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Do you understand what software to build or invest into, Vital Essential Desirable.

I decided to write a quick brief. There are very simple principles of inventory management which I have applied to investing in companies or building software tech. The key was to understand what are the basic types of tech.

 

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Vital software apps – OSs are an example. Growth is embedded into the hardware and the annual CAGR is not high but predictable. Greatest ROI for companies that own the IP and investors. Rule of 3 plays out. B2B business models embedded licensing to OEMs. Few apps in this segment, more than 5 – 7+ Microprocessor cycles (Moore’s Law of 18 months), then Bells Law of new Computer Classes in a decade emerge, creating new opportunities.

Essential Software Apps – Office productivity software such as word processors, spreadsheets, presentation tools, etc. Growth and CAGR is closely tied to  “Vital” software apps but a smaller percentage of the market. More volatility than the Vital apps. High ROI for companies that own the IP and investors. Rule of 3 plays out. B2B business models embedded licensing to OEMs is >99% of value and emerging B2C Pay-Per-Use. Small group of apps in this segment, less than 10.  Apps in this segment between 5+ Microprocessor cycles (Moore’s Law of 18 months).

Desirable Software Apps – From fashion apps, to games to IM to Utilities. Highly volatile, growth and CAGR is closely tied to  “high bursts and growth”, generate the lowest ROI.  B2B business models such as advertizing and B2C Pay-Per-Use/Advertizing/In-App-Purchase, et al. Software apps but a smaller percentage of the market. More volatility than the Vital apps. Lowest ROI for companies that own the IP and investors as based on probability. Form 99% of the overall software market size. Apps in this segment between 1 and 3 Microprocessor cycles (Moore’s Law of 18 months). Demonstrate extreme volatility and always searching for business models.

So if you are an entrepreneur, CXO, VC, PE, product manager, academic or anyone just interested in understanding the 101 of the tech industry, this can be a good start.

 

 

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