A small Independent Software Vendor (ISV) needs to have the same competence major companies have; how software products are built; how major and minor releases are planned for; how presentations are given to audiences; down to the common sense treatment of customers and employees. Except they need to do it in less time and on a tiny budget. All major companies are not software companies, ISVs shouldn’t compare themselves to these companies, but the standards and competence an ISV needs must set it apart.
An ISV can be born out of a client case, a customer who needs very special software, often to solve a much larger problem, that is built in-house with external help. During development, the helper sees a possibility to build something for a much larger market, although they need to observe intellectual property rights owned by their original client. Building functionality differently, incorporating elements the first client didn’t need, the new-born ISV can create something truly unique for a whole new market.
Experience is a great help, some would say it’s a necessity, but it helps tremendously when the ISV is started. The journey can still be made without it, but everything becomes much harder and a lot riskier. Experience is not only about how to code and test; or how to push an idea to the market. The experience incorporates many different elements, from recruitment of talent to how human resources work, from technology to development practices, and how to handle customers in a fiercely competitive segment. It is very important for innovation and brand building, helps a great deal to position the company and sets it apart, and enables the founders to trust their own intuition. Positioning a company influences every decision, as it defines who you are and what you want to do.
Positioning and strategies define which market an ISV aims for. The enterprise market is by most considered to be harder than the consumer market. One strategy is to address the consumer market first, and only when that works can the ISV address the enterprise market.
To land the first client takes a lot of investments. A software product requires three to five years to develop, sometimes longer, and only then can sales and marketing activities start. Landing the first client is a good start, but it won’t save the ISV, who have entered a treadmill of new releases and finding new customers. Some ISVs spend 70% on sales and marketing activities, which can’t be done by a new ISV, nevertheless must a newly started ISV be prepared to spend considerable amounts on those activities. The best is to have investors with deep pockets and a good deal of patience, but most ISVs don’t live in that world. The ISV can try a rented-by-the-hour business, many do, but that usually means they are stuck with clients who never will see them as an ISV. A rented-by-the-hour approach also prevents them from having a position that sets them apart.
Office locations, including the size, cannot be ignored: customers and potential recruitments see them as evidence of success. A newly started ISV can, however, hardly afford to put their money on luxury items, but the Startup culture is more widely known today, and even clients may show some curtesy. Fifteen years ago no one knew what a Startup was or how it worked. Twenty years ago, it wasn’t uncommon that large companies put their people in wooden huts, but that is forgotten now and never experienced by the millennial generation. Engineers put crudely drawn banners on the wall as morbid jokes, ”Wellcome to the coal mine!” Now, the office has become an important part of brand building, understood by the advertising business but still not fully grasped by the engineering community. Some Silicon Valley companies use food and office decoration to communicate their brand values to visitors, but that is not as common in Europe and other parts of the world. There are also practical reasons for serving food at campuses in Silicon Valley.
There are other differences between a large company and a tiny ISV. Larger companies can make investments for hundreds of millions that result in a complete failure – the tiny ISV cannot. Except for the size of the investment, a product failure will sink the tiny ISV. The small size forces them to stay with the technology and platforms they are choosing, they can hardly afford to be on several platforms at the same time. It forces them to make bold bets early.
An ISV can be based on more than one business model. Freeware is one of the most common, where the software is licensed freely in return for user data that is sold to information brokers. The revenue can also come from advertisements, although that is harder and harder to make as very few dominates the market. The intention can be to acquire a large customer base and then make an exit, to sell the company to someone who is much larger. The freeware can also act as a kind of goodwill, software that can make users aware of the brand. It’s usually mainstream software, not a niche product, but something that brings a new flavour. It’s also common to bundle the software with a larger package – consisting of hardware, third party software, and some main application – necessary to make the package work.
The try-and-buy model is often used by larger ISVs, where customers can evaluate the software by using it during a limited period. The model can be misused by users who only want to build prototypes and demo solutions without paying for them. It can be the beginning of a productive conversation, but users who don’t intend to buy the software usually don’t have the power to make a purchase. Freeware is also misused in this way, even by large companies, who use it in their own solutions after misinterpreting license agreements.
A fairly new trend is the subscription model. Customers subscribe to the software on a yearly or even monthly basis. The customer can cancel and renew the subscription at will, but the real beneficiary is the ISV. The old model allowed customers to skip one or more releases and still have a working application, especially if a new release didn’t bring much of new functionality. The subscription model doesn’t allow this, users must pay on a regular basis or they can’t use the software at all.
A model that is becoming less and less popular is the ’buy once and get a limited number of free upgrades’. Free upgrades normally include bug releases and minor enhancements, and they will end when a new, major version is released. Major releases are always an investment decision for a customer, to continue or try software from a competitor, but all business models have disadvantages. The ISV can use a combination of all these models, although it is recommended to strive for simplicity. It depends on who the customer is and how the ISV wants to position themselves.
A product license makes it possible to sell additional services in the form of education and support to enterprise customers. Complicated products make it even easier, which is counterproductive for the entire business. Smaller ISVs should never use this strategy. They should build products that are easy to install, use and maintain. Margins for ISVs are generally in the 20% to 30% range. This can be compared to rented-by-the-hour companies, who have a 5% to 10% margin.
The most common goal for any ISV is to grow and become one of the adults. It’s a journey that doesn’t come without major challenges and even disadvantages. A larger company brings much larger problems to the agenda. It’s not only about handling engineering people, to make them understand where they should go, larger companies will bring new types of people, financial people and business administrators, who want to run operations differently. It’s always a headache for an ISV to know where key people should spend their time, in airports or in front of audiences, or if they should learn how a product really works. Having a smaller ISV is less boring, some would say more exciting, but it’s a shaky reality to cope with.