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9 Tips On Software Startup, Funding, and Software Sales from 3-Time Winner Linda Hayes (Page 1 of 3)

Linda Hayes knows a thing or two about software companies. In the early '80s, she founded Petroware, which hit $5 million in revenue in four years. In 1986, she started AutoTester, and took that one to $7 million in sales in eight years. 

For her third act, she founded Worksoft in 1998. This time, she hired a CEO, and made herself CTO of the Addison, Texas-based provider of  solutions for change management and software quality. The company has raised more than $30 million in venture capital.

Nowadays, Hayes is a consultant to Worksoft, and, just for fun, is starting a website called Shelfware. It isn't finished yet, but Hayes says it will be a spoof of software companies, with the tagline, "Our software is 100% guaranteed to never have any functionality whatsoever." Kind of like "The Office" meets Dilbert, she says.

Her deep knowledge of the software industry gives Hayes license to poke fun -- and it also gives her enormous credibility in providing tips to software startups.

Tip #1: When it comes to markets, bigger is not always better.

"I think a a lot of people get confused about the idea that a bigger market is better," Hayes says. "For example, at Worksoft our technology can be applied to any platform. You'd think that would be a good thing, because any company is a candidate. 

"The problem is the bigger the market, the more of a challenge it is to sell to it -- it's more difficult to reach prospects. It seems oxymoronic, but a smaller, more targeted market is better. 

"At Worksoft we were growing, but not as fast as we wanted to. So we focused on the SAP market, and our costs went down. SAP users congregate at user conferences, meetings, forums -- so it's easy to target and market to them. 

"After we applied that focus, our growth rate basically tripled. We may broaden again, but sometimes the more narrow your focus, the fast your revenue ramp."

Tip #2: When it comes to funding, bigger is almost always better.

The problem here is that most startups have too much faith in the business plans they present to investors. "I made this mistake myself," says Hayes. 

"If you do choose to raise capital, most entrepreneurs never ask for enough. It's part of the natural optimism of entrepreneurs: You believe your own forecasts. 

"The rule of thumb is you always ask for more than you think you need. Not that it just gives you a cushion to be stupid; what you're really looking for is some dry powder, so that if you do have a hiccup you're not having to go back and raise money when things are not moving in the right direction."

How much is enough? "In the first round Iíd be going for $10 million," Hayes says. "Basically, you should go for three to four times what you think you need. You probably are going to miss your projected revenues by half, and you should take your projected expenses and double them."

Tip #3: Get your clients to pay for R&D funding.

"If you're starting from scratch, you're better off having customers pay for the product development," says Hayes. "This validates the need, and you have a pretty good indication that your going to have customers who'll buy it. Lots of companies build really cool technology that nobody wants to buy. 

"Second, it keeps your development efforts very focused. Customers will help you keep the product on track, trimming out the stuff that is not really needed."

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