The Inside Story of a Small Software Acquisition (Part 1 of 3)

My startup history goes back a few years.

In 5th grade I sold comic books to my classmates at a 30-40% markup. I was a voracious marketer; I handed out homemade flyers, created checklists so customers could see “at-a-glance” which issues they needed, and even started a subscription service. Whenever kids in my school had extra money the first thing they thought of was buying comics.

In 8th grade I sold candy at a 500-800% markup because kids couldn’t buy it within walking distance of school. I made money hand over fist, and quickly learned that you should re-invest your profits instead of purchasing DJ equipment that you think will make you cool, but will actually collect dust in the back room of your house because you never spend the time to perfect your cross-fade.

In high school I wrote a booklet about comic collecting and sold it through classified ads. Technically I broke even, but realistically I lost money on the 50+ unpaid hours I spent researching and writing. This was the first business I launched “in the wild,” and I learned a lot about what it takes to market a product in the real world (i.e., to someone other than my classmates).

During college I sold $5,000 worth of comic books on newsgroups and eBay (this was circa 1997, when eBay was still black and white and so slow you had to snipe 40 seconds before the auction ended or your bid wouldn’t hit the servers in time). This business funded my entertainment expenses for two years. I had many Silver Age books that were some of the few copies for sale on the internet at the time.

Fresh out of college I started an ISP with my best friend. We closed down after a few months, but the technical experience we gained resulted in lucrative web development jobs for both of us.

Lessons learned so far? Be the sole source, market like hell, go for big markup, and learn something from your business.

These are basic business principles, but I learned them from hard-knox experience by the time I was 22.

Several years later I started my consulting firm, The Numa Group, which has been going strong in one form or another for five years.

In the past two years I’ve found time to build and launch FeedShot, Flogz (now defunct), and buy and sell an ASP.NET discussion forum package called ChitChat.NET (now owned by Moon River Software).

But the next entry in this saga, an ASP.NET billing software package, is quite a story. So let me start from the beginning.

Two Types of Leverage
There are two types of leverage: people and products1.

A consulting firm leverages people. The employees work for a lower rate than the company bills, and the owners keep the difference.

Leveraging people is lucrative if you can hire good people and keep them busy. There is little up-front risk as the company is (theoretically) paid by the client for most hours an employee works. The downside is that resource loading is difficult and you often wind up with people who are too busy, or not busy enough. Consulting firms are also notoriously hard to sell.

I was talking about leverage with Joel Spolsky at one of his recent appearances on the FogBugz World Tour (yes, that was a conspicuous name drop), and he nailed it: “The problem with consulting is that you can’t find people who are as good as you.” You may find a few, but the better they are, the more likely they are to go off on their own. So your growth, and thus your leverage, is limited by personnel (one of those human sides of software people keep talking about).

Now to product leverage: Microsoft, Oracle, and PeopleSoft are examples of companies that leverage products. They invest in building a product once, and then sell it to many customers.

Leveraging products is extremely lucrative if you can sell enough copies to make back your initial investment, knows as “sunk costs.” Knowing how to market software, which I’m convinced is some kind of freaky black art, is crucial to generating enough sales.

One of the benefits of a product company is that it can be sold more easily than a consulting firm.

The downside is that the investment to bring a product to market can be sizable, and typically requires outside funding (or, for a smaller product, a lot of evenings and weekends), and that freaky black art of software marketing is harder than you think.

What’s Next?
I come from the consulting world; I worked for small consulting firms on and off for five years. Climbing the ranks in consulting is obvious if you work for a large firm, but there’s not much room to advance in a six person company. Seeking to learn more about the business side of things and to take the next step in my career, I started The Numa Group in 2002 and we are now a thriving three-person .NET development shop.

And in the midst of all this I’ve been looking for new skills to augment my consulting background; something new to keep the fire burning as brightly as in the early years of my career.

The Product
Earlier this year I was scanning through a forum and came across a developer who was looking for marketing help. He and a partner had written an ASP.NET invoicing package that was selling reasonably well, but they knew someone with more marketing experience could have a serious impact on sales. I looked at the online demo and I was blown away. The UI was simple, clean, filled with AJAX, and the product was easy to use.

The first thought that ran through my head? Buy it. An ASP.NET invoicing package was one of the ideas in my product idea notebook, and buying the application would eliminate one of the major drawbacks to leveraging a product: the initial investment to bring it to market.

So I emailed the developer to see if he’d be interested in selling.

(To be continued…)

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1. A third type of leverage isn’t really leverage. Some people say you can leverage fame or popularity. Someone who writes books and articles can become a household names in a software community and command a high hourly rate for their consulting services. While it’s true they can make substantially more money than their colleagues there is a limit to their earning potential, and that’s why it’s not truly leverage. Leverage scales. You can hire 10 or 1,000 consultants, or sell 10,000 or 100,000 copies of your software and earn egregious amounts of money without substantially more work. But no matter how much popularity someone achieves, their hourly rate will hit a cap, and they will still work 1 hour for x dollars. This is not a bad thing, mind you, it’s just that it doesn’t fit my definition of leverage.

[tags]startup, software startup, asp.net, dotnetinvoice[/tags]

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9 comments ↓

#1 Rob Bazinet on 09.17.07 at 1:25 pm

I agree with what you are saying. I ran a company for 10 years which was mostly a service based software and network consulting business which we had “bodies” in clients and were billing hourly. I sold the business in 1999 and have started another business which is trying to be more product focused, in 2006. Two gems I can take with me from the consulting business, it doesn’t scale well for the reasons you mentioned, keeping people busy but not too busy and secondly the business has no tangible assets so it has only goodwill and therefore the sale value is not very high. I think a product business is the way to build real value, an obvious example is 37Signals. Products like blinksale.com also come to mind. I am curious, what forum did you find the guys wanting help with marketing their invoicing product? -Rob

#2 Rob Walling on 09.17.07 at 4:35 pm

It was a webmaster forum, either SitePoint or WebMasterWorld.

#3 http:// on 09.18.07 at 1:48 am

“instead of purchasing DJ equipment that you think will make you cool, but will actually collect dust in the back room of your house because you never spend the time to perfect your cross-fade.” SO TRUE. Please kids, don’t buy expensive DJ equipment unless you’re sure it’s what you want to do with your life…

#4 The Inside Story of a Small Software Acquisition (Part 2 of 3) — Software by Rob on 10.05.07 at 2:23 pm

[...] we left Part 1, I had emailed the developer of an invoicing software package, asking if he would be interested in [...]

#5 Lessons Learned “Selling” My Micro-ISV | Software by Rob on 06.04.08 at 4:28 pm

[...] of you following the chronicles of my .NET invoicing product know that I purchased it about 16 months ago and after putting in hundreds of hours cleaning up the code and growing [...]

#6 Should You Build or Buy Your Micro-ISV? | Software by Rob on 10.03.08 at 12:46 pm

[...] an invoicing system. I happened across DotNetInvoice and made an unsolicited offer. If you read my original account of the purchase you’ll know there were some early hurdles that I had to overcome. But once I worked out those [...]

#7 Lifestyle business » Blog Archive » Что может твой разрушить бизнес? on 10.08.08 at 6:25 pm

[...] при покупке софтверного продукта с потрохами.  Реальная история [...]

#8 The Software Product Myth | Software by Rob on 12.03.08 at 5:26 pm

[...] product hits critical mass you’ve conquered the hardest part of the equation. After that the exponential leverage of software products kicks in and you can live large on your empire of web-based unlocking-device locator applications. [...]

#9 The Most Challenging Part of Becoming a Freelance Developer | Software by Rob on 09.29.09 at 6:56 am

[...] rate dramatically, you discover that you have to be constantly working, in addition to having no leverage. Bah – that isn’t what you signed up [...]