You’ve got this great idea for a software product. You are pretty confident that you can crank out version 1.0 working full-time on your own from the spare room, and you are fairly confident that people will buy it. But you’ve also got a well paid full-time job ‘working for the man’. It’s cosy and familiar in that cubicle. Is it worth risking your career and savings to set out into uncharted waters on your own? Do you take the red pill or the blue pill?
The aim of this article is just to give you some insight into the economic realities of becoming a one man software company (a microISV). The results might surprise you. ‘Working for the man’ you get a steady monthly income every month. Working for yourself you start off with no income, while you create your product. If all goes well you start to make sales when you release v1.0 and these sales gradually improve over time until you are earning the same amount each month as when you were working for the man . As the sales continue to improve you (hopefully) reach the point where you have made as much money as if you had stayed in your old job for the same period of time. From here on it’s all gravy. Here is a very simple model:
Monthly income as microISV vs WFTM (T0=version 1.0 release, T1=monthly income equal to WFTM, T2=areas under the red and blue lines are the same)
Obviously I am making a lot of assumptions and simplifications here. In particular I am assuming:
- Net income from microISV sales rises linearly month-on-month as soon as you release v1.0. Obviously this can’t happen forever (or you will be richer than Bill Gates) but it seems as good a guess as any and it keeps the mathematics simple.
- MicroISV start-up expenses (buying a domain name, starting your company, buying equipment and software, getting an Internet connection etc) are fairly low compared your monthly WFTM salary.
Even though the model is embarrassingly over-simplified, I think it can still give some insights. If I plug some numbers for T0 and T1 into a simple spreadsheet I can come up with values for T2. I’ll choose numbers that I consider optimistic, realistic and pessimistic for each. For T0 (time to V1.0) I choose 3, 6 and 12 months. For T1 (time to same income as WFTM) I choose 12, 18 and 24 months.
Months required to reach T2
i.e. if it takes you 6 months to get V1.0 out and then another 18 months until it is making the same monthly income (after expenses) as WFTM then it will take you 47 months to reach the point where a microISV has made you more money than WFTM.
So how much do you need in the way of savings to survive until you have a decent income? I can work this out by assuming living expenses as some proportion of WFTM monthly income. Calculating for 50% (living on noodles) and 100% (full speed ahead and damn the torpedoes):
Maximum debt in months of WFTM income with living expenses=50% of WFTM income
Maximum debt in months of WFTM income with living expenses=100% of WFTM income
i.e. if it takes you 6 months to get V1.0 out and then another 18 months until it is making the same monthly income (after expenses) as WFTM and your living expenses are 50% of your WFTM income then your maximum debt is 5 months of WFTM income.
I think the results of this simple little model make a few points:
- Rate of sales growth is critical but the the time to getting v1.0 out is also very important. The longer it takes, the more you have to catch up later.
- You are unlikely to come out financially ahead after 2 years as a microISV, even with fairly optimistic sales figures. It could easily take 3 or 4 years and, if the sales don’t take off or level out too early, you may never get there. There are many reasons to start a microISV, but getting rich quick isn’t one of them.
- Given that you can’t know what T1 will be for your product, you should probably have at least 6 months WFTM income in the bank. Preferably 12 months.
- Learn to love noodles.
You can download my Excel spreadsheet here (it’s a quick hack, so don’t expect too much).
Successful Software 
Excellent graph. I had thought about the ‘cost’ of getting to T1, but not in terms of getting to T2 in order to have drawn even.
what about the uncertainty in the two curves – isn’t that where the real problem lies. if there was a guaranteed success down the line then this is a no-brainer. what make it a hard problem (and what you ignore completely) is that the uncertainty in the blue line is fairly small, while the uncertainty in the red line is huge.
Working from home is great. I’ve done it full-time for the last 6 years and it totally rocks.
It also took me about 2 years to begin earning more from home than I was earning in a job. It would have been sooner if I had known more about marketing.
Sales come when you can reach potential customers for your product at a profit. Marketing is what makes you a success.
Is there a market for this product?
How can you reach that market?
How much will it cost to reach the market? (Per unit and total?)
Being able to answer these questions going in helps make you a success much more quickly.
Good article, though, as you point and others point, there definitely is a lot of uncertainty in the model.
Vasudev Ram
Dancing Bison Enterprises
http://www.dancingbison.com
Yes, the uncertainty in the red line is huge, I thought that was too obvious to need spelling out. T0 and T1 could both be anywhere from 0 to infinity and there is almost no data to go on because microISVs are very cagey about their sales. In the circumstances the best I can do is make some guesses at reasonable values for T0 and T1. You can download the spreadsheet and try your own values for T0 and T1.
Good article! Key aspects, as mentioned by a previous comment, is marketing. In some respects, it is all about the marketing – what are you selling, who is going to buy it, is there demand for it, and of course, probably the most important aspect – how are you going to sell it.
Here is what I mean: http://softwareindustrialization.com/BridgewerxProductSuccessBusinessFailure.aspx
Keep up the good writings!
So, pretty much, I could live off of ramen noodles until I start selling software like hot cakes. Then I can buy a new Ferrari. Awesome.
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The WFTM income is not necessarily constant.
Interesting. I’ll give you my take on this one via blog post after I get home from WFTM.
NOT BAD AT ALL
Of course, another simplication here is making the WFTM line flat. For a highly competent young software developer, if the line is anywhere near flat, you’ve been at the same company too long. Switching companies or going into contract work would be other alternatives to becoming a microISV.
I stayed in my job for 5 years too long, during which time my ISV was earning more than my employment.
Silly.
But I just couldn’t give up that civil service pension, until, I realised that working 40 hours a week just for that made no sense.
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You can always normalise the graph so that WFTM does stay a constant value. It just means T1 is going to take longer.
Why not work on your mISV *while* at work. I don’t spend more than 4 hours of actual work in my cubicle. This is pretty typical of most companies I’ve worked at.
Use the other 4 hours to built your own product.
>Why not work on your mISV *while* at work.
Because then your employer almost certainly owns all the rights to your mISV. You might also find yourself without a day job, if you get caught.
There is also the chance when starting a “Micro” ISV that it won’t be that Micro. The “Become The Man” possibility :) Or at least the “Become Quite Wealthy” one!
You forgot to mention that you will have no colleagues anymore. You will be pretty much isolated. And you completely miss out the product lifetime cycle affected by competition, big players stepping on your feet, etc.
And v1 is before v2, before v3. It is not a one shot work. And your boss pays you always while a loser program earns nothing.
Take all this into consideration.
maria
The difference between the two lines should somehow account for the time value of money. If you have enough money in the bank to house and feed yourself up until T1, you are losing money that you could make investing that money in the stock market up until T2. If not, then you are borrowing money that you will need to pay back with interest. All other things equal (and assuming that investments would perform well, you’re still behind at T2 by taking the microISV route.
I don’t say this to discourage anyone from taking the microISV route at all, just to point out a factor that is not accounted for above.
jb,
You are correct. But, as I say in the article, I am making a lot of simplifications and assumptions.
Mmm… this makes me wonder if there is a place for a business that can support micro-ISVs in the areas where they’re likely to be weak.
Quite a few people mentioned marketing as critical, and there is the issue of how long you have to live off savings, and the risks of the product not taking off at all.
Some kind of org that can put in a bit of finance and marketing know-how in a return for a share of the upside might be a winner for both parties. If there are enough potenital micro-ISVs out there.
This is an old post, but we can now comment that the WFTM line is not as riskless as some people expected it to be.
The advantage of MISV is that in bad times, your income can decrease by 20-30% as sales flatten or decline. How is that an advantage? In bad times your WFTM income can suddenly decrease by 100%. Once you are established and selling (at T1), it’s actually less risk to rely on many small sales than one big salary. If you can release more products, your risk decreases even more, particularly if they’re not correlated markets (ie 1 financial planning product and 1 farm equipment maintenance product).
I think it might be missing the huge variability in how much microISVs make. Some (a lot of?) microISVs don’t make much money… after going through the stories in Bob Walsh’s book, there is a huge range in how much microISVs make.
Preferably, you have enough saved up to make 2-3 products and see what sticks. And I think it’s important to avoid difficult markets and products that are bad ideas. My theory is that the best approach is to make a product that in significantly more useful/better than the other choices out there, so there should be lower risk (and higher return). If the competition is very good then your microISV is going to be a lot riskier.
Some people are so uncomfortable with uncertainty that they simply cannot bear to take the chance involved in starting their own businesses. If something makes you miserable, you shouldn’t do it. And, besides, we need people in those steady jobs to provide support services for us (the people who deliver your packages, the person who serves your lunch, the executive who okays the purchase of a huge site license of your software).
It’s true that success isn’t guaranteed, and the red line can move up and down for all kinds of reasons. But I know very few people who have regretted taking the plunge
Educative article! Why not work for both? Get a good junior partner to run the Micro full time while you run part time. Business is sometimes about partnerships. Maximize earnings from both boss and micro….
Good article! Key aspects, as mentioned by a previous comment, is marketing. In some respects, it is all about the marketing – what are you selling, who is going to buy it, is there demand for it, and of course, probably the most important aspect – how are you going to sell it.
Ts a very good idea to work from home. I have done it for since 2009. I develop software prototypes every week and then attempt to convince some small company that it can add value to their business. However I would still prefer that working from home be a side business. Thanks.
Jakony Amnon
Kampala, Uganda.