Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

First Time Entrepreneurs, Developing a “Capital Efficient” SaaS Company Requires Work, Dedication and Diligence

Every five years or so, venture capitalists develop a new mantra with regard to their investment philosophies. In the late 1980’s and early 1990’s the mantra was “synergy”.  Towards the turn of the century and shortly thereafter, the new mantra was “scalability”.  Today, in a risk adverse environment, venture capitalists’ new mantra is “capital efficiency”.  This is especially true for start-up companies looking to develop Software as a Service (SaaS) companies. What does this really mean to entrepreneurs – spend less and so that venture capitalists can achieve a higher return on their early stage investment.  With the development of the SaaS business model, there has been a simultaneous emergence of offshore software development houses in India, Russia, Pakistan and other countries that provide Internet-focused software development services that support significantly lower labor rates that can provide equivalent services at a much lower cost than can be achieved with local software development teams in developed countries.  This is very attractive to both investors and entrepreneurs as it provides a means to facilitate capital efficiency with the delivery of a high-quality product.  In what follows is a short discussion regarding some of the issues facing entrepreneurs looking to take advantage of this offshore “capital efficient” business model on their way to developing a successful SaaS product offering.

Understand the Details

Given the geographic and time differences required by using offshore talent to develop your start-up company’s SaaS product offering, you must take the time and effort to understand the details of your SaaS product requirements.  This includes developing a proper functional specification. This document must be detailed enough to outline all of the capabilities and requirements of the website application and database. This is very important, as you need to provide a basis for which your offshore development team with the ability to analyze the needs and requirements from the technical side so that they can provide proper estimates of the total development costs and associated schedule.

During this process you also need to make a clear delineation between design and development activities.  Both are clearly different in focus and function.  During the design, generally done locally, you need to have a designer focus on the website look and feel and he necessary user interactivity that makes your website function as desired.  This needs to be accomplished before development begins. The end result or delineation point is generally the delivery of a complete architectural specification with an appropriate number of design files (.psd files) to your offshore development team.  The offshore development team then takes these results and does the necessary programming in the appropriate language for the targeted end application (e.g., website, Smartphone app, or tablet app).  The key here, to achieve successful results, is to proper delineate your requirements in a functional specification, understand the details of the design development process, and identify the proper handoff point so that both parties can do their respective jobs appropriate and deliver a successful SaaS product offering.

Get Multiple Quotes and Understand Their Differences

As in any business transaction it is important to get multiple quotes from different service providers.  If this is your first time developing a SaaS product offering, you will need to ask a lot of questions to fully understand the differences between the various quotes, their costs, and delivery schedules.  You also necessary need to understand what is required from you as the customer.  Questions you need to answer can include:

  • Do you require a project manager with the appropriate expertise to manage the process from on-shore?
  • How often will you interface with the development team?
  • What are the development milestones?
  • What do you need to deliver so that that development can proceed as required?
  • Is this a “platform” based development or a “custom” development?
  • Is there any license fees (one-time or recurring) associated with final product?
  •  What does the development contract look like?
  • What are the service and support terms, conditions and costs?
  • Where will the development be hosted?
  • Who will host the production product offering and what are the costs?

As delineated above, there are several different scenarios that you can run into when looking to source your offshore development overseas.  Make sure you get multiple quotes and that you thoroughly understand each quote and the differences between each.  Remember, the most inexpensive quote and shortest schedule may cost you more in the long run. In addition, you need to make sure you do not enter into a development contract that will tie you hands when you try to sell your start-up company. 

Check References

You need to do a reference check on your service provider(s). This is necessary and appropriate.  Remember you are putting the future of your start-up company in the hands of a stranger.  So, unless you get a recommendation from a trusted source, you need to do your due diligence and check at least three references.  In addition, develop a list of questions that covers all of your bases. This will do two things. First, it will allow you to ask the same questions to different reference sources to see how each responds. Second, it also provides you with a dialog in which to drive the conversation. During your reference check discussions, you may get off track, but you will have your reference list of questions keep you going forward as you move through the reference check.  Finally, ask tough questions to see how the references respond. This can include:

  • “What didn’t you like about the development team?”
  • “What would you do differently in the future?”
  • “Would you use them again for a future project?” 

 These types of questions provide the reference person with the ability to respond honestly to things that they would not necessarily bring up on their own.  These same questions will also provide you with a comfort level that cannot be achieved any other way.  Hence, by the time you are finished with your reference checks you will have a good feeling as to whether you want to move forward with this service provider or not.

The development of the SaaS business model and the requirement for “capital efficiency” from venture capital investors has required entrepreneurs to look overseas for their software development.  With the low cost of labor and the highly skilled readily available labor force, using an overseas software development team can significantly lower development costs and provide for the necessary capital efficient model deemed necessary by today’s venture capital investors. When looking to source their development from overseas, entrepreneurs need to necessarily understand the details of their development get multiple quotes and understand the differences, and check references.  By going through this process you will help facilitate a successful development and the delivery of a product offering that meets your requirements.

This information was taken from Robert’s new book: “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up Companies”.  Available at www.amazon.com.

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July 12, 2010 Posted by | Venture Capital | , , , , , , , , , | Leave a comment

Entrepreneurs, Using Outsourcing to Obtain Capital Efficiency Needs to be Thought Through to be Effective

“Cloud” computing is changing the landscape of the software world.  No longer is it required for corporations to sign up for multi-year, multi-million dollar software license contracts only to incur this same amount of capital expenditure in three years to receive a software license upgrade.  Today, “cloud” computing, or the “Software-as-a-Service” (SaaS) business model has taken a strong foothold in the software market and has changed it forever.  As such, many start-up companies are looking to support this same SaaS model for their software service product offerings.  In addition, with the availability of inexpensive, highly-skilled technical software development support from companies in India, Russia, Pakistan and other overseas countries, venture investors are pushing for their new mantra, “capital efficiency”. In short, this requires finding a reliable, inexpensive, highly technical software development partner to get your product to market, so that they can invest less money and at the same time increase their return on investment.  This model is good for both the investor and the start-up company, as both would like to invest less to get their products to market and as a result receive higher financial returns.  The requirement for this outsourcing model to work is to identify a development team with an excellent track record, provides a direct management chain, and supports the near term and long term strategic objectives of your start-up company. In what follows is a short discussion on how to address these underlying issues when working to identify and partner with a capital efficient outsourcing development team.  

Excellent Track Record

Let it be known that there are many, many outsourcing company and individual resources available on the market in order to support the venture investor’s “capital efficiency” model when developing your start-up company’s cloud computing, SaaS business.  On the other hand, not all of these same outsourcing groups have the same business models or objectives.  In addition, like any third party consulting source, you need to verify this third party company’s track record, by doing your own due diligence on the company, including:

  • Checking the background of the management team,
  • Verifying the reliability of their delivery schedules and costs,
  • Making sure they offer leading edge technical solutions, and
  • Finding out how many clients have used them for repeat development work.

All of these things will help you, as an entrepreneur to get a clear picture of the outsourcing group and their ability to be a strong potential strategic partner for your start-up company.  In addition, you need to check your rolodex to see if any of your colleagues can recommend strong outsourcing partner.  In the end, you need to look to identify multiple outsourcing partners and then go through the process of elimination in order to find the right group with an excellent track record that fits your business and business model.

Provides a Direct Management Chain

Working with an outsourcing partner requires strong lines of communications between the third party outsourcing partner and your start-up company. The best approach is to develop a direct “managed-team” relationship, where you and your start-up company have direct management chain control of the relationship.  You do not want too many “project managers” in between your start-up company and your outsourcing partner.  There are many U.S. intermediaries that offer third party management of their “outsourcing” team. This model will work, but it is better to take a hands-on approach to where your start-up company’s technical lead (e.g., CTO, Director of Engineering, Project Manager, etc.) interfaces directly as the project manager of your third party outsourcing group.  Putting another layer of project management in between you and the outsourcing development team can be flawed with potential problems. Not the least of which is that fact that putting one more level of communications between you and your development partner will be a source of mis-understanding and possible product feature and function problems and resulting delivery issues. So, take the time to find and develop a direct relationship with you third party outsourcing team, this will result in much smoother product deliveries and much less potential for mis-communications between the two parties.

Supports Near and Long Term Strategic Objectives

If you are going to partner with a third party outsourcing development group, you need to make sure that this partner has the skills and assets to support your start-up company’s near and long term strategic objectives.  A lot of outsourcing groups are good at a limited number of software sourcing technologies.  This will require your start-up company to look for other, additional outsourcing groups to address your possible future product development needs.  Again, this is not the best way to go.  You need to step back and understand what technical skills and assets you need both short term and long term and find a partner that has the broad set of skills and assets to address these needs.  The last thing you want to do is to have to manage multiple development teams across multiple platforms and time zones in order to get your final product offering to market. So, take the time and find an appropriate outsourcing partner that can address both the near and long term technical development needs of your start-up company.  This will serve you best, and often provide for development efficiencies that will result in spending less money and getting products to market much sooner.

“Cloud” computing and the SaaS business model has significantly changed the software world and with the requirement of focus on “capital efficiency” for your venture investors, start-up companies need to necessarily find an dependable, overseas outsourcing partner to help develop their software based product offerings.  To do this entrepreneurs need to find an outsourcing partner that has an excellent track record, provides a direct management chain, and supports the near and long term strategic objectives or their start-up company. Taking the time to identify the correct outsourcing partner is important as it can necessarily facilitate the future success or failure of your start-up company.

This information was taken from Robert’s new book: “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up Companies”.  Available at www.amazon.com.

June 7, 2010 Posted by | Venture Capital | , , , , , , , | Leave a comment