"SOFTWARE START-UPS FEEL THE PINCH"

Good article by CNet's Martin LaMonica on the difficulties of building a new software company (crap! maybe we should become an online dating service:):

Ismael Ghalimi started software-maker Intalio with a solid business plan and leading-edge technology. But like many software entrepreneurs, Ghalimi is finding that isn't enough.

After six years without showing a profit, company executives decided it was time for plan B: Rather than sell customers pricey, high-end software, Intalio decided to sell open-source software instead, cutting the price from about a half-million dollars to zero. The company would charge for support and a license fee when its software is deployed on closed-source databases and middleware.

Intalio's dramatic strategy shift reflects the difficulties of operating a software start-up in a rapidly consolidating market. The upheaval in business software is unraveling the traditional formula for start-up software companies, prompting smaller players to bet on novel business models and technologies.

"Enterprise software is a mature market and you can't compete head-to-head against IBM, Oracle or even SAP. You just can't--they have too many resources on the engineering side and they own the customer," said Ghalimi, Intalio's founder and CEO. "It's just brutal out there."

Entrepreneurs and investors say fundamental changes in the business software market are rewriting the rules of engagement for potential software upstarts. Corporate customers are buying from fewer, larger providers and choosing different purchasing models, notably annual subscriptions in place of upfront fees. With the traditional equation for starting a company being strained, smaller firms hoping to survive need to pursue new business tactics and technologies--such as open source and hosted services.

"A critical requirement for start-ups is that they've identified an area where pain is extreme, so extreme that a company is willing to deal with a start-up and willing to pay money for it," said David Skok, a partner at venture capital firm Matrix Partners. "No question, it's tough." (full article)