You can only capture a share of the value that you create if you want to create a sustainable business. While you need to assess the likely return on investment from your efforts and your probability of success, you also need to look at any deal from the other side of the table. It’s as important to minimize risk for you and your customer as it is to maximize value.
How Can I Maximize ROI and Minimize Risk?
Q: My co-founder and I are independent ERP and cloud data integration specialists with a combined experience of 50 + years in software development consulting. We have recently solved a ‘wicked’ problem for several customers: how to keep very significant volumes of transactional ERP records (in the millions) in sync with “cloud” platforms such as Salesforce.com using an innovative Java framework we have developed. None of the existing mainstream vendors in the integration space have solved this problem! We have acquired a provisional patent and know from first hand knowledge of the industry that this is a problem with a high value potential. Needless to say our customers have paid us well over the last five years years to tackle this problem.
Our business challenge is how to bring our software to market to maximizes ROI and minimizes risk using Lean Startup principles. It feels like there are almost too many pathways open to us including licensing our IP and/or software to systems integrators, platform vendors, direct customers, etc. I welcome any suggestions for the best way to proceed to commercialize our product.
Some Warning Flags
A: I have worked with a number of teams of two to five engineers or scientists (many of them over 50) who had working technology they were using in consulting and were looking for their first niche market: several of the phrases you used to describe your situation are warning flags that may indicate potential mindset barriers to building a product company.
“Combined experience of 50+ years”
- Challenge: Experience does not necessarily stack, either across time or by combining multiple people.
- A better approach: It would be more useful to describe key accomplishments or benefits your work has delivered to your consulting clients.
- Challenge: solving unique problems is good for a boutique consulting firm but not a good recipe for building a product. By definition wicked problems are unique.
- A better approach: solving a high value problem that at least a few dozen firms share you can reach out to.
“a provisional patent”
- Challenge: This may be of interest to investors or potential licensees but of little or no interest to prospects.
- A better approach: talk much more about “before and after” impact of deploying your technology. You can also talk about patent coverage if you are in an OEM licensing or acquisition conversation but end users are rarely influenced by this
“customers paid us well”
- Challenge: it’s hard to build relationships with early adopters and explore the best feature set for a product and extract maximum value at the same time.
- A better approach: describe the impact on customer’s business, e.g. customers saw a 3 month payback period or saw a 2.5 return on investment in the first year.
- Challenge: This depends upon your time frame. Survival in a niche is a normal goal for a startup initially, this may mean trading revenue for references, case studies, testimonials. Establishing good relationships that create long term value can be hard to square with an objective to maximize revenue in year one. So my question is what is your time horizon for calculating ROI?
- A better approach: talk about the company you want to build and why folks should join or consider buying from you because of your mission. Or offer an explanation of the synergy for a potential acquirer or licensee.
Least Risk Strategy
I work primarily with bootstrappers and tend to focus on strategies that minimize risk. Since you are currently bootstrapping–using consulting revenue to build a product–let me suggest what I think is the least risk strategy. Because you have a working technology that none of the mainstream vendors currently have then licensing it to one or more of them (or creating an auction for an exclusive license) is probably the quickest way to see a return on the time invested and specific expertise you have developed.
Your enterprise customers should be willing to make introductions to the larger vendors because it will lower their risk: you are a small consulting firm and they are likely to be more comfortable seeing this piece of mission critical infrastructure maintained by a large vendor instead of a team that can be wiped out in an automobile accident.
The good news is that your solution is in production use: you can have a potential acquirer or licensee talking with your customers about results achieved and impact on their operations instead of having to supply increasingly detailed explanations of the technology and reviews of the source code (either of which normally presents a number of hazards).
Lower Risk Strategy: Consulting to System Integration to Product
A lower risk strategy is to continue on the path you are on: you have been offering to integrate your custom technology with their existing infrastructure. Take the next step and license it as a stand alone product that has defined API’s or leverages existing defined interfaces to the off the shelf ERP packages. You are going to trade less up front revenue for recurring revenue from license, maintenance, and enhancement fees. But while you may close the books this year with less revenue you will open them next year with recurring revenue in the pipeline. If you can get your non-recurring service revenue to between 25 and 40% of total revenue (or about a third to half of your license revenue) that’s normally a much more sustainable model and much easier for a third party to acquire since the founders don’t have to be there for the firm to make money.
Related Blog Posts
- Service Factory
- Crafting a Value Proposition
- Small Wins Enable Larger Wins
- Find a Problem so Bad That People Pay You To Solve It and Let You Keep the Software
- Entrepreneurial Mindset: Create Value For Others
- Entrepreneurs Blend Passion and Prudent Risk Taking
We are a boutique consulting firm based in Silicon Valley with clients in the US, Canada, and Europe. Our focus is on early customers and early revenue and are typical client is a team of two to five engineers or scientists with working technology looking for their first dozen customers. You are welcome to schedule a no cost no obligation office hours session that includes any team members or advisors you want and walk around an issue, challenge, or opportunity you are wrestling with. More info:
Trackback from your site.