The barriers to being the next great software startup

The barriers to being the next great software startup

In a recent article entitled “Why American business is stuck in neutral,” Alan Greenspan presents the following stark reality on the state of entrepreneurship in America:

“Americans are finding it harder to start companies than they did a generation ago and harder still to grow those companies once they have started them. The share of all businesses consisting of young firms (aged five years or younger) declined from 14.6 percent in 1978 to just 8.3 percent in 2011, even as the share of firms that were going out of business remained roughly constant at 8 to 10 percent. The share of total employment accounted for by young firms declined from 18.9 percent in the late 1980s to 13.5 percent just before the great recession. The proportion of people younger than thirty who owned stakes in private companies declined from 10.6 percent in 1989 to 3.6 percent in 2014…The decline of creation has even extended to the tech sector. The number of young tech firms has declined since peaking in 2000.”

Think about that. Technology is foundational to our daily 2018 lives. There’s something new popping up every day: a new app, a new device, a new software to make our lives easier and more efficient. Technology is driving creativity, social and economic innovation and growth the world over. And yet, there are actually fewer young tech firms today than almost two decades ago. How can this be possible?

While Greenspan presents a number of macro-economic theories to explain, there are some micro-economic challenges that we at BOS Framework see with tech entrepreneurs every day.

Somehow, the barriers to starting a software or software-enabled business continue to mount even as access to the tools to build software is greater than ever. Here’s how:

It’s never been easier to create software, but it’s never been harder to survive as a software or software-enabled startup. The accessibility of software tools and the ease with which one can learn to code or piece together a product with open source or some sort of drag-and-drop tool would seem to suggest that we should see vastly more young startups driving our economy than a generation ago. But, as the stats above illustrate, we are seeing the opposite.

The democratization of software development means the tech space is extremely noisy. Everyone has the next big idea and some sort of prototype he believes proves it. As a result, there has been a necessary shift in the focus of entrepreneurship from software innovation to business model innovation. Startups live and die on product-market fit, not a neat, new technology.

Additionally, many of the software development tools that allow for a quick and inexpensive prototype or MVP weren’t designed to build a scalable, innovative business over time. So, if you have the good fortune of finding success using these tools, it often means you have to throw out your software and start over – which usually means needing to raise capital.

It’s never been harder to access early stage capital. A generation ago, you could raise a Seed Round on little more than an idea. Today, you need a product – not a prototype – and a market on which to build a business. Seed is the new Angel, A is the new Seed and so on. This again means finding product-market fit earlier with less money. And, let’s be honest, proving a market for an ever-evolving idea is a lot of both art and science. So, today’s early founder must also be differently skilled than a generation ago when he might have had capital earlier to bring diverse talent in around him. Today, founders have to do more with less and without access to capital the shot clock for launching their idea is shorter and ticking faster.

Software development business models are designed for the software industry not for startups. So, if you are a non-tech founder, do you have a guy who codes? Do you know if he’s any good? Is there a good place to off-shore your product development? Will your idea translate? How will you manage communication? Ensure quality? Should you get a local dev shop? Can you afford it?

Software development is rife with risk and tradeoffs for the entrepreneur. Quality – Time – Scalability – Project Management – Cost – oh, and did I mention quality and scalability?

The stories we hear daily go something like this:

Bill is a non-tech founder who had to rebuild his product three different times (first with a “guy who codes”, second with an off-shore dev shop, and finally with a local dev shop). Over several years as he found early success, his first two product iterations couldn’t scale and didn’t have the flexibility he needed to adapt his product as he learned from the market. By the time he got the product he needed on round three, it was too late. He was out of resources and his market window closed because his idea had been unable to evolve rapidly enough.

Jane is an entrepreneur who was quoted $100k for her MVP. She didn’t have access to that kind of capital and was pretty sure she didn’t know enough to sink that kind of money into the product. She bootstrapped it with what she could afford, found some early success, and had to throw away her early product and start over because the tools it was built with were too constraining for her innovative business.

Mike knew he wanted to work with a local dev shop and was very happy with the MVP they had produced. It was exactly what he wanted even though it took six months to build. But, he quickly found out that some of his hypotheses about how the market would use his product were wrong. He went back to the dev shop who quoted him another month’s worth of work and a $30k price tag to make the changes. He had spent all of his friends-and-family investment on the MVP and couldn’t afford another $30k.

The realities of the noise and limited access to capital are indicators of larger systemic changes in the startup world. They have in turn made the non-do-it-yourself models for software development increasingly problematic and prohibitive for startups.

Software development needs new business models that understands these market shifts and the challenges non-tech founders are facing as a result.