Why is it so hard to make money from software?

Probably the most common thing you'll get to experience as Freelance Developer, Independent Software Developer, Lone Software Developer or even just a contract software developer, is the phone call or email from the guy with the next big idea! He has a dream for a new software application, mobile app or even a new game.

Often these dreams include starting a new business with the desire to put a dent in the universe!

This article is not meant to dissuade you from starting your own software company or stop you from thinking about your new software product but what it does do is attempt to provide you with a realistic view of what to expect and to prepare yourself for. The harsh reality is that only 1 out of 4 Start-Ups succeed which translates to only  0.4% of startups will become successful!

Creating a new software product or digital product and getting everybody in the whole world to use it and pay for it. Is often seen by many as the quick-fire way to success. How hard can it be, if some geeky college kid can build a billion-dollar company from his dorm room, surely it's got to be easy!

In this post I will discuss at a high level, some of the most important aspects you need to consider before thinking your next step of approaching freelance software developers with the next big idea that is going to transform the universe!

Product Development is hard

Before we get into specifics as to why approaching a single freelance developer to help with your new product development idea, is that for the most part new product development is really hard work and also very risky, requiring the efforts of people with a whole range of skills.

This coupled with the fact that a new software product is never a one and done affair, a new software product will continue to evolve and your original idea will gradually disappear as it becomes evident that it may spark an entirely different need from your customers.

Think about your offer and actual budget

The offer made made by these aspiring web/mobile entrepreneurs generally have a recurring theme and almost always involve the line :

We'll be 50/50 partners.

This usually translates too: They generally have no money to turn the idea into a reality so they expect me to devote every waking hour of my valuable time writing code, to churn some brain fart into a meaningful and functioning piece of software.

There have been a number of occasions when  I have actually had this exact same offer made on at least 3 separate enquiries on the same day!

Pursuing an offer like this would generally require me to forsake all other earthly pleasures like paying the mortgage, feeding the kids and wearing clothes, in order to develop a functional piece of software, in the hope that we can sell it and make millions and I can receive just 50% of the proceeds.

Does it actually make logical sense,  that just having an idea is of equal value to the effort required to make it a reality?

Would this imply that software by itself has very little value ?

The Harsh Reality

What many people don't realise is, that developing software is hard work and it actually involves money. Good software requires more than just 1 good idea. Developing great software requires an amalgamation of a million great ideas.

Writing the code all day is the fun easy part, which I totally love and ultimately enjoy.  The hard part about the software industry is it takes a huge inordinate amount of effort to actually make it saleable which usually has nothing at all to do with code.

Eric Ries in his book, The Lean Startup,  states most new businesses fail. However, most of those failures are preventable.  I recommend you read this book before calling a software developer and making your offer of 50% equity stake in a business.

 Your initial  product is not your revenue generator

This is a strange phenomenon within the software industry, in that it is not always entirely obvious where the actual money is generated.  It is often a mystery to those who work in the industry, so for an outsider, it must be totally confusing.

You only have to analyse a list of the top 5 popular software giants and successes of the last few decades and you'll notice that neither of them actually made money directly from the products they developed, but rather the products they developed enabled them to generate money from nascent markets they created.

Google

The search engine software has never made money. It's been a free tool from the outset.  For all the secret recipe and sauce of the PageRank and Search Indexing. The real Kerching moments at Google started on October 23, 2000, with the release of Adwords.

Adwords is what created the seemingly unstoppable behemoth,  not the free search engine.  Google continues to innovate in an attempt to find it's next Adwords.

Many people regard Google as a search engine, but in actual fact, it is nothing more than an advertising company with a technology capability. It more or less decimated the print advertising industry by giving marketers the capability to gain metrics from their advertising efforts. Which was traditionally a hard thing to measure.

facebook

A free service used by half a billion people on the planet.  It's still a mystery to many people how Facebook generates money, but it does and it continues to give it's flagship product away for free.

What made Facebook, into the behemoth it is, is the exactly the same thing that created Google. Advertising!

It also continues to create new products and services at a rate of knots. It uses its data gathering and data analysis capabilities to help it identify potential gaps in the market and to try fill them with products and services.

Facebooks true value, is that it enables advertisers to tailor their adverstising campaigns to specific target customers.

twitter

Yet another free service, that somehow seemingly makes money! The reality is, Twitter at its heart is nothing more than another data gathering and advertising company.

Yet again, what makes Twitter truly valuable is that it has a whole suite of tools, services and software products primarily geared to help advertisers target specific groups of users.

They have 100's of engineers working on these tools and daily basis implementing ideas and concepts and searching for more ways to make money.

LinkedIn

Another partially free site, that generates some revenue from subscriptions, but it's real revenue generating centres are not really in the software, the revenue model has little to do with connecting people and more about gathering data and advertising.

I won't discuss in depth into how these companies have generated and developed the specific software products or discuss their business models in depth because quite honestly I don't really know, but what I can say is that they all have same things in common, their initial software products didn't generate revenue.

Software Products are created by teams

The revenue generating products weren't created by one guy working on his own in his underpants into the early hours of the morning.  Ultimately these products were created by teams of people who iterated and collaborated to deliver products and they continue to do so.  

Successful software based businesses will continue to have one successful project out of  4, ensuring they extract as much value out of their successes to cover the costs of the failures.

It may be tempting to think that all you need it to create 1 product and you're set on the path. The reality is that all successful software companies have a number of software products that generate revenue.

Many aspiring entrepreneurs could actually benefit from reading The $100 Startup : FIre your boss, Do what you love and work better to live more

The book is not about building the next billion-dollar empire, but it focuses on building small profitable businesses on a tight budget. These help you to build your business acumen, while steadily building the revenue.

The basic premise of the book is about analysing your business idea, then identify the basic and simple elements of that idea that you can quickly and easily turn into a profitable business cheaply.

You need a really diverse set of skill sets to make successful software

These companies become successful by the combined collaborations of many highly skilled individuals, each contributing their own unique talents and insights.  Each funded by something more than just a promise of 50% of something.

A product team is comprised of at least a product manager and usually somewhere between 2 and 10 engineers. If you're creating a user-facing product, you would expect to have a product designer on your team as well

Inspired : How to create tech products customers love

Developing software requires a real team effort.  A good software development team will usually consist of at least 6 members with a unique set of skills. Many of these skills will have overlaps i.e. Business Analyst, Quality Assurance, Developer,  UX/UI Designer, DevOps, Infrastructure, Support the list goes on.  The secret is identifying which elements are the most important for your product and focus obtaining the key skills in those areas.

We haven't even started getting into the sales & marketing function yet.  The real heart of your organisation, without it you won't succeed no matter how good your geeks are. Sales is the only criteria of how successful business are measured by. 

Your engineering efforts may be best of breed, but sales are what pays the bills.  Making Sales makes a business, therefore, every business should start with sales.

Businesses gain funding not software solutions

The Silicon Valley is awash with the fairy tales of how each of these company owners were literally thrown cheques out of the windows speeding Porsche's to start their companies just because they had developed some code in their Dorm rooms. However, the realities of their stories are somewhat different. It's important that developers have side projects, but there is no guarantee that all side projects become successful.

The most essential element to getting any business off the ground is funding. You don't always need to approach Venture Capitalists, banks or other finance sources for money. It is possible to bootstrap a business. However, the best way to fund your business is by making sure it can generate sales from the start.

Customer revenue is the best form of funding

You need to examine your product idea and explore which elements of your product idea are saleable without the product. 

Are there any services you can sell in your target market?  

Your biggest skill set you need to harness is lateral thinking. You need to explore every avenue of your product idea, to find revenue generation opportunities that don't need lines of code.

Your idea is not unique and even if it was it won't be for long

When it comes to software and particularly web & mobile solutions, it is a complete fallacy to think that you have a unique idea.  You can almost bet the farm, that for every software idea you have there are at least 100 people working on that very same idea at that exact moment. 

In a software-driven business, it is not the uniqueness of the idea that creates the business, it comes down to how efficiently the idea is implemented. That does not mean how great your programmers are, it basically boils down to how well you sell the idea.

The other downside is, once you launch your idea,  you can rest assured that within a matter of weeks you'll be overwhelmed with competitors entering your so-called niche.  Some of these competitors will be better organised, better funded and hungrier for success.

In fact, there are organisations out there that specialise in instantly bringing to market competitive businesses.  Your success will be how you mitigate these assaults, and this will have nothing to do with ninja-like coding abilities, and everything to do with Samurai-like business abilities.

Ideas man delusion

The other most common delusion I encounter from the wannabe Steve Jobs and Bill Gates's is that many regard themselves as the ideas man, and all they need is somebody to execute on them.

One can not help thinking, that these people think that software developers are only good at developing software and their biggest weakness is that they are totally devoid of ideas. The idea that a software developer will have his hands on the keyboard and ready to go, but just needs that idea to get them started!

I can assure you that this is really not the case. In fact, most software developers will have a number of side projects they are working on, developing a number of little projects that actually solve real-world problems, problems they themselves experience in their day to day lives.

In fact, most of the best software products available today are a result of software developers scratching their own itch and developing a product.

Innovation is not the result of an idea, true innovation comes from continuous iteration of working on several ideas.

It takes more than just one idea, to create a product. That one idea needs to backed up and worked on by another several hundred great ideas!

What most software developers lack in getting their products to market are the same issues any ideas man will have getting a product to market :

great ideas are just 5% of the process...the easiest 5%!

Phil Baker - From Concept to Consumer: How to Turn Ideas Into Money

In From Concept to Consumer: How to Turn Ideas Into Money is a thoughtfully written book which can benefit the start-up entrepreneur as well as the seasoned professional. You can save a lot of time by learning from Phil's experience, from working in large multi-national corporations and as a start-up entrepreneur. He offers several real-life examples of his experiences along the way as well as the experiences of other companies.

Build it and they won't come

Many people are also misdirected in their thinking that all it takes for customers and even investors to be interested in an idea is that it should exist. The thinking that customers and investors are just sitting there with the wallets open just ready to throw money at something just because it exists.,

I can assure that this is most definitely not the case. I have been involved in countless software products. Witnessed many products launch and completely fail. Primarily because the customer just doesn't have that problem or doesn't understand they have the problem or worse, has the problem but it's not a big enough problem for them to spend money to solve it.

The startup world is littered with great products that never actually found a use or in fact a target. Eric Ries, in The Lean Startup describes exactly how his own company had started down this path because they had incorrectly determined what they thought customers wanted. It wasn't that their idea was necessarily a bad idea, it's just that the way they wanted to provide the product was wrong, it didn't mean the customers didn't want the product, they just didn't want to use it the way it was conceived. It actually took an entire product redesign and redevelopment for it to actually work. They had to more or less throw away the old code

This happened despite having good developers with great engineering discipline. It epitomises that you can't necessarily sell a great idea if its implemented wrong! It comes back to ensuring that your idea actually fits in with the ideals of your customers!

Peter Thiel also discusses these very notions in chapter 11 If you build it, Will they come of his book Zero to One: Notes on Startups, or How to Build the Future, and highlights just how crucial sales are too any start up, more so than the actual product they build.

Conclusion

If your new year's resolution, or holiday inspirational idea, is to start the next biggest software giant to take the world by storm. Just remember it takes more than just a promise of a 50% share in the proceeds to make your idea a reality.

Your first effort should be to get acquainted with sales, marketing and finding customers. I'll leave you with this quote.

purpose of business is to create a customer, the business enterprise has two and only two basic functions: marketing and innovation.
Marketing and innovation produce results; all the rest are costs.
Marketing is the distinguishing, unique function of the business

Peter Drucker