Wednesday, December 06, 2006

When it Goes Right, What Does It Cost to Build a Great Software Company?

(Click on picture to see data)

What makes software such an attractive area to invest?

Capital efficiency married to the potential for fantastic outcomes.

While the companies above are the 1990s Hall of Fame, the data is still instructive for those of us building software companies and thinking about the time, capital required, and revenue ramp profile of when it goes right.

  • Median Capital Raised: $10.1m
  • Median 1st-4th Year Revenue Ramp: $.1m $.8m $6.9m $21.6m
  • Median Years to Exit: 4
  • Market Comps: Massive variance
  • Lesson:
    • Pricing discipline is critical as multiples at exit are impossible to forecast and may not be consistent with market multiples at time of funding
    • With market pricing impossible to forecast, capital efficiency is critical
  • Software model supports the creation of great companies on <$15m of capital


  1. Anonymous10:06 PM

    Great post, but can you tell me why you chose the companies you chose? I think it would be more instructive to see the data for the universe of software companies that went public...

  2. Anonymous1:24 AM

    Great data there. I was wondering if you had any figures on the Software as Service area? The spend patterns would be different I am guessing and the barriers to entry and exit create different valuations, exits (if any) etc.