From the Garage to the NYSE in 10 Years Flat – Scaling a Software Company
In my recent post in the series “From the Garage to the NYSE in 10 Years Flat“, I discussed some core issues associated with getting a software-driven business started. In this post I will discuss issues related to scaling.
We normally call companies getting started “Startups.”
When are you transforming from a Startup to the next stage and what is the next stage?
If we use the definitions made by Dr. Ichak Adizes, there are two stages of a Startup:
1. Courtship (looking for a workable business model)
2. Infancy (chasing cash and profit to stay alive, refine the business model and crossing the chasm)
We are finally out of the Startup stage when we reach Go-Go (tornado and scaling).
Most companies don’t make it out of Infancy. Securing cash flow and making a reasonable profit continues to be a daily struggle year after year.
You will find many companies that are in Infancy for over 20 years.
What makes the transition so difficult?
As I mentioned in my previous post most companies are started to feed the owner and her family. These companies are mostly providing services to the local community.
I will claim that the majority of software companies are started with higher ambitions than just feeding the owner and her family. I will also claim that the market dynamics makes it extremely difficult to survive as a local software company. The nature of the software industry cries for scaling and economy of scale.
Grow or die!
Scaling – why is it so difficult?
Based on my experience there are four main reasons why companies who are actually profitable and enjoying positive cash flow cannot scale their businesses:
1: A product, but not a value proposition
Many software companies have products but not value propositions. Software is invisible until you actually use it. Products are difficult to sell when you don’t know what value they provide to whom. With no clear value proposition, the sales effort remains a “black box” or “wizardry” that can be only be performed by the founders or by people with very special skills.
Another version of this issue is the “nice to have” character of a product. It is a nice product offering a nice value, but it is not really sticky. Customers can easily live without it. Not all products have value propositions simply because they actually offer very little genuine value.
Moore’s “Crossing the Chasm” challenge also belongs in this category. Moore is discussing disruptive technology, but we can also include products positioned as new categories. Many software companies choose to position themselves outside established categories. Doing so creates a double sales effort. First you must exercise missionary work for your cause, than you can sell your products to those you have converted. That’s a tough job.
Some help with creating value propositions are provided by Alexander Osterwalder, but the NABC approach defined by SRI still holds.
2: A product, but no value chain
A value chain is a “specification” of all the steps it takes to identify, win, make and keep happy customers. Having the value chain under control makes it possible to hire marketing, sales and pre-sales people to scale the business. Sales is no longer a “black box,” but a process which can be described, taught, learned, repeated, replicated and thus scaled.
Marketing and sales will never be deterministic processes, but less can also do it. When you can foresee at least 75% of the issues, questions and needs for information that potential customers will have then you are well on the way. By moving yourself to the other side of the table and applying a good portion of empathy, you can develop sales tools that match most of the issues raised from the customers’ purchase process for your solution. By standardizing the sales processes, you can improve your lead and prospect qualification criteria and focus your resources on potential customers matching your ideal customer profiles (defined in your value proposition).
3: A business, but not a business model
There are also versions with multiple business models in parallel or new business models every three months or various business models for various markets.
It takes very big companies to manage multiple business models. Companies moving from startup to Go-Go should have one and only one business model.
Osterwalder’s business model definition is a great help to all companies and especially to technology and software driven companies with “invisible” products and value propositions.
4: The size of your local market
Let me give you an example.
You have been operating for 15 years and you have achieved a 75% share of your local market. You have 12 customers, a revenue of €2M, a profit rate of 15% and employ 15 people. The issue is that your local market (i.e. Denmark) only represents 0,36% of the global market for your solution. Although your business model is healthy it doesn’t generate enough profit and cash to fund the investment in entering a foreign market.
This is a genuine challenge for most [slider title=”high-touch”] high-touch means requirements for people on location for sales and implementation purposes [/slider] business models started in small markets such as Finland, Denmark, Israel, Sweden, Norway, South Africa, Australia, New Zealand etc. etc. Software companies in these markets are well aware of this challenge and find ways to internationalize their business very early. They compensate for the size of their domestic market by learning to master global markets.
The paradox is that the size of the local market is a much bigger challenge for the medium sized markets such as Germany, France, Italy, Spain, Japan, and the UK. These markets are big enough to allow some scaling “at home” and the companies are not exposed to international scaling until it is too late and too expensive. Too late means that their global competitors have closed the window of opportunity and made the endeavor even more difficult and risky. Too expensive means that they have to apply substantial changes to their product and their organizational capabilities before they can enter a foreign market.
See this post for a description of the German problem: Why are German software companies failing to get global market shares?
In my next post I will dig into the challenges with and the solutions for global scaling.
5: All the other reasons
There are many more reasons why software and technology companies don’t make it into the tornado and become solid global businesses. Here are a some of the more frequent “other” reasons.
Lack of ambitions
That’s perfectly all right. It’s a free world. It’s your business and you can do with it what you want, but let’s have a chat the day you are considering retirement or something else happens and your life takes a new direction.
Being content with a comfortable lifestyle may be a mischievous situation and give you false signals of security.
Grow or die!
The product is excellent. The timing is right. The market is plenty. The ambitions are high. However management is not capable of executing. They are misaligned or they “know it all” or some other flaws in the personality of the founders and the executive management. They simple do all the wrong things, wastes tons of money and miss their window of opportunity.
Changes in the business environment
None of us can predict the future. Even fewer of us can make the future. Things happen in the environment, which we didn’t foresee or ignored until it was too late.
Alexander Osterwalder has provided us the “Business Model Environment” analysis approach. This is a great help, that all companies can use to keep an open eye on the factors in the external world having an impact on our business model.
Domain specific software for the government is an example. Many governments around the world believe that the software they have had developed to support their administrative processes can be exported to other countries. That’s never going to happen or it is a least a very tough call.
We see big software and services companies making acquisitions to get market share with government related businesses in new territories. Even these big players have a very tough time bringing a software solution developed for the government in one country to another country.
Some business models are simply local bound and are extremely difficult to scale globally. That may not be tragical if your home market is the USA, but more so if your are based in Luxembourg.
Other posts in this series “From the Garage to the NYSE in 10 Years Flat”