VCs are looking for extremely large exits. This puts a lot of pressure on the founders to succeed fast or fail fast. A small, self-sustaining company can be more rewarding, because it can be molded to fit the founders better. Also, these companies usually have better chances to succeed (though without the lucrative exit).
I found much more literature about traditional VC backed startups than about building a small software business.
What should I do differently, if I have an idea for a software product and I want to build a company around it without looking for VC money? What should I do the same?
What should I do differently, if I have an idea for a software product and I want to build a company around it without looking for VC money? What should I do the same?Build a minimum viable product. See here too and here.
Use adwords to assess demand.
Basically, do the bare minimum possible to validate (or refute) the hypothesis that people will pay money for your service, and that it satisfies a concrete need.
If you see there is demand for your idea, build it. If you don't know how to build it and can't afford it, convince someone else to invest time or money by showing them the market learnings you have, and the evidence that there is a market.
The key question is whether the problem you are trying to solve for people (the market) requires more resources than one developer can supply. If yes, you need more founders, and perhaps funding.
If not, you can build a microISV. That outcome often delivers something in the range of 2x- (rare) 6x what you could make as a developer.
Re resources on microISVs, see the Business of Software forum, and some of the things I've been doing.
I thought this was a great Q&A with Urbanspoon on bootstrapping.
10 Lessons in Bootstrapping: http://www.techflash.com/seattle/2009/05/Ten_lessons_in_bootstrapping_from_the_founders_of_Urbanspoon_44968952.html
That's a complicated question. Certainly the software and technology industries talk a lot about the VC / angel investment route, but bootstrapping your company is actually the most common way to build a business.
I'd recommend reading Eric Sink on the Business of Software, Joel Spolsky 's experiences starting Fog Creek Software, and the 37 Signals blog.
Lifestyle companies are usually an evolutionary process. Often, they come about simply because the founder(s) could not raise early outside capital for growth and learned how to bootstrap themselves and manage their own cash like it was more important than a family member. From that discipline, they begin to grow the company out of cash flow, not terribly fast, but enough year over year growth without negatively impacting that cash flow. Then all of sudden, they find they have a lot more cash than they expected and begin to take more money out of the company themselves (sort of paying themselves back for the early lean years) and before you know - it's a lifestyle company, where theyre running a nice little company, growing a little year over year, they're enjoying themselves, making a very nice living. Not a bad thing.
I think it's just the case that the VC funded companies garner all of the attention and interesting headlines.
I don't have the numbers, but bootstrapped companies must outnumber VC funded companies many times over. It would be interesting to see some numbers and their relative survival rates.
I would say that you shouldn't do too much differently - It's still important to structure your project and set milestones where you assess the potential upside, and the risk of failure.
The main difference with boot strapping is that you're trading really fast growth and diluted ownership (what the VC money pays for) for incremental growth and hopefully full ownership for you. To survive and still keep food on the table, do as the others suggest - get a minimum viable product out there and start generating cash flow and visibility for yourself as soon as possible.
Have you read about Sam Walton? or Bill Gates? Then please do.
All you need is customers, money flowing in...
However, to scale up you'll need money injections and you have no choice but accept external funding. It's not that bad actually.
One of my previous companies build up to about $10MM/year in revenue without any external investment at all. The only problem is that it wasn't very sustainable because we weren't able to inject the capital needed to grow much more than that. At that point, all of our revenue was getting funneled back into just running the company. Unfortunately, our growth model was founded on constant growth and so we had to scale back eventually.
Another company I co-founded was much more along the lines of your typical lifestyle company. We were self-sustaining at around $1.75MM/year. It wasn't a huge company, but that was ok. It was fun.
In both cases, we started with a very small contract with one customer and slowly built on that.
Another option that I've seen executed rather successfully is to begin your software as an open source project and slowly build the momentum around that project. If it's an interesting project, you should be able to recruit some smart developers to donate some time. If you are able to eventually parlay that project into a larger company, you will already have a pool of potential employees to tap and hopefully some customers who might be ready to sign up for more services or premium modules.
I think its unfortunate that the term "lifestyle company" has gotten a bad name in certain circles. There are a ton of positives for companies like this.
Let me know what you decide to do. I'm very curious about successful lifestyle companies.