For years, startup software companies have assumed that bringing a product to market first and then investing more than their competitors in sales, marketing and product development was the road map to a winning outcome. However, a new study charting the common characteristics of both successful and unsuccessful software companies claims that, on average, winners are not first to market and do not spend more on sales and marketing or product development. Rather, successful companies become large, profitable businesses for a variety of unexpected reasons.In “Building a Great Software Business in Booms and Busts Alike: An Empirical Analysis of the Operational Performance of Formative Stage Companies,” Bain Capital Ventures professional Jeffrey Crisan and managing director James Nahirny analyzed financial results from 1990 through 1998 for 304 publicly held software companies. Their baseline criterion for labeling a company as successful is what they call the “Rule of 126” — that is, these software companies achieved $100 million in revenue and earnings before interest and taxes (EBIT) margins of 20% within an average of 6 years after company formation. Companies were considered failures if they had never had a profitable year and had never reached $40 million in revenue.T
