Running the company for 5 years. The lessons learned.

Five years ago three seasoned software developers created a new company and called it Farata Systems. Fa was taken from Fain, Ra is from Rasputnis, and Ta from Tartakovsky. Five years is a good milestone for any firm, and in this article I’ll tell you our story.

When people create a startup, they often have a big idea, sometimes a business plan and an exit strategy (typically, to be acquired by a larger company for an X amount of money). But was Farata a startup in the first place? Here’s the quote from Wikipedia:

The phrase “startup company” is often associated with high growth, technology oriented companies. Investors are generally most attracted to those new companies distinguished by their risk/reward profile and scalability. That is, they have lower bootstrapping costs, higher risk, and higher potential return on investment. Successful startups are typically more scalable than an established business, in the sense that they can potentially grow rapidly with limited investment of capital, labor or land. Startups encounter several unique options for funding. Venture capital firms and angel investors may help startup companies begin operations, exchanging cash for an equity stake.

We didn’t have any investors. We were profitable from day one by working as billable consultants for corporate clients.
We didn’t have any business plan. We had our own software, but it brought us peanuts in terms of monetary rewards. We didn’t have money to invest into finding a professional salesman to offer our skills to potential new clients. We didn’t have any exit strategy. We didn’t even have an elevator pitch to quickly explain what are we doing. What did we have and why did we create this company?

We had good noses. It was the time when Adobe acquired Macromedia and released a software product for development of Rich Internet Applications (RIA). The name of the product was Flex, and even though its first version has been created earlier, Adobe made some smart marketing changes to make it affordable. We decided to bet on this product. We started with writing technical articles and blogs about Flex – in early 2006 there were no or little information available on the subject. Then we wrote an advanced book on bringing together Flex and Java in the enterprise world.

Each of us had billable hours (and the rates were pretty high), but we also started bringing other people on board and offering their service to our clients. How can you sell a consultant to any company without having a salesforce? We did it by PR. Consistent writing of quality technical materials and speaking at various gatherings (from 5 people in a local user’s group to large audiences at major conferences) got the word out – we started getting requests for help in development of enterprise RIA. Using the terminology from software engineering, we’ve implemented the Inversion of Control design pattern, which is also known as a Hollywood Principle: “Don’t call us, we’ll call you”. We were patiently waiting till someone would call us.

But publishing advanced technical materials was a double-edged sword. While perspective clients knew that Farata’s experts can be engaged for solving heavy-duty tasks, other consulting companies were simply placing their inexpensive consultants on never-ending enterprise projects.

First, we started getting requests for help only with non trivial situations, for example,
– we are going live with our online game in a month, but when more than two people are playing they experience serious slowdowns
– our enterprise application works fine, but once in a while some users are losing messages
– you don’t need to sell us Flex, we know it’s good for UI, but can you improve the reliability and customize communication protocols to fit our needs
– we’ve chosen Flex to avoid page refreshes, but our pilot application requires 40 seconds just to load the first page

We were helping everyone, but didn’t grow much. Placing a couple of consultants on a project at a large company was fine, but it wasn’t a major change from the growth perspective.
At some point, we started getting requests for bidding on projects. If a large corporation was about to start a large project, they’d ask several small vendors to bid on it. We’d sign a non-disclosure agreement to receive a Request For Proposal. Being experienced architects from our past lives, we could properly estimate the efforts required for successful completion of the project in question. We could foresee the issues and warn the perspective client about them. But we were not experience bidders – we were telling the truth.

For example, once we gave a $250K estimate for a project, while our competitors offered to do the same job for $50K. Now we know – they applied such strategy just to get their foot in the door and to win the bid. Six months down the road we’d get a call from the project manager of that corporation complaining that the promised $50K turned into $500K and the project arrived to the dead end. Interestingly enough, we didn’t learn anything from that lesson. If we believe that the project would cost $250K, we’ll say so. But now we also offer to reduce the scope if there is a shortage of funds.

Coming back to promoting ourselves, I’d like to tell you about the role of technical training in our growth. Two of us are Adobe Certified Instructors and all these years we were teaching classes to corporate clients. Adobe develops excellent courseware and we use it a lot. But we also found a niche that was not taken by anyone. We became the only company that started offering advanced custom curriculum in developing rich Internet application with Flex and Java. As an example, during the last two years we were teaching public zero-marketing technical seminars in New York, Boston, Toronto, London, Moscow, Brussels. These seminars didn’t make us rich even though we remain in the positive cash territory, but they gave us a chance to spend two-three days in front of fellow developers proving that we are technically sound. You can’t BS for two days in a room filled with programmers. Have you ever had to go through a technical job interview that lasted two full days? No? We do it on a regular basis. These public training events are like technical interviews for us and usually we receive a call or two from our former students, “Guys, we need help with our project”. This can be a year after we met, but hey, it’s better late than never.

At some point we won a large project (no, we didn’t lie in the proposal). How thin can you spread three experienced consultants? We couldn’t be at the same time in three different places. We had to bring more people on board to make a profit and do the job. An hourly rate we’re getting from our clients minus some profit margin would be the rate that we could offer our consultants.

Between 2006 and 2008, consulting rates offered for RIA development have substantially decreased. It became difficult to charge premium even for the expert-grade services, and we switched to a blended rate model. If someone needs a senior developer with Flex/Java skills, we offer a resource (hate this word but this is what the industry understands) that consists, say, from 10% of myself (or one of my partners) located here in the USA and 90% of a developer working from Eastern Europe.
This model works well for us. This gives peace of mind to our clients who know that their project is in good technical hands while staying within the budget. Such outsourcing model works because we (as opposed to large corporations) cherry pick each and every developer we hire from overseas. Today, 25-30 people work on Farata’s projects.

We’ve also learned that for a small company, selling programming tools for software developers is literally impossible. People want free stuff and they get it from us. We’ve open sourced a number of productivity tools that go under the name Clear Toolkit, which became yet another PR-tool for our company.
On the other hand, we’ve created a spin-off startup Surance Bay that’s specializing in development of the software for insurance industry. Today, Farata serves as an investor (!) of that startup, which started bringing cash in a record time, but this can be a subject for another article.

Two years ago, a top manager of a large company decided to create his own company. I knew the guy and he came to me asking for some details of starting a small business. While he didn’t have any experience of running a small company he knew rather well how to run a large department. He started with a business plan and a lot of financial calculations. He asked me, “Where are you guys planning to be in five years? How big are you planning to get? What kinds of revenues do you have in mind? What’s your exit strategy?” He was a very experienced manager and quickly realized that I was not ready to answer all these questions. Finally, he said, “Are you guys just created a company to build a nice life styles for yourself?”

He was right. Without knowing it, we wanted to have nice life styles while doing what we enjoy. Five years after I can tell you that we’ve achieved this goal. We still don’t have any exit strategy because we are not planning to exit. We are enjoying our lifestyles, developing cool software, helping our large and small clients in achieving their goals, we are writing books, teaching and learning, attending conferences, raising kids, traveling. What else to wish for? God bless America!

Yakov Fain

7 thoughts on “Running the company for 5 years. The lessons learned.

  1. Good job, Yakov!

    Very smart business approach and good selection of partners.

    Hope that one day, when you will have no heart to say “no” to
    a real big project, you may reconsider your current strategy on using
    “individuals only” and turn to using companies as your outsourcing
    partners. Let me be first in a line ;-).

    Good luck, congratulations with 5th anniversary and long life to Farata Systems!


  2. Hello Yakov,

    this was a pretty interesting reading. Our company, Webfuel, started during 2004 in the RIA market (at the time, with OSFlash) and our story is pretty identical to yours. Well, with the difference that the market in Portugal is a lot smaller, harder to deal with, and our economy is completely stagnated. We are right now investing more in building our own products and less in doing consultancy work.

    There are three parts in your post that I enjoyed most:

    First, is your story about budgeting projects. We face(d) *exactly* the same situation, where we charge a realistic amount with realistic deadlines, and then we loose work to other companies that appear to charge less, but at the end it cost 10x more than the budget with half of the expected quality, and double the time needed. Ironically, like Farata, we “haven’t learned” the lesson, and we still budget realistic values and deadlines. Fortunately, this also have the inverse effect with clients that end up working with us, by creating a trust relationship where they know that we won’t trick them or fail.

    Second, I find interesting your position about management bullshit. Getting big? Exit strategies? I’ve had that talk with managers around 20 times. We’ve had plenty of investors/venture capital/business angels/whatever knocking on our door, and unfortunately it was always a big big waste of time. We’ve spent days in meetings discussing everything except real work, building documentation and plans for everything besides real work. Of course, venture capital would help us launch some of our ideas, but we’ve been growing all these years without venture capital and we will keep growing.

    Third, I enjoyed our goals: nice lifestyles and doing what you enjoy. Those are exactly our goals – along with the goal of building one or two things that can really make a difference. I can’t say that our lifestyles are already nice – they aren’t -, but for sure we are doing what we love to. I just hope the situation of the economy in Portugal gets better, or that we export more to other countries besides Finland and Spain.

    Wish you guys the best of lucks

  3. Interesting discussion from both sides of the ocean.

    Let me ask you: Aren’t you guys hiding from reality a bit?

    How can you afford _not_ to grow, at least with the same speed as our industry?

    Your programmers want rises, your customers are pressed to cut their budgets –
    and you plan to remain “same old bakery on the corner my grandfather was
    buying his bread from”?

    Based on your description, you both are in “service model” and you face the same
    “scissors” problem (the difference between your costs and revenue depends on the number of your “billable resources”) as we all have in this model. Being focused
    on certain technology / vertical may help in getting better rates, but the problem

    Can you look back and elaborate on the size of your both companies within past few years? Was it growing? In terms of # of people? Revenue?

    Hope you don’t mind me asking these questions, I started back in 1993 and wanted to remain small “mom and pop” shop, but had to grow my business to almost 200 ppl and need to keep on growing.

  4. Yakov,

    Although I have been working with Flex and Java as long as you, Micronautics Research is younger. It is interesting to read about your blended rate; this is not how other professions have addressed the problems you describe, yet I recognize that clients would respond well to this pricing strategy. I don’t feel comfortable with the logical conclusion of this strategy; many consulting put forth their best talent to win the job, then they substitute less experienced resources. The resulting work then does not meet expectations. Litigation (or the threat of litigation) often ensues. This hurts the industry in general.

    Currently our best prospect is a customer facing a software development or enterprise integration disaster. Like your business early on, a significant percentage of our business today consists of rescuing projects in trouble. A high percentage of those projects are outsourced, so we end up advising the end user firm and mentoring the outsourcing company. It seems that before the project starts, clients don’t know what they don’t know, so they can’t visualize the impact of poor architecture or implementation. After they run into problems, and a VP’s job is threatened, hourly rates become less of an issue. As usual, Obi-Two, our virtual evangelist, is outspoken on this

    I’m still searching for the right business formula. Certainly having a selection of resources is important, and we have recently brought on some great talent, who are located in less expensive parts of the world. That does not fully address the competitive pressures you allude to, however. I think the answer lies with shaping customer perceptions and expectations, and positioning our message such that our premium quality services is seen as good value.


  5. Hi Yakov,

    very interesting article. I really see myself in the same situation – with the difference that I did not start my business with fellow software developers (which I would prefer, but at the time I could not find any interested ones).

    I am located in Austria, and started my business without a real business plan and was focusing on providing consulting services and developing tailored software in Adobe Flex. I started with clients in Austria, but soon realized that the RIA market was much bigger in the US and now my majority of clients sits in the US. However, I am facing the same problem as you are regarding bidding. Some providers just give unrealistic estimates and costs, this gives clients the feeling that they can get software for almost nothing and expect hourly rates below $30.

    I am also following your principle of quoting the real price of the software, which of course often results in getting outbid by low-cost providers, but I love the quote: “No bad is better than a bad deal”.

    Like Arcady said, how does your growth look like? I started 2 years ago as a one man show, but soon realized that I need to grow in order to stay in the game. Current projects require resources, but you need resources to acquire and develop new projects, etc. etc.

    Last thing – I totally agree with the lifestyle thing: I don’t have an exit strategy either, nor a business model based on one core product with funding, but this kind of business allows to me to live a very exciting lifestyle, doing what I love (not just at work but also in my spare time).


  6. Ups, sorry for the type, of course it should be:
    “No deal is better than a bad deal” :)

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