Making your software: Step 4 - Budgets and funds

Priya, our fictional software entrepreneur from the previous chapters on this series has a dream to make “Designly” a software platform for interior designs. She has followed our suggestions on writing down her features in the specific format that software developers love as step 1 in her journey to make her software. In step 2 she went over strategies to find a software developer company who will turn her dream into reality. Then she gets good ball park estimates for making the software in step 3. Now that she has some numbers she can work on her next challenge of budgeting and financial planning for the software development.

Software development can be expensive, so a proper budgeting and financial planning is essential to make your software and launch it successfully.

Phases of software launch

There are several distinct phases in getting a software product to the market. These phases actually go way beyond the obvious software development and sometimes the founders don’t really realize all the steps and runs into difficulties with finances when that step happens. Here are some of the phases and what a founder should expect from a budgeting and finance point of view on such phases.

Design and planning

Every software product has a significant design and planning phase. If you cut this phase short you end up a poorly designed software that is hard to use or a software that took a lot more time and money to build because the developers just didn’t have enough guidance on what to make. So it’s essential to invest on the design phase. If money is tight, as it is on most startups, this phase can be less elaborate than what textbooks suggest about design and planning of software but it still needs to have some basic things done. The top focus should be a set of “mockups” of the software interfaces. These are pictures of the software screens as the user goes over common or most used features. If money is seriously short, these mockups can be just black & white rough sketches called wireframes, but that’s the bare minimum that must be done.

Typically this phase will require 10 - 15% of your total budget for the software.

Development of the MVP

This phase is the actual software building phase. MVP stands for minimum viable product and we’ll go over the concept of MVP in a separate post. But basic idea is simple: find out what is the minimum set of features that will sell the software and make that first and launch with it. Here’s good video about MVP..

Typically as founder should plan for 40 - 50% of her total initial budget for the MVP.

Launch and marketing

The launch of the product by itself is time consuming and can come with unexpected costs. The developers may request for server certificates, special cloud setups, software licenses that a founder may not have budgeted for. On top of that the launch process itself takes developer time which adds to the costs.

The marketing is obviously a huge area to think about when you are launching a product. Nothing sells without proper marketing.

Typically launch and marketing should be around 20-30% of total initial budgeting, but note that this is one area where it’s very product specific. If a software is planned to be something based on a huge number of users then marketing itself can take up more than half of the all the money spent in a project.

Releasing the updates

The biggest mistake that founders make is not factoring in the costs of making changes to the software AFTER the launch. These changes are usually the make or break between a software that people use and one that goes into the software graveyard. After all, only after a launch does a founder really get to see what works and what doesn’t, what her users are using and what they are asking for. Based on these real data points a founder has to adapt the software, modify it or fix the bugs to quickly launch a new version (usually a series of new versions) that adapts to the need of the market. This process is iterative, it’s usually time and effort consuming and thus it’s expensive. Not budgeting for this phase means the software never had a chance to fight it out in the market. So it’s absolutely essential.

Typically a founder should budget at least 15-20% of her initial funds for this phase.

Maintenance

Maintenance is the phase of managing to keep the software live over time. This may involve bug fixes time to time, maintaining the servers, updating various components as new versions of the OS or other software is released or new security patches are put out. For mobile apps this means the continuous effort to keep up with the new versions of OS that Apple or Android guys are coming up with, each having the potential to break your software.

A founder should budget for at least 2 years of maintenance after launch in her initial planning. Very much a product specific thing, but typically over 2 years it would take up 15 - 20% of the overall costs.

Payment strategies

When the founder is planning for financials of a project there are certain strategies she can adopt for the funding and the payment to the developers. These are general tips, after all, as each project is different with it’s own sources of funding, own specific situations of payments. Here are two strategies that works well for startups.

Milestone based payments

Setting up a payment schedule with the developer based timed milestones is great for both sides. For the founder it gives certain dates where she needs to make the money available, it also gives are a quantifiable way of seeing what she is getting before she does the payments and of course more solid commitment from the developers about the dates. For the developers it’s a good way of splitting up a bigger software project and getting paid as they build it. It reduces their risk by not lumping everything up for a big payment at the end.

Phased development

The phased development strategy is where the founder just makes her final product over a set of phases. Each phase has it’s own launch, marketing and payment. This way the founder can get the product out in smaller steps, judge the market as she goes along and only commit to more payments if she sees the demand. For a developer too it’s is a good way of splitting a large project up and getting paid early. But note that if the phases are too small this might be impractical for the founder and the developer as the costs of starting and stopping the project in each phase can be a big overhead.

OK, that’s it for today on this series on getting your software made. I’ll be back soon on step 5 soon about finalizing a software partner to get software made.