Micro ISVs and Enterprise 2.0

Why work for a software start-up?

A bootstrapped start-up is a great place to work. However, not everyone can start their own – you need to have enough money in the bank to live on for about a year or you'll need to do consultancy work at the same time, and deal with the overhead of context-switching your brain between consultancy and your company.

The next best thing is to work for a start-up that you don't own. So why should you give up your job in a bank or IBM and work for a start-up you've never heard of?

• Your job in a big company isn't that secure – the world is in recession and big companies tend to see expensive developers as an easily reducible cost centre.
• Your job may well be more secure in a start-up – a well-run start-up has much lower costs and inertia than its large competitors. The recession will help to weed out the worst managed and most bloated competitors from the market.
• You can influence decisions to a much greater degree. You get to work closely (in many early-stage cases, across a cubicle partition) from management, making it easier to pitch ideas. Start-ups are also generally more amenable to trying out new tools and languages.
• Good start-ups tend to be run by people who read books about managing programmers and they want their programmers to read books about their craft.
• You'll almost certainly get the chance to buy some of the company. The payday from owning a measurable percentage of a company that gets acquired is spectacular, and will give you the finance to start your own and give the next generation of great programmers somewhere to work.

At last – a Twitter use case I get (nearly)

Twitter left me cold when it was launched. I didn't get the point of a blog that isn't a blog, and agreed with The Register that it was more "Web2.0rhea".

Bob Walsh and Patrick Foley talked at length about Twitter in the most recent episode of their podcast and suggested using the feed-able Twitter search tool to look for people with the problem your software solves, in much the same way as one would use Technorati to look for blog posts about it.

However, unless my understanding of how replying to a tweet works is wrong (i.e., only my own followers will see the reply unless the original tweeter subscribes to a search for @ his own user name), I'm still not sure how to exploit it. Any suggestions?

The mid-project hump

In every major project I’ve worked on over the last ten years, including the one I’m doing now, I’ve hit a psychological wall about half way through. The initial research and requirements gathering stage always flies by, because talking to people about great ideas is fun, and turning bad ideas into good ones is rewarding. The design stage – and I hope you have one – where the specification is written tends to go quickly too, because there is something tangible in those user interface mock-ups.

The problems start once I start writing code. I’ve always started implementation from the bottom up, developing the skeleton of the system, the database schema, the parts of the system where concurrency problems make my head hurt. I suspect that this may be why, about two months into any project, I’ve always found it incredibly hard to motivate myself. The problem is not seeing anything happen – what I’m working on might not get used in the product for months after I’ve finished it. Developing the user interface first can help, but there is a danger of ending up with a prototype that needs to be turned into a product, something that is rarely good for your health.

Lately, I’ve found that a way to motivate myself is to make tests my milestones in the initial coding stages. In parallel with building a subsystem I build throwaway implementations of the subsystems it interacts with. These aren’t mock objects – they’re fully-fledged but completely naive implementations that would never scale to real-world use, with instrumentation so test cases can be written. Each time the tests for a new piece of functionality are written and passing, I can check in and pat myself on the back.

This type of development has many names – test-driven, test-first, tracer-bullet – but for me it’s just a way of giving myself real goals during the most difficult stage of a project.

Have an exit plan

I'm no fan of the type of business plan created by MBAs for venture capitalists, full of made-up financial projections and detailed owners' CVs¹. However, every small company should have a plan for its own development, and there are a few things that must be in it. Over the next few weeks I'll write about some of these.
Perhaps the most important part of your company's plan-for-itself is the exit plan - how you intend to conclude the current stage of your company's development and move to the next. There are only a few options:

• Take investment.
• Use your profits to become a bigger company without taking investment.
• Sell to a competitor and stick around.
• Sell to a competitor and leave to do something else.
• Sell to the public in an IPO (you'll probably have to stick around afterwards).
• Become the next Microsoft.
• Fade out.
• Fail spectacularly.

I've left one out deliberately:

• Grow slowly, hopefully funding your own lifestyle, and worry about moving to the next stage some other time.

This could otherwise be described as "not having an exit plan". While this is surely the most common exit plan for a Micro ISV, it's the one I least recommend. Without an end goal in mind, decisions involving money become impossible to make.  You've had an idea for a new product, but aren't sure whether to implement it. If you intend taking investment, you should investigate the idea more as it may well help you get that investment. If you want to sell to a competitor or the public, you should file the idea away for your next venture, and concentrate on making your current product better and your company more profitable. However, if you don't have an exit plan it is likely you'll end up developing a half-hearted product, marketed half-heartedly, that ultimately devalues your company. I've seen this first-hand more than once.
What's my exit plan? Currently, I'm self-funded and developing a product. The exit plan is to take investment - from myself, family and grants - and hire a small staff that can do the things I'm not that great at (sales, marketing, accounting - you get the picture) and thus create a very small ISV (a Milli ISV?) . Once that happens, I'll need to devise a new exit plan.

¹ Résumés, for American speakers.

What the books on running a small company don't tell you

There are a couple of great books on running a small software company. If you're based in Ireland, there are some OK books to help you with the mechanics of starting and running a company. However, none of these books more than touches upon something that has taken up a painful amount of my time since the start of the year: bookkeeping. In itself bookkeeping is simple – if you're reading this, you're probably able to program a computer, so you should be able to put entries into a journal in your sleep. However, over the last few hundred years accountants and tax collectors have come up with a large set of rules about how things are done around here, and they aren't very good at explaining them to us mortals.
While I can't vouch for the general quality of the series, I found Bookkeeping for Dummies to be useful enough that I now think I understand enough not to end up fined for breaking the law. I'll share a few things that might not be immediately obvious:

• Accounting software is complex, and you'll get upset at how little you understand what's going on for the first few days. I'm using Sage Instant, but all accounting software is pretty much the same. The key to understanding it is that there are basically three big databases. First is your nominal ledger, which is made up of lots of accounts that can each be debited and credited (see below). Because computers are good at searching, you probably won't find separate journals of original entry as you would in a paper system. The other two databases are of customers and suppliers. Everything else in the system is either a tool to help you add debits and credits to your accounts, or a report drawn from those accounts.
• Debits and credits don't mean what they mean on your bank account. Depending on what type of account you're looking at, a debit can increase or decrease the balance. Thankfully, there is a very simple pattern to it and any book will have a cheat sheet, but don't expect your accounting software to give you any help when you do things manually.
• Prepayments are going to be how you pay for a lot of your overheads (costs that aren't directly tied to the manufacture or sale of a specific product – pretty much every expense in a software company). If you pay in advance for a domain name, support contract or similar, you are invoiced immediately, get refunded the VAT at the end of the period of the invoice (assuming you are using accrual-based accounting), and probably pay at the same instant as the invoice (albeit with money temporarily borrowed from a credit card provider). What you've paid for isn't an immediate expense – you've actually bought an asset (actually a debtor) called a prepayment, which you the chip away at over the next year as you use the service you paid for. Your accounting package probably has a way to set up recurring nominal ledger entries to transfer money from the prepayments account to the relevant expense account.
• Accruals are almost the opposite of prepayments; if you pay for an expense in arrears (like a phone bill) you have to guess how much it will cost for each accounting period (read: month) and post that as a special type of expense called an accrual. When you get the bill, you need to do some adjusting entries to sort everything out. I haven't done one of these yet.
• Paying for stuff yourself is almost certainly going to happen in the first few months of running you company, and when you have employees it will happen all the time. I couldn't find much about how to account for this, so I set up a pretend bank account in the system call “Employee reimbursements” and use it to pay the invoices that I paid for myself. I then transfer money from the real bank account to this account to represent paying myself back. One thing to watch out for is importing – if you don't give your VAT number when buying from another EU country you have to claim the VAT back from the government of that country, which is not going to be easy. There are companies that do this for you for a percentage.

The Seed Capital Scheme – and why I'm not using it

In Ireland there is what appears on paper to be a tax code specifically designed for Micro ISVs – the Seed Capital Scheme. In short, it allows you to invest in a new company and claim back tax relief at your marginal rate on the investment, backdated for up to six years. A few months ago, my plan was to invest a pretty big chunk of the fairly small amount of money I got when my previous employer was sold into my new company and live off the refund.

However, when I started the process, the scheme quickly lost its attraction. As a software development company you must be approved for a feasibility study grant in order to qualify for the scheme. There are two agencies that can do this (three if your company is in a Gaeltacht area) - Enterprise Ireland and your local County Enterprise Board. Enterprise Ireland is interested in MBA-led, salesman-heavy companies; in fact such companies even have a name - “high potential start ups” - and a resulting initialism. After a frustrating meeting it became clear that this wasn't for me. I believe it's better to spend time and money developing your company and its product rather than a shiny business plan with fairytale projections and meaningless size-of-market numbers from Gartner.

The next step was to contact my local Enterprise Board. While I think that without the pressure to reach the targets of an Enterprise Ireland high potential start up it would be much more straightforward to get grant approval from the enterprise board, I gave up when I realised that the process is exactly the same. First, you are encouraged to attend a subsidised “start your own business” course. Our CEO and official company wife went to one of these run by FÁS and basically wasted eight Tuesday nights. These courses – including the ones recommended in our meeting with Enterprise Ireland – consist mainly of long lists of reasons not to be an entrepreneur and why most companies fail. There is no information of substance on any of the things I've lost sleep about over the last few months (legal requirements, bookkeeping, taxation, etc. - all things I'll write about soon). If you really want to, you can buy Brian O'Kane's book on the subject, but I don't recommend it. You'll probably get a cut-down version of it as part of your course material anyway.

Once you've taken the course, and realised that a lot of people's business ideas really are very bad, you must then apply for your feasibility study grant. For this, you need to spend a minimum of just over €5,000 (of which you get half back); I can't actually figure out what I could do to spend that much on a business plan. Possibly I could fly somewhere to hire marketing consultants; travel expenses are covered.

For me, the final straw was simply that the company doesn't really need money right now. While I don't like using savings to pay the mortgage, putting a large amount of capital into the company to have it sit on deposit seems pointless.