The most famous example of getting your customers to fund your new product development comes from Microsoft. As legend has it, co-founder Bill Gates negotiated a deal with IBM that paid Microsoft $430,000 to develop the DOS programming language, which IBM was given a license to use. However, Gates retained ownership over the code, which allowed him to sell it under the MS-DOS brand.

How Brian Ferrilla Got a New Product and a Premium Valuation

In a more recent example, Brian Ferrilla ripped a page out of Bill Gates’s playbook when he started Resort Advantage to help casinos adhere to new anti-money-laundering laws. Criminals were laundering money through casinos, and Ferrilla’s software helped casinos spot the bad guys.

Ferrilla started by selling a simple version of his product to small casinos and eventually got a call from MGM, the granddaddy of casino operators. MGM needed extensive customizations to Ferrilla’s product, but instead of building a custom solution that MGM would own, Ferrilla offered to waive the customization charges in return for retention of the ownership of the product.

Ferrilla reasoned that since MGM was one of the biggest players in the gaming industry, whatever levels of security and features they wanted, other operators would also value.
MGM got their custom solution, and Ferrilla retained the rights to an underlying product that the entire gaming industry valued. In the end, Ferrilla was glad he kept the rights to his IP when his $3 million business, with just 15 employees, was acquired for more than $10 million.

Had he slipped into the trap of making custom software for each of these customers, Ferrilla’s business would have likely been worth less than half that as custom software development shops offering a unique solution for each customer usually trade at around one times annual revenue.

The next time a customer wants you to develop something just for them, consider agreeing, provided you maintain ownership of the IP behind your work.