6 Biggest Obstacles That Startup Software Management Teams Must Overcome

You’ve found a hole in a software market segment. Perhaps it arose from a personal need that you couldn’t find a product to fulfill, or you worked in a VAR or consulting company and realized that customers were repeatedly asking for the same custom solution. So you created a standard software product or SaaS application, and started a new business unit or company to exploit it. There are many ways that software startup companies are conceived; these are just two common examples.

Let’s say you’ve also written a good business plan along with an investor slide deck, and used these to raise enough seed capital to truly “open the doors”. These are significant milestones that most who dream of starting up a software business never reach. It seems like you’re poised for liftoff and are well on your way to becoming a real software company.

But looking past these startup milestones that can kill an embryonic software business, there are unfortunately almost always upcoming new sets of challenges. What are the next issues most likely to be, and how should you handle them? Here are a few possibilities that make sense to prepare for:

1. Getting the First Software Product to Market Before You Go Broke

Of course, you have to walk before you run. Many things can go wrong from the idea stage onward and kill a software startup. If you don’t get the product to market before your funding runs out, the odds of early failure increase exponentially. First of all, it makes sense to put serious time and thought into scoping your real capital needs to get the first product to market.

Second, many startup CEOs are very protective of how much equity they give up, and rightfully so. But at this stage, being too protective can be “penny-wise, pound-foolish”. There is always considerable uncertainty about how much money it will take to complete the initial product and enter active marketing and selling mode. Software development is, unfortunately, an inexact science. Oftentimes, the product is done “when it’s done”, regardless of the forecasted development schedule. And there is always some feature creep involved in the development of the first product. Some are reasonable & beneficial, some are not.

I believe that it makes sense to raise more money in most cases. You should raise more by a comfortable margin, above and beyond what you think you’ll need to get to market and become well-positioned for that next round of funding. Once you actually run out of money, with no revenue to fall back on, any money raised will be at greatly reduced valuations. That’s if you can raise it at all.

2. The First 10 Customers – Creating the Initial Reference List

Imo, this is one of the toughest things to do in the software business. Raising money is really challenging. Getting the first product right without any historical context to guide you is also very difficult. However, I think landing the first ten customers without an existing brand, user base, or operating history may be the toughest of all. So how do you go about it? There is no set formula for success in this area. But I have a few ideas that I believe increase the odds for success. Consider making these sales a priority even from the outset. Even when you first seek beta users. You don’t necessarily want to start “selling” at that time.  However, you want to be mindful of what it might take convert your beta sites to paying customers, if at all possible.

Additionally, contact anyone within your personal networks who might be candidates as early customers. These two constituencies are the most likely to take a chance on a new company and product. That’s because of experience with the product in the former case and personal credibility in the latter case. Think of building your customer list as drawing concentric circles from the inside out. The innermost circle is the initial reference list. This will likely come from prospects who are closest to the company. After exhausting that list, it’s time to move to the next circle and start marketing to referrals. That’s “friends of friends”. Then on to finding early adopters who aren’t currently in the company’s network.

3. Recruiting Key Software Startup Executives With Only a Story

Recruiting top talent is never easy, especially when you can’t offer the salary, job security, support, or many of the perks that an accomplished executive might be able to obtain from a more established company. While it’s not easy, imo it’s not quite as difficult as some of the other items on this list.

The reason is that, in most cases, for a ground-floor startup, you really don’t want folks that are particularly motivated by security and the trappings of a position. Successful early-stage executives generally have a different personality profile. They can be bored by those secure, larger company positions. At this stage, in most cases, you are looking for risk-takers and value creators that are motivated by a “clean sheet of paper” and ” the thrill of the ride”. Not to mention something very critical that you can provide. That is a nice chunk of founders’ equity.

For this reason, I believe it is important for startups and early-stage software companies to offer some form of equity participation. I realize that opinions on offering equity vary widely, but this is something I feel strongly about for optimizing company performance.

4. Raising the Software Startup Company “A” Round Funding

This key task has, in recent times, become relatively difficult compared to raising the seed round. The world seems to be currently awash in seed money for capital-efficient businesses, such as software companies. While raising money is never easy, more software companies seem to be able to raise seed money than in the past. The downside of this trend is that there is tremendous competition at the next funding step. That is raising the first major institutional round from the shrinking roster of VC funds with fresh money to invest in “A” rounds.

This funding gap puts a premium on execution during the seed stage. It becomes crucial to show that you have developed some initial momentum. As well as a history of hitting your milestones. These are critical if you want to be successful in raising your critical A round. To enhance your odds, plan and begin building a network of VC firm contacts early on. Do this far ahead of when you will actually try to raise money from them.

This seems obvious. However, in a SaaS or mobile software startup, there are always 5 hours of work to be done for every available waking hour. Building relationships that aren’t immediately critical can easily fall off the list of items to work on today. And never actually happens, until one day you wake up and it’s time to raise more money. If you’re going to need more money, ensure you prioritize building those relationships, along with all the other critical daily tasks.

5. Keeping Key People Motivated – And Not Burned Out

You’ve raised the needed money, created the first product, and even gotten some market traction. Things couldn’t be better, whether you’re building a mobile, SaaS, or on-premise software company, right? However, most of the executives and staff are exhausted at this point and dreaming of a beach in Bermuda. Or maybe just a good night’s sleep. This is very common and can derail a young company that has otherwise done many things right. Because of this, it’s important during these early days to keep one eye on the long-term, even as meeting that next milestone is a critical focus.

Remember that building a software company is still a marathon. No matter how many individual sprints are taking place in these early days. Building a positive company culture that respects that employees are people with actual personal lives can be a critical component of completing this marathon. When people have been working particularly hard, make sure you thank them! Even encourage them to go home once a crucial phase has passed. Buy them a certificate for a nice dinner with their significant other, and make them take a long weekend off. This is just an example. The key is positive recognition, along with an opportunity for people to recharge their batteries when necessary and possible.

6. Reaching Critical Mass in Your Software Market Segment

You’ve now completed all the essential steps above. There is a nice product, a small reference list, a good team, and adequate money to plow forward. Unfortunately, you still haven’t quite “made it” yet. The software startup business road is littered with companies that have made it this far. But ones that have not really become a stable software company that can handle a significant bump in the road. The key to reaching that stage of stability is obtaining a reasonable market share in your chosen market segment. The actual share number varies widely and is dependent on your chosen business. It might mean 10% share in a huge market and 40% in a small niche segment. But I’ve found that you’ll know it when you get there.  Some of the things to look for:

1. Not every sale is like “pulling teeth”. You’re getting some “word-of-mouth” and repeat business
2. Monthly website traffic is increasing nicely, even without any boost in marketing
3. Your company and product name have started appearing occasionally in the press without any particular push on your part
4. Customers are telling you what they want in the next version, and this is unsolicited
5. Potential business partners are approaching you, rather than just the other way around
6. You have enough cash flow that an unexpected negative event or two is more of an annoyance than a death threat

When the above list happens, you’re on your way

When you start to see these things happen, congratulations! You’re no longer an endangered software startup! You’re now definitely what those accounting folks call a “going concern.” Of course, the obstacles to survival and success never truly end. They only morph into a different form. When you’re ready, take a look at the 7 Biggest Issues Faced by Management Teams in Mature Software Companies. In this article, I discuss issues faced by software companies that have “made it” to stability.

So there’s my list of some key things that a software startup must overcome from birth to a going concern.  Many other things could show up on this list – is your list similar? Many readers will have ideas on other critical items to be overcome. Post a comment with your own additions or subtractions to continue the discussion.

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