Grow very, very fast or die: what makes software such a tough business

On the surface, the software business always looks and sounds so sweet. Write some code, get it out there, and sit back and let the money roll in.

Contrary to perceptions exacerbated by the lore of Silicon Valley riches, software may actually be one of the toughest businesses around. I recall speaking with a vendor CEO some time back, who was talking about the 10% to 15% annual growth his company was experiencing. In any other business, that would be spectacular, he pointed out. But in his business -- in this case, connectivity software for PCs to back-end systems -- anything less than 15% a year for a small vendor meant being dead in the water.

It's worth noting as well that writing great applications is only half of the formula for success. The other half depends on really good marketing, and getting the word out to potential users. That holds just as true today in Software as a Service delivery as it did in the days of disk-delivered software.

The fast-paced requirements of staying in the software game were recently explored by McKinsey's Eric Kutcher, Olivia Nottebohm, and Kara Sprague in an analysis and series of interviews with leading vendor executives.

The lessons conveyed should be shared well beyond the bounds of the traditional software/IT industry as well. It doesn't matter what industry one is in -- everyone is, to some degree, now in the software and data delivery business.

Kutcher, Nottebohm, and Sprague report they analyzed the life cycles of about 3,000 software and online-services companies between 1980 and 2012, accompanied by executive interviews. Here is what they found:

"Growth trumps all." The software companies that succeed in the long run are the ones that were seeing spectacular growth right from the early days. The authors even said there is a class of "supergrowers" whose growth exceeded 60% annually. Ultimately, these are the companies most likely to succeed. The other bit of this is that it really made no difference how cost-conscious these businesses were -- there was no correlation between cost structure and growth.

"Sustaining growth is really hard." There are a lot of software startups and small companies, but a precious few make it to the big time, meaning at least $100 million in annual revenue. "Just 28% of the software and Internet-services companies in our database reached $100 million in revenue, and 3 percent reached $1 billion,: they state. Plus, it's really, really hard to keep a torrid growth rate going -- at least 85% of the supergrowers were unable to maintain their growth rates. And once a company slips from growth mode, it's not likely to recapture that magic. Signs of an impending stall include "slowing acquisition of customers due to market saturation, declining lifetime value of new customers, decreasing participation of ecosystem partners (developers or channel resellers), market disruption from new entrants; and the loss of key talent from sales, presales, or engineering," the McKinsey folks point out.

"There is a recipe for sustained growth." The good news is that Kutcher, Nottebohm, and Sprague were able to identify some common traits that successfully growing software companies share. Namely, the growth occurs in two stages -- first, the stealthy launch phase marked by rapid adoption once released, then the second act consists of building out channels.

Here are some snippets from the CEO interviews that accompanied this research:

Frederic Laluyaux, CEO, Anaplan: " Build a culture, bring the processes, and bring the talent in the organization. If you manage those three things correctly, and you stay focused on your core values, you have a good recipe."

Tony Zingale, executive chairman of Jive Software: "You have to have a great leadership team.... You also have to be very crisp with your vision and strategy from the top... So many times companies want to do 25 different things, or even 10, or even 5. Where, at the end of the day, it's two or three that you have to be exceptional at."

Aart de Geus, cofounder of Synopsys: "We always look at those stories of incredible, unimpeded growth. But for many markets, that's not the reality. It goes really well, and then it becomes more difficult, and then you have to do something different."