Everyone seems to agree that Michigan needs to do more to diversify its economy. Unfortunately, in our collective drive to diversify quickly into growth sectors that can replace all the manufacturing jobs lost with jobs those displaced can fill, we seem to have missed some great opportunities, especially in the area of software and IT. The software industry has many advantages as a sector to diversify and grow in Michigan. That's because software requires less capital investment, and can generate revenue more quickly than any of the other forward looking sectors being promoted by our state economic development organizations, those being Advanced Manufacturing, Alternative Energy, Homeland Security, and Life Sciences.
First and foremost, a software company requires less money to grow than many other sectors. For each new developer, you're going to buy a computer and a reasonably small set of software. Open Source programs, and the Microsoft BizSpark program can lower that cost even more. New employees can be producing valuable intellectual property at home, or in coffee shops, or in your basement for relatively little capital outlay. Co-working spaces, which we will cover in our article about non-traditional work environments later this week, are another alternative to traditional office space.
Second, software businesses can generate revenue more quickly than startups in other sectors. This is even more true now in the era of software as a service (SaaS), or hosting software programs on the web. This model enables startups to create an initial limited offering very quickly. Once that initial service is stable, a startup can begin generating revenue, and work with customers to prioritize future work. Because the software resides on servers, the startup can provide upgrades quickly and seamlessly to all existing users.
Third, this SaaS model makes it beneficial to use a subscription-based pricing model. That means startups can have a more stable cash flow earlier in their lifetimes. This early revenue stream provides several benefits for a startup: the revenue is the best justification to investors that the idea is a solid basis for a business, it's another reason why software startups can be launched with less seed capital, and it helps build a relationship with customers to provide more information about what features and enhancements would provide greater growth in the future.
Fourth, software businesses can penetrate global markets easier than many other businesses. It's still not easy; you must understand regulations and provide localized versions of your software. However, web addresses are accessible worldwide, creating an easier path to global markets.
Finally, there is no geographic necessity for software companies. It's just as easy to develop software in Michigan as it is in California, Boston, or other higher-cost locations. The more reasonable cost of living in the Midwest can be used as a means to attract software producers to our region.
The challenge that Michigan faces is in proving that we have the talent to staff any potential growth in Michigan's software industry. Maybe that's why the state has focused on sectors where they believe those people displaced in the auto sector could find work more easily. It's a bigger stretch to imagine going from autos to software than it is to go from autos to advanced manufacturing. But yet, so much of our auto industry runs on software (just like any other industry), that I believe that's faulty logic. I do believe the state should be enabling software startups in the same way they are enabling startups in the chosen growth sectors.
Future posts will discuss challenges and ways our software business community can help create the environment to provide the incentive to enable software businesses to thrive in Michigan.