Dear Mentor:

How should I launch a software company?

A friend of mine and I were talking about doing some work together, making software. I would like to know the risk factors involved in it, and what else we should consider before start working on our idea.

Mohit Sharda, NOIDA, UP, India

Dear Mohit Sharda:

First of all, we are glad to see that you are considering an entrepreneurial venture. Keeping your eyes open and observing opportunities is fundamental to being successful. We all see things, but very few of us observe them, and fewer still act on them. It is the power of observation that highlights the potential opportunities. We believe that luck is nothing but capitalizing on opportunities created by hard work. So in that sense, you are off to a good start. Whether it is a false start, or a successful or unsuccessful start, you will never know unless you try.

Now let's turn to "making software." Is it developing an application for sale (such as Microsoft Word), or developing software on contract basis for a company (custom application), or implementing software (application integration and/or customization), providing advise on software to companies (software consulting), etc.? As you see, "making software" is too broad a term. This indicates either a lack of precision in your language or, more likely, a lack of clarity of thought for your idea. In either case, it is okay. Remember, it is a start. All ideas begin in a crude form. They need to be nurtured and refined, which eventually creates the precision and clarity of thought that is essential for any successful business idea.

No matter how great the idea, it must have a narrow, well-defined scope and approach in the beginning. Yes, great things can be done later, but the question really is what to do first. Here are some things that should think about. Who would buy this product/service and why? Why and how much would they pay for it? What is your competition? Why do you think you can succeed, given the competitive environment? How large a group (segment) of potential buyers is this anyway? How fast is this segment likely to grow and why? How will you reach your target potential customers, both for sales and promotions? What would be your business model, i.e., where would the revenues come from and how much, what would be the initial fixed costs and on-going costs, etc.? Simply put, you need a very precise and clear business idea first and then a business plan. The business plan need not be precise but it should be directionally correct. At the very least, the plan must at least make an intellectual case as to why the precisely defined idea is financially attractive. Our advise would be to not start the business until you have addressed these issues, at least to your own satisfaction. You will certainly need to answer these questions if you wish to seek outside funding (that is, funding beyond personal resources).

Let us now address the risks. There are basically two broad categories of risk - investment risks and liability. Investment risks are essentially risk of capital (cash injection into the business), and personal efforts and other such resources (for example, use of personal computer, Internet, automobile, telephone, etc.). Liability is the risk of causing harm to another party, be it your customers, vendors or any other person or entity. For example, you may be held liable for any harm your software causes to the systems and operations of your customer. You may also be held liable for violating any government rules and regulations, such as collusion with a competitor, false advertising, violation of privacy, etc.

The process of developing the business plan should make every effort to identify all investment requirements and all foreseeable risks. It should also include contingencies for mitigating these risks.

Defining a precise and clear business idea is like cutting a diamond. Business ideas are like diamonds in the rough, and good ones take time and effort before they become viable business opportunities. You initial effort should be expended primarily for defining the idea precisely and developing a business plan. Hopefully by then, it would become clear whether the risks are worth taking.

Another important point that you may want to keep in mind: Be very selective about sharing your plans - both the basic business idea and the level of details about it. You should share this information only when it is necessary. It is customary in the US to sign a Non-Disclosure Agreement (NDA) before sharing information with other individuals or organizations. Note, however, that many venture capitalists will refuse to sign such documents. NDAs are not easy to enforce without long drawn out legal battles; nonetheless, they are the only legal protection you have.

We hope Mohit that you and your friend find a business idea that leads you to unparalleled success. We would like to hear from you about your on-going adventures and success.

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