Why most software companies fail ?

Operating in a cutthroat environment, enterprise software companies are constantly challenged and strive to stay ahead of the competition. The industry is pushing all players in one direction, grow or be left behind, a similar mantra to the airline operating principles of the '70s and '80s.

Despite the fact that many software firms around the world have tried global expansion, most of the well-known global software firms have originated in the United States, such as Google, Microsoft, IBM and Oracle. There are just a few exceptions such as Skype, SAP and Infosys that have been successful in building a global software businesses. This is striking considering that there are a significant number of businesses operating in other industries that originated from outside the United States and are established as global players.

Why do most software companies fail to become leaders ?

If you don’t have time to read further, I will give it to you in two words: insufficiant growth.

It is estimated that just 28 percent of the software and Internet-services companies reached $100 million in revenue, and 3 percent reached $1 billion.

Software companies can quickly become billion-dollar giants, but the recipe for sustained growth remains elusive. The industry’s booms and busts make growth, an essential ingredient in value creation, difficult to understand. But few executives can say precisely how important growth is to these companies, or how it is achieved. The rules of the road in other industries do not apply here. If a health-care company grew at 20 percent annually, its managers and investors would be happy. If a software company grows at that rate, it has a 92 percent chance of ceasing to exist within a few years. Even if a software company is growing at 60 percent annually, its chances of becoming a multibillion-dollar giant are no better than a coin flip.

A recipe for sustained growth: Growth happens in phases

Researchers have shown the importance of approaching growth as an episodic phenomenon. They found three critical phases, which they called the prelude, act one, and act two. In the prelude, companies test the fit between product and market, typically through bespoke or one-off solutions for initial customers. The prelude is all about finding an offer and business model that appeal to a broad customer set. This is a vital phase, of course, but has been well studied.

In act one, companies narrow their focus to an offer that truly scales, both with regard to serving many customers and consistently delivering revenues. It is with this first scaling offer that software companies prove their first business model and typically ride to tens or hundreds of millions of dollars in revenues. It is in this phase that a company expands its act-one offer to new customer segments or geographies. Unfortunately, every domestic market is finite and software vendors are pushed to expand internationally questing for efficient revenue growth.

It becomes critical to pick the right market, ideally a “limitless” market with millions of end points (that is, users or devices). Google’s addressable market, for example, is every Internet user on the planet—some 2.4 billion people—and the approximately $500 billion (and growing) worldwide spending on advertising. Similarly, LinkedIn addresses a market that includes any professional and anyone looking to hire a professional in the whole world.

What are the current limits your company is facing in terms of segments or geographies ?

Finally the second act is about expanding one’s products offering beyond its first offer, and to do that transition in a smooth and seamless way across all segments and geographies. That is how SAP started with their ERP and now have dozens of products, how Oracle moved from hardware to software and so on.

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