Some folks seem to know instinctively how to run a software company. They have the right idea at the right time, they assemble an impressive team, they make good deals. Guess what? You can do all of that right and still be one of the 90% of startups that fail. In fact, to become a truly successful software company and not be relegated to the (ahem) MySpaces of history, you have to do more than simply avoid others’ mistakes. You have to go to school on what the world’s most successful software companies did right – and do it even better.
How to Run a Successful Software Company and What Makes it Successful?
Of course, every company is different. The business plans, goals, and clients vary whether you’re an SAAS startup, an enterprise software company, a consumer mobile app, or a game creator. Still, there are some common denominators of successful software companies. Though it’s possible the stars just happened to align in the right order for recent off-the-chart success stories like Asana, Slack, and Zoom, for example, to have evolved into the vital business tools we can’t live without today, more likely, the leadership made strategic decisions at critical junctures in their company’s timeline that set them apart from the competition. Now’s not the time to flex your inner cowboy and blaze your own trail. Lean into the lessons of the best!
Take a moment to understand the five winning rules that sent successful software companies on a completely different trajectory than they otherwise would have.
Have no doubts about your team. You don’t have to be BFF’s like the founders of Airbnb to ensure a successful partnership. But at the heart of nearly every stable software company is a relationship of mutual trust, support, inspiration, and respect. When you’re assembling a team for your board, your executive leadership, or other stakeholders, be mindful of selecting cautiously – you’re going to need them to have your back at all times and vice versa.
Think way out of the box. Another stratospherically successful company—Slack—started as a little utility the company’s founders created to facilitate communication on a video game project. Their creative and flexible thinking allowed them to morph their funky chat tool into something few could have predicted. Now, you don’t have to aim so high as to create a brand new platform, like the Slack founders did, but if you want to be successful, could what you’re creating have widespread usefulness in another setting?
Bootstrap it. While it can be slow going, full of risk, and not attainable by every software company founder, plenty of successful software companies, including the hosting service GitHub and the tech site TechCrunch, bootstrapped their way to monumental success. If you can do it, bootstrapping exempts you from giving away valuable assets in exchange for investor money (namely, equity and decision-making). The internet is full of money-saving tips for software startups like “use free tools for as long as possible,” so when you do make it, you can keep a lot more of the money you make.
Take advantage of the freemium model. If you can remember back to 2019, most of us were managing videocalls on Skype and FaceTime. These were fine, but not necessarily designed for the extensive videoconferencing required of the great work-from-home revolution brought upon by coronavirus quarantines. Suddenly, we all became hardcore users of a little video utility called Zoom that was fast – and most importantly, free.
And, once we realized we needed it – we were already hooked – and also craving the upgraded features Zoom offers for a small premium. Successful software companies figure out exactly how much of their services they can give away to grow their user base and allow users to become invested in the product. Then when they’ve come to depend on it, users are willing to cough up a little more to get access to all your product’s features.
Make something you need. Slack started as a homemade tool to facilitate communication on a group project where everyone worked remotely. It was created to solve an individual problem that turned out to be universal. If you create something that’s handy for your needs – it’s entirely possible it could help millions of others. And if not, at least you’ll have the satisfaction of creating something that makes your life a little easier.
When Should You Get Business Insurance for Your Software Startup?
Forget the days of programming in your garage in your hoodies-and-jeans. Whether you’re seeking venture capital funds or are unfunded, your role as software entrepreneur will put you in the company of people who could give you a hand up. You want them to have as much faith in you as possible and that means appearing serious and professional. One sure sign that you mean business is doing a full risk management accounting and equipping yourself with the right business insurance.
The exact right time to buy a business policy is determined by a few different factors. In general, most software entrepreneurs should get insurance before these milestones: bringing in other people; establishing a physical location; using vehicles for the company; meeting with potential clients; and signing contracts. What type of insurance you need varies but typically you want to make everyone involved in your company is covered: you, your leadership team, your customers, and your employees. For most tech companies, that means buying these policies:
- Employment Practices Liability Insurance (EPLI) to provide protection against employee lawsuits.
- Directors & Officers (D&O) to protect your board members and leadership team against lawsuits.
- Tech Errors & Omissions (Tech E&O), including Cyber Insurance to protect yourself against any claims of something going wrong in your product. Cyber protects your company against malicious cyberattacks and their unwanted effects.
- Funded companies also need Fiduciary Liability insurance to protect against claims that HR or other management mishandled employee benefits administration.
Is a Software Company Profitable?
If you follow the rules above, stick with your business plan, and stay focused, software companies can absolutely be profitable. But there’s a difference between being profitable and actually bringing home the bacon in a paycheck. Why? Because software companies can be so complex to run and so tough to “get right” that the numbers don’t always line up perfectly at the time you need to show clients, potential funders and partners, and prospective employees.
It can take a lot of development hours, user testing, partner deals, and other issues–including debt and expenses you racked up while you were busy engineering and designing—that obscure your company’s real income as well as the potential income you could make if you didn’t have any drains on your revenue.
If you’re not an accountant, it may come as news to you that there are actually a few different ways to measure a company’s profitability that are all standards of generally accepted accounting principles (GAAP). Companies often run the numbers different ways to gain more insight into their cashflow and revenue, including:
- Gross profit (GP). This is the amount you have after you deduct the cost of sales or cost of goods sold from your revenue. GP measures profit as a percentage of sales revenue and is a good way to determine how efficiently a company makes money from its products and services and also compare companies with different sales revenues.
- Operating profit (also called Earnings Before Interest and Taxes, EBIT). This is the amount that remains after you subtract all operating expenses from your revenue. EBIT is net income without debt interest and taxes and can show you a company’s underlying profitability.
- Net profit. This is the amount you have after you subtract all expenses, including interest and taxes, from your revenue. Net profit shows you how much money you’re bringing in and how profitable you already are.
- Earnings before interest, taxes, depreciation, and amortization (EBITDA). This is another widely used measure of a company’s profitability. EBITDA excludes expenses associated with debt so, while it is a good indicator of a company’s overall financial performance, it can be a little misleading.
Today, the barrier to entry for those who want to launch a software company is pretty low. You can run lean by hiring one or two senior developers and using more junior programmers. You can outsource development. You can forego an office. But if you want to run a successful software company, you have to demonstrate your level of commitment. A great way to show how serious you are is to secure business insurance. It will not only allow you to attract top talent, quality clients, and smart employees, it will give everyone the freedom to think and create fearlessly.
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