Can Failure Be Good?

Index

Index Software
Life Span: 1991-1993
Cause of Death: Insufficient Funds
Subsequent Venture: Perseus Development Corp. , founded 1993
Vitals: Revenues exceed $1 million, with 40 employees to date

Jeffrey Henning, 32, learned the hard way that it takes more than a great idea to build a winning venture. In 1991, at age 22, Henning co-founded Index Software to provide auto-illustration software to people who couldn't draw but still needed custom graphics at an affordable price. Based on his research, there was a clear need and a ready market for his product. In fact, Henning says the start-up was on the verge of getting the software bundled into Lotus SmartSuite, which would have been a major score for his company. But the deal never got off the ground.and neither did Index Software. Henning shut the doors after two years.

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Find out " Where the Funds Are " so you won't find yourself in a pickle as you attempt start-up.

The problem? Sure, they had a great idea, but they didn't have a fully developed product, nor enough cash to make it happen. "We lacked funds to invest in completing the technology," recalls Henning. "With the recession [during the early '90s], venture capital firms were not providing seed funding. They were only financing companies that had completed development of their products. But our product was too labor-intensive for us to do that, requiring a team of artists to create customized clip art."

What were the lessons learned? Henning cites three:

1. Design a business model where you can self-finance product development. This way, your business' survival isn't 100 percent dependent on outside funding.

2. Secure sufficient lines of credit, even at times when it doesn't seem you would need to access them. This will give you leverage when you want to raise expansion capital.

3. Start with a very basic initial product, and get it to market ASAP to begin generating revenues. This way, you get money in the bank and more relevant customer survey research to build a revised, more robust version.

Armed with these lessons, Henning quickly turned things around to co-found Perseus Development Corp., a Braintree, Massachusetts, firm that develops and sells software for conducting more efficient market survey research, in 1993. And the failure experience seems to have served him well. Now the COO, Henning has helped grow Perseus from three employees in 1997 to more than 40 today, with revenues exceeding $1 million.

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What kind of cash do you need to get your business off the ground? " How Much? " will help you do the math.

"We developed the survey first for our own use [at Perseus] to provide better market research services to our customers, and we kept investing in the software until we were ready to.sell a mass-market version. This avoided the need to raise capital," says Henning. Instead of being 100 percent dependent on outside capital, as he was with Index Software, Henning and his team designed a business model where Perseus would self-fund software development with revenue from consulting services. And then they gradually transferred more focus to the software development side of the business. Here's the breakdown: In 1993, 100 percent of Perseus' revenues came from consulting services. Today, consulting accounts for 54 percent, with the other 46 percent generated by software sales.

What motivated Henning to start a new company and put the disappointment of Index Software behind him? "There was never any doubt that I would do anything but start companies. I've been starting companies since I was a kid," Henning reflects.

Sean Lyden is the CEO of Prestige Positioning (a service of The Professional Writing Firm Inc.), an Atlanta-based firm that "positions" clients as leading experts in their field-through ghost-written articles and books for publication. Clients include Morgan Stanley, IFG Securities, SunTrust Service Corp. and several professional advisory and management consulting firms nationwide.

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This article was originally published in the September 2001 print edition of Entrepreneur with the headline: Can Failure Be Good?.

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