Being a software service company is expensive

I’m going to start writing about software companies. I’m still pondering about whether it should be in Spanish or English because I’d like to talk about the peruvian ecosystem. Last year I’ve published a paper on the matter for the JPC 2011. So, let’s start. I welcome any comments and will consider feedback for improving this.

First of all, we need to have in mind that in the computer software ecosystem we have two kinds of companies: a product company (say Facebook, Apple, Google, VMware, Microsoft, Zynga, Rovio, 37signals, Amazon) and a service company (say TATA Software, Accenture, IBM services, Infosys, Globant, GMD, etc). In the software ecosystem almost no one considers  service companies as startups.

Starting up

Starting a company depends on the nature of the company of course. Let’s say we have two people who just graduated or dropped-out from school and had this thing inside that is calling everyday in their heads people have named entrepreneurship. Bob starts a service company and Alice starts a product company. Let’s do a quick comparison on what is their mind-state at this point.

What Bob Alice
Idea? Selling services I could do myself. I’m flexible. Big stuff!
Skills Since it would be just me for few months, more of inter-personal ones than mastering the technology itself. At the end I could hire skilled people or work with contractors. It would be just me for quite some time, Yes knowledge is key!
Investment Definitively! Hardware, software, marketing material, office place, desks, omg help! I could work from home for a while, my savings tells me so. My product is what matters.
Advertising? Sure, starting with my personal network. Oh I have Facebook, great! Not until I have something to show. Doesn’t make sense to put effort so early. Resources are scarce!
Market Well, actually there are many business that use IT and I’d like to help them to do it right. I’ll help everyone. I’m solving the x problem for the y industry. You know, it’s a longstanding issue and I’m stunned to realize there’s no solution for such thing! I’ll target 10% of the y industry for the first two years.

Getting at this point is great for both. For Bob it’s a matter of heavily invest in networking and networking. The service company will be never known if you don’t advertise it yourself. It’s crucial for it’s success to have the right contacts and executive sponsors inside a customer. Most likely you’ll be getting business from friends, family and some fools. If you did things in a professional way, which is a lot for the peruvian market standards, for instance, you’ll be doing great and will begin to be referred. This is a nice time.
For the product company the history might be different. Your focus is and will be getting your product to be used by a customer, thus validating that someone is able to pay for it. Meaning that it adds value at least for someone. This is very important and key for scaling.

Strength Service company Product Company
Networking – Social skills Definitively! for sales, lead generation and referrals. You’ll be interested in meetings, industry events, etc. I mean you need them! You also need your personal network. At some level, but with different focus: attracting people that can add-up to your idea.
Technical/domain expertise Yes, but most important is the service itself. This is: the customer is happy working with you. This is key. Yes, definitively! No other way to compete on global markets.
Execution Yes, keeping track of projects, costs, time vs. effort. You’ll be very interested in methodologies and process management. Things like ITIL, SCRUM, etc will be very familiar to you. You really need to invest on this. Yes, definitively! No execution, no success! You need to get at the customer-ready point as soon as you can to validate your idea.
Capital Yes, for assuring business scalability. You need to save some bucks for later. Not really, if your idea is worth their time, any investor will be willing to put some money on. You can ride another race using someone else money to get from the demo/prototype to the customer-release point. That is hiring skilled people.
Technology Yes. You can’t make business there is not the technology on the first place. It’s important for you to partner, train your team, etc. To build your product on top, yes! Depending of your product, most likely you are creating technology rather than using it.

Most founders never anticipate to this moment and it’s never in their minds from the beginning. It just knocks your door at some point. Here is they crucial moment for a business to known if it will be a real business or not. By real business I mean at least: generating jobs, commit to sales targets and returning profits to the owners/investors. No real-world business exists just to be able to cover founder’s living expenses and pay salaries. This only happens at the 3-year period for most self-subsistence (you create your own job, but as long you get a job offer you drop this) companies, specially in Peru.

The service company here, In my opinion, has more trouble for scaling than the product’s. The fact is that services depend on people doing them. The more people you are able to recruit in order to deliver services, the more customers you will be able to serve and by consequence the more sales you’ll be making. Your constraints are time, people and money!  If you aren’t backed-up with seven figures in your bank account money is crucial for you to be able to hire more people, market the company, acquire more customers, foster the relation with existing ones, and so. You will not be able to grow on sales and profit if you can’t scale. You’ll be limited to do a limited number of projects. The equation’s variables remain time and resources and it’s definitively linear, still in the atom’s world.

The product company has a different story. In the case things go well, the product markets itself, your existing customers are recommending it to their colleagues in their industry. Do you recall the last time a colleague asked you about recommendation for something related to their work? that’s how it works. You can still be yourself, since the focus is on developing the product. You can make alliances with services companies to sell your product for a share. You don’t have to worry about delivery, because you can put your product on the vast number of stores that are now available. Don’t have to worry about billing, payment platforms, et al. Here the equation variables are skilled resources and money. The equation itself is most likely to be exponential at the end, and it definitively has potential to happen in the bits world and Alice is probably happier than Bob.