Harvard i-lab | Startup Secrets: Disruptive Business Models with Michael Skok 4 of 7

great well welcome we're going to have a lot of fun tonight and mostly because I've got a group of people who are going to bring this whole subject to life here so just as Jodi said to put this in context for those of you who have not been here this is going to work as a standalone session but it does follow what we talked about in the perfect picture is how you fiddle this together and kind of a business plan and a pitch that you could take to VCS for example and it builds on the value proposition concepts things like for example the game pain ratio for those who are here for that and if you weren't all of this stuff is available on the website at MJ's cocom under startup secrets so you can find all that prime aterial there and we also if you remember last time talked a little bit about company formation and how obviously go about building a team that can actually take the kinds of value propositions that you're building and products and services to market and so today we'll be focusing on the piece that I think often gets dropped too far down the stack which is business model and it turns out I think this is as important as any subject of the five in a series and is most often overlooked so I'm excited about presenting it and I'm excited to have some examples today that will bring it to life but what I think doesn't count so I want to make sure you do the following which is promise to engage if you don't understand the concept or if there's something you want feedback on or if you're shy about doing it in a big room like this with a large audience that's no problem then just do so either in person afterwards or feel free to throw your comments and questions up on the website - we've delighted to engage with you whatever makes sense to you now the one thing I will say is that the go-to-market strategy which comes next is sort of the other side of the coin of business model because you sort of can't this define a business model without thinking about your go-to-market strategy and it also goes hand in hand with the value proposition - so for those of you who are trying to put this all together I highly recommend the next session as an adjunct to this I think it'll make a lot more sense to you in that in that context but with that said let me make the introductions so tonight we have three companies who are presenting in the main part of the presentation first of all I'd like to introduce Don dodge from Google so Don is a longtime industry friend and somebody who actually really did anime thing which was to make a huge shift in his career from being in the in the developer world with Microsoft to literally becoming the exact same role in Google so he's seen both sides of a big business model transition which is why I wanted him to be here tonight and I think he'll give you some great examples of that we also have a couple of startups at different stages so we have a choir here and I just like to introduce Mary and Rhys so Mary is our CFO and she'll be talking about some of the finer points of the business model and Rhys is actually the founder of Drupal the open source project behind the Acquia company and so he'll talk a little bit about what open source brings into the business model and why it's such a great example of how you can be disruptive so we're very excited to have you both here thank you for coming I like this we haven't audience the claps beforehand so in it's all downhill from here very excited about that and then as people have continued to tell me it's important to have not-for-profit examples because I know that there are a number of you who are doing not-for-profit kinds of ventures we've actually got one who's going to present tonight if you can get here and that's Chuck cane from One Laptop Per child he's actually teaching at MIT tonight but he's going to also join to talk a little bit about Demandware because unfortunately our CFO who was supposed to be here tonight that's been called for actually a great reason to spend some anything with the bankers but I'll cover Demandware and Chuck can help me out with axes on the board of the media but his other role here will be to talk about One Laptop Per child which for those of you who don't know is a fantastic not-for-profit initiative to get IT spread to the third world and then Alok has very kindly continued to do great work on the dfa example that we've shared in previous workshops and so those of you want to follow that he's going to put some slides together which we'll put up on the website which will give you a following example to how they're building their business model again in a not-for-profit way so I think we'll have a pretty rich tapestry of examples tonight and I'll include some from my own background to try to bring this to life and as I've said to you all along the way this is about trying to give you some unfair competitive advantage as a start-up because when I look back thirty years ago all the things that I wish somebody told me that we're trying to bring to the fore here so this doesn't feel practical enough raise your hand and ask the questions because we want to make sure this is down-to-earth this this is all about making it practical for you so let's jump in our agenda for the night is four basic things the first thing I want to do is find a disruptive business model for you so I will not be happy if you walk out of here thinking okay my business model is just a me-too business model that is a lost opportunity for you as a startup the second thing I want you to do is to walk out of here understanding what your core differentiation is in other words what is at the absolute core of your value proposition that you can use as differentiation those of you weren't here in the value proposition session that's okay we'll talk about at least in concept tonight and in terms of how you use that in the business model and then I'm going to bring in two very simple ideas one is how you'll multiply your value and the other is how you leverage it and I think mostly that could be done with innovation but in some instances by the way that innovation is not technical and so I'm going to bring some examples out that are purely business oriented because I've often amazed at how many entrepreneurs are focused on purely the technology and trying to create their differentiation and that's a lot of what the sessions about is making and making it obvious to you why the business model can actually be disruptive and then I've actually enhanced this since we last gave it here because last year I heard a lot of people say to me what's the impact that a great business model makes and it actually makes impacts in lots of ways but startups in the end and founders often they ask the very basic question which is C but how do I build something really valuable how do I have the next Google or the next Acquia or the next Demandware or whatever it might be and so we're going to talk about that tonight I've actually gone to Goldman Sachs and done some work with them to pull out some of the statistics that they have on a very broad basis and I'm going to bring those into focus tonight and put more of them up on the website for those of you want to get into that too and when you get to the end of this I hope that what you will have is at least a taster for what it takes to go and build a business model there's a lot of material out on the web about you know how do you build business models this is not trying to replace that it's trying to get you to think about as a start-up and trying to get it into a framework that will get you thinking about it for how you could make an impact with your business model so what do people typically talk about when they're creating a business model they really usually mean how do you make money that is a part of it that's sort of the end result but I would describe it as the end result of doing three things well it's how you create your products and services how you deliver them and how you harness the value and that's really what we're going to talk a little bit about tonight is how you might go about creating those different aspects of your business model but as I said we're startups so I don't want to get anything other than creative here about how we do this and the first thing I want to remind you is that the best business models are probably not yet invented why do I say that well when I started in business thirty years ago there were probably four or five basic business models people looked at revenue and they looked at cost of goods and they looked at expenses and they looked at the bottom line and they probably focused a little bit on other things like cash flow and receivables and things like but fundamentally we had really simple business models fast-forward obviously today there are many many business models I mean just to be clear I thought about creating a list on the web and if you have an interest in that I will create one for you because I certainly see tons and tons and tons but the point is that each and every one that I see has some nuance that in potential terms has the capability to make an impact in a disruption so let's talk about that disruption first of all why is it important well when you're thinking about what you do in building your business wouldn't it be great if you could get an advantage out of a faster time to market with your product or service obviously one of the biggest challenges for startups is how do you get return on your cash quickly because you're always resource limited so that's important it also turns out if you get a great business model that's very frictionless it'll help your market adoption it'll help people buy your products and services more simply and that's what we can talk about tonight and ultimately even if you're not for profit organization you've got to find a way to make this business model profitable or sustainable because otherwise you're gonna be out of business so it's very fundamental it's not like this is an afterthought that you can think about as a you know maybe I'll think about my business model and then fund has always challenged me on yeah but why do I care as a founder why you know why do I have to think about this right from the get-go and I'm going to try to bring it right down to the core of this this is your spend if you don't get your business model right you'll spend on the wrong things that has a huge impact on your cash efficiency and we're all about obviously trying to help entrepreneurs spend as little as they need so that you can keep as much of your company your ownership for yourself and ultimately end up with a highly valuable asset a business that is sustainable so this is really directly tangibly worth you taking time on because it is your venture and when you get a business model it works you'll end up keeping more of it it'll be more valuable so I hope that connects the dots for you and by the end of tonight I want to make sure that you can actually get a sense of how you should go about this the other thing I want to put in context here is that you can't just think about this in isolation obviously if you have a disruptive business model that's great but why not have a disruptive technology that feeds a direct disruptive business model and then for the next session that helps you attack a new market with an innovative go to market model if you can do that you'll have the perfect storm and that's really what I'm trying to help each of you find is your own perfect storm for how you can be uniquely effective in bringing your product or service to market so in the business model context I want you to do something right off the bat and that is throw away any preconceptions you had about what it is that you're bringing to market as a product and think about what it is you're doing to build a business and if you can start by changing the game and rewriting the rules and causing an innovators dilemma for those of you who haven't followed Clayton Christensen it's just doing something that somebody else can't follow but do it with your business model then we're starting to play in the right way and what I mean that by this is as simple as this if you come into a marketplace and you follow the same rules that somebody else has about how they package and price their product and who they distribute it through obviously you are going to be beholden to matching their price or figuring out how to get some more time from that channel etc and you'll always be playing by their rules and startups usually aren't the first companies in a market in some cases they are they're creating market that's great but if they're not this becomes even more important so I really encourage you to stop and think about how could you do this how could you rewrite the rules how could you create completely different paradigm that other people have to follow because at that point it becomes other people's challenge to adopt your rules and you're in control of the game which is just the kind of place you want to go so of course I challenge myself to bring an example up at this point and I'm also going to date myself by doing it and I won't go into this in too much detail because I've covered in previous classes but I'll put this example up on the web my example is working with semantics about 20 years ago semantics created a product called semantic antivirus for the Mac well back then there weren't really many viruses for the Mac believe it or not I mean to give you a sense of it that you could have counted them in you know less than a hundred and you probably had you know one coming up every quarter or so there was only significance in a few other minor ones fast forward of course to today there are thousands tens of thousands of viruses but what was interesting was when we moved on to the PC we had a very typical discussion in the product marketing group we said okay well what a PC product you know we already unknown for our antivirus solution on the Mac why don't we just launch it exactly the same way we rolled up through the same channels etc thank God we stopped and said we'll wait a second what are we learning about this marketplace we're learning that actually this is not a business that is really about the software of scanning for viruses it's actually a business about defending the data and information on your PC or your Mac and what really people are concerned about is having a subscription service that keeps that data detected against new viruses and so what happened was really interesting we introduced the the products in a completely different way the PC product got introduced as a subscription service in particular we gave away the software why because obviously without the software and everybody's machines we had no basis to send the updated virus definitions to anybody and what we realized was that that was the opportunity for people to actually get the value in other words whenever a new virus came out to instantly be able to download it and how they protected was the value and that was something that was coming on such a fast pace that people didn't want to buy it like software once a year and upgraded once a year they wanted instantly update it downloaded from the web would have been nice except we didn't have that in those days but they still were willing to pay for it that way as a subscription and I will tell you without you know going through the entire case study which again I'll put on the web it was game-changing for the company and if you want to look back at semantics history at what turned that company from being an interesting company to being a market leader this was it and it wasn't the technology it was the business model and to this day a big part of Symantec's success emanates from their having created the subscription service where they gave away the software and started charging for the virus subscriptions ok so that was kind of a technology example but obviously a different way of selling technology I then challenged myself to say you know what the results from this and how could you think about this well in the end what I really want you to try to think about is how this is an example of flipping the model on its head and creating a what turned out to be very predictable because now it was subscription-based business model that caught the comparison completely off-guard and it did because we created a dilemma for them just the way I was saying you know you can rewrite the rules the competitors were still selling products through distribution channels and trying to charge for software so now we're completely on competing on completely different rules for them we were saying no the software is free and you know you can start buying it obviously as a solution and the great thing about this was the customers actually saw it the way we were trying to market it to and we ended up launching something called the data security campaign my investors at the time were a little bit nervous about this because we spent a lot of money I like millions on going to market through major advertising in major newspapers because we really believed that this was what customers wanted to get was actually security around their data not antivirus software whatever and it met their need more effectively and then the last piece of it that was exciting was it caused us to actually learn something for the rest of our product range so here's the statistic we would typically sell 1.5 products per customer so in other words if you averaged it out we didn't sell two products per customer of the semantic range we sold about one and a half doesn't sound like very appealing number to the person who only got that half of a product but the point here is that you were getting about 50% uplift on the base product you saw so we had many products and what utilities was one of them we had one backup and many other things so that 50% uplift was nice but one of my sales guys have to give him credit for this said well when second if we're selling data security and people are actually buying from us in this broad way now we're effectively getting the platform adopted everywhere what if we actually made a data security bundle and we packaged everything together and we said okay you can buy that bundle for guess what 50% more well it turns out that what happened was people were willing to pay a lot more than that once they started to see the value of all the products together as a complete data security solution we actually ended up selling a 160 percent uplift so two point six x so two point six products but per customer was sold so we learned from this shift that actually customers really interested in data security and then we learned again and bundled products together and ended up getting another uplift from it and it was game-changing for the company it literally caused our revenues to just spiked dramatically and for us to put a couple of companies like PC tools out of business which you know wasn't a minor deal at the time because they were pretty similar competitors to us so is exciting to see this and I bring it to life because this is what I'm hoping you guys will find when you think about your business models any questions on that one before I move on yeah go ahead you've seen but isn't it watch how I knew to bury you today isn't very easy for XYZ purpose anything well it would be if they weren't reliant on all the models that they had in the past so for example if you've been selling software at very high margin and you've had a two-tier distribution channel which is what used to exist then so we sold it to distribute as they sold it to retailers yeah they were very stuck in that channel right and they had their salespeople on Commission for it and they had all their incentives and everything else based around it so you had a lot of things that were effectively the legacy of that old model which other people basically had to dismantle to follow us it's expensive to do that and and you know Don's going to talk about how Google played this this card in a second but it was extremely effective at changing the game and what's important in this last piece is yes they could have come along and started to attack us on just the core product but by then we had already reached tremendous penetration by giving away our software so we effectively already had the customer we've done the customer acquisition with the virus software that we've given away from free now they were trusting us because they were seeing how well we were doing with that and they were saying ok if we trust them with virus definitions why wouldn't we trust them with backup and with utilities that do things like disk repair etc does that make sense so not to say by the way it was you know impenetrable defense but it turned out to be the game changer in the industry and the tipping point for us ok the next example is a pure business example and I particularly picked this because this goes the point of you don't have to have a technology disruption to be disruptive so what was going on in the marketplace was that you were seeing a lot of great software publishers develop products in the US for the PC marketplace and they would come over to Europe where I was at the time and they would basically put it into this two-tier distribution channel and they'd expect that the company would be successful sounds great except that the two fundamental problems number one is distributors don't sell products they distribute them so there's a lot of sales and marketing and so forth that's needed behind out the second thing is that the software business was relatively young at that stage so believe it or not Symantec now multi-billion dollar company was only about a twenty twenty-five million dollar company at the time you know even in today's dollars that's still a small company and if you took that and you went to any market in Europe which is roughly a tenth the size say Europe you know split thinking about Germany for example might be 12 or 15 percent but say the UK about 10 percent you ended up with a business that at max was about two and a half million in relative potential so not a large amount of money didn't give you critical mass that do any of the marketing of distribution or service or support so what I did was to create a company that became the critical mass of multiple publishers that was able to put the right quality of management marketing distribution even translational localization and so forth in place behind a series of companies each of which would benefit from the economies of scale of having that access so in other words just to really put it in the simplest of senses if I'd already sell sold to Royal Dutch Shell which is a huge buyer of personal piece of software IO had the relationships to that account and so if I brought one product in and they trusted me and they had that relationship they trust me to bring in another product and so the cost of customer acquisition was lower and are obviously ability to sell and support was much more effective and that's what we did and then we put in a really interesting business model behind it we found a way to make it possible for any of the publishers that we brought over such as Symantec to buy us back when we became profitable because it's actually very expensive to build a European business start off with and many of these companies were trying to go public Symantec was a good example they weren't yet public at that time and so they didn't want their balance sheet expense of going and building a sales force in Europe building management teams etc we took that expense and we said look when we become profitable you can acquire us on an anti diluted basis which basically meant that it would immediately be hitting their bottom line in a profitable way and would add to their value so they effectively forego the cash dip effective and the profit dip associated with building the business but when it became profitable that acquire it and then the way they're quiet it was non diluted so it would add to their value on an earnings per share basis and therefore their overall value as a business right away so it was like a win-win everybody's gain from it the publisher gained from it by gaining access to that marketplace in a very effective accelerated way the customer gained from it by having a local organization that a much more comprehensive job of bringing the products to market in a translated and supported way and ultimately obviously our investors benefited too and even though that the amount of paperwork that went behind that acquisition is sort of sitting as two huge Bibles on my shelf these days as a reminder of it that work and that planning of everything in the business model paid off to the extent that if I rise it for you we had a 97 X return as shareholders for the first investors in that European software publishing business so everybody want one in it and what I want to point out about it is that there was really nothing in the technology side of the balance sheet on this model I mean we weren't building anything we were actually just finding ways to get economies of scale in as a said management marketing distribution etc we also did something clever in the time I don't think you can do this anymore we had brought a tax break into play through pooling of interests which used to allow you to have a an effective write off and we were effectively time shifting expense from the publisher in the u.s. to our balance sheet and allowing them to buy it back when it was accretive to them nothing to do with technology but an extremely effective way to build a business that created tremendous value actually for everybody so I'm not saying this is a great example that you still rush off and do it was just an example that I wanted to pull out from my past to get you thinking about this in a non-technical way so what are some sample models that are up to date that are today that you might want to think about and how can you start thinking expansively about your business model there are so many as I said I could have literally created a long list but I just want to bring up some current ones I think there's a massive mega trend going on which is to do with generational shift people are willing to share things now so that's giving rise to opportunities for things like Airbnb or Zipcar I mean that was something that's not even thought of you know 15 20 years ago now there I bet you there will be many more shared resources coming in to business models in the future flash sales was never thought of you know so whether it's Prive or it's Groupon that came up with a variety of that those of you were one of my workshops saw me bring in you test a company that's crowdsourcing testing just extremely effective way to do broad testing that just couldn't be carried out in any other way and then we're going to introduce tonight to others that have sort of combinations of disruptive business models a career and demand where and I hope you'll get a sense from them that there's lots of different ways to go and create these disruptive business models so of course that leads the question which is well how do you do that whether you start starts with questions and the kinds of questions I get you to ask are these do you have a product or a process so it's arguable whether Amazon actually has a product I know there's sell lots of products but what they really have is an extraordinarily efficient way for people to get access to the products that they want and to process that order online and in fact for those of you don't know this a lot of their IP has been patented around process not product so that's an example of how you might ask that question of yourself do you have software or services again very big distinction one of my favorites is do you have data or software turns out lots of people who are building software products are collecting tremendously valuable data well it turns out in some instances the data may be more valuable than software so in which case why not give away the software to collect the data so again without asking every question on here the thing I would encourage you to do is have a brainstorming session with your customers and your partners in as part of this to challenge where they see your value is and then obviously where you believe it is to in the end I want you to get one key thing out of this I want you to be able to determine what is your core value and those who know me I've already talked about this I like to use mnemonics because it makes it easy for you to think about things core to me is about finding that piece of exceptional value that you believe is distinct in your proposition so what is that capability that you have that is really core to you and if it is for example developing a magical product and that's really where you want your value great but actually if you're willing to step back from it and say well what if I could get that product into tens of thousands if not millions of people's hands by giving it away and collect a different kind of value from it which is actually for example how they use it and that utilization then becomes something that they can work on sort of you can work on for monetizing in a different way could that be disruptive especially if everybody else is just charging for software and if it can I just ask you to do one thing focus on it forget everything else once you know what that core is and once you know what it is that is distinct it's incredibly important to build around that because it gets very distracting if you have five different value propositions as we've talked about and five different core pieces of value it stuff your customer to identify what it is that they're getting that's of unique value from you now just to put this in context of some of those companies we talked about a lot of these companies are doing things that seem software related like Siri series really not a software company it's actually a data company the more data they collect from you it's now part of Apple but the more they're effective they become in translating your speech and obviously giving you value-added services and ultimately that became the value of that company Yelp mean Yelp yeah it's a great website but what use would Yelp be if there was no content in it nada so yelps value has obviously become content and then there are local presence is obviously being monetized in lots of different ways I'm going to let Don talk about Google and in a second the one of course that I think is fun to talk about normally is red hat because it's built on free software but we've got an even bigger example of that tonight in Treece who's actually built the largest group sorry open source project in the planet in Drupal and he's going to talk about how we monetize free so we got a chance to hear that live but this time last year when we were all talking about it Facebook was the big question how much would people value Facebook add I don't think that's really been determined it had obviously an extraordinarily unsuccessful IPO by some standards in terms of how it went up and down but if you looked at in relative terms I think it's still true that people are trying to figure out what is that network worth you know how do you value the relationships that are online one thing I know for sure is it's certainly not a software product that people buy the way we would think about traditional packaged products and the value is being very clearly focused on by that team at the core as the data they're collecting and how they monetize and everything from advertising to other relationships so once you've found your core whatever it is the big thing you want to do is step back and say what could I do to make that disruptive in terms of how I'd monetize it how could I take that and do something that other people are not doing with it and use that to my competitive advantage and that's where the beginning of creating a disruptive model starts so with that enough talk for me I'd like to get Don to come up and share a real-world example of what he experienced when you move from Microsoft to Google and what did Google do to actually change the game on apps and and think about this just as I introduced Don Microsoft dominated with a multibillion-dollar highly profitable business the apps arena with office for a long long time so what was the core of their value anybody then this is this is Microsoft software software yeah that was clearly software they weren't trying to monetize anything else so what do you do to come along and compete with that that would you Don thank you I want to start by saying this guy over here asked a brilliant question to remind you he said well Michael was describing the business model that they used at Symantec and he said well why can't they just copy that well that's it that's a very interesting question because you have to be when you're in a business like this you have to be disruptive in three areas technology business model and market position those are the three levers that you can pull you have to assume that technology any technology can be replicated within a short period of time months to years any technology so that's easy I mean that's what technology companies do develop technology so start there assume that any technical advantage that you have is very short-lived and your competitors will copy it so that leaves you business models and market position so why can't you copy those things well the reason is it becomes part of your DNA if because it's the way that you do business it's how you hire people it's your cost structure it's the way that you communicate to the market your market position is very very difficult to change so we're going to get into that a little deeper in a few minutes we're going to compare Apple and Google and Microsoft Apple Google and Microsoft compete in many areas and they're all very big powerful companies but they compete in very different ways the technologies are about the same or one leapfrogs the other but they generally are in the same category so why is one more successful than the other it's because of their business models and their market positions so we'll get into that in a minute now Google Apps vs Microsoft Office office is the dominant product it's hard to imagine now but five years ago ten years ago it was office if you did Microsoft Word Microsoft Office Microsoft Excel PowerPoint they dominated there was no competition at all so how do you compete with a competitor that has 90% of the market 100% of the market well first thing is don't compete head-on and I'll get into what that means in a minute but that seems obvious right don't compete head-on you're going to lose so don't do that Microsoft Office was the enterprise market everyone in business used Microsoft Office so what did Google Apps do went in the opposite direction so let's start with consumers let's start with home users don't compete head-on in the enterprise will lose so they started in a different position free that's always great free versus paying 500 dollars for Microsoft Office so that's a way to compete and as Microsoft going to come down to free no they aren't hey Don just a key point on that Microsoft probably didn't have the technology to do what Google did at the point because you at that point you had an ability to host it right on existing obstructs you want to just talk about that because it's often startups to trying to figure out how could I compete how could I do something like offer a free version actually it's not that hard oh here's another key point startups can pivot and change and and change their DNA very very quickly big companies can't Apple cannot change the way that they do business Microsoft cannot change the way that they do business startups can so we'll get to that a little later when we compare how Microsoft and Google and Apple are approaching the smartphone market or how they're approaching the browser mark or how they're approaching the search market and you'll see how the technologies yeah they can compete on technologies and get pretty close but when it comes to the business model and the market approach they cannot change the core startups can so any startup can sort of shift directions and change big companies can't free versus the $500 license okay so that's a sort of a business model approach and it's free as in freemium right it's free to use for a certain number of users or for a certain level but then you pay premiums to get extra services and extra things simple versus complicated when I worked at Microsoft we analyzed office and the reality is that most users only use about five to ten percent of the features in office but there are markets that care about every one of those features so office is gigantic and it has thousands of features that most of you have probably not used but there are customers out there who pay a lot of money for one or two features that they care about so being simple versus complicated that was one of the advantages that Google Apps had lastly the 80% solution so just make it easy do that 80% solution versus the big thing so that was one of the big ways that Microsoft Microsoft Google competed I worked for Microsoft for many years so sometimes it slips and I still think up there okay so how do you compete with a market leader that has eighty or ninety percent of the market how can you do that it's a tough tough thing to do so rule number one do not compete head-on find a way to go around them we're at Harvard Clayton Christensen wrote the innovators dilemma how many people have read the innovators dilemma okay there are two books in my entire life my business life that had a major impact on me innovators dilemma is number one you must read that book if I was in business school it would be a requirement that you read the innovators dilemma it's the most fascinating business book I've ever read basically what it says is it looks at why do large companies fail to adopt innovation why do these tiny little startups come in and disrupt big companies I won't spoil the book for you you should read it but it's amazing and it happens over and over and over again so one of the key points of the innovators dilemma is start at the low end be disruptive be disruptive in technology in market position and in business model go for the low end because the the big companies the big market share companies they're going to move up upscale they're going to try to be more expensive product higher margin and they'll ignore the low end the second book that I read crossing the chasm by Jeffrey Moore that gets at the second one about going for the low end get your beachhead on the low end and then build up up up keep creeping up up up market and sooner or later those big guys you've squeezed them out so that's the approach of Google Apps start on the low end and then work your way up don't compete head-on start with consumers so with Google Apps it was start with consumers then go to schools universities because they don't have any money so and they still need products then go to local governments because local governments they need spreadsheets and word processors and they need all this stuff but they can't afford to pay then go to small and medium businesses and lastly go to the enterprise because once you've proven yourself through all of those markets your constancy what's happening you're moving upmarket every time and eventually you get to the enterprise and by that time the incumbent can't respond they're stuck they don't see it coming I'll jump in on this one tip to to sort of start us off so just to summarize on that last point I think the key thing that Don was doing there was giving you a sense of how even a big company like Google comes in and recognizes you can't just compete head-on and so they actually use their competitive advantage of having everything on the web to say we'll give this away for free get the users actually working with us even from the lowest level and then they've added more and more functionality and of course added more and more value that could ultimately be charged for and that's been hugely disruptive so then a lot of people when I was putting this case studies together said yeah but the current example that's more interesting is mobile so we added this in so even though we're a little bit over time we'll jump in with this what's interesting about this is that there's a lot more players than just Apple and Google in this ecosystem there's actually the handset manufacturers and there's also the carriers and so forth but there's a massive battle going on between Apple and Google obviously for what is the you know consumer usage of the ultimate device whether it's a tablet or smartphone etc so don't how can Google win this one and I mean I know this is playing out in real time so maybe this flip us to the next slide and give us some of the things that some of the pointers probably around 60 60 % Android and less than 30 percent iPhone and it's going the other direction so Android is growing iPhone is declining and Microsoft and Nokia and all those others are struggling for whatever's left so who is winning well I think it depends on how you define winning so is it possible that both Android and iPhone are winning do you think yeah it is because we're playing different games this gets back to your question about why can't companies change when you look at Apple what does Apple do hardware software integration they sell a premium product and they control everything that's what they did with the Mac that's what they did with the iPod and that's what they did with the iPhone so they that's what they do that's their core what does Microsoft do Microsoft license licenses technology they licensed an operating system that's what they have done forever so when it comes to the smartphone market what do they do they license Windows 2 smartphone manufacturers because that's what they do okay so Apple does a totally consolidated thing Microsoft says okay I'm going to license the operating system what does Google do well we have to be disruptive we can't do what Apple does and we can't do what Microsoft does so we do and if you go back and look at Google from the very early days with search what do we do we were disruptive with technology and we were disruptive with the business model there were 10 or 15 search engines before Google even started it was a mature market but Google disrupted with technology the back-end stuff the nitty-gritty stuff that most people can't see and with the market they introduced an ad system that no one else had and it really what made Google's successful was the ad system it wasn't really search because search can be replicated and looked pretty much the same it was the business model and the approach to the market so when it comes to the smartphone market what did we do we gave away the operating system for free because that's what we do that's our DNA we give things away we give search away we give chrome away we give Gmail away we give Android away but our core business model is advertising so apples core business model is consolidated hardware and software high margins make money on hardware Google's core DNA is give away the service and make it on vert Iseman that's what we do so you see how it goes through what Microsoft does what Google does and what Apple does the smartphone market it's the same if you look at the iPhone and the Android phone and the Windows Phone the new one they're pretty much the same but three completely different approaches to market three completely different business models and that's where we compete so that's very helpful thank you very much needs anybody have any questions on that I think we should thank Don for bringing into focus two very very real examples both of which are entirely dependent on the business model any questions for Don he'll be around this evening go ahead so this idea is based on advertising how does that change hi in the future as its whenever you want like a race to the bottom because and advertising so many different places then it becomes to achieved our refined online design change um scale matters in advertising and Google has scale that if you look at Microsoft versus Google in the area of search Bing versus Google search you could argue that the technology is pretty close but the business models aren't that we have scale that Microsoft doesn't have and can't have so it makes it work when it comes to mobile advertising on mobile is going to be different when it came to search you're probably too young to remember this but I used to work at Alta Vista and we had these display ads and these blinking gifts and all this crazy stuff that's what advertising was until Google came along and changed it and made it profitable you'll see the same thing happen in mobile mobile advertising is going to be completely different than the advertising that you see on the web so it's not a declining market it's not a race to the bottom there's going to be innovation there that's unbelievable I was wondering about the patent battles between Apple and the Android manufacturers particularly with the settlement I believe with HTC this week which would seem to indicate that Apple is moving all or in the windows like direction of life technology what impact you can ever have in light of your discussion I have nothing to say about patents no not about the patents I've talked about the business model essentially let me take a shot at it I think I think there's a very different thing than you think going on there what's actually going on is they're still protecting their IP quite strongly so they're still placing huge value on their software where that's not what Google's doing Google's saying you can have that software free the Android operating system is an open source platform and the fact that HTC is settled but not for nothing just to be clear but for obviously a license fee that is per phone I don't think we know the full details of it yet it still says that the model hasn't changed is that apples very much defending it right so the model won't change the only thing I'll say about patents is that this game is far from over there's more to be done Thank You Don so for those of you who want to get a hold of Don we'll make sure his slides are up and he has some more depth behind that on the site too but he said Don dodge at Google calm ok so there's a lot more I could have gone into there because the whole mobile phone ecosystem is one of the most fascinating in the world there's many different players in it you know not just the handset manufacturers and the operating system providers but also the carrier's themselves who've traditionally had tremendous control this market place so I think it might make for an interesting case that if we do a masterclass on on this onwards so creating value is the first step that I want you to take when you're thinking about you know what these three steps are creating delivering and harnessing value but hopefully now you have a sense of why do you create disruptive business models that's what we've tried to give you up to this point because they can make such a big impact as a start-up so in creating value I want to jump right in with a startup secret because it's amazing to me how many startups go back to the drawing board and build everything from scratch it makes zero sense to do that today there are massive amounts of open source projects hundreds of thousands of them to be precise that for example provide a basis on which you can be disruptive and the overall when which we talk about this as at least from a venture standpoint is co-creating value in other words don't create it yourselves co-created and at a bare minimum I think what you can do even if you don't find any open source out there is you can be open and extensible so other people can build around your core if you create for example in the software world open ap is they can do that if you are even in the hardware world there's things now such as the open source hardware projects that that are out there that you can build on and if you're in a not-for-profit world then think about how you could build on whatever infrastructure is already in place and open it up to a community the point about this is that the more you do that the more likely you are to get leverage out of creating your software but I don't really want to hold back from introducing our guests tonight because Driss actually has built one of the largest no sorry not one of the largest the largest open-source community on the planet it's it's twice as large as Linux this community for example doing exactly this building an open-source platform which is enabling users to effectively scratch their own itch in other words build what they need for themselves to serve a very major marketplace so Driss let me welcome you up here and let's get you a microphone and make sure you get a chance to tell your story all right good evening everyone how many people actually know Drupal all right a good a good amount of people so for those I don't know Drupal Drupal is open source software and explain that in a bit it's effectively software that people use to build websites you know just like you use PowerPoint to create a presentation you use Drupal to create your website this is me twelve years ago out of my dorm room in in Belgium where I started Drupal I kind of started it by accident to be honest because I just wanted to create a message board and as you can see it was your typical geek um at my assembly books my chess board my collection of stamps so basically all of the check box is checked and so what I did is I created this piece of software and I decided to make it available for free so I gave it away and everybody could download and use it and what happened is that over the course of 12 years a lot of people decided to basically chip in and help you know add to the software and so fast forward 12 years and now you know roughly one out of 50 websites actually a little bit more one out of 50 websites in the world you know are built on Drupal we have over 15,000 modules or extensions you know little pieces of like you know very similar to apps on the iPhone you know things that people can download to extend their website and an example module could be a blogging module or a forum module and so forth also interesting is that our web sites drupal.org we get 1.5 million unique visitors a month which kind of blows me away because it's a pretty boring website about you know just a piece of technology it's not like it's your local newspaper or you know some other you know popular destination on the web so a lot of websites are built on Drupal from whitehouse.gov to Mitt Romney's website to pretty much every major artist in the world Britney Spears Michael Jackson Rolling Stones Justin Bieber so a lot of different artists a lot of different universities in fact 71 of the world's top under universities use Drupal in a very significant way including Harvard's main website you know that is built on Drupal so what's special about Drupal compared to our competitors is that Drupal is open-source and for those that don't know open source open source effectively means that the user gets four freedoms the first freedom is a freedom to actually run the program and that means you can download it you don't have to pay a license fees free and you can install it and use it in our case to build your websites but that doesn't you know differentiate open-source from say um freeware so there's these three additional freedoms and that's a freedom to study the program meaning you can look at the source code you can study how it's built how it's architected and then on top of that the third freedom it actually allows you to make changes to the program so if you find a bug you can fix it or if you have an idea for an improvement to make it faster to make it better to add functionality you can actually do that as well and then the fourth freedom is actually a very important freedom and that's a freedom to change to you know redistribute to program so you can actually share this changes that you've made you know with other people and so Drupal has grown so fast you know because it's cheaper it's less expensive but that's not the only thing it's it's also winning because it's actually better and so open-source people often think you know it's great arm because it's free but really what happens is those additional three freedoms you know freedom two to four it actually encourages collaboration you know it encourages people to share and as a result open-source is not just a software license it's actually a development model and so to give you an example Drupal 7 which is our current main version of Drupal have actually accepted patches from over a thousand different people so more than a thousand different people you know actively contributed to making that version of Drupal and that's just the base version of Drupal that I'm talking about as I mentioned over 15-thousand you know modules or extensions and each of those extensions have been developed by one or more people as well so in total we have you know tens of thousands of people that altogether built the software and that's highly disruptive because even our biggest competitors proprietary competitors they may have engineering teams of fifty to a hundred people but certainly they don't have you know tens of thousands of people building the software so again open-source leads to collaboration and in our case collaboration leads to community here's a photo of one of our events we have these events all around the world thousands of people at them actually last weekend I was in California there is an event called bat camp which is the Bay Area Drupal camp was over a thousand five hundred people we have bigger events even where you know we have 4000 people show up and these events are happening all around the world so every weekend there will be these events in major cities around the world where hundreds to thousands of people show up to work together and help make Drupal better so again open source it's not just a license it actually leads to collaboration leads to this huge huge community with thousands and thousands of people and it's actually that community that translates into a lot of innovation I known as a result open-source actually wins or at least mature open-source projects they win not just because it's cheaper or less expensive but it's actually better and it's better because effect so many people you know contribute to it and so in terms of business models you know Drupal and open source in general they're huge you know catalyst for creative destruction I don't know how many people know Schumpeter but I was an economist that had this you know concept concept of creative destruction which basically he said that you know to create more value into you know to change change the game you actually have to destroy something and so in many ways what's happening here is we are kind of changing the way we develop software through open source or changing the way people build websites I didn't really talk about that but the way we do things in Drupal is fundamentally different from the way our competitors work but in doing so we're also changing our industry the way we sell Drupal the way we market Drupal all of these things are being you know disrupted so then as a little bonus something that I like to talk about is in doing so we actually do well financially like you know I also started a company called Acquia and so we're doing well in terms of you know very growing successful company but in being so we're also doing a lot of good meaning in making Drupal better we also enable lots and lots of organizations from govern you know governments that are trying to change the way they inject or participate with citizens to helping a lot of large and small nonprofits from Amnesty that's using Drupal to Greenpeace to Doctors Without Borders which you know are standardizing in Drupal we're actually enabling all of these organizations to better fulfill their mission so not only are we changing our industry we're also enabling a lot of other organizations to do all so a little bit of background on Drupal Anna I'll come back to talk about some other things Thank You grace I think what that does hopefully is to give you a sense of something that has had a huge impact because of what dree started with which was a very very small in this case literally technical core for building what was this bulletin board but making it extensible and so really what I would hope you get take away from that apart from the many wonderful things that trees just shared with you is that having that vision right from the get-go about how you might do something that could enable people to create a rounded co-create as we talked about it can lead to some very very big game-changing outcomes and there are many examples of this going on in many different regards around the world that I think our basis even for not-for-profit to think about that as an opportunity so let's move on to the second part of this delivering and capturing value this is all about how do you actually take your product or service to market and how do you do that in a disruptive way and again I'm going to jump right in with a startup secret there are two things I like to try to get people to think about here multipliers and levers and each of them plays a role the multiplier is really about how do you get more out of your lifecycle value of your customer in other words how do you get more revenue out of them how do you increase the reach to get the and how do you increase the coverage of how they use your products and services and so levers are the exact opposite of that they are how do you reduce the time to deliver your product or service how do you reduce the costs in doing so and how do you reduce the resources in it and what Driss just talked about is all of those things actually in the Drupal delivery subtrees just to come back up here and wrap this up in business model terms can you talk about how what Drupal's open-source project does in terms of providing these multipliers and levels sure so as you mentioned our core is a you know very small piece of technology which is architected to be very very extensible and flexible and so as a result one of the multipliers is you know this community that I talked about that is adding functionality every day and they're adding that functionality not acqua as a company and so it's kind of magically happening it's like you know from a Chris point of view or from any other group of companies point of view it's like we have this massive engineering force out there you know people adding those those features and functionality and you know with that is also another multiplier which is a community reach the fact that so many people are using Drupal in so many different use cases and it's a completely new way of doing you know product management even and then to talk about the levers so one thing which as I mentioned already one thing which we have to do a lot less off as a companies we need to spend less um you know time and effort you know actually building Drupal itself and so we can focus our time and effort on building you know other things and same thing with marketing it's it's amazing to see how passionate some of these people are in the community they have you know like Drupal tattoos t-shirts it's like the amount of marketing that they do for us is pretty pretty overwhelming actually if you want to check out what they do just Google you know Drupal and Flickr or some other photo sharing site and you'll be amazed alright some of the passion that these people have on how that translates in a a marketing advantage the multipliers here are really fun because they actually are examples of things that I think you can find in almost any project what you'll find is that if you can get co-creation going on for example then other people adding value to your product or of course cause them to be passionate about it they'll often evangelize it for themselves because it's it's something they've created and that's exactly what happens at Drupal you get many people who created in what we call distributions that have done things like create entire almost products that are doing things like for example providing educational sites right out of the box so people can get value right away and on the other side of things of course by us not doing all the development it's taking the cost out of you know they are adi side of things and that's what I mean by levers that take cost out but also when people are using the software for free at a certain point in time they become a customer a potential customer for the services that might be needed on top of that and that's making customer acquisition effectively free until somebody actually says all I need something on top of it we're going to talk a little bit about that mary is going to introduce the commercial entity behind Drupal which is a queer and talk about how we do that so let me just put some examples up so you can think about these the kinds of things I'd have you think about around your business model are in sales and marketing how could you do things like tiered pricing come up with freemium the way we've talked about with Google and and and Drupal here how can you create channel partners which will leverage your ability to get to market and then in your product I'm going to introduce a few concepts to tonight Slippery products and Russian doll packaged eggs which will actually give you a sense of that he's a cup of startup secret and also how you might leverage other people's technology stacks so building on top of what's already there the point here is that as a venture capitalist I'll tell you we're always looking for the multiplier in your business model because if all you did was charge for hours in the day then there would be a limited amount of value that you could ever deliver on a per person basis and that's why we don't like consulting businesses because obviously you can only have so many bodies and so many hours in the day to get so much value delivered but the more you can create multipliers with your products or your channels to market or the ways in which you actually deliver that value obviously the more interesting it gets and the more you obviously create a basis for getting higher value out of your core and then on the other side of things we look at the lovers and we say how can you take the cost out of the sales and marketing whether it's by using things like the web or inside sales or inbound marketing or getting viral marketing and by the way when people say viral marketing there's lots of ways to talk about Merril marketing the most obvious of which has been around forever which is referral marketing when you buy a product or service that you love and you love it enough to talk to the next person you know you care about and you tell them about it that's viral marketing it's most cool and it's still one of the most effective ways for startups to actually spread the word and people under utilize it so I would encourage you always to test your most basic propositions with people who should care about it and see if it passes the test that they would recommend it to the next person because if it doesn't you probably have learned something you probably haven't got a level working for you and you've probably got a challenge any of your product or your business model or something but these levers are can be a little more fundamental in your business model they can be things like how do you take cost out through offshoring or outsourcing or crowdsourcing as we talked about code creation we just talked about or again through technology stacks and I've got technology stacks up here twice and if we have time I'll explain why but it's actually for most technology companies true to say that your greatest leverage will come from figuring out whose ecosystem you fit into and how to leverage it leverage in terms of playing with them and go to market as well as in terms of taking cost out by not building everything yourself so have a think about that and in the end the best business models I've found work on both multipliers and levers at the same time in other words they enable you to get both an advantage in going to market for example and a cost reduction in building a product from a single strategy and there are many ways in which that may play out but since we've just talked about Drupal I'm going to invite Mary up to talk about how did she find a way to take what was basically a free and open source product and and make money out of it and I shouldn't say it was just you but you were now responsible for it so we get I get asked often well if Drupal is free how did you build a business around Drupal how does Acquia make money and so the way in which we do that is aqua is formed by by Driss and an another co-founder and it was all about providing enterprise support for Drupal and being the enterprise guide for Drupal so you know Driss talked about there being 10,000 modules 15,000 modules out there you know high degree of complexity with that and so aqueous is really about helping enterprises with Drupal and their usage rupal in that and I'll talk about from a product set how that works in a couple of different ways but you know we do provide cloud-based solutions and support so we have built IP and some products around Drupal software itself is free we've done that now for over 2000 customers we've built a company over the past several years here of today that has 250 employees you can see our revenue growth rate has been significant we've done that in a highly predictable and repeatable way and I'll talk a little bit more about that and really focused on what we call a land and expand strategy so it's all about landing within these customers in a way that's providing some level support around their use of Drupal and then expanding that relationship with them through products through services through upsell capability so again Drupal is free it's also open source you know can you make money from that absolutely and it's really focusing around the core of that in using the free and open source as Michael talked about as a multiplier and a lever both from an RD perspective and obviously we have the community that that from an R&D and really drives the caught our cost of R&D down and then leveraging on the sales and marketing side through partners through the community and through also in our ability with that land and expand strategy to drive the cost of our of our customer acquisition down over time so on the product side this looks little complex and a lot going on but really what we focus to do is to provide services and support around Drupal in whatever way the customer is using Drupal and so we've really listened to our customers and Drupal at its core is about building websites and companies have hundreds of websites and the way in which they want support from us for those varies and so we started out at its core with with what's called the Aqua Network and it was really about providing support and tools and a knowledge base for customers everything from them being able to call because the because the software is open source who do they get support from when they're dealing with some of the complexity about the modules how do they put those things together and so we provide everything up to you know 24 by 7 support for these enterprises as well as a way for them to search through a knowledgebase and for any issue that they might be facing as it relates to Drupal they also and that's in a situation where customers are hosting the websites themselves we also learned over time that they had a desire not to be in the business of hosting those websites and allow us to host those websites for them in our cloud and so that that's in a managed deployment way where they can still manage the code but we're actually hosting the sites for them in a variety we've built out a layer of of IP that really optimizes their use of Drupal in our cloud and then at the top here Drupal gardens this enterprise site factory concept is really about Drupal as a service service and software as in a software-as-a-service way so in many cases customers have hundreds of web sites you know juries talked about all the music artists where they want to spin up those web sites in a very templated way and they can do that in front software as a service they don't care so much about about managing the code they're happy for us to manage the code for them but we are providing Drupal to them in a way that is very economical for them and very quick for them to be able to spin those websites up we wrap around that a variety of professional services and training we don't actually build the web sites we have a huge partner community that is also you know I multiply and a lever for us in a lot of cases but we provide very high end services around Drupal whether it be performance type audits site audits migration audits those types of things and so oftentimes that's how we get into a customer is our relationship begins at that stage where we're doing some sort of professional services for them they see the value in that and a sign-up for subscription at you know at any of these levels whether it just be the aqua network or on our cloud and so that when I talk about sort of a repeatable business model it's that subscription services that we're selling on an annual basis that becomes the foundation for that repeatability from in terms of multipliers and levers you can see we have created multipliers by value by upselling all of our products and services in some cases we start with a free version of the software or a trial version of the software going after you know developers in some cases winning the hearts and minds of those developers that can really be the influences in the organization for continued upsell capabilities and then you know on from a lever standpoint really you know continuing that land and expand strategy and expanding the usage through our network of partners they're building the websites they often bring aqua in and selling our services alongside theirs from from a either professional service standpoint or on the subscription great thank you Mary so one of the things that's interesting about this is obviously every business had a different way of thinking about what their core value is and in this case obviously we've talked about software but a lot of you here are thinking about things in a in a broader sense and so I'm going to try to give you a couple of ideas about how you can design your business model for success and designing for success is something I don't want you to start again after you do your product build I want you to think about it right from the get-go so what I've learned from watching startups is obviously people think about UX they think about user experience because that's the first thing that that customers obviously feedback them and I'm going to ask the obvious question which is you know what's been your user experience and let's take the smartphone example how many of you've downloaded more than five or 10 apps big numbers you know so you know that's 30 40 50 people in the audience here who've done that so how many of you have used more than one or two of them for a long period of time okay that's that's still a good number but I'll ask it another way then how many of you rejected at least five apps and stopped using them same number hands the point is it very quickly comes back to you you know whether those are worth keeping or not and so that user experience quickly is the determination of whether you're succeeding or not so your product design obviously is critical to whether you start to get customer acceptance and therefore the beginnings of a good long life cycle or not but what also comes past at that point is things like support ability and how do you do things like your maintenance your updates your upgrades and upsells and it actually needs designing right from the get-go and it leads to two particular startup secrets I want to share with you the first of which is what we call slippery products so if every product was slippery I would guarantee it would be successful so what do I mean by that well first of all if it was simple it was low to no initial cost it was easy to install it proved value immediately and it played well with other things that you use it with and it was then easy to use and whatever your application of it was and ultimately gave you a payback that was obvious and finally became something you couldn't live without it would be successful so why don't we design Slippery products well my experience is this people just don't think through all of these steps and it turns out it's a fundamental part of your business model so particularly as a start-up think about your product as at the very core of what you're doing to define your business model because if you can make a truly slippery product for those of you here for the value prop you're going to really quickly benefit in the game pain ratio you'll quickly give your customers a lot of gain from the product and their experience of actually trying to install it and use it will have low pain associated with it so it'll become a why wouldn't you product which they can't live without and if you think about the carrying on with a phone example the apps that you can't live without have probably all these slippery characteristics it probably immediately when you downloaded it gave you great value and you've found it so easy that you didn't bother even thinking about what it cost you even if it did cost you some you kept using and the next thing you know you're clicking the Update button every month and you're getting more value and then next thing you know you probably find that your bang in-store purchases if you're getting value out of the thing so this is a critical piece of your business model even though it's actually about your product and why I spend some time on it here is because it feeds into as you'll see later on how the lifetime value of your product is monetized and indeed obviously how effectively you're acquiring customers if they're getting great experience they probably will be referring it you'll get viral adoption and so forth so again just to bring this into focus with our case study for this evening I'd like to invite dress up just to give us a sense of what makes Drupal slippery all right so you know Drupal is simple because the way you use Drupal is you can basically build an entire website a very very rich and powerful and complex web site just from within the browser without having to do any programming which is you know often game-changing compared to almost all of our competitors obviously it's free so that you know checks of the L in Slippery it installs very easily and that's something that we've actually focused on a lot by providing easy-to-use installers as well as a software-as-a-service version where you can just go to say Drupal Gardens comm which is our enough software as a service offering and you can just sign up and you'll have a website up and running within minutes versus you know often with proprietary vendors you have to you know talk to a salesperson they'll schedule a demo once you've gone through the demo you need to buy it once you buy it you can actually start using it to build your website so that usually takes weeks or months pros value quickly um you know once you install it you can immediately immediately start using it we also have a concept called distributions and the distribution is essentially a product iced version of Drupal that that's one thing for example there is a distribution called open open publish it's kind of like a newspaper website out of the box you install it and you have a newspaper website ready to go and so we have distributions along many different dimensions place well with others is an easy one for open source because of the architecture it's very flexible basically integrates with many different systems and if it doesn't people can basically built an integration module self so we're integrated with everything from Amazon to salesforce.com to Pinterest just to give you an example of breath of that right and and you could never imagine doing that if it was just your own R&D team trying to do those hundreds of integrations we'd have a huge team but open-source community does it continuously right and we do it really fast like usually save a service like Pinterest launches within weeks there will be an integration module versus again our proprietary competitors it usually takes you know many months before they first Pinterest needs to become a thing then it needs to be recognized by a product manager then it needs to be put on the roadmap but that's not always possible because they sold the roadmap you know to customers and so you usually can fake many many months or years even before they build these kinds of integrations that in the Drupal world usually come within thirteen weeks again it's easy to use I've already talked about that the return of investment is pretty office obvious because it's cheaper it's also better because of all of the community efforts that I talked about and you know customers can't live without it because in our case usually the flexibility and the extensibility that comes with the platform and because it can do things which you can do with you know many of the other platforms so thanks trees so hopefully that brings up an example of a slippery product to life if we have questions on any of this don't hesitate to jump in and ask Greece about it or anybody else on the thing so that's the first startup secret is think about building slippery products and try to find a way that those become part of your business model how you can actually use them to both reduce costs and obviously extend the the reach so the second thing I want to talk about is something I call a Russian doll and it's just the term to bring to life for you in a graphical format how you can use packaging pricing distribution and much more as a start-up to create a disruptive business model so let's talk about some of the things that we've already been doing in terms of this construct first of all if you can create a version of your software that's free or a version of your product or your service that's free I encourage you to do that because there's nothing that beats free and to state the obvious if gives people a chance to try before they buy it they're going to do it it's just a natural human thing that we want to do that however you obviously want to have at some point a freemium model that gives you a basis to upgrade from that to something whether it's of limited functionality or more substantive functionality that gives the next step because being able to charge ultimately as we will learn from the first collapse of the web is somewhere along the line going to be important even if you're a not-for-profit because you've got to have that sustainability as your backbone now if you're going to think about ways in which you do interesting distribution one of the first things that often comes up for startups is standing on the shoulders of giants and doing things like OAM deals so I think OEM deals are great so long as you don't give away your core IP because then you very quickly get effectively commoditized and you lose control of that value but you can do it if you use a Russian doll you can come up with some kind of an addition a personal addition that is OEM doubt by a big partner that gets out of the marketplace if once again what you've got is some premium to that that you can sell upwards from as the next step and so again it's thinking about this as a startup if you're packaging your product in this way in this Russian doll way you can create different channels and different versions and different value points that will enable you to get leverage in how you go to market now what's interesting about this is when you get into sales you've obviously got a much higher cost you've obviously got you know human cost associated with whatever it might be you know six legged sales calls if you're dealing with a sales rep and se and you know support person so you're going to have to have a higher price still and that's why people again try to come up with packaging that usually gets up to whatever it might be corporate or enterprise level and so again if that's a packaging or pricing you can do that enables you to get a different distribution channel like a sales channel across this channel then figure out how to do that and they're going one step further as you get adoption you will find there'll be tremendous pressure on you to come up with lower pricing people would just expect it they'll say okay I'm going to buy 10,000 units now how much of a discount you going to give me well you're going to face that question so why not designed for it and say I'll give you X percent discount but now I've got an Enterprise Edition which has a whole bunch of other things by the way like management consoles for example of controlling in the case of Drupal it turns out that when Warner had over a hundred music sites the one of the most important things for them was to manage all of those sites like it was one site so they could do things to be reaching out to their artists in a very time efficient way so that became another option for us to sell on top that meant we didn't just keep losing value now I'll tell you it's amazing to me how many times startups don't think this through early enough to be able to modularize their product and package it correctly to take advantage of all these things but it is critical to getting the multipliers and levers that I was talking about if you're going to be successful at scaling in the longer term so I really encourage you to think about something like a Russian doll model and to give you sort of a one-line tweet if you like around it that you can remember what I really think about is addiction before adoption try to get people addicted to your solution long before you try to get them to adopt it because guess what if people are addicted they'll adopt all the rest of it and if you think about great products that you probably love that you're just using without thinking about it you probably got addicted them very early on before somebody said well I'm going to sell you this that the other and everything else that goes with it and you know at the basic level it's razor and blade strategy at the more fundamental level today in the way we do things it's everything from inbound marketing to obviously upselling to get extreme value out of it now I won't get married back up here for this one because she's really sort of talked it through but you know we were going to talk about this in in Drupal sense and it turned out Mary had already done all the work in our last board meeting so I'll just share it with you she as she explained ACK we did exactly this they created effectively a free version their developer edition that people could immediately start to get value out of they also created a free tier of the aqueous support network to get value out of and enable people to just get on and try this and the results of doing that would never have played out well if we haven't got this Russian doll packaging strategy and pricing strategy with all the different product versions on it but it's played out amazingly well because if you look at the results we've basically seen our lifetime values escalate hugely I mean was it doubled last year yeah so doubling in in the lifetime value of the customer over the course of one year and as you can see from the numbers getting into detail they've just escalated hugely since since day one so instead of something getting marginalized or commoditized it's increased in value because we from day one were thinking about this and it's really the opportunity that each of you has when you think about how to build your business model is what will be the way in which you will increment value year after year to get this kind of same result that the Acquia team has got so let's put it all together I said we wanted to be able to create deliver and harness value well most startups have a very basic model on which they test this they say has the lifetime value of the customer got at least three acts the cost of acquiring that customer and that's a that's a reasonable model but you'll notice that I've been using slightly different acronyms here and there's a reason for it it turns out what makes for a great business model is more than that it's more than just those two statistics and it's why I'm not a favor of what I would describe is prescriptive learning because you've seen people come in and give me the statin saying I've got it at exactly three point four you know we're going to be a hugely successful business maybe it turns out there are a lot more things to this and so what you really want to do is step back and say how do you do what Mary was talking about which is create something that's very repeatable that's very scaleable with leverage in it so it ultimately becomes profitable and therefore sustainable and even if you're not for profit this is important and then for real sort of extra bonus points how does it become very predictable and valuable so I'm going to try to deconstruct this and tell you a little bit about that and how you might think about this and get a sense of how you can build it into your own thinking so first of all mistake number one that I see from startups is that they assume their entire business model is about maximizing that Rd spent well it turns out when you build a company from scratch obviously you know Rd is probably going to be a hundred percent of your P&L or close to it if that's what you start with us coming up with a Minimum Viable Product for example and you know it's a pleasure to see people trying to figure out ways to take cost out of that but here's the bad news the bad news is when you get to your target model and I've made one up here but it's pretty typical of any software company I could pick out for example or many other companies in other industries gross margin becomes more important than then you can possibly imagine that obviously the cost of producing that product and delivering it and if you can get that as high as a software company or drug company at 80% that you're in great shape but even then the next thing to notice is that R&D is now done at about 15% of revenue the sales and marketing it will typically end up being about triple the amount that the R&D is so you'll typically see it being about for example you know 4045 percent in sales and marketing whereas R&D will only be about you know 10 to 15 percent and then your bottom line will be about 20 percent so what I would like to do now is invite Mary up to to share what literally was live at our last board meeting about the company's challenges to do this this is not easy right Mary and now so so this these are real live percentages here of for aqueous over our life cycle here so you know starting in 2010 you can see a significant amount you know forty eight percent we're still spending in R&D on the on the product side and with you know our cost of goods sold over sixty percent we have had a lot of success sort of declining that over the past couple of years in all areas I mean if you look at 2013 we're still all of our expenses are adding up over a hundred percent it's not good enough we need to be a profitable company obviously so all of those expenses need to be under a hundred percent but this is a model that I use with our executive team and talking about as we set our our operating model every year and looking out as a long-term model as Michael just talked about looking and saying okay if we have you know gross margins at 75% and you know profit at fifteen or twenty percent in our models a little bit different than the proprietary software company that would have you know 80% margins and the fact that we're doing a lot on the cloud our margins are going to be a little bit lower but it's really guiding the company towards that long-term model so that you know as Michael mentioned R&D is going to come down significantly from you know when you start up and you're spending you know a significant amount of money on R&D and a long-term model you're spending in the fifteen eighteen percent range your sales and marketing takes over in spending you know thirty five to forty percent on sales and Marketing side and then GNA at a much lower rate at about 10% so that your your operating at a profit and your operating margin is somewhere around you know fifteen to twenty percent for a long-term profitable sustainable company thanks Mary so the point here being if you're designing your products and services thinking about how do you take them to market cheaper then you'll be hitting the number one cost item in your long term model which is this big green chunk here and whereas it was Rd way back there you know that was the fifth 48% of the model right now that's down to 15% and this is the big nut to crack is how do we get things to market cheaper and make them more supportable and serviceable so this is why the business model is so important to think of and and you know happily what Mary's done here is actually build something that's highly predictable and now we have you know higher degree of recurring revenue and a long term model that is paying off you want to just hop up and just cover these last two sure so from a standpoint of the repeatable you know today we are selling 70% of all of our bookings is our subscription-based and so why is that important because they're renewing every year and not only at the time that they're renewing you know we looking to renew them but we're also looking to continue to upsell them and so that our annual renewable base continues to increase every year 30% of our business today is coming from consulting services that will continue to decline naturally will always be providing those key differentiating services around Drupal but that will continue to decline naturally as that annual renewable base continues to increase and today our renewal rate is 85% for non project related work a lot of web sites are built today and they in maybe just for a project a good example as we built Drupal was used to build the merger site for continental and United and and obviously that was up for you know a period of a year we have those types of things who our renewal rate is going to be less than a traditional SAS model in that way but we are certainly shooting for you know 90 percent renewal rates for non project related work over time you know our annual subscriptions being about 20 percent of our model so we continue to increase that those renewable subscriptions and we continued also you know from an upsell capability also to continue to build value into the products to increase that stickiness factor so that you know it's much harder for customers to to to walk away and not want to continue to renew that subscription so from a long-term model this is what we guide the team on like I said we'll always do some percentage of of consulting services and I think from a long-term perspective it's probably be right around 20 percent and then you know what are some of the levers that we look at for for continued growth I mean obviously new new geographies Drupal is used all over the world today we primarily sell in North America our offices are in are in Burlington in London we have an office in Australia as well but continue selling in all geographies around the world new partners we're continually looking to find more strategic partners so that they can lower that help with on the sales and marketing side and lower that cost of our customer acquisition new verticals I mean today we're very successful you know government media publishing and entertainment you know high-tech but there's emerging verticals that we're seeing such as pharma healthcare financial services so there's a amazing amount of growth that we think in new verticals and then and then from a potential M&A as I talked about we're always looking for sort of tuck-in technologies to increase the stickiness factor of our subscriptions and we do that by delivering more and more value to the customer and then with our existing customers you know this whole concept again about the land and expand and why it's so critical is number one you know it's much more expensive to acquire a new customer than it is to to sell back into your install base but we continue to sell into into the install base in a way not only with new products and services to those to the customers within to the to the departments within a particular customer that's using Drupal today but that viral concept I mean we get though some of those departments you know real we happy and they are recommending us throughout the through throughout the enterprise people are adding new sites all the time so you know we have people sign up for a subscription and then they add on to the extent that they're adding new sites and new capabilities and then new products continuing to introduce new products again to improve that increase that lifetime value of the customer and increase that stickiness factor which ultimately plays out in the renewal waits thank you Mary so that's a real-world example of somebody dealing with a real set of numbers to work through to ultimately getting to a profitable business model and also making sure that it's got disruption for continued growth but the next question that everybody asks is how does it become valuable and it's always the one that seems to be at the heart of entrepreneurs mind so this is a new section that came out of feedback from last year's stuff and what I'm going to try to cover for you here is how do you extract the value out of your company how do you get it to be highly valued at the end so show of hands for those who's interested in building a highly valuable company yes okay so I think that's the one thing we're almost all focused on so in the software-as-a-service model which is the the most disruptive model come along in my world in the software world it turns out that there are some tremendous high values being placed on companies today and the question is why and what influences them so even the median here for public companies right now this is as at November then data from goldman sachs thanks to them would show you that you're getting about five x or more than five x revenues so that's a pretty high multiple and and why are we getting that well the first thing that you'll see and especially for companies that are above that multiple is it's through revenue growth so companies that are achieving you know 30 plus percent revenue growth are getting tremendously high multiples and obviously one of the reasons that is is that if you look at where you're going to invest your money on the stock market today it's tough to find anything that's yielding anything like 30% returns and needless to say compared to putting it in the bank that would be a stellar outcome so when people could see these kinds of growth companies that have a potential to get leveraged in their model and ultimately translate to profit they're going to pay up for them and that and that's what you're seeing more and more but if we deconstruct this a bit more and I'm not going to go through all of this tonight but it will be up on the website I'm going to put this entire pack up that I got from Goldman to share with you you'll find out that there are two key pieces to it first of all the unit economics in other words the value is subscribed to existing customers and then the unit growth the value ascribed to new customers and how you acquire them and if we double click on that it turns out the range of multiples is hugely influenced by two things we've talked a little bit about tonight retention and upsell things that we've covered already are things like how do you get the levers and multipliers out of sales and marketing to get more efficiency a tour that's extremely important that drives your growth that's some of the things we've talked about today things we haven't talked about today but we've talked about in other sessions as how big is your total addressable market you know what's that big potential market you're going after if it's not big that's always an issue and then obviously right the bottom line you know what is the profitability of your business but these two things it turns out extremely important to focus on the retention and upsell beyond just customer acquisition and so let's talk a little bit about how important they are well it turns out for demand we're who is at the top of the list list list with 97 percent retention it's one of the key reasons that they are so highly valued because people find their solution incredibly sticky for those of you don't remember what they do they're an e-commerce platform available as a service on the web so when companies like Q go boss or Hamleys in in the UK or you know if you're a fashion guru Barneys of New York build their websites on this and they create the integrations with all their back-end catalogs of merchandise it becomes very sticky and if it's successful for them then I'm going to take it out they'll live with it for many many years and that's what's creating this high retention rate which of course creates huge predictability in your business if you know that your customers got average live with you for several years and it of course makes it very easy for you then to do the upsell of new product services if you're successful in creating innovation so then turns out that if you look at upsell on these models you have an unbelievable leverage for a 2% up at tic and incremental so in value you will get a 14x leverage on the valuation in your company and why is that well it's probably pretty obvious when I state it but if you already have the customer and you can just sell to them effectively so cheaply you're really dropping almost all of that sale right to the bottom line and if you can do that on all ready high-growth company or effectively compounding the value of it which is why people place such huge premium on companies that have multiple products and services they can upsell that whole Russian doll packaging that I talked to you about this is the result of it it's it causes massive leverage in your valuations so I'm not just telling you this because it's a good idea to go to market I'm telling you it because it'll pay off in your valuation and as I always like to say if you know this is where you're headed you're trying to build a valuable company why not design this way right from the get-go so my revised startup model for you to think about is actually not just lifetime value but it's the entire lifecycle value and it's not just cost of acquiring customers cost of acquiring and re-engaging them so this is up there on the website if you want to get more detail about it but the net of it is you want to think about the entire lifecycle in which you engage with a customer and how long that can be that's about your attention and what are the things that you can do to obviously take cost out of during that period re engaging those customers and upselling them new products and the more effectively you can do that the higher value your company is going to be and so the lifecycle value and the cost of acquiring and re engaging and retaining your customers is really the two key metric are really the two key metrics to spend time on and again for those of you who have been here before what we're really talking about here is it's the same as the gain pane it's you know what's the gain you can give customers over a period of time and what's the pain you can take out of selling it to them in a low-cost way so in order to make that work a couple of things you've got to think about and I've highlighted them already during this evening but you've got to spend time thinking about how supportable as your product is it very expensive to support because if it is that's going to add to your is it difficult to service and uni a lot of professional services to handhold in the ongoing lifecycle of the customer and that will take the obviously that the costs up put it all in in one chart for you so you can see it there really two views are the same principle you've got the monetization view for us on lifestyle LCB ncar see but for the customer their view is what's the gain they're getting and what's the pain that you're causing them in terms of actually adopting this so that whole concept for those of you who are here for value proposition fits exactly with the same model and it's all about gaining multiplication of the upside and taking cost leverage out of the cost on the downside so why I say this is so important to startup is obvious as I said if you know where you're headed why not start as you plan to finish now when people ask well what does that practically mean I've struggled to always get this in a form that is just a diagram without using examples but the diagram I've come up with that people seem to like is a simple one it's thinking about this product life cycle I start with a simple cycle C products try them buy them fly them and then they ultimately die if they're not successful so what this typically looks like is a very short cycle if you for example download one of those apps that we say doesn't work it's just gone and that could be minutes long literally so that's obviously not the experience you want and if you did have that what all the development cost is you know immediately just on the wrong side of the balance sheet and you've got no life cycle value coming out so you know it's how companies lose money and go out of business fast but what if you could extend this so what I encourage you to do is spend time thinking about how do you get them up the sea try by ramp really quickly as quickly as you possibly can and then once they're up it how do you reengage them and get them into an extended life cycle to repurchase stuff from you and that's where all of this evenings tools come into play in the software world what these are is things like how do you use the web to get people to find you with things like search and keywords SEO and SEM how do you use things like open source so people could try you for free and actually go and scratch their own itch and extend you and do whatever they need with it how can it make you make it possible for people with slippery products to buy you in the fashion that we were talking about that's low cost easy to install immediately works with everything that you're already using the more you do that the more they'll move up this ramp really quickly and then once they're actually using you why sell them everything upfront why not let the buy on demand that's what software-as-a-service is all about they buy you as they use you that's why these business models become so disruptive because people are paying for value as they get the value and that's what software-as-a-service is done to effectively take out all the cost associated with what used to be that on-premise install and so forth and as I told you in this session this evening there are many ways to do this but think about that Russian doll packaging concept as a way in which you can break up the value so again customers consume what they want when they want and now if you create this as a subscription model you'll also encourage your customers to instead of paying for everything up front be getting value over time and you'll enable your business to have this naturally built-in cycle which brings your customers back around to you every time you deliver a little bit more value that they pay for it that you deliver a little bit more and then you all tomatoes to go and upsell them the beauty of this model is this which is obviously if you're engaging customers effectively and they trust you they're going to want to buy more from you if you can deliver more value and all of that effectively is that marginal cost potentially of zero if you're keeping that relationship tight and that's why as I said in that leverage of a 14x that comes out of upsell designing for this upfront is what will build a highly valuable company so in the end what I'm hoping that you're getting a sense of is that you can actually design for a short low-cost customer acquisition or attention cost and you can get quick payback you can get an extended lifecycle value and the net result of that will be an extremely valuable business and if you don't believe me you just have to look backwards twenty years and you will see the following when I started out in this industry software was installed by IT it was customized at a very expensive level it had very infrequent upgrades people usually found it to be so proprietary that they wouldn't even try doing anything with it you had basic extensions like people like I said peek em with something called bappy which only the Germans could ever create or understand and it was licensed in a way that you paid for everything upfront so you really had tremendously long cell cycles associated this was huge cost of customer acquisition this is the model that used to exist in our industry just twenty years ago none of that exists today we're in a place where people buy stuff on the web for free they demand that it be you know self-service they don't need anybody coming along they don't want people installing for it and obviously they're expecting to be able to pay for it as they use it and when they do they'll take a subscription which usually in today's world is as we said creating a very predictable business model on very highly valuable one two so this is an example of exactly what's happened in the software industry in terms of a fundamentally disruptive and much more valuable business model so even though none of you here are probably going to want to go backwards 20 years go forwards 20 years and think about your next opportunity to come up with a set of highly disruptive and highly valuable business models in this way and I guarantee it will help you build tremendous value so without I'm going to take a pause and we're coming near to the end of our time but I'm lucky enough to have finally been joined by my last guest Chuck so Chuck Cain if you'd like to come up and introduce yourself Chuck is the president of One Laptop Per Child but he's also a board member at Demandware and since we couldn't have Demandware CFO join us this evening due to unforeseen circumstances he and I on a double team to put all this together and just talk you through what we think is innovative about demand web so you ready Chuck I'm ready very good so first of all demand where is a public company so Chuck I'm going to leave you the fun part what the heck does this forward-looking statement made it anyway just go to the next slide you have to do this whenever you're a public company because you get in trouble if you don't lawyers are all everywhere very good I'm not going to say any more than that you take felicity that's it so demand well is the conference of three significant markets it's in the retail market it's also which is a twelve trillion dollar markets also in the e-commerce marketplace and it's in the global sass market for each of which is very big so it fills one of the categories we're talking about for a valuable company it has a huge total available market so that's important let's talk about this for a second Chuck I mean we both know this but why is it that everybody is now challenged to sell and buy stuff or you know in so many different channels online is it is it all coming through the PC still no not at all maybe not at this school anyways maybe other schools but not not this school so how many people here for example of both stuff on their iPhone or you know or tablet or somewhere else other than the web recently good numbers okay so that's the problem that we're actually solving it turns out that there's this multi-channel experience that people want to buy stuff on everything from you know the mobile phone to even point of cell and and when they do that they want one integrated experience and in the future we think there'll be things like for example TV and mobile point-of-sale even that fact it's not even the future of mobile point-of-sale is here that people want to buy through and so you could keep trying to innovate and build all of these different pieces but that would be a very expensive R&D experiences we've talked about and especially for the customer be very expensive for them to as a retailer or brand to continue to deliver great online experience if they had to keep building all of these things so what was our solution Chuck well when you look at what a customer needs if you can provide that to them remotely and you can provide the services as software as a service then you can be very flexible it's very inexpensive on a relative basis to establishing your own infrastructure and it can be much more effective because of its flexibility and dynamic dynamics so what demand where is doing is they're taking that what was that model that Michael talked about earlier where a company has to build everything inside take it outside off of the service allow the customer however to get in and be can manipulate in ways that they can bet be creative with the offering so that it's not something that's take it or leave it this is the one flavor and as a result of that they get a tremendous amount of value for that with their with their with their offering on the web so becomes effectively the best of both worlds it's like outsourcing that entire cost center but you effectively get the ability to customize it and leverage it in the way you want so that is what is at the core of their value proposition I think with the question we asked ourselves early on in the businesses what would be our multipliers and levers in this business so let's just cover these so you can get a sense of this at the core of this is this what can be described as at the the infrastructure that is highly reliable by the way this is more reliable than Amazon just to be clear we've had less outage than Amazon has and right now we handle you know hundreds of millions of customers and billions of dollars worth of Commerce so this was at the core of this but we now consider this table stakes we not even talked about this is like okay well you got to do that the key differentiators are what the customers really want to do which is they don't to spend any time on that they want to do the merchandising and marketing and things that actually make their brands if you're something like Gucci or L'Oreal really stand out and so that's where all the value is being placed so we've actually shifted our core demand where from being initially unbelievably highly reliable you know delivery of commerce sites to now everything being about how do we make the merchandise are more effective so it's an interesting shift and not to say that we can't do the latter we've still got to do that and if that ever went time that would be a big challenge for us what about the multipliers and and levers this is the most important piece and I'll leave you to do it because it's the fun piece we have a shared success model so you want explain that so the shared success model is we set a certain level at the front end of the contract and if we exceed that level where the revenues are achieved higher we share in that revenue base I've been in software my whole career and I think the reason that this works is because we're doing everything for them it's not like I've tried this in other companies where you'd go in and say if you do so well will you know if we get a piece of the action or something but it's the customer delivering that function in this case it's us delivering the function so they're much more readily agreeing to this arrangement and and we've been extremely successful it's also great feedback to know just how well the product is behaving and how successful the customers with with their total sales so what actually argue if just to pause for a second and emphasize this that the single biggest reason that the company is being successful is actually because of that shared success model at least at a business model level now that's if you're a customer and you're typically expected to spend let's say tens of millions of dollars which is what it takes to put up these big enterprise infrastructures and we come along and we say to you know we're going to charge you nothing for it but we'll charge you a percentage of the revenue that flows through our platform so as you're more successful selling online and opening up new channels we will be - it's such an inviting why wouldn't you model and the more successful we are at making them successful them the more we profit from it it's been a huge disruptor in this business it literally changed the game and it's why you know in a real world example I wanted to bring it to the fore here so we talked about multipliers and levers Demandware has got many examples but this one I wanted to bring to the fore turns out ecommerce is a complex landscape people want to do everything from ratings and reviews and recommendations that integrated with their back end order management systems etc so we could have done all of that we're going to be the built into our product but if you remember I said to you why would we do that that's things like co-creation why wouldn't we just instead create an open platform that people could augment and that's what we've done and so all these people in our link program are able to just connect to and build into our platform all the capabilities they bring it's a win-win because the customers end up getting more value out of the platform and because these are pre integrated when they buy the platform they get a broader solution much quicker so it's a faster time to value and so everybody's winning in this and ultimately we don't care because our business model right is not selling software it's actually making the customer successful and the more successful they are with the broader set of offerings the more everybody wins so the multiplies and levers here can be summed up very simply as in the link program we're creating a broad a whole product fulfilling a broader value proposition and the lever is it's reducing the cost of integration for the customers and for us and reduce the time to deploy the hive gives you faster value so again pretty much every business model you look at we'll have these but the results are pretty spectacular for the company the content growth rates here are over 50 percent if you look back these are most recent numbers that we just announced it's a public company the number of customers going live is dramatically increasing and this is probably the most exciting one of all which is the average revenue per user per user here is is nearly double over this period of time all the while we've got a very highly sticky model the subscription rest margins are also staying very stable and at a very high rate I won't go through this but I'll put it up on the web for you if you were to look back so you can get a sense of those same percentages we were talking about earlier you'll also see that all these things that we've been talking about is shifting our DS cost is is the cost that's going down and we're also trying to get sales and marketing more efficient all the time also we're taking down our cost of revenue dramatically and ultimately we've got a very profitable business model here it'll end up being in about a 25% drop to the bottom line anything you'd want to add to that well it's the revenue that drives those percentages on the right as the revenue increases with you keeping steady expenses that's what drives the model the way it does and then here's a piece of it that just is very visual - so each of our customers actually has multiple sites - so when we get one customer they often have multiple brands so you know there's many that I could point out here but you can visually see it in the separation of customers versus sites so remember when I said make your product slippery one of the things that I could have said is make it self-service we get our customers up and running to a point where they can build their own sites deliver their own implementations of the product at their own pace and so you'll get companies like Crocs for example that went live in literally a dozen countries on their own without us even touching the software or or helping them and so the number of websites has gone up you know exponentially and each of those websites is generating more revenue and of course we're taking a percentage share of it that's leverage in your business model so those are the kinds of things that hopefully you're seeing by example that you want to try to reach for so let me summarize here hopefully what you've taken away from tonight is that you can have a very disruptive business model it can be as disruptive as your technology if not more so you can do it in three simple steps number one focus on your core differentiation number to find multipliers from it and number three get levers on it that take the cost out and I gave you some examples of how you could do that with co-creation you had a great example from Driessen in how he's done it with open source but there are many ways you can do that you can do it with strategic partners which we didn't go into tonight but you'll find information up on the website about that we covered it last time and with a couple of ideas like Russian doll packaging and slippery products and in the end if you do all of those things and you think about it right up front you genuinely can design for a business that has a very long life cycle very and very low costs of both acquiring and retaining customers and they'll give you huge valuation as an output so I'll pause there and thank you all for taking the time thanks to our guests

Channel: Harvard Innovation Labs

Views: 46,437

Rating: 4.9054055 out of 5

Keywords: harvard i-lab, harvard innovation lab, michael skok, startup secrets, north bridge venture partners, disruptive business models

Id: ktou5CQX1W0

Length: 114min 54sec (6894 seconds)

Published: Tue Jan 01 2013