The following is a guest post.
I have had the misfortune of personally making every one of these mistakes during my years as a software entrepreneur. I am currently reviewing a startup that seems to be trying really, really hard to make all of them in one go. As a result, I decided to put this list together in the hopes of saving as many startups as possible from crashing in to the rocks of false hope and misguided thinking.
20 Ways To Put A Monkey-Wrench In Your Machinery
1. You think that your product must be awesome because your buddies are telling you it is the greatest thing since sliced bread. Unless they are willing to hand over cold cash to use your product, they are just being nice.
2. You are finding that your product is so versatile it could solve just about any problem. This is a clear sign you don't have anything worthwhile.
Dharmesh: This is one of the most insidious problems in software startups. As developers, we tend to like dealing in higher abstractions. Writing a simple business application is boring. But, writing a framework that lets others auto-generate a business application (or any application!) is fun and challenging. For startups, it is usually unwise to try and build a framework or platform as your flagship offering. Most people use apps not platforms.
3. You have found a client, but in your euphoria you have forgotten to ask yourself if this client is an anomaly. You need to make sure that the client represents a real market, otherwise you are just building a custom solution.
Dharmesh: This is what I would call the "you can't build a software company one custom implementation at a time". It's fine to find big clients that have big problems they're willing to spend some money for. This is an easy to way to get started and some cash in the door. However, it's imperative to look for the patterns in the customer's needs and be thinking about future customers. If you have multiple sets of code running for multiple customers, you're going to be in trouble.
4. You keep coming up with ideas for all the many different ways you can make money with your product. You can sell it to Google, ISV's can include it in their products, Adobe for sure will be interested. If you are not focused on something specific, you are dead.
5. You choose to work with verticals that don't have a lot of money. Sure they like your product, but they can't afford to pay you enough for it, so why focus on them?
6. You choose to work with a small client first instead of one that will be able to help you get more clients later on. Just because Joe's Fish & Chips is using your product doesn't mean Motorola will be impressed enough to try it.
Dharmesh: Closing on some smaller clients early isn't particularly a bad thing (in fact, you might be targeting the small business market). As long as you can find some repeatable pattern so you can build software for many people (and sell it to many people), you're probably ok.
7. You think you can't work with a "real" client early on because it's too risky. But you aren't selling them the product - you are selling them the idea of the product. If you can't sell them the idea, you are never going to be able to sell them the product.
8. You start building the product before you have a (real) client identified. Again, if you can't sell the idea, you are definitely not going to be able to sell the product.
9. You think you can't sell the idea until you have a product. This is a major killer - you think that as soon as you have feature X or Y, you can start showing people your idea. One more time - if you can't sell the idea, you can't sell the product.
Dharmesh: I agree. Reminds me of "Stealth Mode, Schmealth Mode" posted earlier.
10. You don't want to stop or throttle development when you aren't really sure you are on the right track. You just want to keep on going, because you just know that soon the product will be so awesome that it will dazzle everyone with its brilliance. If people aren't buying the idea, you better stop wasting money now until you have figured things out.
11. You think that just because your product can solve a generic problem like "collaboration", you have a sure-fire winner. You have to ask yourself how your product really stacks up against the competition that is already out there and why people would buy yours, and if they would, for how much. Often, the current solution being used is simply good enough, and even if yours is significantly better, no one is going to buy it.
12. You underestimate the power of a penny over free. If something is free and barely does what you need, you will stick with it versus something that's much better but requires you to pull out your credit card.
13. You think that just because someone says they would definitely use your product that they actually would use it - or that they would pay to use it. Talk is cheap.
14. You think that just because people say they would pay for your product (and actually mean it), they would pay enough to keep you off food stamps.
15. You think that just because there is a company making money in your field, there must be a lucrative market that you too can take advantage of. But there may not be room for more than one successful product in this particular area. And the incumbent has a much better chance than you do of succeeding.
16. You think it's not a big deal for a user to create yet another login to use your product. But it is. This is like the penny versus free. They have to have a really good reason.
17. You think because your product integrates nicely with a bigger product, you're golden. But you forget that there is inside-out and outside-in integration. If I am in Google and there is a tool (like a gadget) that I can easily access (i.e. I don't need another login and password), I am much more willing to try it than if I have to go to another site, sign up, sign in, and then get to my Google application from there. So if you are going to integrate with an application your target market is already using, it must be inside-out integration, not outside-in. Facebook applications are a good example of inside-out integration.
18. You think you can get users to pay a reasonable monthly subscription fee, but you forget that you need a LOT of $19/month subscriptions to make real money. Do you really understand how many subscriptions you need, and how realistic is it that you are going to get there?
19. You think that you need to offer an onsite solution to go along with your SaaS solution, but you forget the huge costs involved in supporting on-site software. Besides, if think your market is both an on-site corporate solution and also a SaaS-based consumer application, chances are one of those assumptions is wrong.
20. You think you have come this far, you can't possibly stop now. It's like you are swimming across the lake, and you are more than halfway there. So you just keep on going, but the shore keeps receding into the distance…
If you have your own list of "signs of trouble" in a software startup, please leave a comment. Or, if you've got a great article that you think will help software entrepreneurs, email me to discuss making a guest submission to OnStartups.com.