How to Start/Create/Build a Software Company - Hamid Shojaee PHX Startup Week

thank you very much appreciate it so as was just covered my name is hameed shojai ii my twitter handle is at hamid s so if you're going to be tweeting you can tweet at me you can include hashtag Phoenix startup week and hashtag yes Phoenix if you're really into hashtags you can also hashtag chase Basecamp I'm not sure why you would you could just do a collection of a bunch of hashtags and call that your tweet that's pretty popular these days so I'm going to be talking about how to build a software company and the lessons that I've learned and let's get started I want to leave a little bit of room for Q&A towards the end so I'm going to just run through a bunch of different things that I want to talk about quickly so first question to ask is why even a software company and the answer to that is duh because software is the absolute best business in the world to have or to be in it's super easy to get into you can if you're a software engineer you all you need is a computer and your own skill set to get into the software business very very easy very low barrier to entry it's literally hundreds of dollars to get into the software business it can change the world as all of our lives have been impacted in one way or another over the past few decades with software it's highly scalable meaning you can go from zero customers today to a million customers tomorrow if you happen to have a hit on your hand as has happened many times in the App Store as well as web-based applications that literally go from zero users to millions of users overnight to multi-billion dollar valuations it's just an incredible business it turns out software is also one of the worst businesses in the world for largely the same reasons because it's so freakin easy to get into anyone can get into it from anywhere in the world so you could be competing with your sort of living style requirements that maybe multiple thousands of dollars per month in living expenses with someone in Bangladesh whose living expenses or only 50 dollars per month and guess what he can actually sell or she can actually sell her software to people in the United States who are your neighbor so that happens all the time and in fact it's the one of the most competitive businesses in the world for those same reasons just taking the ios app store as an example there's over one-and-a-half million apps in the App Store right one and a half million apps think about that for a moment because if there's even a thousand different categories of apps I can't even imagine a thousand different categories of apps that means on average there's 1500 different apps per category so how are you going to compete in that market space so it's very very competitive it's very cutthroat the same software can be sold for thousands of dollars or even given away for free there's no sort of cost of goods sold if you will in the software business or it's so low is sort of negligible so the question we're going to try to answer is how do you build a software company that's going to sustain that's going to grow and is going to have the most likelihood of success that's what my talk is about if you're not interested in software this is probably not the right talk for you to give you a little bit background about myself I've started three software companies everyone's limited by their experiences so my limit is based on these three experiences that I've had I started a software company with my college buddy in 1995 called vie Trix we went out and raised a bunch of money we raised hundreds of thousands of dollars to start the company and over the course of the next five years we raised a couple million Burt through most of it we made all sorts of mistake it was a software company targeting time and attendance software by the way do not Google vie Trix anymore they gave up on the domain name and yeah it's not sufficient for work NSFW whatever they call it anyone so the image searches is terrible I was looking for a logo of vie Trix and I had to like dig quite a bit to find my old business cards but anyway it was a funded company I after five years I gave up on it and chalked it up into this sort of failed but learnt lessons learned category and went to work for Microsoft I then started another company called AK so soft in the software development tool space in AK so soft we grew that organically and profitably it's going strong still it's it's a multi-million dollar success story and we created a number of different products in there including transfer big files one of the soft side projects of access oft was a product called pure chat that has led to the sort of next thing that I'm focused on right now and pure chat is a funded company we split it off into its own company raise money around it we raise one and a half million dollars it's still burning cash but it's growing very rapidly we expect to be profitable by the end of this year so that's my background and that's sort of where I'm coming at things from so of course the first thing you need to have if you're building a software company or any sort of product based company is a product and generally speaking a better mousetrap will have much higher probability of success than the same old mousetrap but it turns out there's something else that makes the product more likely to succeed and that is this concept of market timing fit different than product market fit market timing fit is just a timing issue of when you're entering into a product market so every market goes through this growth cycle that looks something like this the the number of potential users that can use the product we'll call that a hundred percent of all of the users in the universe that can use it and that number could be you know depending on what category you're targeting it could be in the hundreds it could be thousands it could be millions or even billions so if you were to look at email for example today has billions of potential users in the 80s email was at sort of the very beginning in the late 70s and 80s it took it a while to get into here maybe this was sort of around the 90s timeframe and growing rapidly in the 90s probably by 2000s it was over here and today I would say email is over here so if you are sort of creating an email product there's a good time to get into this market and there's sort of a bad time and there's a very difficult time and those times look something like this this is a great time to get into the business into any market think of it as you know like in any product category you can sort of break it down in this way and there's a bad time which is right at this stage where the market is already largely saturated the people who could use this product category already have a solution so email today would be one of those market and then there's a really hard time which is at the beginning before people even know that they need email you have to go out there and convince them if you're trying to build this sort of market category you have to convince them that this is something that's really good and you need it before they actually are like I don't know what would I do with email seems kind of stupid I could fax things and you know I could print memos and give it to my employees so it's really hard to get started and building the market category another example of this might be you know early social networks like MySpace and Friendster and others sort of built the sort of need like helped get the market started got it into the millions of users then Facebook came along and sort of really Facebook was sort of a later entrant into the game but you know like they came in at this great time when the market wasn't already saturated and they sort of took up a book of this market share and now dominate the space so today it would be too late to get into the sort of social market social media space right trying to compete with with Facebook that doesn't mean you can't disrupt things for example in emails case something like a tool like slack is coming at it from a different angle it's not making a better email client slack doesn't do email it's a better communication client which is sort of the same problem that email is trying to solve so it turns out that slack is disrupting email in in a sort of coming at it from a different angle and making a lot of headway as a team communication tool eliminating the need for email internally at least for internal communication and interestingly slack is now a team communication tool which is probably sort of in this sort of timeframe so if you were to go into that space you know like right now is probably at the later stages of when it might be a good time to get into that space just you know as an example of another market space so part of the reason why the sort of there's a great time and sort of bad is that at the beginning stages of it you work really hard a lot of time so in the case of email maybe a whole decade before you build maybe 10% of the potential users for that space over the next decade you know 30 40 percent more people come online over the next decade in the case of email the remainder of people are coming online or you know a bulk of the people so you could sort of you know in in most of these markets that are going through these cycles and it in most cases it's not decades most markets will saturate in just a matter of a few years you could not get into it for the first year or to come in with a much better mousetrap and still be able to capture the market as long as you do have a better mousetrap and sort of solve all the problems that the early people did not see like pricing issues and other things that might allow you to capture market share so so the next the next thing and I'm not sure why this goes to slides at a time or there we go so the next thing that I hear all the time is with respect to building a team or outsourcing and there's a lot of people who have great ideas for apps or various different software product ideas that they want to bring to market and I have in the course of the past five six years as I've been active in the tech community I have spoken with a number of people who have spent 50 thousand a hundred thousand even two hundred thousand dollars on the development of an app and then ended up abandoning it because the product never functioned exactly the way it should and it turns out that software is very difficult to build especially if you're not building it yourself so if you're thinking about building a team to build a software company which is very very expensive to do or outsourcing it which is relatively cheap to do is probably a 1/4 1/5 the cost to get to sort of a v1 a lot of people will choose outsourcing but it turns out outsourcing often times more often than not is throwing your money away because what happens is software is an iterative process you have to build something and then you have to improve on it your first version is never going to be the right version so it it turns out that you'll be throwing a lot of that money away and if you're outsourcing the people will not have that continuty of thought your users are too far removed from the developers for them to be able to get that feedback cycle going rapidly and iterating through it so if you're thinking about it software company think about it like this what is the core competency of the company that you're building if you're building a software company the answer to that question better be software right so if you're outsourcing your software development you're outsourcing your core competency as a software company so what are you exactly a sales and marketing company that's ok if you are then it's best that you know that ahead of time you're not a software company so you might want to partner with a software company or bring in a tech co-founder as a lead it if you guys were here in the previous talk and and make sure that that you get that portion of your technology addressed otherwise you're going to have a hard time building a software company so as has been mentioned in previous talks as well the the clean router one was a perfect example building incrementally Minimum Viable Product and sort of moving on and iterating quickly is one of the best pieces of advice that anyone can give with respect to developing software you want to tackle on a small sort of set of problems features that you can do really well with your product solve that problem really well get it into the hands of users give it away for free and I don't know why I keep going multiple slides but give it away for free if you have to not if you have to it's actually a great practice to do so and get that feedback build on it release again and do that whole cycle over again and the reason you want to give it away for free and a lot of people sort of resist this and there's a lot of advice out there by people who say don't give your product away for free people will not have value for it you need to charge from the beginning you need to have a business model and those are great pieces of advice I haven't found them to work very well in the software business but the reason is because of similar sort of back to that graph of market growth is that if you're entering the market let's say at the right time between you know like if you can release early get feedback between the first year of development so let's say that's between that timeframe and then the first let's go to here the number of users that come online in that time frame is a small fraction of the entirety of the market so if you can establish yourself as a leader capture market share you can keep that market share going keep your product free for all of the existing users so you don't you know do a bait-and-switch on anybody or gradually increase their price to a normal price but what's more important is that you're going to capture a bigger piece of the next group of people who are coming online for your for your product category and as you capture this next piece that's when you start charging and actually have a very significant and fast growing presence right so that's why you should give away your product for free initially as you're sort of going through it and it also does another thing which is quite interesting which is similar to putting a beta sticker as the clean router guys did is that people are a lot more tolerant to free products not working exactly as they should now even if they're paying ten bucks a month for it they are very very critical so it works out really nicely the last lesson that I want to talk about a little bit is experiment with pricing with software you can sell the same product for free ten bucks a month $100 a month $1,000 a month a hundred thousand dollars a month if you if you depending on the number of customers that you want to have and all of those prices are actually valid for software because literally it takes millions of dollars to create most products so if you're only going to have tens of customers you should be selling your product for hundreds of thousands of dollars in order to make a profitable company but if you're going to have millions of users then you probably could get away with very close to free or near free five dollars ten dollars or whatever and what you want to do is experiment with pricing especially if you don't know the size of your market you could experiment with pricing all the time sort of get things right now there are certain things that you can do like experimenting with pricing starting from low to going high which are relatively easy to do going from high if you already have revenues down to low it's very very difficult to do so might be good to start the other way around one example of the company that went from high to low is Apple Apple had a product called web objects when they acquired next from Steve Jobs back in the late 90s they sold this product for $50,000 a license and overnight they decided oh let's sell it for five hundred dollars and see what happens of course they cut the revenue from that product significantly the existing revenue but the volume went up very very rapidly as a result and it gave web objects more of a chance to be successful eventually it failed and they sort of candidate but just an example of a pricing experiment Google has bought companies before that have charged hundreds of dollars for their product and then made them free like google analytics used to be another product that was four hundred dollars a month as an entry fee and now everyone has it for free super interesting right so you want to experiment with pricing or not what I want to do is share with you some of the experimentation we've done with pricing and then we'll go into QA right after that so with pure chat we started for free and we did this sort of exact same thing where we gave away our product for free had lots and lots of users we had over a hundred thousand sign up accounts sign up for pure chat before we ever charged a single dollar for the product then we came in from the bottom we wanted to charge as little as possible so we charged $5 per user per month and then established an average revenue per customer of which is by the way something you should know average revenue per customer a RPC or ARP you per user of eleven dollars per month because our average customers were getting two point something users per customer after a few months of doing that then we decided okay let's let's add another pricing plan eight dollars per month where we tweaked some features we said okay if you wanted the powered by pure chat to not be there we're going to charge you $8 per month for that and minimum is two users per per account for signing up for the $8 plan and our average revenue per customer jumped to $16 per customer at 50% growth a increase in our growth rate essentially and your question should be well did that do anything to conversion rates because if you converted fewer customers then they might not be worth it and the answer is that there wasn't any noticeable change to our conversion rate so we did that for a few months and the next thing we did is we came up with a sort of set of buckets where we said okay if you have up to three users our entry plan is $15 per month it's still $5 per user per month but we charge you for three right off the bat the next bucket is six users and the market after that is 15 users and in fact those are newer experiments we did ten users and 25 users and we wanted to see what would happen if we did this type of a plan because if our average revenue per customer was 16 we wanted to see how do we move that average revenue up a little bit and it turned out that our average revenue per customer shot up to $30 per customer almost double so our growth rate overnight doubled just like that and of course the question of whether or not it affected our conversion rate was answered by this it actually increased conversions which we were kind of surprised about now the increase in conversions is kind of hard to explain we don't know exactly the reasons for it but we have a bunch of theories right well we know the product guys thinks it's the product the support guys think it's the support the marketing people think it's all the marketing and content efforts that we're doing which is all probably true but one other thing that happened is that we were now giving away more users per account type and it might have been that $5 or $15 it's just such a low barrier to entry that that didn't affect business people's decision because it's a business product so at $15 if you already have three users you're more likely to add your three users and add a couple other people to respond to chats and therefore you get more usage out of the product for the for a relatively low price rather than having to think about whether or not you want to add your next employee as another user of pure chat so we had this sort of like interesting things that have developed as a result of pricing experiments and we have many pricing experiments we're going to do but just sort of giving you a taste of things that we've done one other thing about pricing experiments is that you want to do them without affecting existing customers so because we're moving price inching it upwards in some ways we're keeping all of our existing customers on the old plans we call them legacy plans without affecting them so our average revenue for total customers it hasn't doubled but our growth rate has doubled meaning like then new customers we're adding are paying us more and as a result the growth rate has doubled so in summary there's five things that I talked about market timing fit building a team as opposed to outsourcing developing products incrementally giving it away initially to get sort of your initial early adopter feedback and cycling through that iteratively building the product there and then experimenting with pricing all right thank you

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Length: 21min 18sec (1278 seconds)

Published: Fri Feb 26 2016