How to make it in software big

Want to know how the UK's most successful software vendors made itompanies are world leaders while others struggle to survive? On the eve of his much-heralded book launch, Peter McHugh, author of Making it Big in Software, reveals exclusively to Infomatics five strategies to secure software success. big? Over the years, a number of major UK success stories have emerged: Sage in accounting, Dr Solomon's in anti-virus, JBA in the ERP market, Staffware in workflow, Cadcentre in plant design software, Zergo in encryption software.

In my book, Making it Big in Software, I set out to understand how these, and others, have grown world-leading software businesses from the UK. I found that UK software vendors achieve high growth by successfully executing five fundamental business strategies which differentiate the leading from the mediocre players. The first three strategies are pre-requisites for success, while the latter two can be viewed as success accelerators.

STRATEGY 1

Developing a customer-centric product

Having the best product, from a technical or functional viewpoint, is not essential. But producing and evolving a product which puts the customer at the core is.

All the software market leaders develop a customer-centric product which has the following five major characteristics:

- Targeted at solving clear market problems.

- Designed with a number of specific points of uniqueness.

- On-trend with market developments.

- Continually evolving product offering, from both a functional and technical perspective.

- Rooted in familiar territory with a focus on one area of core competence.

STRATEGY 2

Creating a balanced management team

The typical start-up team comprises a lead entrepreneur, often with some fellow founders, with a small supporting team to complete early product development and assist with initial customer generation. It is striking how many of the success stories assembled the core team with a complementary mix of skills (covering all the key functions) at an early stage.

They also acted fast to expand management bandwidth in line with anticipated strain points at critical milestones, such as the start of the export process, undertaking an IPO and when employee numbers hit 50, 150 and 250. These strain points often require a change in management style, plus the addition of new management layers in the organisation structure.

The stage between 50 to 150 employees is often the most problematical, when the degrees of management complexity multiply dramatically. In fast-growth software companies, there is also a real need to continually examine the chief executive's comfort zone and suitability for the company's stage of development. Often an external replacement is brought in if fresh thinking or specialist skills are needed to drive the business forward.

STRATEGY 3

Securing equity funding

One of the most common reasons for mediocre performance is a conservative investment mentality and a reticence to risk spending money outside the company's means. Hence the over-riding priority of equity funding. This requires early adoption of a mindset which is comfortable yielding equity to external parties, and possibly ultimate control over the company.

Most founders in fast-growth software businesses rapidly go below the 'magic' 50 per cent shareholding, at which point they are no longer in control over voting rights. The options should be matched to stage of company development.

Early stage companies often turn to business angels where the amount of equity required is up to £250,000 and if they are also looking for software business experience as well as money.

Venture capitalists (VCs) tend to look at funding requirements of above £250,000, and have a number of 'hot buttons' which will fast-track negotiations. Briefly, these are that you are operating in a market with high growth potential, have a unique product with clear competitive advantages, a committed management team, a profitable business model and have thought about the VC's exit strategy. Venture capitalists focus particularly on management team issues.

Key topics for negotiation are company valuation, level of ongoing VC involvement and exit mechanism.

STRATEGY 4

Executing a winning business model

Normally, the vendor will want to expand the number of feet on the street under its control by working with third-party companies, either to assist with sales or implementation. Building a web of partners is therefore a critical skill for the company to develop.

Acquisitions can also play a significant role in expanding the vendor's footprint and infrastructure for accessing the market. Nearly all successful vendors start out with a direct business model, selling and implementing using their own resources. Rarely do they waste time trying to secure strategic or channel partnerships until the company has become 'magnetised' and naturally attracts partners because of a compelling proposition.

Having secured some early success, they then select one of the four generic business models - direct, partner, channels or hybrid - as the preferred end-game business model. Normally, this involves moving towards a collaborative view of the world which incorporates some mix of complementary technology partners (such as hardware vendors or ISVs), integrators and IT consultants, and channel partners.

STRATEGY 5

Charting the route to export markets

Some businesses are born global and have exporting in their blood from very early on. More commonly, deciding to get serious about export markets is triggered after a period of opportunistic overseas selling. The key issues are which countries to target and how to secure market entry. It is essential to focus on the priority countries and then dedicate sufficient resources to make a success of it. Dilution of effort is the single most common factor underlying failed export initiatives.

Market entry is a straight choice between direct and indirect means.

For the major markets, and in particular the US, it is essential to establish an on-the-ground presence fairly soon. A local start-up can be fronted by the chief executive (or other company founder), a proven senior manager or a locally recruited manager. A risky alternative, but one which delivers critical mass faster, is to acquire a local operation, often a competitor.

Even indirect options should be thought of as Trojan horses - that is, channels or strategic partners which could be acquired outright should the operation prove a success. Joint ventures can be an effective option if a strong candidate company can be identified to share the risk, and to whom giving exclusivity would not be unduly risky.

Successfully implementing these five strategies should ensure that you are well on the way to high growth. It is certainly not necessary to be some kind of supermanager to blend the many different success ingredients into an effective business formula. Nearly all the founders profiled in my book were just everyday folk who stumbled across a good opportunity, which they had the vision to recognise and the drive to make it a success. Above all else, what matters is the old cliche about one per cent inspiration, 99 per cent perspiration.

The current climate in the UK is very favourable to ordinary people with sound ideas. An entrepreneurial culture is being promoted by government.

A wide body of experience from those who have already been through the growth process is available, possibly in an investment or non-executive role. And there are encouraging signs that the venture capital community is becoming increasingly interested in early stage, and in some cases start-up software companies.

All that's needed now is a pool of entrepreneurs willing to have a real go at making it big in software.

Title: Making it Big in Software

Author: Peter McHugh

Price: £20

Publisher: RUBIC Publishing

ISBN: 0-9535487-0-8

More details: www.rubic.co.uk.

Like this story? Spread the news by clicking below:

 del.icio.us     Digg this     reddit!