The meteoric success of the stock market listed Irish software companies, CBT, Iona and BCO Technologies is set to be followed over the next two years by at least another six Irish software companies which are tipped to pursue a similar path.
But if the transition from a one-man boxroom operation to a multimillion pound business appears to be seamless, the reality is very different. There are many pitfalls to stymie the unwitting start-up company's best efforts.
Usually the "eureka!" stage of software development is marked by the breakthrough of a computer zealot using only a PC, a phone and a desk. At this stage very little capital investment is required to get the business up and running low capital investment is one of the major contributing factors to the software explosion. In the early days it is very easy to muddle along, answering orders in a haphazard fashion without considering how output can be maximised, or what the future holds. According to Mr Tom O'Connor, manager with Prospectus, a strategy consulting company, the software companies most likely to succeed in the early stages are the ones that have developed a niche or unique product with an immediate demand.
"Many software operations will not progress beyond the stature of a medium-sized company because their products lack intellectual advantage," he says. "Examples include payroll and accounting software, which can be tailored to different demands, but the core technology remains the same."
Where a new piece of software is thought to be unique in some way the next course of action is securing patent protection. "The majority of new companies do not make use of the patent system either through the level of expense involved or basic lack of experience. While they can still have the benefit of copyright protection, it represents a lesser form of intellectual protection," says Mr Andrew Doyle, a partner with A&L Goodbody Solicitors, and head of the firm's high-tech unit.
Securing a patent generally costs no more than £5,000, and though it can take up to 18 months the protection is applied retrospective to the date of application. One of the drawbacks is that the idea has to be kept confidential until the patent is approved, meaning production cannot take place beforehand.
The problem with only having copyright protection, according to Mr Doyle, is that the Copyright Act says the developer of the software is the owner. But because many software companies subcontract the development work, in effect the developer has an unspecified claim to the software. "This leads to serious problems when the company goes looking for venture capital investment, and the potential investor conducts an intellectual property audit. If gaps are found in the ownership of the product it can have very serious implications. The company needs to draw up a standard legal agreement clearly outlining ownership of the copyright before a subcontractor is taken on to develop the product."
Registering a trademark on the software is also advisable as it gives the owner a monopoly right to the name. While this course of action may be obvious, mistakes are often made by not registering the name everywhere the product is sold.
Mr Doyle cites several cases where a company has entered the US with its brand, only to discover several other products carrying the same name. He recommends carrying out a trademark search in the product's relevant markets before deciding on a name.
Introducing customers to a new piece of software, and identifying the size of the market can pose problems for start-up companies with little money to invest in marketing. Iona Technologies found itself in this position in the early days, and overcame it by issuing its software for a 60-day trial period at about 5 per cent of the purchase price.
At the end of the period the product automatically ceased to operate and the customer had the option to pay the difference due and receive the version with full capabilities, or return the product.
According to Mr Chris Horn, managing director of Iona, this was a very useful way of entering the US market and interacting with potential customers. "We also exhibited at a major US trade show and followed up all our leads immediately. This would definitely be a recommended route in terms of maximum exposure," Mr Horn says.
Once ownership of the software has been established, and a potential market identified, many companies decide to seek capital investment.
According to Mr O'Connor, Irish equity companies tend to take minority shareholdings on the basis of a strong business plan and a competent management team. The business plan needs to convey a clear understanding of the product's market and its customers. Competitors need to be identified and comparisons drawn with their strategies.
The growth opportunity and product advantage are selling points which should be highlighted, while key features of the company internally have to be outlined, including the marketing strategy and human resources approach to retaining staff.
Developing a competent management team often presents problems. "The classic problem is having a really good idea, but no good management ability," says Mr Horn. "When we started we were conscious we didn't have good marketing experience, so early on we brought in additional management on the marketing, sales and financial side at both board and senior management level."
Similarly, the appointment of non-executive directors with previous or similar expertise in the relevant area is often a wise course of action.
Because the technology industry is viewed as high risk, in the early stages at least, Irish venture capital companies tend to invest only after the product is well established. "Software companies coming through usually feel they are more ready than they are. We would prefer if they achieved a higher turnover pitch before approaching us. A great deal of grooming is required in advance," says Mr Maurice McHenry, managing director of ICC's software fund.
Some companies prefer to establish links with larger companies in order to inject capital into the business. This avenue can also be fraught with risk says Mr O'Connor: "Strategic alliances can be very difficult to get right for every good one there are a couple that fail. Irish companies tend to link with international companies and this can lead to cultural problems. It is important to remember it is not a sale, it's an alliance both parties have to pull their weight."
Joint development agreements can also end up compromising the core product when a fledgling company doesn't invest in specialist legal advice. Superior legal teams from multinational companies can draw up agreements very much in their own interests.
Assuming the company does enjoy exponential growth, the general expectation is to go for a stock market listing. For a US Nasdaq listing, the managing director needs to go on the marketing trail to investment houses worldwide; a prospectus must be published meeting stringent Nasdaq requirements; a board structure needs to be in place which will appeal to investors; and legal and accounting due diligence procedures need to be detailed.
Mr O'Connor believes it is very important to decide whether a company wants or needs to pursue this line. "From the day a company decides to float, it takes approximately 18 months to get there, and it involves a hell of a lot of time consuming work. Ask yourself whether you can stand over your income projections for the next couple of years. Examine your worst-case scenario and see how it would affect your business; would it recover?" he asks.
Mr Horn says: "It was only when we got to the stage where I was comfortable enough with my management team to know I didn't need to be around, that we were ready to consider an IPO (initial public offering). The very worst thing you can possibly do is go public, and then miss your first quarter."
Mr McHenry points out that Nasdaq is no longer the only route as the Dublin and London DCM/ AIM markets become increasingly popular. "With Nasdaq, a company has to get to the situation where they know their investors extremely well, this can take a ferocious amount of time and executive input out of the company. The DCM/AIM is quite attractive with many Irish institutions prepared to support Irish companies particularly during the current good times," he says.
Then there are the internal problems of day-to-day management to be considered. More recently, the skills shortage is emerging as a very serious problem. This is further heightened by a recent prospectus report which found that most software companies rated themselves weakest in the area of human resource management.
Mr O'Connor points to instances where management becomes so absorbed in looking out for new talent, that it does not nurture its existing staff only to lose them and half their knowledge base with them.
