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Ask HN: How do custom software dev firms make money?

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Re: Ask HN: How do custom software dev firms make money?

#91

Post by erklik »

robocat wrote: post #51
jvilalta wrote: post #8

I'll add one more that I have run across. It's a revenue/savings share agreement, where the company writing the software gets an X% of the revenue (or savings) generated by the project.

I saw a small company do all their work this way, where their pitch was more a marketing company with software skills. Projects were successful, but it folded a few years later due to other reasons. One problem is that clients hate it, even when success was very measurable. I suspect due to our natural tendency for zero-sum thinking. Note that usually the projects were limited to ones where there was a directly measu…

>One problem is that clients hate it

I've seen this personally as well. Especially with non-Software clients, the psychology you're battling seems to be that "they're ripping us off" since most of the work you're doing isn't happening while you're earning money.

Re: Ask HN: How do custom software dev firms make money?

#92

Post by chairmanwow1 »

ctvo wrote: post #73
chairmanwow1 wrote: post #37

>> “Hey HN, I'm working on a project for school and need to learn a bit more about the revenue model of custom software dev firms.” I used this trick A LOT in college to get secrets from companies. My friends and I would call some people and tell them we were trying to understand something for a report. It was amazing how much secret information people were willing to share. One of the most powerful assets you have a…

> It was amazing how much secret information people were willing to share. Was it secret information or did they spell things out much more clearly for you because there was no assumption that you had prior knowledge? This tends to happen to journalists also, for the same reasons. See the replies in this thread for examples of people clearly spelling out things step-by-step. It's not secret information. When you take…

Absolutely. They gave revenue numbers, they told me how they marketed, how they retained customers, if it was a good deal for the customers.

I think there’s some element of explaining things, especially if you come across as naive and interested in what they are doing.

Re: Ask HN: How do custom software dev firms make money?

#93

Post by waheoo »

ctvo wrote: post #73
chairmanwow1 wrote: post #37

>> “Hey HN, I'm working on a project for school and need to learn a bit more about the revenue model of custom software dev firms.” I used this trick A LOT in college to get secrets from companies. My friends and I would call some people and tell them we were trying to understand something for a report. It was amazing how much secret information people were willing to share. One of the most powerful assets you have a…

> It was amazing how much secret information people were willing to share. Was it secret information or did they spell things out much more clearly for you because there was no assumption that you had prior knowledge? This tends to happen to journalists also, for the same reasons. See the replies in this thread for examples of people clearly spelling out things step-by-step. It's not secret information. When you take…

I dunno, if my competitor emailed me I would be pretty tight lipped.

A student, not so much.

Its not game over of competition finds out but I don't need to hand it to them.

Re: Ask HN: How do custom software dev firms make money?

#94

Post by oneelectron »

edanm wrote: post #67
gharman wrote: post #32

I founded, grew, and sold a boutique software services co. Here's the skinny: * The core revenue model is charge customers a certain amount for doing work, and to have a lower internal cost. (duh) * Typically you're looking for a 30% margin or thereabouts; after cost of sales, consultant bench time (yeah you gotta pay that even when folks are idle, if they're employees), etc. you have maybe a 10% profit margin when y…

I also founded, grew and sold a boutique software services co., and am now running a new one. I agree with all of the above. The only major note I'd add is: some of the above really depends on who your clients are. For example, we work with mostly technical customers, taking on things that are not their core strength. But only customers who already have internal dev teams. The way we phrase is internally is "we want…

I also founded, grew, but have not yet sold a boutique software services co.

I see on your profile you sold to a client. We have had that option before but the multiple on our earnings was too low to actually consider it. Curious what your revenue/earnings multiple was on the acquisition. Also curious about the handcuff terms. Giving up autonomy over my daily life is hard to swallow without 8 figures.

Re: Ask HN: How do custom software dev firms make money?

#95

Post by redis_mlc »

sirspacey wrote: post #86
tootie wrote: post #18

I was a director for digital agencies for a long time. There's no real fixed model for any of it. Like others have said, contract-wise you can bill as fixed fee, time and materials or some hybrid. Customers are more apt to sign a fixed fee, but it's a huge risk to put a fixed scope, budget and timing unless you know exactly what you're doing. Any level of ambiguity could lead to costly overruns and missed expectation…

Along these lines it is important to recognize: 1) the larger the client, the more it is an intentional practice to leverage any gaps in the contract to extract whatever value the company wants at that moment, regardless of what was agreed to 2) what the client “remembers” the agreement to make is usually whatever they first proposed. While many agencies seek to define agreements as a defense, larger clients happily…

It gets much worse than that. If you're planning to do software development consulting/contracting, definitely read on.

Here's some scenarios I've seen:

1) US F500 companies are sending out documents to vendors to allow clawing back payments from your bank account number. So besides stretching out payment terms to monts, they can reverse those payments. Never sign those if you plan to be around next year.

2) Sometimes the staff proposing the project get cold feet in the middle of the approval process, realizing there's career risk if the project fails for any reason. You'll get an email like, "Good news, we signed the deal but you'll be reporting to somebody else. Good luck!." And then you talk o the new guy and he says, "It doesn't matter to me if this project succeeds. We just won't pay if it doesn't." Without a champion, there's a sense of limbo that weighs on the project.

In this case, the former champions became so risk-averse that they said, "Why don't you retain ownership of the product, and we'll just pay you like it was a service instead?" Bizarre, but that level of hands-off made them comfortable, and the product can be sold as-is to other companies.

3) Then there's the "missing key man" who shows up after approval and says, "This project is for my group, but I don't want to meet with you. Just develop it and I'll take a look after you're done and let you know if I like it or not."

4) I've done development on 3 contracts where the big name companies had serious networking or other infrastructure issues that required workarounds.

One manager actually said after I arrived on-site, "It's more valuable to me if you troubleshoot the infra problems than finish the product." It turned out they had email loop problems that lost most internal emails and saturated their switches.

Often you get a reaction of disbelief when you tell people these anecdotes, even in the industry, but those actually happened. All of the projects were finished successfully, but the project risk increased far beyond what was expected for both sides, and relations turned from friendly to hard-nosed solely because of their internal politics.

The best thing you can do is ensure the project is big enough to make it worthwhile despite surprises, and to know exactly who the champions and customers are. Or just get a job at FAANG.

Re: Ask HN: How do custom software dev firms make money?

#96

Post by redis_mlc »

ozim wrote: post #71
karaterobot wrote: post #30

I did this for 13 years. The basics are covered well in this thread already, so I'll just add a couple of points. The phrases we always used for contracts were "time and materials" versus "fixed price". We wanted time and materials, which means the client pays us a set rate for each unit of time we work (could be hours, days, sometimes months) plus the cost of any materials we need to do the job (software or SaaS lic…

If you would have a SaaS product idea then you could invest in a product that will bring stable income. That is the way back to sanity so instead of going into that madness of chasing bigger contracts you invest time of employees that are on bench into building your own SaaS. Then you keep one of employees, later maybe more, on that SaaS and slowly change your revenue mix. Then you still might get some additional pro…

That's a common strategy in the West. Basecamp basically did that, and Slack was a parallel project while developing something else.

One Michigan company was doing CRUD apps on contract, wrote a nice code generator, then swiched over to using the code generator internally (not for sale) to scale up to state government contracts.

In Asia (China, Indonesia), it's common for unfunded startups to start an internet cafe for revenue/office space, then once that's operating do product or contract software development.

(Internet cafes require constant staffing, so any "profit" is mostly paid out in salaries to the owners and family.)

Re: Ask HN: How do custom software dev firms make money?

#97

Post by FpUser »

tootie wrote: post #90
FpUser wrote: post #84

Earlier quoted context omitted.

Being very experienced product designer/developer after few talks with the client I could fairly accurately split big project in few comprehensible stages with the price for each. I do not remember ever being off by any significant margin. I've done way too many of projects either directly or as a director during the course of my life so it is mostly an autopilot at this stage for me. Also my clients tend to be real…

I mean, I've worked on plenty 7-8 figure programs for Fortune 50 companies of all kinds and that has not been my experience at all. I've even worked for FAANG clients who didn't know what they wanted until we tell them. The kind of work I did (I am exiting the consulting world as of this week) was very consumer-facing and creative driven. I can estimate tech work as well as anyone, but there's always too many moving…

I did work on similarly sized contracts but I was at the time a CTO and had like team of 30 on that project under my supervision.

Everything fell into places. But that was after few month long and expensive exploration phase that along qualified for decent contract.

After I went on my own I handle smaller contracts that are easier to eyeball. Well small is relative as in one case licensing fees alone over a period of time went well into 7 figure territory. But yeah I no longer had to direct 30 people and did not have 20 persons on a client side bugging me every day and being under constant stress ;)

Re: Ask HN: How do custom software dev firms make money?

#98

Post by edanm »

oneelectron wrote: post #94
edanm wrote: post #67

Earlier quoted context omitted.

I also founded, grew and sold a boutique software services co., and am now running a new one. I agree with all of the above. The only major note I'd add is: some of the above really depends on who your clients are. For example, we work with mostly technical customers, taking on things that are not their core strength. But only customers who already have internal dev teams. The way we phrase is internally is "we want…

I also founded, grew, but have not yet sold a boutique software services co. I see on your profile you sold to a client. We have had that option before but the multiple on our earnings was too low to actually consider it. Curious what your revenue/earnings multiple was on the acquisition. Also curious about the handcuff terms. Giving up autonomy over my daily life is hard to swallow without 8 figures.

I can't get into exact details. It was a fairly typical multiple, a bit higher than normal after some negotiation. That's smaller than a startup, obviously, as there was no IP, just a team. However, since we were bootstrapped, all of the money went to us, none to investors.

It ended up being fairly profitable to sell, though we were by no means dependent on this - we could have just as easily continued and possibly gotten more money in the long run by not selling (with a greater risk, of course).

Re: Ask HN: How do custom software dev firms make money?

#99

Post by edanm »

tixocloud wrote: post #80
edanm wrote: post #67

Earlier quoted context omitted.

I also founded, grew and sold a boutique software services co., and am now running a new one. I agree with all of the above. The only major note I'd add is: some of the above really depends on who your clients are. For example, we work with mostly technical customers, taking on things that are not their core strength. But only customers who already have internal dev teams. The way we phrase is internally is "we want…

How do you get started with a custom dev shop? What type of technical companies would you focus on?

Depends on the field. We tend to try to offer complimentary services - e.g. if you do web, typical clients might be companies that do embedded, and need a web UI. Or who do mobile usually but now need some web expertise, etc. Or who focus on building security products, and now need a web interface to them.

Basically, try to find companies who are technical, but are missing the skill your company can provide, and then provide that.

Re: Ask HN: How do custom software dev firms make money?

#100

Post by roel_v »

xwdv wrote: post #85
roel_v wrote: post #55

Earlier quoted context omitted.

That's the wrong way around. You start small, part time if possible, and grow (and hire) as you get more steady work. Do not save up 2mm, hire 5 guys, then the next Monday morning say "ok guys let's find some customers".

But at some point you must be saving up profits right? Eventually you will have to hire people that do not have billable hours, you can’t rely on just cash flow from work to cover salary expenses.

The company should be saving up some of its profits for future investment, yes, but the question was (at least that's how I understood it from the way it was phrased) how much to save up before actually starting. My point was that one of the great things that are specific to software is that you don't need large up front investments, or even any investment at all besides some hardware and an internet connection. You just get started and reinvest the earnings, e.g. by hiring people (where the 'investment' is the non-productive ramp up phase of any new hire).
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