When David Greiner and Ben Richardson decided to build their first software product, they didn’t even consider going to investors for money. In fact they didn’t even consider asking friends or family for the start-up capital they needed. They used the revenues from their consulting business to fund their efforts. Building a product while running a small consulting business wasn’t an easy choice, but it allowed them to bootstrap their new business and successfully cover development costs.
Other businesses that choose to make the transition from consultancies to web product companies are facing similar dilemmas and surprisingly consistent success. In the early 2000’s Chicago based, 37signals set the tone for this strategy by rapidly transforming their web design consultancy into a web product business. Ironically, when they initially started work on their flagship product Basecamp, it was considered purely as an internal project management tool and did not emerge as a fully-fledged public product until they realized other similar businesses could use this tool.
This strategy has the obvious advantage of not requiring outside funding, but it’s not something every business can pull off successfully. So what are the challenges and advantages of this strategy?
The compromise between revenue-producing efforts and investing time and energy in a product appears to be the biggest challenge. “For us the biggest challenge was the decision to start saying no to consulting work so we could get started. Sounds easy now, but when you’re relying on cash flow and you’ve got no guarantees that anyone’s even going to be interested in what you’re building, it can be a scary move”, says Greiner, co-founder of Campaign Monitor when he describes their decision to morph from their consulting business to a product company.
David remembered, “Once the first few orders starting coming through it got progressively easier to dedicate more time to Campaign Monitor.” Greiner and Richardson made sure they didn’t burn any bridges and kept their bigger consulting clients happy throughout development. This seems to have paid off. Right now they are going through a restructure to ensure that both the software and consulting sides of the company can prosper separately. “It’s definitely a more intense and time-consuming way to approach things, but if you can find the balance then it’s certainly worth it”, says Greiner.
“When I first started selling my first application, I made the mistake of trying to reach too many people” says Bob Walsh owner of microISV and author of an independent software developer blog. “Now, I’m finding ways to make our product relevant to very specific, very narrow, little tiny markets. It’s too soon to tell what results I’ll have, but as the saying goes, tenth of a penny here, a tenth of a penny there, and soon you’re talking real money!”
Targeting a specific niche is a much more realistic approach than attempting to reach an entire market. By focusing on a niche, it is easier to identify the early adopters rather than trying to engage the market for a more broadly targeted product. The strategy of tightening your efforts on the early adopter community did not escape the attention of Campaign Monitor’s founders. “This was one of the biggest motivators in deciding to focus on the web design community. Being a web development company, we were already in the industry. We knew where designers hung out, who influenced the market and most importantly, what features this market needed. Already having this domain knowledge has proven invaluable.”
Having a clear marketing plan is a critical component of success. A common trap for software engineers and designers appears to be the “if we build it they will come” philosophy. Enthralled by the coolness of their own products, many designers and developers convince themselves that the product will sell itself. This is rarely the case.
In his recent blog entry, ‘don’t give up you day job’ David St. Lawrence makes the following observation of aspiring entrepreneurs and artists that give up their jobs to follow their hearts. “Programmers run into the same kind of trap. They start out writing games or cool applications at night and they find out that no one wants to pay for them. They haven’t done their marketing or they would have found that people readily pay only for dull things like maintaining legacy software or utilities that run on Windows machines.” St Lawrence goes on to describe how underestimating the workload of launching and sustaining a software product, “Innovative software applications take an incredible amount of creative effort and require endless amounts of support, which startups rarely plan for and almost never deliver.”
Staying Very Close To The Customer
When 37Signals launched Basecamp it was on the back of months of teasing and community building. Their blog, which currently receives over 20,000 unique visitors a day, became the hub around which they build their pre-launch buzz. In a brilliant maneuver they deliberately remained transparent allowing their future customers to see their efforts, mistakes, internal concerns and promising features. The community that developed around the blog became a loyal foundation for a successful launch. So loyal were these innovators and early adopters that even when the company failed to deliver certain features on time they were still able to ensure continued growth by accepting responsibility and asking for forgiveness. Something their followers were wiling to give because of the established bond that had already been created.
“We also try to be as transparent as possible to our customers. We have a blog that’s updated daily with recent updates, tips and answers to common questions. We post when something goes right and are just as quick to post when something goes wrong. Also, we’re a small team, so the guys who are running the blog and answering customer support are the same guys that developed the software. It’s much easier to give our customers what they want when our ears are that close to the ground”, says Greiner of their own grassroots strategy.
In any niche or market there is a pattern of incredible activity, especially online. Credibility can be established passively and organically when enthusiastic and happy customers post about their experiences. Greiner observes that even the smallest comment can spread around the web like wildfire, “A good blog post by a respected designer can make traffic to our site spike instantly. Also, whenever someone has something nice to say, we’ll blog about it.”
Creating communities is not as simple as signing up for a blog and waiting for the traffic to arrive. It’s hard work. Actually, it’s really hard work. But the ubiquity of the web allows for a more leveraged approach. In most situations is better to leverage existing communities as much as you can. No matter how small your niche, there’s a message board, mailing list or blogging community already thriving and waiting for your contribution. If you have something decent and relevant to say, people will listen. Customers are smart and should be treated that way. They can spot a fake from a mile off, which is why being transparent is crucial.
Transparency is a scary concept for traditional business, but online it’s the only way to establish trust. In every successful small web business that we’ve encountered this has been a common theme. Every time these emerging companies fixed a bug or when their web service experienced down time, they would post it straight to their website or blog for the world to see. It’s unlikely that more than 1% of their customers would have ever have noticed the problem, but from the volume of
emails thanking these companies for their openness and honesty, it’s clearly a strategy worth emulating. If you’re offering a solid product and genuinely want to make your customers’ lives easier, there are few disadvantages to being so open.
Staying Competitive and Different
Evan Williams, the current CEO of Odeo, Inc., points out that competition is a good thing but only if it’s approached intelligently and with an attitude of adventure. “Ideas are in the air. There are lots of people thinking about—and probably working on—the same thing you are. And one of them is Google. Deal with it. How? First of all, realize that no sufficiently interesting space will be limited to one player. In a sense, competition actually is good, especially to legitimize new markets. Second, the specialist will almost always kick the generalist’s ass. Third, consider doing something that’s not so cutting edge. Many highly successful companies have thrived by taking on areas that everyone thought were done and redoing them right.”
In the case of Campaign Monitor, David and Ben faced stiff competition. Their chosen market is not only big but it’s also very competitive. These new breed of entrepreneurs are looking for previously unexposed niches in each market. They aim to solve small problems with very specific solutions. The web designer market has been largely untapped by the bigger providers because it is such a niche market.
Reflecting Williams observations, Greiner agrees, “To the average consumer, we don’t stand out from the competition, but from our target market’s perspective, we don’t even have decent competition. Every feature we add to Campaign Monitor is requested by our customers. We’ve even taken features out because designers just don’t need them.”
Deciding to build a product that does everything a certain market niche needs and nothing it doesn’t is a counterintuitive approach. The software market is full of solutions that profess to address a nuts-to-soup range of problems and requirements. This one size fits all approach can actually backfire in many cases because of the complexity of the sale and the intensive hand holding required from sales through to hand off.
The alternative is to solve small problems with simple solutions – one at a time. It’s cheaper and more efficient. The result is a focused, extremely easy to use tool. By combining that with customer driven updates and very personal service, companies like 37Signals, Jim Coudal’s Jewelboxing and Campaign Monitor have been rewarded with a very loyal group of customers.
Odeo CEO, Williams, sums it up with this gem, “Focus on the smallest possible problem you could solve that would potentially be useful. Most companies start out trying to do too many things, which makes life difficult and turns you into a me-too. Focusing on a small niche has so many advantages: With much less work, you can be the best at what you do.”
Embrace The “Good Enough” Product
Scope creep is the biggest enemy of software development. This is the process by which new feature requests are added to the product prolonging the delivery of the product. It’s an emotional and technical problem that entrepreneurs are faced with daily. Getting comfortable with turning down feature requests is hard and is a learned behavior. Bob Allard, CEO of Extension Engine describes this as “the art of the Positive No”. Allard who manages 50 developers working on multiple small projects warns of too many positive responses from software partners, “Of course the answer has to be “no”! How can we know what you mean, when we haven’t started to work yet, haven’t asked you 100 questions, haven’t made our first mistakes. If you hear “yes”, “no problem”, “I get it”, from your development partner when you should be hearing “no”, you should run away.”
Smaller companies are at greater risk of scope creep because they have more to prove to an audience of yet unimpressed customers. It’s easy to say yes to a feature request or a tweak to the design but these little distractions can be a huge distraction.
In a recent interview in Forbes Prith Banerjee reveled how he let his passion for science get in the way of putting sales on the books. Banerjee, Former chairman of Northwestern University’s computer engineering department and current dean of the engineering school at the University of Illinios at Chicago, Banerjee has launched two companies within the Illinois Technology Enterprise Corporation, a business incubator at Northwestern.
The problem was, rather than get an iteration of the software up and running, Banerjee and his team of Ph.D. students kept adding more bells and whistles every time a potential customer so much as mused about them. “We love solving problems, and these were cool problems to solve,” he says. “I couldn’t say no.” All that extra tweaking delayed the project by six months and upped the development costs by 50%.
Shipping an incomplete product is okay. Eric Sink, software developer at SourceGear, puts it this way, “The six billion people of the world can be divided into two groups: People who know why every good software company ships products with known bugs and people who don’t. Those of us in group one tend to forget what life was like before our youthful optimism was spoiled by reality. Sometimes we encounter a person in group two, perhaps a new hire on the team or even a customer. They are shocked that any software company would ever ship a product before every last bug is fixed. Every time Microsoft releases a new version of Windows, major news services carry a story about the fact that the open bug count is a five digit number. People in group two find that sort of thing interesting.”
Size Does Matter
Big companies have big problems. In the ultra-fast web economy there is no place for lumbering fools. Williams reminds us, “It’s standard web startup wisdom by now that with the substantially lower costs to starting something on the web, the difficulty of IPOs, and the willingness of the big guys to shell out for small teams doing innovative stuff, the most likely end game if you’re successful is acquisition. Acquisitions are much easier if they’re small. And small acquisitions are possible if valuations are kept low from the get go. And keeping valuations low is possible because it doesn’t cost much to start something anymore.”
The Campaign Monitor team consists of the two founders and two others. To stay on top of cash flow, the founders developed their email management tool while the rest of the team focused on the consulting businesses. There were many occasions where the two groups would sway either side, but this was the general trend and continues to stay that way. Greiner describes how their structure overlapped with their philosophy for staying small, “This meant that the two of us were responsible for the initial planning, strategy and development. We’re also taking care of all marketing and ongoing support (which are the same in my opinion). Sounds like a lot, but we are dedicated to keeping a good work/life balance and never work weekends (besides support) unless we must.”
Smoothing Out The Bumpy Road
If you’re contemplating a future as an entrepreneur you should be as scared as you are excited. It’s not a choice for people seeking a life without risk or challenges. “Working for yourself is not an all-or-nothing proposition. If you have been able to accumulate enough money to live on for six months and additional funds to launch your new business, then you might very well abandon your day job and succeed as a self-employed business owner. Otherwise, you won’t. Far too many of us have started a business with inadequate funds and hoped to make a go of our dream by working incredible hours, only to find that the law of gravity has not been repealed and that credit cards will only carry us so far” warns David St Lawrence.
It’s important to point out that adopting these counterintuitive and non-traditional ideas does not translate into ignoring the basic principles of business. Small or large there are some things that are consistent to all companies. Like setting targets, knowing what customer problem you are solving before you start and hiring smart happy people. Being small allows companies to be agile so they can adapt to the ever changing world around them. Evan Williams notes that agility is a strategy in itself, “Many dot-com bubble companies that died could have eventually been successful had they been able to adjust and change their plans instead of running as fast as they could until they burned out, based on their initial assumptions.”
Having specific goals is part of the recipe for success. “We’ve been very target oriented from day one. Having monthly and quarterly growth targets are so important” says Greiner. “I think the biggest lesson we learnt throughout the process was that it’s always worth a shot. If you have the safety net of a good client base and have an idea you think might make a difference, what have you got to lose?”