a cash reserve for emergencies. It's very possible that the programmers reviewed financial statements that "described" this plan as opposed to a true profit gouging philosophy.

If that's the case, I feel the owner still did a diservice to his employees; putting aside the argument that the owner isn't legally required to do so, he still has an obligation to give his employees a reasonable picture of the company's financial health and strategic goals (or at least offer a positive spin).

For example, if I was one of those two programmers and he constantly told me that he couldn't afford to give me a raise, I would start looking for a new job regardless of whether I'd seen those financial papers anyway. He really should have done one of two things:

a) paid me to shut up by offering me a raise in line with industry expectations, or

b) gave me cause to believe that the situation will improve, i.e., he's waiting on a new contact, he's hoping to get bought out, whatever and if I stuck with him for the next X months, there's a good chance I'll be rewarded for it.

The moral is still "if you have employees, remember their finances are at stake too and if you don't at least acknowledge that in a positive light, they'll go elsewhere."
TheDavid
Wednesday, July 19, 2006
 
 
>> It showed the owner had been raking in the dough (close to a million last year)while being tightfisted and complaining about cashflow.

>> The programmers told me there was close to a million in revenue last year.

Whoa, hold on.  A million in revenue does not equal a million in profit.  Taxes and even low salaries would take a big chunk of that.  And it's quite possible that he had to borrow heavily to afford the original five employees and now has to payoff the loans.
SomeBody Send private email
Wednesday, July 19, 2006
 
 
This is a common scenario. One way for a small consulting business to start is for a couple of programmers to gradually expand their work. These firms have solid foundations but tight margins.

The other is for a sales or management guy to land a lucrative contract, and then be placed in the position of filling that contract. These types of companies treat the programmers exactly as described here - low cost workers who have to be kept in their place by lying or other techniques.
.
Thursday, July 20, 2006
 
 

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