How Do You Build a Software Company?

How do you build a software company? It’s a trick question.

There are certainly things you need to do and not do on the way to building a successful software company, but there are no recipes, especially in CRM where demand changes all the time. In my career, I’ve seen firsthand some of the ways that company builders succeed or fail, and to paraphrase Tolstoy, happy companies are all alike; every unhappy company is unhappy in its own way.

We’re used to having an idea, a prototype, or a minimally viable product (MVP) to shop around to investors in the hope of raising a few million bucks to get going. One round follows another, with the investments and the number of investors growing until the company either fails because it can’t raise more cash, or has a successful liquidity event like an acquisition or IPO.

Another Way

Some years ago, I witnessed up close another approach, called “bootstrapping,” in which founders finance the effort and retain ownership. It should be said that bootstrapping was the only method of starting a business until the Renaissance.

At that point, the costs of starting, say, an import-export business, were so high, and the risks so great, that prudent business people began pooling resources to lower the risk of any specific voyage meeting with robbers, weather or other disasters. The profits were lower but more consistent, and the risks were, obviously, less.

That was the beginning of what would be the “joint stock” company, and it was so successful that a peripheral business, shipping insurance, took hold. For the first time, investors could make money not on the profits of the voyage but on its simple successful completion.

It’s noteworthy that Lloyd’s of London, the 300-plus year-old insurance company, got started as a simple coffee house/information exchange, where nervous investors gathered to trade information about their shipping investments. Watch out Starbucks!

At any rate, venture capital was a significant investment that, like insurance, discovered a new niche within the old idea of shared risk. VCs invest in ideas that are far, far removed from first voyages in markets that demand immediate results.

My point is that bootstrappers might build the company more slowly than the guys with access to the capital markets, but they are part of a long and successful tradition. For some entrepreneurs, it’s the right move.

The big question occurs if — and it’s often the case, when — growth stalls. A VC-funded company might get shopped around and eventually sold to a company with parallel interests. A self-funded outfit might go into a holding pattern in which it operates more or less as a funding mechanism for the founders.

These companies are at least minimally profitable, and they can go on for many years. Some call them “lifestyle companies,” because they provide a product or service but are uninterested in generating profits beyond satisfying founders’ income requirements — that is, their lifestyles.

Nevertheless, some very successful examples of bootstrapped companies in the modern era include analytics vendor SAS and shipping giant UPS, which only went public in 1999 after being a business icon for many decades. UPS company raised more than US$5 billion its first day. Also, back in the day, Ford Motor Company was like UPS, only having its IPO in 1956 once it was well established.

Enter Zoho

What many bootstrapped companies have in common is that they decide to avoid the spotlight to concentrate on building great products and serving customers while providing good workplaces for employees. Last week, I spent a day and a half at Zoho in Pleasanton, California, and I think it fits the overall description.

It’s impossible to say how big Zoho will become. Heck, it’s impossible to say how big it is right now. As a private company with offices around the world and zero interest in accessing the public markets, it keeps its financials well hidden.

It’s part of the Zoho culture of investing profits back into the company and its people. It’s also part of a strategy that emphasizes making everything rather than buying it — no acquisitions, that is — and invests heavily in educating its people in how to focus on customers, the Zoho way.

Bootstrapping might not be for everyone, but it has worked at Zoho. The company has a culture well-focused on customers and empowering employees.

Zoho was founded in India and most reminds me of another company with some Indian roots, HubSpot. It might surprise some people that a Boston company has roots in India, but as I wrote in Solve for the Customer, its cofounder and CTO, Dharmesh Shah, defined its culture and published it in a Slide-Share deck that is still available, titled “Culture Code: Creating A Lovable Company.”

Culture Code is too long to go into detail here, so check out the deck. One thing that stands out to me is this prime directive for employees:

• Favor your team over yourself.
• Favor the company over the team.
• Favor the customer over the company.

Why? Because this directive speaks about not making lazy mistakes that have to be fixed by applying money. When you are funding your own growth, the last thing you need to spend money on is replacing the revenue you lost because you hurt an employee who hurt a customer. So, yes, favor the customer over the company.

My Two Bits

What’s interesting about Zoho is that the company has been expanding from its core constituency of small businesses into a larger universe, and it is bringing its unique culture with it. Zoho understands the moment we’re in, which includes a turn toward efficiency and effectiveness driven by reliance on automation.

However, it still sees treating people well as core to the business. So Zoho is in favor of profits, but in an inversion of the lifestyle company, it is not interested in profits at any cost. Yet it simultaneously shows great interest in manufacturing happy customers and employees.

As a practical matter, that’s what supports the strategy of building everything in-house and not growing by acquisition, which would require compromises as disparate systems must be bound together.

There’s a lot to like about a single platform and an intense focus on customers and employees. It’s kind of old school and goes back centuries. So I’m now following Zoho, just to see what it does next.