In May of 2005 I profiled Michael Zammuto of Sapago, Inc. At the time Michael had recently completed work on his software product and was looking to ramp up sales and take the product into several vertical markets. Things didn’t quite work out exactly as planned as Michael explains.
My application was an RFID system for Art Galleries and Museums. This past summer the product won three awards, one of which was Best In Show in the Small Business Division at Microsoft’s 2005 Worldwide Partner Conference. Two days later I got a call from a recruiter at Microsoft saying they wanted to talk to me about a senior position with the division that is producing Microsoft’s RFID product. The interviews went well enough that I instead jumped at the chance to be part of Windows Workflow Foundation, a key strategic technology for Microsoft which will ship with all future versions of Windows, Microsoft’s Office 12 Server and several other key Microsoft products.
Michael was kind enough to answer some follow up questions about his microISV experiences.
I was consulting as a CTO for a few small businesses, leading a range of development projects. It was plenty to live off but it did not afford me enough time and money to adequately grow the company. The hardware costs ate up most of my revenue. Ultimately, when I looked at the margins, I could not justify the additional investment. It is heartbreaking and it is difficult to know when to cut your losses. You do not spend your savings or personally borrow large amounts of money if you objectively cannot make it work. Health and business insurance are getting very difficult to deal with. I was surprised just how time consuming health insurance was.
Do you consider your microISV experiences a success even though the final results weren’t the original results you’d imagined?
As long as what you get out of an experience exceeds what you put in then you can consider it worthwhile. I thought that I knew the software business pretty well before. Think, for a moment, of every role that keeps your current employer functioning. Doing all of those functions yourself teaches you how a technology company really works. That kind of breadth of experience is invaluable.
What were the major obstacles when selling your product?
The prospects were business owners and marketing people. The system involved hardware, software and services which makes it like building three different sales systems simultaneously. I could not build an effective indirect sales mechanism, such as a partner network, retail distributors or web based sales. Instead I did mostly direct selling which does not scale easily or cheaply. Finally, building a prospecting system to qualify adequate and consistent numbersof propects is really tough.
What was the response of the people who did purchase your product?
They love the concept and I had interest from other types of retailers. Several thought that it helped sales and uniquely distanced themselves from competitors. My first generation relied on off-the-shelf hardware and this made the system too complicated to set up, use and maintain and it was not durable enough for retail settings.
What do you think you should have done differently during the initial phases of starting your company?
I was trying to do too many things. Selling software is all about investing in the software development, mostly, up front and being paid back over time through licensing revenue. By contrast, reselling hardware is about managing margins. Selling both hardware and software gave me the worst-of-both-worlds, high initial investment and low margins. I should have selected a software only product that I could develop and maintain part time and which I could sell indirectly, preferably access to a web-based application or a download and activate model.
How much revenue were the VCs you spoke with wanting to see before they funded your company?
At least $ 1million a quarter operational revenue. If I had gotten to that point I probably would not have wanted investment money.
Given the right mix of time and money do you think your product could have become successful?
There are three ways to get money. Earn it, borrow it or sell something of value, such as equity in your company. It would have taken millions to get the hardware and sales right and to fix my margins problem. I think time alone would not have done it. Borrowing that kind of money puts you in a hole that is tough to dig out if you cannot get revenue and margins right quickly. Taking on additional investment at that level, if even possible, would have left me as too little control.
Are you going to sell the source code to your application if someone is interested?
I guess so. One of my clients calls me trying to get me to try again, with a partner. She really beleives in the concept, thinks it is the future of all retail. I have had a lot of interest from people wanting to build one-off systems for a University project or a client museum. I am focues on my work at Microsoft and have not touched the business in months.
In your new position with Microsoft, do you see any opportunity for add-on products that would be created by the microISV community?
Lots. Windows Workflow Foundation is the Technology that lured me to Microsoft. I think software that allows business people to build ad hoc workflow projects could have a lot of applications. Our integration with Windows and Office is powerful. There are lots of legacy enterprise business applications companies that would struggle against a web based service that integrates with Office. “Connectors” or “Adapters” for making two specific enterprise systems work together can be a great small business. People are going to write web based alternatives to nearly every kind of business application, hoping to be the next Salesforce.com, look at development tools to help them. Nobody in software supports partners the way Microsoft does.