How to start a software development company: Step-by-Step Guide for Beginners

The IT market is very extensive – this includes both equipment suppliers (servers, personal computers, laptops, mobile devices) and manufacturers of various software. At the same time, if the market for personal computers is shrinking in volume, then the market for mobile devices is growing. And the software market has a direct relationship with the hardware market, respectively, desktop applications have not been in demand for a long time, but the market for mobile applications and cloud services is gaining more and more momentum.

We will not touch upon the equipment market, since access to it is difficult and costly, but it is worth talking about the software market in more detail. Choosing the right niche when entering this market is very important, since it can determine not only the volume of initial costs, but also the entire further development of the company. In general, the software market can be divided into several conditional types according to the type of development:

• Global software – this includes operating systems, programming languages, server software used in data centers, etc. The development of such software products is very difficult and has been carried out for more than one year. To start a project of such a scale, you need to determine in advance its goals, the amount of investment and not build illusions about making a profit. Moreover, there are many free analogues supported by the collective intelligence of the communities of enthusiastic programmers.
• Corporate IT systems – this includes a variety of ERP and CRM systems, intranet forums and any other programs that provide shared access to files and data. Despite the abundance of box solutions, more and more new products are constantly appearing (and becoming quite successful), and custom development is in steady demand, since not every company is suitable for the standard “boxed” functionality. The required volume of investments for the development of such a product is several orders of magnitude less than in the case of global software, but the success and return on investment will depend on a number of parameters: exact hitting of “your” client, advertising campaign, competitive prices, competitive advantages, level of support, etc. .d.
• SaaS-services – by and large, this is a kind of corporate systems, only with implementation “in the cloud”, so all of the above is true for them;
• IT startups are a fresh trend in recent years. Most often it is a small group of enthusiasts developing a service and looking forward to further investment. According to statistics, 9 out of 10 startups “die”, so before choosing this particular niche, you need to carefully study the market, assess the risks, draw up a business plan and only then design and develop a service that will conquer the world;
• Custom development is the niche that we chose several years ago, and which continues to actively develop. A huge and indisputable plus of this niche is that it requires a minimum investment to enter the market, and also has the lowest risks in comparison with other types. This includes the development of websites, and the development of corporate systems, and the development of mobile applications by order from a third-party client, and all related services that can be provided as independent (support, maintenance, consulting).

It is highly desirable that this interest be supported by some kind of theoretical, and even better practical knowledge about the development process, available tools and methodologies. It is possible to analyze the demand and the level of competition in the chosen niche based on the data provided by the rating agencies. In almost every segment, even as highly specialized as the development of online stores, there are quite detailed ratings comparing the flagship companies in terms of turnover, average check, number of projects and other parameters that give a fairly clear picture.

Our niche is highly competitive only at first glance. In fact, this is the same level of competition as between BMW and AvtoVAZ – segmentation is primarily determined by the price of services and the class of customers. It’s no secret that the range of prices for the same site development can be from 5 thousand to 5 million rubles. It all depends on what needs to be done, what level of quality to ensure, what tools to use, how big the name of the IT company is, how well-known clients are in its portfolio.

To get around the competition, you must first determine in which price segment you will provide services. Then it is worth analyzing direct competitors from the same price segment that provide the same services: see what development tools they offer, what additional services they include in the development cost, with what clients and projects they work.

At the same time, it is quite important to objectively assess your own strengths – will you be able to ensure quality no worse? Can you offer similar services for the same price? Next, it is important to highlight your unique advantage over your competitors: how are you better? Why will clients have to work with you?

If you have such an advantage formulated on an intuitive level, without external confirmation, it is better to check it in advance: to conduct a survey of friends, acquaintances, casual interlocutors. Find out if this advantage really matters to them, or if your hypothesis is untenable. The sample should be large enough to give the most accurate representation.

It depends primarily on your level of knowledge about the industry and technology, as well as on the level of initial investment. For example, the average salary of an experienced Symfony programmer is 80-100 thousand rubles, i.e. 3 months of its work will cost the company already 240-300 thousand rubles. At the same time, projects of this level, as a rule, are complex, expensive and require not only a programmer on the staff, but a full-fledged team: a designer, a tester, a project manager, an analyst, etc. It is highly desirable that at least one of the key competencies is available to the owner of the company, otherwise it will be difficult to control the processes.

If you plan to develop sites on one of the popular CMS, such as WordPress, Joomla and the like, everything becomes much easier. In this case, the requirements for skills and abilities are sharply reduced, the average salaries of developers drop to the level of 20-25 thousand rubles per month. Development can be put on stream, because one project is similar to another.

If you plan to focus on design and creativity, the requirements for programmers will be small, but the requirements for designers will increase dramatically.

Accordingly, the related services in these three examples will be different. In the first case, it will be the mandatory support of the project, its maintenance, expansion of functionality – i.e. technological services for the further development of the project. In the second case, it is more likely that you will need to configure Yandex.Direct, maintain groups in social networks, SEO, i.e. project promotion. In the third case, additional services can be the concept of an advertising campaign, the development of corporate identity, promotional and printing products.

Sometimes it is more profitable to occupy a narrow niche than to offer clients the widest possible range of services.

If we talk about the IT services market in general, the target audience is practically any business, without restrictions. But in order to determine the target audience of your company, you need to draw up the most accurate portrait of the client:

• how much money the client is willing to spend on your services;
• what is the main service he needs;
• what additional services he may need;
• if you have a regional binding, most companies from another region will most likely be eliminated from the target audience;
• what field does your client work in (often clients choose a developer who has projects in their portfolio made for the same industry);
• who makes the decision in the client’s company (if you work mainly with small business, these are, as a rule, the owners; if you work with enterprises, these are middle managers, and they have a completely different level of motivation to start development and quickly finish the project );
• are there any requirements for the tools used in the development (some clients indicate as the main requirement what the development should be done, for example, what programming language should be used, what graphics editor, what CMS).

Beginners should remember that reaching large customers without prior preparation is a very difficult task. Our target audience immediately became a medium-sized business that needs some kind of non-standard solution for process automation.

The thing is that in this segment the products are complex and require maintenance. Moreover, they rely on business processes, which is a flexible thing, and it changes over time. Therefore, the product usually evolves with the company.

An IT company often starts with a single developer. In this case, the initial investment is a table, chair, laptop and the Internet, that is, in total – no more than 15 thousand rubles.

Taking a more serious approach, the initial investment is:

• company registration – 4 thousand rubles of state duty, 10 thousand rubles – authorized capital, another 5-10 thousand rubles for registration, if you do not want to do it yourself. For individual entrepreneurs, registration costs are reduced to the payment of a state duty of 2 thousand rubles;
• office rent – 20-50 thousand rubles, depending on location and area;
• virtual PBX – 2-3 thousand rubles per month;
• developing your own website is rather an investment of your company’s time or resources; conventionally, you can consider about 30-40 thousand rubles;
• domain and hosting – 2-5 thousand rubles per year;
• advertising costs – from 5 thousand rubles per month;
• salary for employees – from 100 thousand rubles per month;
• equipment (server, computers, multifunction devices, other office equipment) – 70-100 thousand rubles at a time + 2-3 thousand rubles monthly.

Additionally, we are constantly testing new ways to attract customers. In particular, we use cold calls, Direct, placement in thematic catalogs, participation in thematic ratings, participation in tenders.

Of the methods we tried, they gave a good effect:

• Direct advertising campaign – 5 thousand rubles a month;
• cold calls – 15 thousand rubles a month;
• networking – about 2 thousand rubles a month.

Direct ad campaigns and cold calling make it easy to calculate conversion rates, which cannot be said about networking. The effect of working on increasing recognition due to its expertise may appear in six months or a year. Nevertheless, they are useful tools at a certain level of company development.

Starting our own business, we immediately decided that we would not attract any borrowed funds. Someone else’s money is very relaxing for a beginner entrepreneur, reduces the level of motivation. Therefore, we started exclusively with our own funds, since the initial investment can be varied.

Our business has main expenses – salaries, office, equipment and advertising. To optimize advertising costs, we very carefully calculate the cost of attracted customers from each advertising channel, thanks to this we understand how much advertising pays off and whether it makes sense to continue using it.

To optimize office expenses, you can rent it in a place that is not very passable, because its location is not very important – clients come themselves very rarely. Or you can act radically and abandon the office altogether, transferring employees to remote work.

But this option is not suitable for everyone. We decided to take this step only 100% making sure that all our clients prefer meetings in their office or in a cafe, as well as realizing that all our employees have been working in the company’s staff for more than 2 years and are quite capable of doing their job responsibly without binding to the office chair.

Saving on salaries if you want to ensure high quality projects is not worth it. But it is possible to reduce costs if employees are attracted for additional services on a project-by-project basis, paying them only for the work that was actually done, and using KPIs to assess the work of full-time employees. All our employees are somehow tied to the company’s profits.

The absence of an office and the use of some of the employees on a project-by-project basis allowed us to minimize the cost of equipment – most of the employees use their own computers, and we bear the cost only for their depreciation.

Having decided on a niche, having studied competitors, having recruited the first clients and renting a room, you can already proceed to the next stage of opening – the purchase of equipment. Mandatory equipment, without which we cannot imagine work:

• Own server of the company (including for demonstration of work to clients and work of the project management system);
• Virtual PBX;
• Laptops or stationary computers of employees with sufficient power for the type of work performed;
• Office equipment.

It was quite easy to find suppliers, since many of them dropped out even at the stage of the first request – they did not answer for a long time, they issued an invoice for a long time, and could not competently answer our questions. As a result, the suppliers of equipment and services we constantly work with have not changed over the years.

For example, we serve the company’s own server in the provider’s data center, which has not been changed for 4 years. His prices are not the lowest, but the speed of response to our requests is no more than 10 minutes.

Thus, the main criteria for choosing suppliers for us are:

• The speed of response to our request (especially if it is a permanent service);
• Equipment quality;
• Cost of equipment.

Of course, no equipment will work without specialists. For an IT company, they are the foundation of success. The number of company employees depends on what services are key and how many projects are being carried out simultaneously. For example, we are a technology company, and this means that programmers must have a high level of training, while on the staff there must be at least two, and preferably 3-4, in order to ensure interchangeability and speed of project execution. But only one designer is enough.

At the moment, our state consists of:

• Sales manager;
• Project manager;
• Technical Writer;
• Designer;
• Three programmers;
• Tester;
• Copywriter and content manager.

There is often a situation where a project manager also serves as a technical writer and a tester. And HTML-layout can be performed, depending on the company and its business processes, by a designer, programmer or an individual employee.

It is very difficult to find such employees “off the street”, and the process of their infusion into the team is quite painful. You must always keep in mind that regardless of the skill level of the newcomer, he will fully enter the work process only 1-2 months after the start of work. When hiring such employees, they go through several stages of selection. First, we look at the resume and study the portfolio, then we give the test task. Based on the results of the test task, the applicant is interviewed by the lead programmer, and after that – an interview with the director.

The final decision on hiring is made on the basis of the totality of the results of each of these steps, with priority given to the opinion of the lead developer, since it is with him that the new employee will interact first.

Low-skilled employees are much easier to find. We usually work with them on one or two test projects and only after that we hire them. The selection process in this case differs from the first option. At the first stage, we also look at the resume and portfolio, if any, after that the project manager conducts an interview and decides on cooperation. If the cooperation is successful, the employee remains on the staff or is entered into the database of remote employees and is subsequently involved in projects as needed.

The bulk of our customers are located in Moscow, so our working day is from 10.00 to 19.00 Moscow time, regardless of where our employees are. Some employees can vary their work schedule, observing the rule – not less than 8 hours a day, and some employees are deprived of this privilege. If clients work from 10 am to 7 pm, sales and project managers should be sure to be in touch at the same time.

The lead time for one order varies from several days to several months, depending on the complexity, urgency and volume of the task. At the same time, you need to understand that not a single person can work 24 hours a day, no matter how much the director of the company or clients want it. In order to avoid missed deadlines, overlapping tasks and constant switching of employees from one task to another, we use a planning system. Thanks to this, each employee knows exactly what he will do tomorrow, has a fairly clear work plan for the next week and an approximate work plan for a month.

All tasks received from clients are formulated in the system, assigned to a specialist and scheduled by date and time. The only exceptions are very urgent tasks:

Our practice has shown that the location of the office does not matter for clients, it is much more convenient for them to meet on their territory. The presence of an office in the center can confirm the high status of the company, but because of this, it is definitely not worth bearing huge costs. Therefore, when choosing an office, one can only take into account how convenient it will be for employees to get to it, and it is quite possible to be located on the outskirts, but within transport accessibility.

If employees work in an office, it is also advisable to take into account how comfortable it will be for them to go to lunch – are there canteens, cafes and restaurants nearby, or is it easier to organize the delivery of meals to the office. It is highly desirable to have a cooler, tea, coffee and sweets in the office. The presence of a microwave and multicooker is also not a direct necessity, but it adds convenience.

There are no requirements for the layout and height of ceilings for IT companies, but the room should be light and spacious enough so that employees do not sit on each other’s heads. It is advisable to plan the placement of specialists so that they have a feeling of isolation from each other.

The maximum area depends on the number of employees in the office at the same time and common sense. The office should be spacious and comfortable enough for all employees to feel comfortable in it. At the same time, people working on one project should be in direct access to each other.

As for contracts and documents for premises, as a rule, an IT company chooses an office in an office center, and there the owner of the premises or the management company deals with these issues. Therefore, an IT company only needs a lease agreement. Nevertheless, this agreement must be given close attention when concluding in order to avoid pitfalls in the form of a sudden increase in rent or an unexpected request to urgently vacate the premises.

To open a company, it is enough to go through the standard registration procedure

LLC or even an individual entrepreneur. We have both an individual entrepreneur and an LLC registered. We started with an individual entrepreneur, but quickly realized that clients are much more willing to work with an LLC, so this form is the main one for us. In addition, the LLC allows you to have several founders in the company.

The sole proprietor has only one advantage: if the bank’s license is revoked, the sole proprietor is equated to individuals and receives his money (no more than 1 million 400 thousand) in the first place, while the LLC stands at the end of this queue.

The tax registration of a company is standard. The simplest and most convenient option is a simplified taxation system. If the company has a lot of operating expenses, it is better to use the simplified taxation system of 15% for income – expenses, if very little – 6% taxation tax for income.

In some regions (in the Sverdlovsk region, for example), the possibility of switching to the patent system for individual entrepreneurs has recently appeared, but according to our calculations, it is far from always profitable, therefore it is better to delve into all the conditions in advance and make independent calculations. So, according to our calculations, a sole proprietor with a simplified taxation system of 6% makes sense to switch to the patent system only if the annual revenue exceeds 910 thousand rubles.

As for OKVED, in our case it is 72.40 “Activities for the creation and use of databases and information resources” and 74.40 “Advertising activities” and 72.60 “Other activities related to the use of computers and information technologies”

No licensing is required for the IT development company. As far as I know, only hosting companies are licensed.

By default, the copyright always remains with the author. Therefore, our employment contracts indicate that employees transfer the rights to the result of their work to the company.

As for working with a customer, there are two options. In the first, we reserve the copyright. And in the second, if an individual design or individual visualization elements are developed, we transfer non-exclusive rights to them to the customer. That is, he can use them, but he cannot resell them. In this case, the authorship remains with us. This is necessary so that we can add the work to our portfolio and put the authorship on the client’s site.

• Registration of a legal entity;
• Opening a bank account;
• Preparation of document forms for working with clients (agreement, annexes to the agreement);
• Definition of target audience and segment of work;
• Office search ( Important! This is optional and not necessary at all at the initial stage);
• Selection of the necessary employees ( Important! This item can go after the next one, and not before it, depending on the level of competence of the studio owner)
• Searching for the first customers ( Important! You shouldn’t hire a sales manager right away, it’s better to search for the first customers yourself. Thanks to the experience gained, you will be able to build further sales and train managers much more efficiently);
• Implementation of the first projects;
• Creation of your website with a portfolio;
• Connection of advertising channels;
• Building up permanent business processes for development.

In order to determine the cost of order fulfillment, you must first of all understand exactly what the cost of an hour of the company’s work is. It consists of fixed and variable costs divided by the average number of hours worked per month.

Knowing the cost is important primarily because at the initial stage of work, without a good portfolio, it will be very difficult to get expensive projects and you will have to be content with little, and sometimes even give additional discounts. Knowing the cost price, it will be possible to rely on it, understanding exactly how much it is possible to move at a price, bearing admissible costs.

The order execution price is determined based on the costs that the company will incur for its implementation, the risks involved and the desired profit. With the long-term existence of the company and work on standard orders, some types of work in the future can be drawn up in a price list, since the average cost of these works will be known in advance.

In general, our calculation looks something like this: the number of estimated hours * the cost of an hour of work of the company * 1.3 (corrective risk ratio; may vary) * N, where N is the profit ratio. Its owner determines the company independently, guided by common sense and his own greed.

A very important aspect of the company’s work is the preparation of technical specifications for projects. Determining the exact cost of a project without having a detailed technical assignment is a gross mistake that company employees can make.

In our company, the work on the project is structured as follows:

• Getting the problem statement
• Preparation of a proposal with preliminary assessment
• Conclusion of an agreement on TK
• Design, development of detailed technical specifications and project prototypes
• Coordination of technical specifications and prototypes
• Signing closing documents for the development of technical specifications
• Drawing up a detailed estimate for the project
• Signing a project development contract
• Execution of work on the project
• Signing of closing documents for the project.

Depending on the scope of the project, the work can be divided into additional stages, performed under separate contracts.

When developing projects, we try to follow the rule: “You need to eat the big elephant in small pieces.” The more pieces, the less chance of error.

If you do not attract any additional investment and keep investments to a minimum, you can reach the zero point with the first 1-2 contracts.

The absence of an advance payment automatically reduces the degree of the customer’s responsibility for the project, and as a result, a situation may arise when you have done all the work, and the client has disappeared. We take an advance payment of 50%, and this amount includes most of the project costs.

It is very difficult to orientate according to the number of orders and the average check, since projects can be of very different levels. Theoretically, 3 projects with a check of 150 thousand rubles will be equivalent to 30 projects with a check of 15 thousand rubles. But in fact, 2 projects of 300 thousand rubles each may be in operation at the same time. with a work front for 2 months and an even distribution of project amounts for this period, 3 projects of 100 thousand each and 5 projects of 25 thousand each. All of them can be at different stages, carried out by different specialists and form accounts receivable that accumulate over time.

The payback period depends on the costs at the initial stage, as well as on the size of the company’s operating expenses, including the level of salaries of specialists.

If you hired an employee with a salary of 100 thousand rubles, and conclude 2 contracts per month for 25 thousand rubles, you will definitely not last long.

Another important point: the more complex the projects you want to get, the higher the cost of attracting a client and the longer the period from the moment of the first contact to the conclusion of the contract.

In this case, with the same employee on a salary of 100 thousand rubles, the following situation may arise: you have a potential client with a project for 1 million rubles, you happily take on an employee, pay him a salary for 2-3 months while you negotiate with the client, and only after that you receive the first tranche from the client. It’s okay if he covers the costs incurred, but what if the deal falls through? This likelihood also exists exactly as long as the money is not credited to your current account.

If you build processes as flexibly as possible and constantly keep in mind the possibility of the described situations, the payback period may well be 3-4 months, or even less.

Debugging of business processes allows to reduce development costs. Each employee must know exactly what to do depending on the situation that has arisen, understand who is responsible and who to run to if something went wrong. For this we have a few simple regulations and a project management system.

Risks are mitigated due to more thorough preparatory work with the client before the conclusion of the contract. We do not set the task to conclude an agreement at any cost. Our main task is to build long-term relationships with each client, and this is possible only when he trusts us as professionals, and we trust him as a customer.

There are several risks, we have faced all of them:

• Insolvency of the client – the client starts a large-scale project, but in the middle of the project he runs out of funds, or the project loses its relevance. To minimize this risk, we break large projects into multiple stages with payment linked to them. This allows you to understand in time that funding is stopping, and to lose a minimum of time and money.
• Lack of TK – sometimes sales managers have a big temptation: “Guys, we have a client for 500 thousand, let’s work as soon as possible, sign an agreement, to hell with him, with TK.” And then it turns out that the client has wants for a million, but he refuses to pay for them, arguing it like this: “And your manager promised me that everything will be as I want.”
• Incorrect project assessment – sometimes it happens that specialists make mistakes in assessing the scope of work. In this case, in order to save face and reputation, you have to work at a loss. To eliminate this risk, breaking up the project into small pieces is also great.
• Seasonality – what about without it? We have a frank “off-season” – this is January (New Year’s holidays), May (May holidays) and June (difficult to explain, we write off for the vacation season, but July and August are not so subject to seasonality). But the frank “season” is from September to December.
• The situation in the country – crises affect us by the fact that large projects cut off financing, some clients freeze in anticipation, some are simply afraid to do something.