If you want to start a software business, watch this | Lisbon, July 15

Summary

The video discusses the differences between software product (SaaS) and software service businesses, emphasizing that building software and building a software business are fundamentally different skills. The speaker shares their experience in running a software services agency and explains that SaaS businesses offer high exit values but are costly and challenging to start without funding. In contrast, software service agencies provide immediate cash flow but have lower exit multiples. The video underscores the importance of focusing on one model, understanding the marketing and business aspects, and highlights that successful software businesses require more than just coding skills.

Takeaways

• 💡 Building software and running a software business are two distinct skill sets, and it's essential to understand the difference.
• 🎯 Focus is critical in business; trying to run multiple companies at once is rarely successful.
• 💼 A software services business is based on the agency model, where companies are hired to build custom software for others.
• 🛠️ In contrast, a software product (such as SaaS) is built once and sold multiple times, leading to high scalability and low marginal cost.
• 💰 SaaS businesses can have high exit values with revenue multiples of 8 to 10, making them very valuable if successful.
• ⏳ However, SaaS businesses often struggle with product-market fit and require significant time and investment before becoming profitable.
• 📉 Services businesses generate cash flow quickly but have lower exit multiples compared to SaaS.
• 💸 SaaS companies often need venture capital to fund operations before turning profitable, which brings added risks and pressure.
• 📊 Running a software services business requires a range of skills beyond coding, such as client management, project oversight, and legal expertise.
• 🤝 Observing and learning from other successful companies through a services agency can provide valuable insights into building a software product in the future.

Q & A

What is the fundamental difference between a software product company and a software services company?

A software product company builds a product, such as a SaaS (Software as a Service), that can be sold repeatedly with little to no marginal cost, while a software services company provides custom software solutions for clients, with each project requiring new development efforts.

Why is focus important when choosing between a software product and a services company?

Focus is important because trying to build both a product and a services company simultaneously can dilute efforts, making it harder to succeed. The speaker emphasizes that focusing on one model allows for faster progress and better results.

Why does a SaaS company typically have a higher exit value compared to a software services company?

A SaaS company typically has a higher exit value due to its scalability and recurring revenue model. SaaS businesses are often valued at 8-10 times their annual revenue because they can be replicated at low cost, while software services companies usually have lower exit values due to higher costs of replication and scaling.

What are the two key risks involved in building a software product?

The two key risks are idea risk and execution risk. Idea risk is the uncertainty around whether the product meets a real market need (product-market fit), and execution risk refers to the challenges of building and delivering the product effectively.

Why is product-market fit crucial for a SaaS company?

Product-market fit is crucial because it determines whether there is demand for the product. Without it, a SaaS company can struggle to gain customers, regardless of the quality of the software, making it difficult to grow and sustain the business.

What makes starting a SaaS company difficult compared to a software services company?

Starting a SaaS company is difficult because it often requires significant upfront investment to build the product, find product-market fit, and fund marketing efforts. In contrast, a software services company can generate cash flow immediately by charging clients for custom software development.

Why does the speaker prefer running a software services company at their current stage?

The speaker prefers running a software services company because it provides immediate cash flow and is more feasible with the resources available. It allows the speaker to scale more gradually, whereas a SaaS company requires large upfront investments and might take years to generate significant returns.

What are the challenges of running a software services business according to the speaker?

Challenges include managing clients, handling communication, organizing projects, managing employees, and dealing with business administration such as accounting and legal work. These tasks require skills outside of software development.

Why is marketing critical for the success of a SaaS product?

Marketing is critical because even the best software product can fail without proper promotion. The speaker emphasizes that many developers underestimate the importance of marketing, which is key to attracting customers and competing in the SaaS market.

How does running a software services company help the speaker learn about the SaaS business?

Running a software services company allows the speaker to work with clients who are building SaaS products. This provides insight into what makes these products successful, such as marketing strategies, which can be valuable for future SaaS ventures.