Tim Oren, a partner at the venture capital firm Pacifica Fund, writes about the two-stage software startup. According to Oren, the first stage of the venture should be focused on providing a useful product as cheaply as possible. Oren states,
“many of these efforts will result in a product, or even a feature, rather than a sustainable company…The go-to-market is similarly light. Rather than a sales channel, the venture will buy ad words on Google, promote itself via word of mouth on blogs and via user communities, and penetrate enterprises by pricing low enough to fall within the purchasing power of a department, or even an individual.”
Stage two revolves around venture funding. If stage one has been successful enough to prove that a market exists, venture funding will be necessary to fund development and establish a formal sales channel. The founders may also be able to command a higher valuation than if they had received funding before stage one. But Oren cautions that this valuation may not be as high as expected.
Now that money is no longer being thrown around like it was in the dot com boom, I think we’ll see the trend of more microISVs following the stages as Oren describes. It appears that many small companies are receiving venture funds today with the anticipation of a buyout from an established company being higher than filing an IPO for themselves. Microsoft, Yahoo and Google are always the names most often mentioned. Oren’s post also shows that the practices of most microISVs are slowly becoming the standard way of starting and growing a software company.