Do you have dreams of creating The Next Big Thing in software? Do you imagine presiding over a flashy new software company with a parking lot full of new Beemers? Well, here's hoping your imagination is an active one, because the hard facts are, it's tough to build a success in the software business.
Software Magazine publishes an annual listing of the top 500 worldwide software vendors. I've been following it for 15 years, since it was a list of the top 100 domestic software vendors. You can find information about the 1997 "Software 500" on the 'net. Before you set out to build a software company, look at the numbers they've compiled, and contemplate just what you're attempting to do.
There's a lot of money in software. I excluded vendors from the 1997 Software 500 list that generated the vast majority of their revenues from non-software products or services. (This excluded the dominant software vendor--IBM--whose software revenues alone are estimated at $13 billion. It excluded over $10 billion in software revenue from other computer systems vendors as well.) 442 vendors whose dominant product is software sold over $1 million in 1996.
The Software Magazine survey doesn't count them, but there are probably another 40,000 software vendors in the US alone. Most of them sell specialized packages to particular vertical industries (accounting for dentists, scheduling for radio stations, collections accounting for churches, and so on). But you're not thinking small potatoes. Your Next Big Thing is based on technology that applies to many industries, right? So let's keep focusing on the 442 million-dollar-plus vendors.
These 442 vendors generated over $43 billion in revenues last year. Great, you say; that's an average of almost $100 million per vendor. IPO, here we come!
But wait! We'd better look at how that revenue is distributed among our 442. The data is discouraging. Imagine a software revenue pyramid. Each block is a foot on a side, representing $1 million in revenue. The revenues are stacked, company by company, upon one another. The firm with the largest revenue, as with any proper pyramid, is on the bottom. The smallest firm on our list sits 43 stories in the air, represented by a single one-foot block. Our pyramid has an appalling shape, as suggested in the chart below: (You may have to extend the width of your browser window to see all the bad news.)
As we stand at the center of our pyramid, the bottom race of stones, representing Microsoft, stretches for nearly a mile in both directions. Microsoft generated over 21% of the total revenue of our 442. Seven tiers up, the stones extend less than 500 feet in each direction. The top seven vendors generated half the total revenue of our 442. The top forty vendors generated 3/4 of the revenue. The revenues of vendors number 311 through 442 aggregated 1% of the total.
Our pyramid is shaped more like an Eiffel Tower in meltdown. What does this mean for you as a software entrepreneur?
You'll be one of a very select group if you can build a software company with revenues big enough to go public. The table below shows how many vendors have revenues exceeding a given figure. Whatever your target revenue figure is, you will have little company if you reach it.
|
This many vendors: |
...exceed this revenue: |
|
1 |
$4 billion |
|
6 |
$1 billion |
|
31 |
$200 million |
|
61 |
$100 million |
|
101 |
$50 million |
|
165 |
$30 million |
|
211 |
$20 million |
|
286 |
$10 million |
|
343 |
$5 million |
|
403 |
$2 million |
|
429 |
$1 million |
Does your business plan take you to $100 million in revenue in 5 years? If so, you're planning to become one of the top sixty independent vendors of software in the world. Do you figure you can execute an IPO when you reach $20 million? Then all you need to do is become one of the top 200 or so vendors.
Be honest with yourself. Sure, your business plan shows $120 million in sales in 2002. But realistically, this is like a career plan to move to Hollywood, wait tables, and expect to be discovered. There will surely be a couple of software firms less than 5 years old with that level of sales. What are the odds it'll be yours? One in a thousand?
So work from plans that have a greater likelihood of succeeding. Set realistic revenue targets, and build your company in measured steps to become profitable before you're a star. You'll work those long hours for longer than you'd like if you run your company lean. But you'll greatly improve its chances of survival.
Is there any good news in these disappointing numbers? In fact, there is. If you set realistic revenue targets for yourself, you can reach them with more focused products sold to more focused markets.
More focus in the product means fewer features, shorter development cycles, and trimmer and more controllable development staffs. More focus in the market means fewer product features (again), more market-focused conventional technology and less risky high technology in the products, and a tighter and less expensive sales and marketing team. You can (and generally should) choose a specific niche to make your name in initially. Many of the top companiess with diversified offerings started with a tight focus. PeopleSoft (#18) did only Human Resources applications; Symantec (#15) sold a flat-file data management system; Oracle (#3) was a focused niche technology vendor with the first commercial relational database management system; Adobe (#8) did cross-platform printing; even Microsoft (#1) did only language compilers for PCs. In each case they became profitable and dominant in their niche before diversifying.
With only 400 software vendors exceeding $2 million in revenues, you can segment your chosen market so that you can dominate your niche with just a few million dollars in sales. After all, how many of those 400 vendors will compete against you in your particular niche? Once you've established yourself as a major player in your niche, you can grow, in measured steps, to address other niches.
Success, as measured by size of revenues, is rarer in the software industry than you probably thought. The careful entrepreneur will work from plans that don't require becoming a top-200 vendor. Your probability of surviving will generally increase as you set your initial sights lower. You can find great gratification, financially and otherwise, in developing a successful smaller company. And, in my view, the best basis for building a profitable large software vendor is to first build a profitable smaller software vendor.
Return to the Copernican Group home page