OnStartups

A little while I ago, I wrote an article on this blog titled “Go West, Young Entrepreneur!  Is The Valley Better For Software Startups?”. 

 

Now, I’ve come across some new information that causes me to reconsider this point of view.  Business Week posted an article recently titled “Ranking The States For The New Economy”, which cites a recent study by the Kauffman Foundation, a well-known private foundation that promotes entrepreneurship.  The study provides detailed rankings on how states in the U.S. are adapting to the challenges of a global, entrepreneurial, and knowledge-based economy.  The study was previously conducted in 1999 and 2002.

 

I’ll jump to my punch-line first:  In both 1999 and 2002, Massachusetts topped the list.  This year, not only did Massachusetts top the list, but increased its lead over the other states.  

 

A few things from the article and the study that I found interesting:

 

1. MA ranked #1 overall, and also ranked #1 in “workforce education”, a weighted measure of educational attainment of the workforce. 

 

2. MA also ranked #1 in the “Hi-Tech Jobs” indicator defined as the jobs in electronics manufacturing, software, computer-related services, telecommunications and biomedical industries as a share of total employment.  

 

3. MA had the fourth-highest increase in per-capita income.

 

4. Another surprise:  #2 and #3 were New Jersey and Maryland.  In case you’re wondering, California came in at #5.

 

5. California ranked #1 in “Inventor Patents”, defined as the number of independent inventory patents per 1,000 people.

 

6. The bottom two states that “didn’t adapt well to the new economy” were West Virginia and Mississippi.

 

7. Vermont (yes, Vermont!) ranked #1 in entrepreneurial activity.  I found this surprising.  The study states that this may be due to fewer traditional employment opportunities in rural areas.  MA came in at #43 and CA at #9.

 

8. MA ranked #1 for the “Venture Capital” indicator (which I found surprising too).  

 

So, what do you think?  Do any of these results surprise you?  If you are an entrepreneur, does data like this influence your thinking at all as to where you might kick-off your startup?  Would love to hear your thoughts.

 

News was released today by VentureOne (owned by Dow Jones), which tracks venture investment data.  Venture-backed companies are now getting pre-money valuations (pre-money means the value of the company before the capital is invested) that are the highest they’ve been since the peak of the last bubble in 2000.

 

Median pre-money valuation of U.S. VC-backed companies reached $18.5 million in 2006 (vs. $15 million in 2005).  At it’s peak in 2000, the median valuation was $25.1 million.  Sounds like valuations are inching back again.  I’m not sure if this is good news or bad news.

 

Of course, for early-stage startups the information that is much more relevant is what the valuations were for first-round companies.  In this case, the pre-money valuation was $6.2 million vs. the $5.9 million in 2005.

 

“That’s all fine and dandy,” you’re thinking, “but what does that mean for me?”.  Well, that depends.

 

For most entrepreneurs, you’re probably not raising venture money – and for those that are, you’re probably not going to succeed in raising it.  Nothing against you or your company (I don’t know you, and don’t know your company), but the numbers are working against you.

 

So, the question is, if you are not raising money does it help you or hurt you that VC valuations are up?  I find this to be an interesting question.  First, I am going to guess (because it happens to be true in my case), that when VC valuations are up, the price other types of investors are willing to pay (such as angel investors) are up too.  For many of us, that’s good news.  Also, VC valuations can be seen as a proxy for the overall boisterousness (uncanny, I thought I had just made that word up, but it passed the spell-checker) of the market.  

 

Overall, for no particularly rational reason, I generally feel that the rise of VC valuations (even though I’m not raising VC money) is a good thing for startups.  There’s a small part of me that thinks that since general “market prices” are rising for startups, my startup is worth more too.  But, I could be totally delusional and uninformed.

 

What do you think?

In the startup world, the phrase that is often bounced around, is to have “skin in the game”.  This is a short-hand for saying that a given individual has some incentive to see the company succeed.  One of the most common examples is:  “Susan just wrote our startup a $100,000 check – she has skin in the game.”

I’m going to argue that there are multiple levels at which parties can be involved in a startup.  Certainly, writing a check is one way to align interests, but that is an over-simplification.

The reason people like to see “skin in the game” is that it motivates the right kind of behavior on the part of the individuals with the skin.  Interests are (supposedly) aligned and those with skin in the game are expected to do the right thing more often than not for the company.

But, there’s a big difference between the degree to which interests are aligned and more importantly the degree to which an individual really has skin in the game.  

On one end of the spectrum, you have those that are lightly (or heavily) “involved” in the startup.  These can be advisors, could be passive angel investors could be members of the management team working for reduced salary – and of course, could even be one of the founders.  Yes indeed, you can have involved (but not committed) founders.  And, on the other end, you have those that are committed.

Here’s the litmus test for how I try to distinguish between the two:  If your startup dies next week, what will be the actual impact on a given individual?  

The point here is that just because someone quits their day job, just because they write a relatively large check, just because they take the founder title – none of these necessarily means that they’re committed.  It’s possible that in all of these cases, the actual impact on the individual is relatively minor.  They find another day job or they mourn the loss of their investment for a week or a month.  What I consider “real” co-founders are those that are financially and emotionally committed to the startup.  For the founders to be committed, if the startup dies tomorrow, it will forever change their life.  They can’t just wake up the next day and have it be life as usual (yes, they’ll recover – but the failure will have a lasting impact).  

In the startups that I’ve kicked off, much to my dismay (and my wife’s dismay), I’m always committed.  And I’m particularly emotionally committed.  Sure, I make substantial investments in the startup, but I really get emotionally committed.  My identity becomes tied to the company.  I meet great people, I experiment with new ideas, I (hopefully) build great products.  But, what really reels me in is that everyone I know, knows that I’m working on a new startup.  Sure, I might fail, but it will not be a quiet, subdued failure.  It will be (in my own way) – spectacular.  Just as everyone I know will know I started, everyone I know will also know it didn’t work out.  

For my current startup, HubSpot, it took me some time to “draw in” my co-founder, Brian Halligan.  I didn’t have to find him (we already knew each other pretty well, and he was already involved in the company for over a year – but he wasn’t committed).  This past summer, he joined full-time as co-founder, but I still wasn’t absolutely sure he was committed until an important thing happened:  He started talking to his friends, family and colleagues about HubSpot.  He told them why he was doing it, and how great the company was.  Now, for good or for bad, he is in.  If by mistake or misfortune, HubSpot does not go in the direction we hope, I do not think he will be able to walk away untouched.  He is committed, as I am.  And that’s what you want in a co-founder.

How about you?  Have you had a hard-time getting people to shift from the “involved” stage to the “committed” stage?  Would love to hear about your experiences.  Please leave a comment.

I’m in the middle of reading “Founders At Work” by Jessica Livingston.  The book is basically a collection of interviews with founders of some prominent software startups.  What I like about the book (I’m about half way through) is that the interviews are pretty detailed and Jessica does a great job of giving the founders enough time to get their thoughts out.  They cover issues ranging from the conception of the idea, team dynamics, investor dynamics, etc. All the things that you’d expect to go on within a startup.  In any case, the book is good and I’ recommend it (it is one of the few ones that has made the OnStartups Reading List.

 

But, this article is not about the book (I’ll plan to write a fuller set of thoughts on that in a later article once I’m done reading it).  This article is about the importance of your early founding team to the likelihood of a successful outcome for your startup.

 

The title pretty much says it all:  I think the idea that you are basing your company on is likely less important than the team that you create to pursue that idea.  Here are some thoughts as to why.

 

Why What You Build Is Less Important Than Who You Build It With

 

1. The Idea Can (And Should) Change:  I’ve read numerous times that most startups that end up being “successful” will change the idea along the way.  I recall from a Clayton Christensen presentation that his studies indicated that on average startups change their basic idea/business about four times before finally landing on the one that makes them successful.  He actually goes further and says that in order for startups to succeed, they need to be flexible and have the ability to change the idea based on market feedback instead of doggedly sticking to their original plan.  So, the point here is, your initial idea for the startup, as brilliant as it might be, is probably going to change anyways – multiple times.  For this reason, it doesn’t seem prudent to get overly attached to the idea or give it too much weight in the early stages.

 

2. The Team Shouldn’t Change:  Startups are an exercise in trust building with a group of motivated and competent people.  Unless you have worked with these individuals before, it can take a fair amount of time to do this.  As such, changes to the “core” team of a startup can be extremely disruptive.  I’ve seen more startups fail because of founder conflict, high management-team turnover and other “people” issues than issues with the technology or the idea.  So, picking this early team and making sure you are coming together with a clear understanding is critical.

 

From “Founders at Work”, one of my favorite quotes so far has been from an interview with Joe Kraus, the founder of Excite and JotSpot.  I’ve heard Joe speak and he seems a particularly intelligent and insightful guy.  Joe says:  “People make all the difference in the world.  Venture capitalists would tell you that they’d rather fund a great team than a great idea.  The reason is that if they have a bad idea, great teams can figure out a better one.  Mediocre people even with a great idea can screw it up in its execution.”  I’d further add that mediocre teams may also be less likely to detect a bad idea, so may be more likely to stay on the wrong path longer than they should.

 

In my current startup, HubSpot, the words are ringing very true.  My co-founder, Brian Halligan and I met as graduate students at MIT.  We got to spend a fair amount of time together and learning about how each of us “thinks about stuff”.  Though we have very different backgrounds (his in sales and mine in technology), we both have similar approaches to problem solving.  We like to analyze, dissect, discuss and debate.  We love abstractions and we love to seek patterns.  This approach has helped us with HubSpot, because as expected, the underlying idea behind the business has already changed considerably since the company was originally conceived.  The good news is that we’re able to openly talk about things and not hold any punches.  If Brian thinks I’m wrong, he’ll tell me (with pretty good reasons as to why).  

 

How about you?  Have you found that your startup has needed to change ideas, or did you happen to “get it right” the first time?  What about the people?  Are you still with the same core team or did this end up changing for some reason?  What were the lessons learned?  Would love to hear from you.

 

Instead of the common arguments of why one of the big guys (Google, Microsoft, Oracle or whoever) can’t/won’t compete with you, it’s sometimes helpful to answer a slightly different question and look at this through a different lens:

Here is what BigCo would have to do to win in this market.  First, they’d have to <x>.  Then they’d have to <y>.  Finally, they’d have to <z>.

You get the idea.  Instead of making decisions on behalf of the other party, let them decide on their own how hard it will be for BigCo to do x, y and z.  As a potential investor/advisor, I like to see the startup founders have an objective stance on competition and can accept that one thing those of us that have been around the block know a wee bit about is the realistic impact of competition from big players.

Having said that, I came across an interesting article recently that should provide some comfort to startups.  It was interesting not because it revealed some startling fact, but because I was not all that surprisng.  The title of the article is “190,000 Office Live beta accounts left in limbo.”  It was penned by Phil Wainewright whose blog I follow regularly and who I believe has a reasonably balanced view on things.  If nothing else, at least his arguments are usually pretty objective.  The best I can tell, neither Phil nor I hate Microsoft (quite the contrary, I’ve been a customer for years, build on top of their platform and own Microsoft shares).

 

The thing that leapt out at me about this article is that the article didn’t leap out at me.  I have read about similar things all the time with big software companies – particularly those that deal with smaller customers.  This brings me to a couple of points I’d like to share with you:

 

1. When the ratio of the size of the software company and the size of its customers is very, very large (as in the case of most big businesses selling software/technology to small businesses), there’s the danger of a lapse in customer service.  In the aggregate, they do really well.  But, often, individual customers or groups of customers can get really, really screwed.

 

2. The reason for the above is that as a company gets larger another important ratio starts to slide downward.  This is the ratio of the number of people in the company that genuinely care about customers to the number of customers.  

 

So, when you’re up against big competition, try to figure these ratios out.  What’s the company size / average customer size  and what’s the people that care about customers / total number of customers.  Of course, the latter is not easy to come by in terms of hard data, but simple looking at the world through this lens is helpful.

I generally tend to believe that the fiercest competition for a startup often comes from other startups, but that doesn’t mean the big guys should be ignored.  Often, the most reliable source of competition eventually is the big companies.  This kicks in if and when you become moderately successful (and thereby the big guys start to care enough to come after you).  

What are your thoughts?  Any war stories from the trenches in having gone up against competitors many, many times your size?  If so, would love to hear them and any other comments you might have.

I’ve been meaning to write this article for a while, but a recent post from Matt at Xobni titled “Do One Thing And Do It Well” reminded me about this topic, so felt this was as a good a time as any.  By the way, I’ve met Adam Smith and Matt Brezina both founders of Xobni a few times when they were based out of Cambridge.  They’re great guys. 

You’ve probably heard of the mantra, “focus, focus, FOCUS!” at least a few times.  I’m hoping not to belabor that particular point, but look at the issue from a slightly different perspective.

The Market Rewards Specialists.  If you think about your personal behavior and buying experience, you’ll likely agree with me.  As an overall society, we are digging deeper and deeper into most problem domains and we tend to reward those that have dug deeper than others.  We are now seeking experts on everything from the life-critical (the medical industry) to the not-so-critical (landscape designers that focus on small urban gardens).  This particular movement applies to startups as much as anything else.

Understanding The Problem Is More Important:  Personally, I think there is a lot of value in digging deep into a problem and really, really understanding it.  Lots of good things come out of this particular specialization.  First, you figure out whether the problem itself and the way you’re thinking about it is shared by a sufficient number of people.  You also start to get a sense of where you draw the lines around the problem when crafting your particular solution.  One of the biggest makes startups make is drawing the line wrong.  By not understanding the problem well enough, they either end up solving parts of the problem that nobody cares about, or not solving parts of the problem that everyone cares about.  The reason is usually quite basic.  Founders assume that if the problem is hard to solve, then lots of people will care about the solution.  Unfortunately, the complexity of a problem is not that highly correlated with the perceived value to a customer.  Said differently, just because something is hard to solve, doesn’t mean people will pay you to solve it.  Just because something is easy, doesn’t mean that there is no market.

Compete On Depth:  This piece of advice is probably the best I’ve received and that I can pass along to you.  And, I mean “pass along” in the literal sense.  It’s advice that I personally have a really hard time taking myself – even though I know it’s right.   This is despite the fact that my first startup was highly focused (and to date, the most successful venture I’ve had).   It is much, much more important to solve a seemingly small problem really, really well than it is to solve a large problem (or set of problems) in a mediocre way.  Once again, the market rewards specialists.

I’ve struggled with this whole issue of specialization in my current startup – but have gotten much, much better.  I’ve now figured out that it is hard for me to focus in the very early stages of creating a startup strategy.  So, what I’ve arrived on is to “start big and broad” – and then narrow quickly.  What works for me is to “cast a wide net” for a little while, and then find a problem that I find particularly interesting and then lock in on that.  At HubSpot, one of the early strategies was to create a company that would deliver “enterprise apps for small businesses”.  We thought of ourselves as “Oracle of the small business world”.  This was an ambitious (read:  foolish) notion.  The strategy was simply too broad for a startup to pursue.  But, Brian (my co-founder) and I had enough sense to figure this out pretty quickly.  Hence, we’ve narrowed our focus – a lot.   

How about you?  Do you find it difficult to get dig deep into a particular problem?  Are you trying to be a generalist because you think the market is bigger?  Are there particular techniques that you’ve found helpful in drawing a circle around the problem to be solved?  Leave a comment and share your wisdom and experience. 

As a software startup guy, I’ve been intrigued by what the folks over at 37Signals are doing for a long time.  I interviewed Jason Fried (CEO of 37signals) for my graduate paper on software startups earlier this year.  (I’ve written a couple of articles about 37signals in the past, including a couple of things I disagree with them about).

I read somewhere (can’t recall where) that as a startup you ideally want your competition to be big and stupid.  Big, because then your smallness is an advantage and stupid because, well, because it’s useful to be smarter than your competition.  If the competitor is big and smart (like Google), you’ve got a problem.  Big means they have resources, smart means they know how to use them.  However, the scariest kind of competitor for a startup is one that is small and smart.  Like 37signals.

Here’s why I think you don’t want to compete with 37signals:  It’s not about the fact that creating simple, usable software is really, really hard (which it is).  It’s not because they have really bright people (which they do).  It’s because the company is a marketing machine.  37signals squeeze more marketing value out of every dollar they don’t spend than any company I’ve ever known. They’re getting an immense amount of return on an investment they’re not making.  That’s why it’s really, really hard to compete with them.  This kind of marketing magic is hard to replicate.  I’d argue that for many software startups, the difference between success and failure is now no longer just a matter of “the better product” (if indeed, that was ever the case), but better marketing.

What their marketing savvy buys them is a lower customer acquisition cost than other startups.  This is why VC-backed companies are going to have a tough time going head-to-head with these guys.  If you have the money, you can “buy” customers and market-share (to a degree), but you can’t buy a low customer acquisition cost.  The only way to get there is to really buy a lot of “scale” (and that is very hard to do and often a dangerous strategy).  What I find particularly intriguing about the strategy at 37signals is that they’re able to get this kind of marketing and PR value despite not having a “network externality” or “network effect”.  In most cases where you hear about efficient marketing and customer acquisition, there’s usually some value to customers/users “passing the word around” and getting their friends/colleagues/family to also be customers.  This is what causes the “viral” spread.  37Signals doesn’t really have this.  Just because you use Basecamp doesn’t mean that I’m going to be any more likely to use Basecamp.  

On a related note, I think it’s important to note that 37signals made more money on sales of their “Getting Real” book (which is well worth the read) than most early-stage startups are able to raise in seed round funding after months and months of PowerPoint pitches.  Instead of trying to find investors, they spend their time building stuff, sharing their passion and knowledge and constantly promoting themselves – and the money showed up at their doorstep.  This type of approach really warms my heart.  There is no better form of funding than sales.  It’s like a loan that pays you interest. 

So, my hat is off to the folks over at 37signals.  It’s great to see a small, immensely passionate group succeed.  If you have thoughts about what you think makes those folks “tick” (that can be inspiration to other startups), please leave a comment.  Will plan to capture these and some of my own thoughts in a future article.  I think there’s a lot to be learned here.  I already have the title of the next article planned out.

I posted a blog article this morning on our partner internet marketing blog (Small Business 2.0) titled “Understanding RSS:  A Quick Guide For The Insanely Busy Executive”.  I’m guessing that most of the OnStartups.com readers already know what RSS is and are using it daily anyways, so the article will likely not be of that much interest to you.  On the other hand, if you’re not using RSS, go read that article first, because I’m not going to be able to sell you on the concepts of this article if you’re not already using RSS.

So, let’s now assume you’re already using RSS.  Chances are, you subscribe to a blog here and there, a news site here and there and perhaps even a social news site like digg or reddit.  That’s great.  I don’t need to sell you on the utility of RSS for this kind of “keeping up with the news”.

But, RSS doesn’t need to stop with tracking the latest news (both personal and business).  It can also be used as a way to track what is going on with your competitors.

For example, let’s say for whatever reason you were competing with my current startup HubSpot.  Here’s what I would do if I were you:

1. Make sure to subscribe to the RSS feed for the HubSpot blog.  This one is obvious.  If I’m a direct competitor, you’d want to know every time something new was posted.  You should also track the comments on the blog entries to see what kinds of things are resonating with our target market.

Note:  It is entire possible that your competitor doesn’t have an RSS feed (or doesn’t even have a blog).  If I wanted to be controversial, I’d say that you don’t need to worry about these types of competitors because if they haven’t figured out yet the efficiency of online marketing, they likely won’t be successful anyways.  But, I don’t want to be controversial, so I won’t say that.

2. Subscribe to a Google search RSS feed.  Basically, this is the equivalent of doing a regular Google search on a specific search term and getting an RSS feed for the results.  You can add a feed URL like this:  http://news.google.com/news?q=startup+hiring&output=rss  (Note:  I’m using the sample search term “startup hiring” on the off-chance that you actually are a competitor.  Don’t want to make things overly easy for you).

3. Figure out who else is writing about the particular target market segment (other bloggers, analysts, community websites, etc.) and subscribe to their feeds.

So, what are your secret tips for tracking competitors (clearly, RSS is not enough)?  Or, are they so super-secret that you can’t share them?

On a related note, stay tuned tomorrow for a more lengthy (and substantive) article on the issue of competition. 

Back in Bubble 1.0, um, I mean Web 1.0, when a startup failed to take off, it generally died a relatively clean and definitive death.  We all knew the company was dead because the assets were sold or auctioned, the servers shut down and the service rendered unavailable.

Now, with Web 2.0 companies, it seems that there is a risk of what I would call the “walking dead”.  Walking dead are companies that have essentially died (but have not quite been put to rest).  There is no longer effort being put into the software.  The founders have lost interest.  Support is no longer available.    In most cases, this is not a big deal.  A lot of these startups have a limited number of users anyways, or are providing a non-critical service – but not always.  Besides, one could argue that if they’re not really dead (i.e. still operating) it doesn’t really matter if the software is no longer being enhanced or supported (as long as it’s useful).  

Thoughts On The Web 2.0 Walking Dead
 
First, there are factors that increase the likelihood of the walking dead phenomenon in a Web 2.0 world:

1. Lack of Investors:  In Web 1.0, many startups could (and did) raise outside capital – sometimes lots of it.  As a result, once it was determined that the startup was not going to “take off” as the investors expected, there was usually a reason to actually shut-down the company and write off the investment.  There was no reason for the investors to let the startup continue operating and carry the liability if there was little chance of a meaningful exit.  They were better off shutting it down.  Startups without outside capital (which represents a lot of the Web 2.0 startups today) don’t have this external pressure to have a “clean” shut-down.

2. Lower Infrastructure Costs:  It takes a lot less money now to operate a hosted web application than it did back during Web 1.0.  Hardware, bandwidth and storage are all cheaper.  There’s an abundant supply of hosting providers (keeping competition high and prices low).  Open source has reduced the cost of systems software like operating systems, web servers, programming languages and databases down to near zero.  As such, it doesn’t take a lot of money to keep a Web 2.0 company “running” anymore (assuming there is no more human effort being expended).  Humans are still expensive (relatively speaking).

3. Advertising Efficiency:  Now that online advertising has been made much more “efficient” by the likes of Google (and now Yahoo! and Microsoft), it is easier for startups to generate at least modest revenue through a semi-successful website.  Often, these revenues can be sufficient to cover the infrastructure costs mentioned above.  When this is the case, there is little reason for the company to actually die (it continues to exist as the “walking dead”).

There are also a couple of factors that decrease the likelihood of startups becoming the walking dead:

1. Easier Exits:  One thing that argues the opposite of the above points is the availability of simpler exit paths for startups.  For example, I know of at least four startups that offered their assets up for auction on eBay.  By making it easier for startups to find a potential acquirer, they are more likely to do so.  Further, if they use a public vehicle (like eBay) for seeking an exit, it is likely that their users will know it.

2. Perpetual Hope:  As the number of Internet users continues to grow and we see new “shifts” in the online advertising space (more competition, better models), startups can often have the chance to be rejuvenated.  There are enough cases where companies that to be “dead” later became alive again (with new capital, a new strategy and a new hope for exit).    Though this certainly gives these companies a chance to be reborn, this also increases the chance for the “almost dead” companies to hang-around while holding on to that hope.

I don’t think this Web 2.0 “walking dead” is a major issue.  As I mentioned, most of the startups that might be classified as “walking dead” are not providing critical functions without which their users could not continue to live productive, meaningful lives anyways.  The number of users impacted by one of these startups is almost by definition small (because if a given startup had a large number of users, they’d likely be living anyways).  I just find the concept intellectually interesting. 

What do you think?  How would you know if one of your favorite Web 2.0 applications is the walking dead?  Would you care anyways (or would you just use it while it was alive and find something else if it happened to be put to rest)?

This blog’s audience can be simplistically divided into two types of people: 

1.  technology geeks (folks with a technology background, and more specifically a software development background) that have an interest in the business issues because they’ve founded or are thinking of kicking off a startup.

2.  business geeks (folks with a business/sales/strategy background) that have an interest in technology because they’ve founded a software startup.  For more on my thoughts on business geeks, read “Business Geek:  Not An Oxymoron”

A number of my articles address one group or the other (like my “Presentation Tips for the Technically Gifted”.

This one looks at the value of automated software testing from the perspective of the business-side.  The reason for the focus is that most programmers I know and respect already understand the upside to automated testing and know way more than I do.  If this is you, feel free to stop reading.  I won’t be offended.

Business Thoughts On Automated Software Testing
 
Automated software testing is a large and relatively complex area that takes a while to understand.  But, let’s work with a simple definition:  It is the process of using computers (instead of humans) to run repeated tests to determine whether the software does what it is supposed to do.  It is important to note that most automated software testing still involves humans in the beginning (to design and develop the tests), but it’s the repeatability that makes it so powerful.  Once the tests are developed, the payback is continuous because the costs of running the tests are near zero.

In order to better illustrate my points, I’ll use Pyramid Digital Solutions (the first software company I started).  Pyramid ran successfully for 10+ years and was recently sold, but I like to use it as an example because I actually lived a lot of these lessons and I find it helpful to have a real-world example to talk about.

1. Build Better Software:  This one is obvious, but is at the core of the value so needs to be said.  By building a library of automated tests, you are generally going to ship better software that at least, at a minimum works when used in certain, predictable, preconceived ways (the use cases that have been accounted for in the tests).  This is a good thing.

2. Test Continuously:  As noted, once you have tests automated, there is very little cost to running the test.  As such, once you’ve made the investment in building automated test scripts, there is no good reason not to run them frequently (and lots of good reasons to do so).  In my prior startup, we eventually got to over 20,000+ test scripts that run for several hours.  We ran them every night.  Each night a process would fire off that would retrieve the latest source code the programmers had checked in, build our product (automated builds) and then run our test scripts.  Every morning, the results of the test scripts got emailed to management and the development team.  

 

3. Cheaper To Fix Bugs:  Most software has bugs.  From the business perspective, the questions are:  which bugs do you know about, when do you “find” them and how much does it cost to fix them?  As it turns out, when you find them and how much it costs to fix them are highly correlated.  Lets take an example.  From my prior (real-world) example, lets say a programmer inadvertently makes a code change and checks it in.  The code has a bug.  In the old way we used to operate, it often be days, weeks or months before that big got caught (based on what part of the product the code was in, whether it was caught internally, or made it out into the “wild” to be found by customers).  The more time that elapsed from the when the code actually changed, to when the bug was actually found, the more expensive the bug became to find and fix.  We’re talking major (orders of magnitude) increase in costs.  Now, in the new world (where we had automated tests running every night), this bug may be caught by the automated test scripts.  If so, the very next morning we would know there was a problem and we could go fix it. The reason it was so must cheaper to find and fix the bug was because the “surface area” of change was so small.  A limited number of things got changed in the prior 24 hours (since the last test), so the bug could more easily be discovered.  I cannot emphasize enough how much money you can save by catching bugs within hours (instead of days) of the bug being introduced.

4. Freedom To Change:  As software systems get bigger, it becomes harder and harder to make changes without breaking things.  Development teams do what they can to refactor the ugly bits of code as they can (and as time allows), but even then, a sufficiently large-scale codebase that has been around for a while will almost always have “corners” of it that nobody wants to touch (but are important).  The business risk to this situation is that you may find yourself in a situation where customers are asking for things or the market shifts in some way that causes the need for change (this should not come as a surprise).  If the programmers are fearful of changing core parts of the system for fear that they’ll break something, you’ve got a problem.  If you’ve got a large battery of automated test scripts, it frees the programmers to do lots of cool things.  They can refactor the code (the automated testing is a “safety net”), they can add/change features, etc. with a lot less loss of sleep.  What you will find, by investing in automated testing is that your organization actually moves faster than it did before.  You can respond to market change quicker, you roll out features quicker and you have a stronger  company.

5. Clients Are Happier:  At Pyramid, we had quarterly meetings with our clients (and an annual conference where a bunch of clients got together).  At each of these, one of the key metrics we shared was how large our automated tests were.  This gave clients some comfort.  This comfort translated into a higher likelihood that they would install newer versions of the software (when the became available).  Since we were in the high-end, enterprise software space, this was a big deal.  If we could get 20% more of our customers to move to Version 5 of our software (instead of staying stuck on Version 4), we had advantage.  Less support costs and higher retention rates.

I like to think of technology strategy in the form of technology debt (take short cuts now, but payback comes later – with interest).  Read “Short-Cuts Are Not Free” if you’re curious about this.  Similar to financial debt, this is often necessary (as is technology debt) but it has a cost.  The reverse of this is Technology Investment (in the classic sense).  This too has an interest rate – the rate you get “paid” (i.e. ROI) on that investment.  I think investment in automated testing is one of the best interest rates you can find.  The payback period is a little longer, but it is worth it.  If you have competition (which you likely will), you will find that having a strong investment in automated testing will give you advantage.  You’ll add features quicker, fix bugs cheaper and ship better software.

Of course, as is always the case, situations vary.  Pyramid was in a different market than my current startup HubSpot – but I’m still passionate about automated testing.  Will continue to share experiences as I progress.