Good time for starting a software venture

With free online tools and viral marketing, it's cheap to open up shop

dranii@newsobserver.comNovember 20, 2011 

  • The next installment in Southern Capitol Ventures' ongoing Entrepreneur's Series on Dec. 12 will focus on building a software company with little or no outside funding.

    "Bootstrapping a Business" will feature a panel discussion with four entrepreneurs who will talk about how they've employed free software development tools, cloud computing and other techniques to keep costs down. The panel will include Jed Carlson, president of ReverbNation, Troy McConnell, CEO of Clever on Demand, and others to be announced.

    News & Observer business reporter David Ranii will be the moderator.

    The event will be at Brier Creek Country Club in Raleigh. For more details, or to buy tickets - $29 if purchased by Dec. 6 - go to eseriesdec11.eventbrite.com/

  • If you want to start a software company as inexpensively as possible, here are some tips:

    A good product doesn't need to be a perfect product.

    "It's got to be good enough," said Joe Colopy, co-founder and CEO of Durham email marketing company Bronto Software. "What's really, really important is that you get some real customers, paying or not, early on. If you don't, it's very easy to exist in your little ivory tower and have no one criticize you and have no one to poke holes into what you're doing. ... Otherwise you have the temptation to perfect and perfect and perfect it, and it never goes out the door."

    Have a long-term perspective.

    Building up a business with the goal of cashing out quickly isn't a recipe for success. "Build the business because you want to build a business," said Colopy. "If you want to get rich, there are less painful ways to do it."

    Pick the brain of someone who's been there, done that.

    "Go talk to Jesse Lipson," said venture capitalist Steve Nelson of the Wakefield Group, referring to the founder of ShareFile, a Cary company that recently was acquired by publicly traded Citrix for an undisclosed sum. "He did it perfectly."

    Have a laser focus on expenses.

    "Keep your burn rate really, really low," said Colopy. Burn rate is the pace at which a company goes through cash.

    Be prepared to make personal sacrifices .

    At Bronto, Colopy and co-founder Chaz Felix didn't take a salary the first three years they were in business. "Every dollar you take out of the business is $1.50 you take out of revenue," because you can plow that money into growing the business, Colopy said.

    David Ranii

The cost of starting up a software company has changed dramatically in recent years.

Today it costs much less.

"I think it can be 80 percent or more cheaper," said Triangle venture capitalist Steve Nelson of the Wakefield Group, which invests in software businesses.

Cloud computing. Free software development tools. Free and/or inexpensive software for accounting, coordinating sales efforts and other vital functions. Viral marketing campaigns. All this, and more, have made starting a software business from scratch a much less costly undertaking.

The amount of time required to go from concept to prototype also has shrunk significantly because of new efficiencies baked into software development tools. And, time being money, that's a cost saver, too.

The upshot is that startups don't have to raise nearly as much money from outside investors. And, when they do, they often already have a prototype or even paying customers.

"The risk is smaller and, hypothetically, the return (on investment) is just as great," Nelson said.

It would make sense that lower startup costs would equal more local startups, and that appears to be the case.

Although the Council for Entrepreneurial Development, a Triangle support group for entrepreneurs, doesn't keep track of software startups, anecdotal evidence points to an uptick, said Kathryn James, director of entrepreneurship.

No outside investors

Some entrepreneurs even forgo raising money from outside investors altogether. Although that's always been the case, the possibilities loom larger than ever today.

A case in point is ShareFile, the Cary company whose software enables businesses to share large files confidentially over the Internet. The 6-year-old company, which last month was acquired by publicly traded Citrix for an undisclosed sum, grew to 100 employees and was on track to exceed $11 million in revenue this year without ever raising a dime from outsiders.

Likewise, the two founders of Durham email marketing company Bronto Software, Joe Colopy and Chaz Felix, invested about $10,000 in Bronto Software when they started the business in 2002 and never needed to raise additional funds. Bronto has 115 employees and expects to generate $17 million or so in revenue this year, up from $11 million last year.

In the early going, it helped that Colopy was an early adopter of free software development tools.

"I don't think I paid a dollar for anything," he said. "And that wasn't possible five years earlier."

Today those free software tools are so robust that they make software development much more efficient, said Mike Doernberg, CEO of ReverbNation in Durham.

"You used to have to build things at such a granular level," said Doernberg. "You can now spend your time doing much, much more sophisticated and value-added stuff than you used to be able to do."

But there is a downside.

"The bar is also much higher," said Doernberg. "Because you can do all this so inexpensively, because you can do it (much more efficiently), you better build something a lot more compelling. Because everybody else is going to do it."

Founded in 2006, ReverbNation has about 45 employees and is profitable. The company has raised $6.5 million in venture capital but would have had to raise considerably more in an earlier era, said Jason Caplain of Southern Capitol Ventures in Raleigh. Southern Capitol has invested in ReverbNation.

ReverbNation's technology provides key services for nearly 1.8 million music artists, including distributing songs to iTunes and Amazon, and coordination and delivery of promotional materials via social networks. "We also work with thousands of venues throughout the United States," said Doernberg.

Business accelerators

The low-cost option for software startups has been a driving force in the formation of business accelerators in the Triangle and across the nation. Although every accelerator is different, they typically offer technology startups a relatively small amount of cash, $20,000 or so, for a small ownership stake in the business. They also often offer free or heavily discounted professional services such as legal advice and accounting, as well as a few months of "boot camp" in which entrepreneurs work with a team of mentors and advisers.

There was a time when $20,000 wouldn't go far for a software startup, but that time has passed.

"If you look at the demographics of the people who are doing it, they are all young people in their early 20s who basically don't care if eight of them live in an apartment and if they eat chicken dogs and rice," said David Rizzo, CEO of N.C. Idea, a nonprofit that supports entrepreneurs. So, he added, giving these entrepreneurs $20,000 is enough for them to feed themselves and feed their passion: developing a snazzy product.

Last week, N.C. Idea and Capitol Broadcasting, the owner of the American Tobacco campus in Durham, announced they had teamed to form a new technology accelerator, Groundwork Labs. Software development is so fast-paced these days that the goal is that, after 12 to 18 weeks at Groundworks, a startup will at least have developed a product prototype.

Chris Heivly, who ran an accelerator in Durham for Launchbox Digital, which earlier this year exited the accelerator business, is now raising funds for a new accelerator called Triangle StartUp Factory.

In the past, said Heivly, startups could spend hundreds of thousands of dollars for computer servers for their internal software development efforts.

Now, however, companies can rent server capacity over the cloud from Amazon or data center companies. Their rental fees are especially friendly to startups, Heivly said, because they are based on usage.

By the same token, many startups plan to make their software available to customers over the Internet, a business model known as software as a service. Such companies used to have to buy and maintain their own servers to host their applications, but now they can rent that capability.

Nor, said Heivly, is office space a requirement when you can collaborate over the Internet and even have (virtual) face-to-face discussions via Skype.

As for developers themselves, you can rent them, too, via websites such as Elance, vWorker.com (formerly Rent A Coder) and oDesk, said Caplain, the venture capitalist. And those developers don't have to be nearby to work on your projects.

"So the small, boot-strapped company now has the power to find talent anywhere in the world," Caplain said.

Some things never change. Talent is crucial to launching a successful software company.

Ranii: 919-829-4877

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