Rants & Raves

Why is it so hard to make money from software?




It’s that silly time of year again.  The season of lists of new things to do, new challenges to explore and new resolutions to break.  It’s inevitably the time of year when a lot of people decide that this is the year that they’re going to make their fortune.

This article is not meant to dissuade you from starting your own software company, but what it does do is attempt to provide you with 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 an estimate that only  0.4% of startups will become successful!

Creating a new software 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 geekie college kid can build a billion dollar company from his dorm room, surely it’s got to be easy!

As a Freelance software developer, this is the time of year I receive a higher than usual volume of calls from the “Guy with the next big idea!”. 

The offer made by these aspiring web/mobile entreprenuers  generally have a recurring theme and almost always include the same offer

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 hours and hours of my valuable time writing code .

The generally requires me to forsake all other earthly pleasures like paying the mortgage, feeding the kids and wearing clothes, in order to develop the new brainwave into functional piece of software, in the hope that we can sell 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 ?

I usually gracefully decline these fantastic offers and end the call, in order to answer the next one, which usually involves another misguided fool with a remarkably similar idea with the same outstanding offer.

The Harsh Reality

What many people don’t realise is, that developing software is hard work and it actually involves money.

Writing the code all day is the fun easy part, which I totally love and enjoy.  The hard part about software 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: How Constant Innovation Creates Radically Successful Businesses,  states most new businesses fail. However most of those failures are preventable.  I recommend you recommend 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 totally confusing.

You only have to analyse a list of the top 5 popular software giants or 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 attempt to find it’s next Adwords

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.  It also continues to create new products and services at a rate of knots.

twitter

Yet another free service, that somehow seemingly makes money!

LinkedIn

A partially free site, that generates some revenue from subscriptions, but it’s real revenue generating centres are not really in the software.

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

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 iteratively collaborated to deliver products and they continue to do so.   They 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.

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.

Developing software is a real team effort.  A good software development team will usually consist of of at least 6 members with a unique set of skills. Many of these skills 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 is sales is the criteria how successful business are measured by.  Your engineering efforts may be best of breed, but sales is 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.

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.

Customer revenue is the best 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 is 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 bowls 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.

So if your new years resolution is 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.

Gary Woodfine

Freelance Full Stack Developer at threenine.co.uk
Helps businesses by improving their technical proficiencies and eliminating waste from the software development pipelines.

A unique background as business owner, marketing, software development and business development ensures that he can offer the optimum business consultancy services across a wide spectrum of business challenges.

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  • Robert Newnham

    Nice Article Dude.
    Food for thought.

    • Thanks Rob. The size of your appetite that’s a lot of food 🙂

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