Wednesday, March 26, 2003

The Dark Side I've been thinking about crossing over to the dark side. I have an opportunity to go work for a large financial institution. The prospects of stability and order are appealing to me right now, given the chaos from which I just left. The interesting thing about software right now is that it is really getting boring. There are very few small players. Most good ideas get either subsumed into standards, or crushed by the big players, and most enterprises are increasingly skittish about investing time and dollars in a small company's technology. From what I am seeing, everything will continue to be dominated by M$FT and IBM. Everyone else is just fooling themselves. The best a small company can hope for these days is simply to get purchased by a larger player, and the multipliers suck these days. Don't get me wrong, there are good companies out there with good technology, and some may actually turn themselves into viable businesses, but the issue is that today's pricing pressures do not allow startup software companies to turn themselves into real businesses. Let's take a look at what I mean. Average deal sizes for software have dropped, even for the big boys, down to about 20% of what they were. Most smaller companies are feeling this pressure. In addition, to get into deals, these companies also are often forced to piggyback off of a major players' deal, further squeezing down the deal size. At the same time, sales cycles are not reducing. It still takes at least 3 months to sell any software, unless it is bought through an online store, and three months is the absolute minimum. The median is in the 6-9 months range. So these companies hire a bunch of salespeople (who are not cheap, by the way). Let's say the average salesperson gets 2 $100K deals a quarter, but takes six months to get productive. That means that these companies are getting four deals per saleman in the first year. The costs of running the company are still high, meaning that burn rates are still running at $300-$700K per month. There is no way that a company can make it under this model. Your options are to hire more salespeople (which fails because they begin eating into each other), or to drop your prices and use a different model. This latter option seems to be the most effective. Go for mass distribution at a lower price tag. Only certain types of products can manage this, but it is a good strategy. Distribution can be channel-based (A big partner sells you as part of a bigger sale), or distributor-based (online store, etc.). There are cases where companies can get the best of both worlds, but this is extremely rare. I know of several software companies that have deals with larger players that sell their technology, while still retaining large $100K+ deal sizes. This requires that the companies are structured around a sell-through model. So anyway, my bottom line is that until things change, most of these small startups will fail. They need to find distribution models that allow them to overcome the software sales dilemma. This can be accomplished using either mass distribution (very low price tag), or channel distribution (higher price tag, but harder to get the relationship). This is why I am considering the dark side. 11:03:16 AM