This post is a follow up to one of our previous posts that discussed starting a software business during the recession. In this post, I want to focus on the cash flow aspects for very early stage software startups. A few years ago, we started the company with nothing in the bank and we've managed to not only survive but prosper regardless of today's tough economic conditions. It is possible to launch a software startup with no money: the tradeoff is time. It will take longer to get out of the very early stages.

Context / Introduction

Before starting, I'd like to point out that the tips that follow are only valid in a particular context:

Understand that these tips are for the very early stage

• Your first business goal is to get out of the very early stage as soon as possible.
• Lots of these tips concern petty little details. However, together these details matter when at the very early stage, when you're fighting for survival.
• Survival is a huge milestone but it isn't the end goal

You have no money and aren't interested in loans.

• If you have no money, this is probably your first venture. I strongly feel loans are a bad idea for your first venture, but others have different opinions.
• Cash is a great accelerator - once you've launched your first business you'll probably have a need for speed and will either have cash or be more open to debt/equity financing because you'll have already learned what you have to learn in organic growth.

You're starting a software company.

• It is possible to start a software startup with limited cash. You've picked a good industry. If you wanted to become a dairy farmer, you would need a massive initial investment. However, for a software startup, your investment will be time writing code - not acquiring assets.

Tip 1) Sell to the right group

Since this is your first business and you have no money, you need to establish a consulting sideline selling to businesses that will give you a good return for your time (even if you're building a product for individuals). You won't be able to pay your bills selling $20 licenses to individuals in the early stage. We recommend selling customized versions of something that will help you grow your core product, as long as you can keep the intellectual property. Read more about this strategy in our previous post.

Everyone values the dollar differently. The earlier stage you are, the harder it is to define appropriate pricing given your credibility level and you don't give the same value to each dollar as your customers. As you grow, you’ll find your sweet spot and will be able to focus on your consulting clients that are right for you.

Eventually, you should aim at moving out of consulting, as it doesn't scale.

Tip 2) Minimize your expenses

Assuming you have no money, it's important that you only spend when necessary. At a high level, you need to be versatile and be able to do as much as you can on your own. Later, you'll be able to delegate but not in the early days. Of course, know your limits and get pros to do things that are impossible for you to do properly.

• Don't hire an accountant to prepare invoices for you. Learn how to use accounting software and do it yourself. Only hire the accountant for an annual review or for real accounting work. Once you know how, it will take you a few seconds or a few minutes to do the most common tasks - you won't be paying someone four hours of work at a high hourly rate. 

• Don't hire a law firm to review a simple non-disclosure agreement sent to you by a customer. Learn to read legal text on your own. Only hire a law firm when you've got something important to prepare or review.

There are plenty of examples of ways not to spend money when you're just starting out and have none of your own. It's time to learn things on your own.

Be smart about the commercial bank account you choose

I've dealt with a few different banks over the years. If you're a tiny business, it is good to know a few simple facts and comparison points.

Get a business account with a variable monthly fee

• Don't bite when they offer you a $50/month fixed rate. You won't have enough transactions to make it worthwhile to upgrade. When you reach that point, switch to the fixed rate plan that is a best fit for your business. You can easily save $480 per year.
• Some Canadian examples: Desjardins: $7/month, TD Canada Trust: $12.50/month, Royal Bank of Canada: $6/month
• Some variable plans charge transactions on top of the minimum monthly fee. Do your homework.

Know the minimum balance you need to get it for free

• Save up to $150 per year by making sure you don't go under the minimum.
• Some Canadian examples: Desjardins: $2000, TD Canada Trust: $8000, Royal Bank of Canada: n/a

Get an ING Direct Savings Account
• Some customers may pay you in advance or you may get grant money. Bottom line: you may end up with cash that you can't spend for a few months to a year. (Actually, you can spend it if you know more will be coming in - depends on your management style.) If you do have it in the account, earn interest on it.
• Business accounts often don't give interest. If they do, the interest is horribly low if you don't lock it in. (Not paying service fees is often more than the amount you'd earn in interest anyways).
• ING Direct's account is free. They have the best rates I've seen for low amounts that can be withdrawn at any time.
• Best of all, they have a referral program. Both the new member and the referrer earn $25. In today's market, this could easily end up being worth more than the interest you'll generate in your first year. Our orange key is 33514316S1 – go ahead, signup (personal or business) and you’ll help support us and receive $25! :)

Don't get a commercial credit card for your purchases

• Unlike personal cards, they're not free and most don't have any rewards programs.

Do you really need to accept credit cards?

• It is a good fit for some users or services, but know the costs. If you have few transactions but most of them are high value, you're better off with a wire transfer.
• Some banks charge you more for wire transfers than others.
• Remember that cheques are slow - you don't have access to the funds are week.
• You'll be paying $20-50 per month plus 2-3% per transaction. This quickly amounts to several thousand dollars.

Will you be dealing with multiple currencies?

• We're a Canadian company but we have lots of clients in the US and in Europe. In the very early days, we chose not to open two separate bank accounts (one in each currency) because of the associated ongoing operating costs and increased accounting complexity.
• Banks all have different exchange rates. However, I've found one bank consistently gives us a significantly worse rate when receiving transfers in another currency. A few percentage points makes a huge difference as the size of the payments increases.
• The larger your conversion, the better your rates. Talk to a specialist like @JamesonBankTrav.

Minimize your telecommunication fees

Don't get a commercial telephone line via large companies

You'll pay much more than needed. Investigate Voice Over IP solutions such as Skype. You can get your own telephone number and free long distance in Canada + USA for an annual fee of $60. This service saves you hundreds per year. Don't get a fax unless your customers nag you for your fax phone number often enough. If you need one, look at online services such as myfax.com which deliver faxes by email and give you toll-free fax numbers for less than what you'd pay to get a separate telephone line in your office for the fax, without the clutter of a deprecated device.

Don't sign-up for a massive cell phone plan if you've got empty pockets

Depending on what you do with your phone, you can save upwards of a thousand dollars a year by downsizing to a prepaid plan. Smartphones are great, but depending on your situation, it might be a wise choice to minimize those expenses. Let's hope you're not locked into a crazy-expensive three year plan! In the end, this is a personal decision which depends on your personality; once you've tasted a smartphone you may be unable to go back. Just keep in mind you might be paying much more for your cell phone than the much faster Internet connection you use all day.

Minimize your rent

Use a co-working facility

One tip often given to people starting their own company is to avoid renting office space too early in the process. Instead, work from home or from a more affordable co-working location. Not only do co-working locations reduce costs, they help you build your business because of the contacts you can make there. Once you’re read, upgrade to shared office space.

Don't minimize everything

In addition to being able to exchange services with other companies to cut costs, there are a few places where you can't afford to cut costs.

Your Image

One thing you don't want to be cheap on is branding. Your image is everything - quality needs to be high. Get nice business cards created by pros. Don't do your own web design if that's not something you specialize in. Your product will look amateurish and you'll lose sales. There are tons of affordable graphic designers out there: find one and have something nice created. Use online marketplaces such as 99designs. Since you're still a software expert, however, you should know enough HTML and search engine optimization techniques to be able to maintain your website. If you're a horrible writer, have someone review your content. This basically boils down to knowing your limits; there are some things you won't be good enough at even if you try.

Hardware & work area

We agree with Joel Spolsky's view that you should buy the best computer hardware and computer chair you can find. These are your primary tools and they are relatively inexpensive compared to your salary, even when you have very low revenue. One investment that is definitely worth it is a second monitor as it tremendously increases your productivity.

Your health

As much as your work environment is important, you should also value your health. Even if you're living on a very tight budget, don't eat hot dogs all day. Proper nutrition and good sleep cycles keep you in good health and makes you more productive. You should not be falling asleep in the afternoon. Starting your business is a marathon, not a sprint. Make sure your lifestyle is well adapted for a marathon.

Tip 3) Leverage your money

We've already covered this part in a previous blog post. Know what government funding opportunities are out there. Some require matching contributions. Some are based on your expenditures. Look around for these opportunities but mostly talk to other people to know what's out there and what's worthwhile.

Tip 4) Cash flow projections for dummies

You should always keep an eye on your cash flow, not just your revenue. I've created a very simple Excel spreadsheet to help with our cash flow projections. This one is simply a template with some random numbers in there. The one we use internally is a bit more complicated as it includes things such as currency exchange rates, taxes, etc. Build it however you like, but I've found that the two most important elements in there are:

1) Past Sales versus Projected Sales

What are my known sales (recurring revenue) versus what serious leads do I have in the pipeline. Being conservative, I base my business decisions on my past sales not my projected sales because I've learned that projected sales are often postponed. We have long sales cycles that culminate with a large sale which has a big impact on that month's revenue. Separating known sales from projected sales is of critical importance because of this because we either make the sale or get zero revenue from that customer in that month. If you're selling lots of lower value items (subscriptions to your service, for example), each individual customer has less impact on your total monthly revenue.

2) Runway

Given our current burn rate, when will we run out of cash if none of the sales in the pipeline are realized. This is useful to help you decide if you can hire and/or if you can give yourself a raise. It can also make you realize you're heading towards a problem and you need to correct the situation as soon as possible.

It would be nice to have a simple, open source, application that helps business owners track their cash flow projections in this fashion. You could go overboard and integrate it with accounting software, but I think it's nice when it's simple.

Conclusion

When you start your first company, and you have no cash on hand, you need to focus on making money and keeping the little money you have. Survival is a major milestone, but remember that it isn't the end goal. You'll learn tons of things along the way, and once you do leave the very early stages, you'll need to manage your cash flow properly. Later on in life, you'll probably start another business - this time you hopefully won't be as strapped for cash - and you'll be able to speed up the whole process.

I'm not sure what is harder between:

• A) Going from nothing to survival
• B) Going from survival to success

I do know, however, that going from nothing to survival appears a lot easier if you have cash to start off with or if you've done it before. Since success is in the eye of the beholder, it all depends on what you want to achieve.

We're six months late to inform people that you can/should still start a software company in a downturn as this has been covered already here, here, here, here, and here.  Why are we six months late informing you of this, you ask? We have been incredibly busy building software for our existing / new customers during this period. For reasons left unexplained, we've seen the number of leads in our sales pipeline increase dramatically since the start of the recession. Furthermore, people have been coming to us for consulting services thanks to the reputation we've built since we launched LavaBlast.

If we had to name a single element that has helped us / will help us during the recession, it would definitely be our capacity to discover commonalities between seemingly different situations, abstracting them out and generalizing the problem. We can build systems for people who may not be in the franchise industry, but have similar needs. This lengthens our runway. This is one of the skills that we learned in university (more on this subject in Part 7).

If you take a deeper look at what LavaBlast does (building customized software that helps collaboratively manage a franchise) it is easy to notice that we're solving a problem in a particular vertical that is present in numerous other business contexts. We build operational line-of-business applications (aka help-me-perform-my-daily-tasks-easily software) that are used by franchise owners and franchisors (aka different-users-can-see-different-parts-of-the-data-while-sharing-some-of-it software). Without going into greater detail, many businesses are looking for software that helps them simplify their day-to-day operations and reduce costs, recession or not. It might not be as scalable as a consumer-focused website and not as glamorous as other projects, but it does have its challenges and is a great type of business that one can bootstrap!

[ We'd like to thank Leigh Hilbert for the "Lava Blast" picture seen above. ]

A mix of software products and services

In the Part 1, written last year, we describe how LavaBlast builds products (franchise management solution, franchise point of sale, etc.) but also services (as we adapt our software to each franchise's business processes). To help sustain development in a bootstrapped startup, software consulting is often a necessary “evil”. This year, we did do some consulting but managed to make the best of it. We've made a few interesting realizations that we've shared at a recent TeamCamp event at The Code Factory and would like to re-iterate here. This discussion assumes you're building software for other businesses instead of consumers (for obvious reasons, it is easier to bootstrap a software startup that targets businesses).

Typically, software consulting companies produce the same kind of software a couple times for different clients before deciding that it would be a good idea to build a product that addresses this same problem. At this point, they've delivered source code to each of their customers, as the customers retained the intellectual property rights related to the produced software. Therefore, to build a product and commercialize it, the consultants need to start from scratch. Although this may seem bad as the firm loses time and money rebuilding the product, it typically allows them to “build it right” thanks to the lessons learned during the first iterations. The product's architecture is well implemented as the main variation points have been clearly defined.

Simply put, we did the opposite and have kept the intellectual property rights from day one. (How? We got lucky that our customers had limited funds to invest and knew the value of intellectual property.) We sprinted for over a year building the core of our solution that allows retail stores and e-commerce websites to communicate with a centralized franchise management application. This was a large undertaking, but we had our first customer already using the product and paying for its development, while we kept the rights to the source code. (Note: we still did multiple iterations and learned from our mistakes!) Once completed, the core was easy to adapt to different franchise systems because we're experts at rapid application development and because our core architecture allows us to vary software behaviour for each franchise (thank you the strategy design pattern and dependency injection!).

What's interesting to note here is that because we own the intellectual property for the core of our system, it is much easier to sell enhancements to our core (to new customers) while preserving the rights to the source code for the combined system. It is also easier to find new customers because the core is already built. Simply put, investing a year into a software product is an investment that keeps on giving, even in the services arena. Because we have a flexible core that has already been implemented and we're keeping the IP, it helps us keep costs down during a bad economy. This is a win-win situation for both parties!

Advantages for the software startup

1. Retain the intellectual property
2. Build applications faster, giving you time to work on other things
3. Keep costs down - easier to find clients in bad economic times

Advantages for the client

1. Lower cost
2. Put the software to use quickly
3. Lower project risk

To get back to the discussion we had at TeamCamp, the question was how do you turn your service business into a product-based software startup when you have limited/no funds, have limited/no leads, and own limited/no intellectual property? Well, I'm sad to say it, but it “sucks to be you”.

You have to break the perpetual cycle you're currently in and do something different.

For some people, that means realizing that you're never going to make a decent living building static websites for $200 when you've got to spend 20 hours with the customer to figure out where they want the pictures of their puppies on their upcoming site before actually starting the work. Your competition is doing it at half the price with pre-built templates, stock photography and, as an added bonus if you order within the next 24h, offering them a box of branded pens, 500 full-colour business cards and a mention on their next Twitter post. You are a commodity.

For others, the decision boils down to what short term loss can do accept for possible future gains:

• Build a product, build your reputation, and try to sell enhancements to customers while retaining the IP.
  • Tradeoff: money. You don't earn much revenue while doing this (often nothing during the first months). If you don't have prospects and don't know if your idea is any good, this is risky.
• Assuming you can't afford this, build something during weekends and evenings and reap the rewards when it is complete.
  • Tradeoff: time. It takes five times as long to build it. However, you aren't screwed if things don't work out because your regular work pays the bills.
• Build a quick alpha version and see what happens. Spark interest? Find funders? Find partners? Abandon your crazy idea?
  • Tradeoff: features & quality. It is preferable to fail quickly if you are bound to fail. I'd prefer investing a week of my time and getting proper feedback from peers informing me that my product idea sucks and I am bound to fail than eating cheap noodles for six months before discovering than no one will buy my completed product. Talk to people at events like TeamCamp or DemoCamp - stop being scared someone will steal your idea. Don't ask Mom or your beer buddies as they won't be harsh enough on you (although some of them might be mean drunks!).

One tip that we do want to give fellow bootstrappers out there is that, in the early days, you can give the customer a non-restrictive copy of the code, while retaining ownership for yourself. That way, both parties have a copy of the source code and both parties can do whatever they want with it, including selling it to others. However, you're the developer and the customer has better things to do than commercialize your software: all they care about is being able to maintain the code when your contract with them is over. This is a win-win situation for both parties, especially when you've managed to collect various modules that you can re-use for different customers.

How to launch a software startup in a recession

(Precondition: Start something that you can sell to businesses to lower the risk. )

1. Find a first potential customer. Sign contract that says the intellectual property is yours but they get a copy of their version and they can do anything with it.
   • At this point, your software is worth nothing more than what the first customer is willing to pay for it.
2. Take your core software and refine it with other customers.
   • This time, try to keep the source code to yourself, as it is starting to build value.
3. Repeat step 2 until you've got enough funds and a high quality product.
   • Your product is now valuable. You are now out of the perpetual cycle.
4. Sell copies and grow your business
   • This is where LavaBlast is at now, after two years.
5. [insert secret sauce here]
6. Success!

Conclusion

Considering all that has been said about launching a software startup in a recession, I think it all boils down to asking yourself "is this the right time for me?". Software startups / Micro-ISVs are tiny in comparison to what's going on at the macroeconomic level. Before taking the risk to launch your own business, what matters is the presence of the following elements:

• Dedication / Passion / Interest
• Capacity to execute on the idea
• Support (family, friends, partners)

We recently joined the Microsoft BizSpark program after seeing posts about it on a few blogs (Flow Ventures and The Code Factory). To make a long story short, amongst the hundreds of startups that register each day from around the world, we've been selected as the most promising startup of the day. It is always fun to get recognition for our hard work!

In any case, you can view the interview here (today only!).

Have a nice weekend!

We've revamped our website home page and wanted to invite you to visit it and let us know what you think.   The general template of the site hasn't changed, as our enhancements focused on five core elements:

1. Simpler menu structure. When we first launched our website, our pages were never nested more than one level deep. We've since added new content and our site was getting harder to navigate. By going with a tree-like structure and adding markers to indicate which page you are currently viewing, we feel this solves our main usability problem.
2. Testimonials. Ian Graham, the man behind The Code Factory, an Ottawa-based software co-working location, talks about how he enjoyed doing business with us. We feel this touch increases our credibility, and the fact that we get things done. 
3. Concise information. We've integrated much more information on our home page and re-worked the text to make it very concise. The home page leads you to numerous inner pages which feature more detailed information about our products. We're always re-working the innards of our site and we're never "done", but we feel this new home page will help drive traffic to the appropriate locations.... only time Google Analytics will tell.
4. Web 2.0 slider. We wanted to have a bit of fun even if it meant requiring JavaScript on our pages.
5. Cartoons. This is the most controversial aspect of our new home page. We've integrated cartoons on our homepage.... cartoons on a franchise software corporate site? Allow us to explain.

Why are we using cartoons?

Simply put, everyone we've talked to is divided in two completely distinct camps. One camp feels our cartoons makes our website unprofessional and inappropriate for the franchise industry's decision makers (one of the more vocal people in this camp is Michael Webster, Ph.D, LL.B.). Others feel it gives us a more personalized feel (a human touch) which increases their trust in our company.

There are hundreds of companies building software for the franchise industry and we want to show that we have a different philosophy from many of the old-school companies. Simply put, we (as web visitors) distrust generic consulting websites littered with stock photography and we didn't want to repeat the same mistake. We love to use pictures, but bad quality pictures or video are often worse than not having any.  After a year and a half of having a more corporate feel (without using stock photography), we decided it was time to do something wilder. We hope to impress our target market with an atypical corporate website, even if it ruffles a few feathers.  

We target small yet energetic franchise systems. These franchisors are not heads of billion dollar corporate empires, they are entrepreneurs who want to grow a concept which worked in their flagship store and scale it to the next level, via franchising. At their growth stage, these franchisors are looking for someone who can listen to their needs, build cost-effective software solutions, and help them grow. The franchises we deal with don't have large IT departments: they're looking to get outside help with technology, as they don't have the knowledge in-house. Outsourcing allows them to get more bang for their buck than hiring software engineers to build everything from scratch.

Why don't you like stock photos?

Does the following image incite you to contact a software firm for custom development?

When we shop around and find a company featuring such a picture, it reveals that they botched their web development work and they're probably going to botch any work we give them. Attention to detail is one characteristic we always want to see; however, we're not completely against stock photography but we disapprove of stock photography abuse. For example, if a company has a page talking about their team, and the team picture is actually a stock photo... they're taking it too far.

As a sidenote, Toronto-based Idée Inc. created an image search engine that not only helps identify stock photography but also people that have stolen your copyrighted images. Here's a screenshot of the results returned by TinEye for the previous image: 

TinEye even found this modified image... very nice technology!

What do you think?

In summary, we decided to go with a cartoonish feel because we felt it was the best way to distinguish ourselves from our stereotypical competition. We purposefully project more youthful brand image, as we are targeting smaller franchise systems. Do you think differently? Are you an ardent defender of stock photo or do you think you've found the perfect balance of web 2.0 styling with the warm fuzzy feeling of seeing people? Do you agree with us? Let us know!

The omnipresence of technology in our lives and the Internet has changed the way we do business. The software industry is not only one of the driving factors for this change, it is also one of the first industries to be influenced and react to changes in society. This contrasts with the franchise industry which is a bit old school... which has its pros & cons. Regardless, being abreast of current trends is helpful for any business and we feel franchisors can benefit from the insights of those with a software engineering background. Since LavaBlast builds software for the franchise industry, we’re at the junction point of two very different worlds ... which are more alike than you would initially expect. 

This article is the first of a three-part series related to technology in the franchise world. It focuses on similarities between franchises and software startups and serves as a premise to Part 2, which covers current trends in both industries. A comparable evolution in a changing context was to be expected, given the similarity between software startups and franchise systems. Finally, Part 3 discusses what franchisors should be doing to react to this change in business context.

For the sake of argument, let’s focus on small and/or new franchise systems. Why? There are numerous reasons:

1. Innovation often comes from smaller, nimbler organizations.
2. Over half of all franchise systems have less than 50 units. 25% have less than 10 franchise units. 
3. Hundreds of new franchise concepts are born every year. Over 1000 businesses turned to franchising for expansion between 2004 and 2006.

Small franchises are similar to software startups in nature.

There are numerous similarities between software startups and budding franchises: the strong need for domain expertise, the global potential, and they are both created to fill a gap in the market. However, their resemblance can be concisely be explained by looking at growth patterns and scalability.

In general, because of the very nature of software, software startups can achieve very high growth in a short period of time (examples abound!). Venture capitalists rate startups according to their scalability in order to obtain the highest possible return on their investment. This is done by building software which solves problems for a large group of people with little or no custom work required on the software firm's end to support a new user. Hosted software applications are installed once on the startup's web server and shared between customers, thanks to a scalable multi-tenant software architecture.  Additionally, the first hires in a software startup are crucial to building both v1.0 of the product and also the company’s culture. A solid team working together in the same direction is necessary to grow a successful company.

Franchises are similar because the concept must typically be tested and proven to be successful in its first location, akin to a software beta. Small business owners which turn to franchising as a growth strategy quickly discover than growing a franchise is a completely different ball game than making your first location successful. Scalability cannot be tacked on, it must be planned. The franchisor must find a scalable supply chain and must ensure the store look & feel is replicable. Unfortunately for some, purchasing store fixtures at your local flea market, police auction, or more recently eBay is not a replicable way to grow a franchise. The franchisor can't fly out to different cities to shop around for cool lamp shades for each new franchisee... Suppliers must be approved and utilized. The same is true for software where an integrated solution is the key to simplified franchise management. Furthermore, people with different backgrounds and skill sets are required to launch a successful franchise, and the first few franchisees are critical. As much thought (if not more) must be given when picking the first franchisees as the first hires in a software startup.

Additionally, the very nature of franchise systems implies that franchisees are geographically distributed. One might think this is not the case in software startups, but this is not totally true due to outsourcing and open source. Furthermore, even small software startups deal with international customers on a daily basis.  As such, the various stakeholders are not necessarily always in the same room ready to discuss business issues even though both are have to quickly react to preserve customer/franchisee satisfaction and grow the business.

Implications

We've just scratched the surface of why software startups are similar to small franchise systems. You may have other similarities in mind or you may disagree and have opposite feelings; in both cases, you are invited to share your opinion.

If you are a franchisor, why should you care about software startups? Simply put, software startups are more in tune with the impact of technology on our society which affects your franchise's operating environment. This subject will be covered in detail next week, in Part 2. In the meantime, you are invited to read Growing up with Google: What it means to education which explains the characteristics of the Net Generation you should be aware of, regardless of your background.

We attended the second Montreal Founders & Funders dinner this week. Since I've noticed that all blogs assume that their readers know what the Founders & Funders event is (which is not the case), I thought I'd give a brief overview of this simple concept.

• The organizers send invitations to a bunch of people who have manifested interest in the event (via an online form or in their network of contacts).
  • I don't know how the selection process works, but attendance is limited to the size of the restaurant.
• The attendees arrive and network with other founders & funders.
  • No special organization - just put interesting people in a room with other interesting people and magic happens.
• Sit down at a random table and enjoy the meal
  • I ended up at a table with a 50/50 breakdown of founders versus funders.
• When you're done, network some more
  • There was a networking event after the meal where an invitation was not required.

It was a nice experience overall and the non-stressful environment was great (although some founders appeared quite nervous!). The crowd was very diverse and we covered a broad range of subjects, in both French and English. Unilingual individuals must have had a bit of trouble following everyone’s conversation but in general it was a very enriching experience. We ended up being so busy talking to everyone that the event just flew by, which confirms it was far from monotonous. We weren't looking for funding but we saw this event as a good opportunity for a first encounter. Going to such an event also reinforces the fact that it's a small community and I was surprised that lots of people had heard of us before, thanks to the hard work of the folks at StartupOttawa and MontrealTechWatch.

Some of the other founders at the event were:

• Christian Laforte of Feeling Software - great business
• George Favvas of SmartHippo - great concept
• Steve O'Halloran of AssetLabs - great pitch

The one improvement I would make for future events would be prepare and distribute a list of attendees a few days before the event. I personally prefer to do my homework before meeting a bunch of people. Furthermore, I met at most 20% of the people at the event and maybe missed out on some founders/funders with experience in retail environments.

Finally, Austin Hill had an open question: what could we do to get more people starting companies fresh out of university? I’ll possibly talk about my opinions on the matter in a future blog post. For now, let me invite you to review the Founders & Funders site and strongly incite you to see if such an event can be organized in your community.

Last week, I loaded up my blog aggregator and I was pleased to see Joel Spolsky had written a new article on architecture astronauts. He made a good point about how Microsoft is rewriting the same software over and over and no one seems to care. I totally agree with Joel's argument about architecture astronauts as we are wasting precious intellectual resources and solving the same issues over and over.  (Side note: an interesting read about how we're wasting massive amounts of brainpower.)

However, that's not what I'm writing about today. I found myself reading faster and faster as I progressed through the article, reading the last paragraph at a frenetic pace. You can definitely feel Joel's frustration - the big boys in the industry are "stealing" all the great programmers by offering starting salaries leagues above what smaller companies can offer. Why do I think Joel's frustration is paradoxical?

Joel's Premises

• Hire only the top quality people
• Treat your employees as if they were superstars in your beautiful New York offices - spare no expense.
• Build a closely-knit team that works on challenging problems to retain your employees
• Set an example as being the best damn place for a software engineer to work and inspire millions of developers to follow your example.

Joel's Aspirations

• Recruitment problem: solved.
• Develop and commercialize high quality software
• Thanks to a well-defined (and very selective) hiring process, retire from software at age 45 to start your own avocado grove as a hobby.

The Contradiction

• Joel is frustrated about losing prospects to Google and Microsoft.  Yes, THE Joel we turn to for tips on software recruitment.
  • (Note: He still has a couple years left to fine-tune his left-handed avocado picking technique.)

Okay... I'm generalizing just because I find it ironic to see Joel having hiring woes. Even if as a general rule things are going well, that doesn't mean you get anyone you want. Everyone has hiring frustrations, even those who set the example. However, I'm left to wonder... has anything changed in the context of hiring? Is there anything you need to do differently today to grab the best technical talent? I can't answer these questions myself, but I see lots of companies struggle with hiring.

I do agree that it is impossible for smaller companies to compete with some of these starting salaries (unless they are keen on burning VC money) but smaller firms do have (many) advantages. But what are they?

1. Get back in the kitchen and make me some pie

What I like most working for a startup (and it would be the case even if it wasn't mine) is the opportunity to touch a bit of everything (engineering, marketing, sales, legal, etc.). Even if you go work for a 40-person startup, if you're interested in contributing to elements which aren't related to your primary function (software developer), you probably can help out. For example, if you think the company's website doesn't communicate what the company does, you can take a step back, think about it a bit, and propose enhancements. (Complaining doesn't bring you anywhere, but constructive criticism helps everyone out!).

If you're a hardcore coder, you can still benefit from working for a smaller company, because you'll have a greater impact on the final product.

However, this fact is not something that has changed in the hiring context... what has?

2. Not everyone wants to work in New York, Redmond or Mountain View.

This is one key differentiating factor for startups. Not all of the world's most talented individual feel inclined to move to get a job and I feel the number of people who will start their own software business in their home town will increase in the coming decade. In the past, we've seen a few companies such as Eric Sink's SourceGear in Illinois do well even if their offices are in the middle of nowhere, so to speak. This is due partly because of increased high-speed Internet availability combined with the lower cost to start your own software business. I think we'll definitely see more success stories from entrepreneurs living in non-metropolitan areas over the next decade because starting your own business (or working for a local one) is such an attractive alternative. It's funny how making it easy to go global causes the creation of many smaller local hubs.

On a related subject, I don't recall that many local startups trying to recruit us while we were software engineering students at the University of Ottawa... there were a few but we were mostly solicited by IBM and Research In Motion (leading to the infamous "hey! do you want a RIM job?" quote). If you're a competent student today, you should definitely look around at local startups that are working on interesting concepts.

3. You can read about it on the Internet

There are tons of people talking about their software startup experiences on the Internet and it's easier to actively participate in the community today than it was a decade or so ago. I can't really see myself connecting to a BBS with my 14.4kbps modem to learn about software startups. Today, you can find people with similar interests very easily but, best of all, you can learn from their experience.

Rather than enumerate a long list of advantages that you wouldn't bother to read, I'd like to ask you an open ended question.

What do you think will change in the way we hire software engineers in the next decade?

Please feel free to discuss in the comments. Ideas: Outsourcing? Co-working? Telecommuting? Nothing at all?

A month or so ago we mentioned co-working environments in one of our blog posts about startup lessons. It appears we're now the number one hit on Google for co-working software startups. When I first heard of co-working, I assumed they were mainstream because the added value these environments bring to software startups is so obvious. However, they are an emerging trend in the software world and you should expect to hear more about them in the future. 

The advantages of co-working environments:

1. It provides a location where members of a small core team can meet, brainstorm, and work on their new idea.
2. It is a low-cost alternative to renting/owning your own office. You can use the space as much or as little as you need it and don't need to buy chairs, desks, a photocopier, fax machine, espresso machine, routers, etc.
3. It opens the door to meeting new people and networking with peers in the same industry.

In a sense, they improve on the familiar software engineering lab environment that is available to university students and we know universities help create startup hubs.

Given the fact that it has become so inexpensive to start your own software company, co-working environments are a perfect fit for the small software start-ups that want to strike it big but have limited resources. Furthermore, who better to help you with your software startup business plan than someone who's gone through the process in the past? Most government agencies that help you start your business don't fully grasp software companies, but the people in a software co-working environment do!

Rather than ramble on about why co-working environments are so great, I'd like to make an announcement: 

LavaBlast Software will develop an industry-specific POS and interactive kiosk for The Code Factory, a new franchisor in the co-working arena.

The Code Factory will open their first location within a couple weeks. Ian Graham, the founder, is very much involved in the Ottawa startup community and this co-working space will definitely help budding software entrepreneurs in the Ottawa-region. The first event to be held at the Ottawa location will be the Ottawa Web Weekend, who is currently looking for more programmers for the event!  Those of you who are not familiar with the franchise industry (and thought it was limited to McDonalds and Subway) might be surprised to see a co-working environment using the franchise model but you'd be surprised by the wide variety of businesses that do (software shops, web design shops, etc.)!

Not only are we very happy to have a new franchisor on board, we're especially excited by the fact that The Code Factory will be out first client outside the child-related retail industry to use our industry-specific interactive kiosk as a key differentiator.

As stated in one of our recent software start-up posts, we submitted our full-length business plan in this contest : 10th annual Québec Entrepreneurship Contest.  In the east part of Montreal alone, over eighty business plans were submitted.  Two weeks ago, we learned we were amongst the twenty-some finalists for the first round of the contest (there are three rounds: local, regional, national). On Monday, we had a short interview with the jury who decided which of the finalists would win in each category. It was a good way to practice our pitch, not only with the jury but also the other entrepreneurs that were being interviewed. Yesterday, at the awards ceremony for Montreal-East, we won the first prize in the Technological & Technical Innovation category.  Woohoo :). We won a cash prize and a one year membership to the chamber of commerce. 

We wanted to congratulate our good friends at Web Estate Management who also won a prize in the Services category! We had a long chat with the winners of the transformation / manufacturing category, Brik-a-Blok Inc.

Writing a business plan is a complex exercise if you want to do it properly. However, participating in a business plan contest can give you the small push you need to actually write it down and define your vision and your short/long term plan. If you aim to be a well-rounded software engineer doing more than coding, writing your plan brings a bit of variety to your day and allows you to distance yourself from the code for a few hours. We tackle business issues as if they were engineering problems and learned a lot during the whole process. (It is a known fact that it is the exercise of writing the plan that is valuable, not the document itself, which will evolve with the company.)

Even at this stage of the contest, we've already met some really interesting people that showed interest in our solution and had a few business propositions. The visibility that such a contest can offer in the media cannot be underestimated; some newspapers will most probably mention our company along with our sexy faces.

Yesterday was the ceremony for Montreal-East; we are now participating in the regional contest.  We'll know at the end of the month if we are in the finalists!  Wish us luck!  Regardless of the outcome, this was a very gratifying experience.

We invite you to read Part 1 and Part 2 if you haven't done this already. A few days ago, Paul Graham had the following to say about our type of startup:

In an essay I wrote a couple years ago I advised graduating seniors to work for a couple years for another company before starting their own. I'd modify that now. Work for another company if you want to, but only for a small one, and if you want to start your own startup, go ahead.

The reason I suggested college graduates not start startups immediately was that I felt most would fail. And they will. But ambitious programmers are better off doing their own thing and failing than going to work at a big company. Certainly they'll learn more. They might even be better off financially. A lot of people in their early twenties get into debt, because their expenses grow even faster than the salary that seemed so high when they left school. At least if you start a startup and fail your net worth will be zero rather than negative.

Paul Graham

Lesson 10) Listen to your customers

Some recent blog posts loudly taunt readers with titles such as I Repeat: Do Not Listen to Your Users. Of course, this is all just a blogging strategy as the end message is simply to spy on users to learn what they are doing with your software, not just listening to what they say they're doing.

Founders At Work informs us that a critical lesson when starting your own software company is to obey your customers, not your thick 75 page business plan. If they repeatedly ask for a module which you didn't plan for, and they're offering you money to build it, do it. It is not uncommon to read about companies starting out with a particular vision, building some internal tools to help them produce the target software, and ending up selling those internal tools instead. The original vision died, but they still built a successful company by being flexible and re-orienting their strategy depending on what the market dictated.

We lived this lesson first hand because our website was visited every day by independent store owners, looking for a particular piece of software. Even if they saw it was a solution for franchisors, they contacted us, wanting to purchase the software. We initially declined, but after thinking it through, we launched a side product targeted at independent stores. For our company, it's easy to spin-off products to target retail stores by cutting off all the integration built into FranchiseBlast. In our eyes, the product doesn't have the same value but, outside of the context of a franchise, it is a viable option.  Who knows, we may branch into software for independent retailers in the coming years (but I prefer our niche :) ) For now, it's a simple sideline to fund our core development. We also confirm the fact that it takes three times as long to develop a product as it does to create it for a single customer.

Furthermore, because we're self-funded, I feel we have a competitive advantage over our VC-funded competition. Our competitors want to skip the flat part of the growth phase and jump directly into the areas of highest ROI. Generally, this means developing one-size fits all software with (if you're lucky) tons of configuration options. We're not attacking the problem in the same way because we're building our architecture organically, refactoring when necessary. In the end, we don't tack on features, we analyze franchisor business processes and produce good solutions for them (both from an engineering perspective and a customer satisfaction perspective). This added personalized touch and desire to adapt to their operating environment is our competitive advantage.

Lesson 11) Software Sales

Because we're a small startup lead by developers, and because we think it's good for us, our developers do a little bit of everything which includes helping out with software sales and marketing. One of our partners is our salesman for the larger projects, but we're still actively involved. We've launched a small software product as a sideline because we had been getting inquiries for it on a weekly basis. It's something we already had and could launch without taking precious resources away from our main focus.

Here are some of our conclusions, from our perspective. Simply put, put yourself in a position where people want to purchase something from you as soon as possible.

Pushing your product is very hard.

Sending emails to potential customers: this generally does not work. We never send out mass mailings; we've spent a few dozen hours navigating hundreds of franchisor websites and picked half a dozen that we feel we could truly help. The experience was enlightening because we could extract patterns from the our potential clients' websites. However, in 2008, getting replies for an email is much harder than it was a decade ago when we first started our web design business. Spam has ruined email for people like us who take the time to write precise, customized emails. Back then, people didn't get that many emails and took the time to reply. Today, most people don't take the time to reply.

Cold calling is an arduous task and although the return on investment varies per product and industry, it is an essential part of business. Anyone can do the job but even professionals find it hard on one's self-esteem. Persistence is key.  For more tips, read this article. 

The long tail effect is very real, people come to us.

An insightful (and motivating) book is Chris Anderson's The Long Tail. To summarize the book in a sentence relevant to this section, given the negligible stocking/distribution costs of software and the ease of which we can search through the very large selection of different software which can be found on the Internet, it is now possible to create profitable businesses by developing software that targets a very precise niche. Simply put, create quality software that solves a particular niche's problem and people will find you, thanks to the Internet. We've experienced this first hand and confirm it is true.

Reality is a bit more complex than a simple if you build it, they will come, because you need to need to know your niche, work on marketing, getting in the search engines, figuring out the right price, etc. A more precise (yet recursive) statement would be if you build and promote something worth buying, they will buy it. In any case, in our first year, we reinforced our preconception that it is much easier to sell software to someone who comes to you than it is to push your software to someone who's not interested.

Karma: the simple solution for software engineers

Work hard and build a quality product. Assuming you are working on something with a reasonably sound business model, you're number one priority should be your product. There are lots of things to think of concerning marketing and sales, and you'll slowly learn to understand them if you have an open mind. In most contexts, writing good software is much more difficult than learning the ground rules of marketing and sales. Work hard, be honest, be open minded, and good things will happen. (Also, keep an eye out for the many people who don't follow these rules and try to screw you! :))

Lesson 12) Finding Other People

Running your own business is all about contacts (pretty much anything is!). At some point or another, you'll need to hire someone, partner with other companies, and find people to sell your product or services to. The more people you know, the better it is. You need to know people (and people need to know you) to be able to grow. We spent the biggest part of our first year working hard, undercover, and this was one of our mistakes. We weren't really trying to be undercover, but we weren't doing anything for people to know we existed. It took us a while to bother throwing our website online because we were so busy with our projects. Bad decision. The sooner your website is online explaining what you do, the sooner it gets on Google and the sooner people start finding you. Today, our blog (even if our readership is limited) helps us find and collaborate with many other people. We weren't sure what to talk about at first (we still aren't!) but we're having tons of fun.

Coworking

We just learned about Coworking last Friday and it's something really interesting!  Here is a quote from the Wikipedia entry that best describes what Coworking is:

"Coworking is an emerging trend for a new pattern for working. Typically work-at-home professionals or independent contractors or people who travel frequently end up working in an isolated way. Coworking is the social gathering of a group of people, who are still working independently, but who share values and who are are interested in the synergy that can happen from working with talented people in the same space."

We have been working from home for the past year and it can sometimes become difficult to spend your days alone.  We are communicating continuously inside the company, but sometimes you need to see people! Here in Montréal, we have Station-C that opened on February 4th 2008!  It is definitely not as expensive as renting your own office and you get to see more people right away, to exchange and make new friends.  When you work from home, the possibilities of making new friends at work are pretty limited even if you have 400 of them on Facebook!

Networking

Networking is definitely something every entrepreneur should develop.  Here in Montreal we have the JCCM (Jeune Chambre de Commerce de Montréal  / Young Chamber of Commerce of Montreal).  Software engineers are not renowned for their social skills, but we're still businessmen so we have to make new contacts and meet new people!  What is nice with the JCCM is that you can network with people who are in the same situation: they are starting new businesses and/or are working from home.  You can meet people that have the same problems as you do and can collaborate to help each other.  Furthermore, networking with people of the same age group may help you develop professional relationships that will last throughout your career. Networking is a crucial part of any business and can improve the way you solve problems because you know who to call when something happens. As with anything, finding a good balance is essential (you need to find more experienced mentors!).

Business Plan

Before launching our company, we worked on a short business case and participated in a Technology Venture Challenge. We didn't win, but it was a very beneficial experience because sitting down and thinking about what the hell you're trying to accomplish is a very rewarding process. We wrote the plan for ourselves, but we had the chance to talk to top technology entrepreneurs, investors, and business professionals.  They helped us drill down and learn our strengths and weaknesses. Recently, we wanted to repeat the process and found a local full-length business plan contest. Again, the contest is a simple external motivation to get things done by a particular date but we're doing it for ourselves. Hopefully we'll get to meet more interesting people and it will allow us to grow as businessmen. We strongly recommend writing a business plan, but only if you're going to do it right, for yourself. If you're going to botch the process, don't bother. The most valuable part is the forced introspection; if you skip that, you'll simply produce a useless 50 page document. 

Hiring

We expect hiring to be our next challenge and are very inspired by Joel Spolsky's book on hiring. We're not too sure how applicable his strategies are in the first years or when you're not located in a metropolis, but it is good to have something to aspire to.  We expect to grow the team at the end of the year, and we're already looking for great candidates. Interested? :)

Conclusion: Infinite Number of Lessons

We could ramble on and on about things we learned during our first year. Simply put, the number of lessons are infinite.  We did perfect our technical skills but we did most of our learning in other areas.

Here are some lessons we could have talked about but chose not to:

• Keeping up to speed with technological changes
• How automation/scripting helps you save time
• Don't forget the legal issues! Contracts, open source licenses, copyright, trademarks, etc.
• The importance of a great web hoster
• Versatility is key

We may post other lessons in the future, but for now we plan on creating a few technical posts with sample code. Be sure to let us know what kind of posts you like to see on our blog!