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Harvard innovation lab Michael J Skok Startup Secrets Business of Software 
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Up-sell Extended 
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AMAZING BECAUSE CLOUD 
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Startup Secrets - an insiders guide to unfair competitive advantage. Michael Skok at Business of Software Conference 2014

Presented at Business of Software 2014, Michael Skok (North Bridge Ventures) looks at what it takes to create a scaleable billion dollar business.

Full of insights and practical tips. Read if you're in the early stages of a startup, considering strategy or wondering how to accelerate.

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Startup Secrets - an insiders guide to unfair competitive advantage. Michael Skok at Business of Software Conference 2014

  1. 1. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 1 @innovationlab @mjskok #startupsecrets startupsecrets.com Business of Software STARTUP An insider’s guide to unfair competitive advantage SECRETS #startupsecrets MICHAEL J SKOK Hi Harvard innovation lab startupsecrets.com @mjskok Tweet questions to: (Q&A at end)
  2. 2. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 2 @innovationlab @mjskok #startupsecrets startupsecrets.com Why are we here? • A story… – Zero to a couple of billion dollars… – but NOT back again!
  3. 3. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 3 @innovationlab @mjskok #startupsecrets startupsecrets.com If you want to build a billion dollar business… Start with a MULTI billion dollar problem
  4. 4. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 4 @innovationlab @mjskok #startupsecrets startupsecrets.com eCommerce… Market: eCommerce: • $4.7 trillion • ~7% penetrated • Growing in mid teens Problem: “Under siege”, Disruptions • Offline -> Online • Physical -> Digital • Mobile -> Omni Channel
  5. 5. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 5 @innovationlab @mjskok #startupsecrets startupsecrets.com And if you want to build a business around it… … you’ve got to make it RSVP • Repeatable, • Sustainable, • Valuable, • Predictable
  6. 6. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 6 @innovationlab @mjskok #startupsecrets startupsecrets.com Tasters… • Value prop - fundamentals • Business model - basics • Product – friction free, “slippery” products • Metrics – that matter • Cloud – the second front
  7. 7. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 7 @innovationlab @mjskok #startupsecrets startupsecrets.com Value Proposition … customer view
  8. 8. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 8 @innovationlab @mjskok #startupsecrets startupsecrets.com Customer view = Gain/Pain • Revenue • Cost savings • Time • People • Competitive advantage • Reputation • Etc.. • Inertia • Switching costs? • Default = do nothing • Alternatives? • Good enough = good enough! • RISK on a startup • Find (See) • Try • Buy • Implement • Deploy • Own – eg.TCO Inertia, Gain RISK Pain
  9. 9. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 9 @innovationlab @mjskok #startupsecrets startupsecrets.com Customer view = Gain/Pain • Revenue • Cost savings • Time • People • Competitive advantage • Reputation • Etc. • Inertia • Switching costs? • Default = do nothing • Alternatives? • Good enough = good enough! • RISK on a startup • Find (See) • Try • Buy • Implement • Deploy • Own – eg TCO Inertia, RISK Gain Pain >10 “An order of magnitude”
  10. 10. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 10 @innovationlab @mjskok #startupsecrets startupsecrets.com Demandware • Commerce, NOT infrastructure
  11. 11. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 11 @innovationlab @mjskok #startupsecrets startupsecrets.com Business Model … your view
  12. 12. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 12 @innovationlab @mjskok #startupsecrets startupsecrets.com Basic Startup Model • Lifetime Value of Customer (LTV) • Cost of Acquiring Customer (CAC) LTV ~3x > CORE Levers Multipliers CAC
  13. 13. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 13 @innovationlab @mjskok #startupsecrets startupsecrets.com A typical product lifecycle See, Try, Buy, Fly, Die… See Try Buy Fly Die
  14. 14. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 14 @innovationlab @mjskok #startupsecrets startupsecrets.com A typical product lifecycle • How do we avoid: – Pain, time and cost of adoption? – Premature decline? Long, costly (CAC), slow payback, EXTENDED lifetime value (LTV) See Try Buy Fly Die
  15. 15. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 15 @innovationlab @mjskok #startupsecrets startupsecrets.com Adding Retention and Upsell Extended Lifecycle Up-sell Re-Trial See Try Buy Fly Die
  16. 16. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 16 @innovationlab @mjskok #startupsecrets startupsecrets.com Retention
  17. 17. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 17 @innovationlab @mjskok #startupsecrets startupsecrets.com Upsell 14 x leverage!
  18. 18. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 18 @innovationlab @mjskok #startupsecrets startupsecrets.com The Model Refined – Enabling Retention & Upsell • Cost of Acquiring & Retaining Customer (CARC) • Lifecycle Value of Customer (LCV) = incl. Repurchase, Upsell CORE Levers Multipliers Up-sell Re-Trial
  19. 19. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 19 @innovationlab @mjskok #startupsecrets startupsecrets.com Retention Costs • Must be included in CARC as you drive down Churn – Examples: • Support • Customer Service • Professional Services • Also include any Re-engagement costs associated with any Upsell as you drive up ARPU – Sales, Marketing etc
  20. 20. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 20 @innovationlab @mjskok #startupsecrets startupsecrets.com Value Prop & Business Model TOGETHER customer view & your view TOGETHER!
  21. 21. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 21 @innovationlab @mjskok #startupsecrets startupsecrets.com Value Prop & Business Model • They are two views of the same principle: – Customer view = Gain/Pain – Vendor view = LCV/CARC CORE Levers Multipliers Up-sell Re-Trial
  22. 22. Harvard innovation lab Michael J Skok Startup Secrets Business of Software Up-sell Extended Extended Lifecycle Re-Trial 22 @innovationlab @mjskok #startupsecrets startupsecrets.com An extended & valuable lifecycle: “Land & Expand” Self service Web / Mobile On demand SaaS Subscription Open source Up-sell Re-Trial Lifecycle short, low cost (CARC), quick payback, extended lifecycle value (LCV) See Try Buy Fly Die
  23. 23. Harvard innovation lab Michael J Skok Startup Secrets Business of Software Up-sell Extended Extended Lifecycle Re-Trial 23 @innovationlab @mjskok #startupsecrets startupsecrets.com An extended & valuable lifecycle: “Land & Expand” without friction Self service Web / Mobile On demand SaaS Subscription Open source Up-sell Re-Trial Lifecycle short, low cost (CARC), quick payback, extended lifecycle value (LCV) See Try Buy Fly Die Frictionless, SLIPPERY
  24. 24. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 24 @innovationlab @mjskok #startupsecrets startupsecrets.com Demandware • Software is free, it’s a shared success model
  25. 25. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 25 @innovationlab @mjskok #startupsecrets startupsecrets.com How do you take away the pain, and reduce friction? … make it SLIPPERY
  26. 26. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 26 @innovationlab @mjskok #startupsecrets startupsecrets.com Friction Free, SLIPPERY products (Reduce the Pain in the Gain/Pain Ratio)
  27. 27. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 27 @innovationlab @mjskok #startupsecrets startupsecrets.com Friction Free, SLIPPERY products • Simple • Low to no initial cost • Installs and integrates • Proves value quickly • Package for progress • Experience is compelling • ROI is obvious • Your customers can’t live without it – it’s stickY
  28. 28. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 28 @innovationlab @mjskok #startupsecrets startupsecrets.com Simple
  29. 29. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 29 @innovationlab @mjskok #startupsecrets startupsecrets.com Which is better? Microsoft Sony
  30. 30. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 30 @innovationlab @mjskok #startupsecrets startupsecrets.com Neither! = Less is More! Microsoft, Sony Apple
  31. 31. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 31 @innovationlab @mjskok #startupsecrets startupsecrets.com Simple ≠ Easy to do • Simple ≠ Easy ! • Simple often means complex technology that makes your product “magic” • Simplification Innovation (search algorithms in the cloud)
  32. 32. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 32 @innovationlab @mjskok #startupsecrets startupsecrets.com Example Knowledge Management vs. Capture Lotus Notes Evernote
  33. 33. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 33 @innovationlab @mjskok #startupsecrets startupsecrets.com Less is More… features are the enemy of function functionality can overwhelm users applicability is all that ultimately matters
  34. 34. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 34 @innovationlab @mjskok #startupsecrets startupsecrets.com Demandware • Retail practice group – best practice for merchants
  35. 35. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 35 @innovationlab @mjskok #startupsecrets startupsecrets.com Why are we here? • A story… – Zero to a couple of billion dollars… – but NOT back again!
  36. 36. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 36 @innovationlab @mjskok #startupsecrets startupsecrets.com Welcome Scott Dussault former CFO
  37. 37. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 37 @innovationlab @mjskok #startupsecrets startupsecrets.com Metrics that Matter • Annualized Revenue per Customer (“ARPU”) • Renewal Rate/Churn • Revenue per Employee • Cost of Acquiring and Retaining a Customer (“CARC”)
  38. 38. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 38 @innovationlab @mjskok #startupsecrets startupsecrets.com TRAK VOCS 0.0x CRM SPSC RP BCOV BV IL SQI TNGO FLTX MRIN CTCT N CVT ECOM ULTI CNQR DWRE LPSN MKTG JIVE SREV 20.0 x 18.0 x 16.0x 14.0x 12.0x CSOD R² = 0.6577 TXTR 10.0 x 8.0 x 6.0 x 4.0 x 2.0 x 0.0 % 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% CY14E EV / Sales Source: FactSet, Stifel estimates WKDY Now MKTO Estimated CY14 Organic Growth Rate
  39. 39. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 39 @innovationlab @mjskok #startupsecrets startupsecrets.com Dec. 31, 2008 Dec. 31, 2013 $103.7M 204 820 $515,000 82% 100% Cloud $7.5M 23 50 $250,000* 37% *Excluding Neckermann GmbH
  40. 40. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 40 @innovationlab @mjskok #startupsecrets startupsecrets.com ARPU • Higher ARPU indicates value delivered – “SLIPPERY” products will drive sequential and year over year ARPU growth • Increasing ARPU driven by upsell – Chance to demonstrate how well your customers re-engage (which is demonstrably better than re-sell) • Investors view ARPU as THE driver of CLV and, most importantly, revenue growth…
  41. 41. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 41 @innovationlab @mjskok #startupsecrets startupsecrets.com Renewal Rate/Churn • Renewal rate/churn is unique for every business – Need is to demonstrate stickiness – Dollar value renewals, churn count, long-term contracts • Rule of thumb is “needs to be better than 90%” – So figure out a metric that magically results in 90% or better…(MJS: but don’t lie to yourself!) • Investors view renewal rate/churn as THE metric for visibility and long-term revenue growth
  42. 42. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 42 @innovationlab @mjskok #startupsecrets startupsecrets.com Revenue per Employee • Cloud software is a technology delivery model that provides significant operating leverage – Most if not all have subscription revenue models that enable predictable revenue streams • Subscription revenue models on their own may not provide significant operating leverage • Legacy software models are inherently profitable, but not predictable • Revenue per employee greater than $250,000 is a benchmark for inherently profitable models
  43. 43. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 43 @innovationlab @mjskok #startupsecrets startupsecrets.com CARC • Cost of acquiring a customer – Unique metric for each business – what is the sales model? How does marketing play in? • Cost of re-engaging a customer – What are the costs for operating a customer? How do customers renew? • High gross margin businesses with less touch on re-engagement will have the best CARC metrics
  44. 44. Harvard innovation lab Michael J Skok Startup Secrets Business of Software Customer Expansion Base Subscription 44 @innovationlab @mjskok #startupsecrets startupsecrets.com Frictionless Land and Expand, Drives ALL of these Metrics Q1 Q2 Q3 Q4 Year 2 Q1 Q2 Q3 Q4 Year 3 Q1 Q2 Q3 Q4 Year 1 Quarterly Revenue $200,000 $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 Cohort analysis includes a family of third-party solution partner customers who share a minimum level of subscription revenue and 56 customers all of which have been operating on Demandware’s platform for a minimum of three years through December 31, 2013. Analysis excludes two customers operating on the platform for three years – one invoiced through a third party and Neckermann GmbH.
  45. 45. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 45 @innovationlab @mjskok #startupsecrets startupsecrets.com Frictionless, SLIPPERY+ Land & Expand = ?
  46. 46. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 46 @innovationlab @mjskok #startupsecrets startupsecrets.com Frictionless, SLIPPERY+ Land & Expand = fastest growing software companies
  47. 47. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 47 @innovationlab @mjskok #startupsecrets startupsecrets.com Frictionless, SLIPPERY+ Land & Expand = fastest growing software companies “Addiction before Adoption & Expansion”
  48. 48. Harvard innovation lab Michael J Skok Startup Secrets Business of Software “Addiction before Adoption & Expansion” 48 @innovationlab @mjskok #startupsecrets startupsecrets.com Frictionless, SLIPPERY+ Land & Expand = fastest growing software companies Delight, ADOPTION ADDICTION (Free, Open Source) Upsell EXPANSION $400 $350 $300 $250 $200 $150 $100 $50 $0 LCV
  49. 49. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 49 @innovationlab @mjskok #startupsecrets startupsecrets.com Why are we here? • A story… – Zero to a couple of billion dollars… – but NOT back again!
  50. 50. @North_Bridge @mjskok @futureofcloud #futureofcloud THE FUTURE OF CLOUD COMPUTING 4TH ANNUAL SURVEY 2014 http://bit.ly/2014FutureCloud NORTH BRIDGE FUTURE OF CLOUD COMPUTING SURVEY IN PARTNERSHIP WITH GIGAOM RESEARCH
  51. 51. THE FIRST CLOUD FRONT 51 @futureofcloud #futureofcloud
  52. 52. TRANSITIONING 52 LEGACY APPLICATIONS: ecommerce CRM ERP @futureofcloud #futureofcloud @SALESFORCE @WORKDAY @DEMANDWARE
  53. 53. THE SECOND CLOUD FRONT 53 @futureofcloud #futureofcloud
  54. 54. GROWTH IN WEB APIs SINCE 2005 1 186 299 438 593 865 1263 1546 2026 2418 3422 5018 7182 9011 11,493 10302 Jun-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 Jun-14 Source Programmable Web @futureofcloud #futureofcloud
  55. 55. REIMAGINING APPLICATIONS IN THE CLOUD 55 @futureofcloud #futureofcloud
  56. 56. THE SECOND CLOUD FRONT: MANY CLOUD SERVICES => RE-IMAGINED APP UBER 56 @futureofcloud #futureofcloud
  57. 57. From: AMAZING BECAUSE CLOUD 57 @futureofcloud #futureofcloud
  58. 58. To: IMPOSSIBLE WITHOUT CLOUD 58 @futureofcloud #futureofcloud
  59. 59. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 59 @innovationlab @mjskok #startupsecrets startupsecrets.com Why are we here? • A story… – Zero to a couple of billion dollars… – but NOT back again!
  60. 60. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 60 @innovationlab @mjskok #startupsecrets startupsecrets.com Tasters… • Value prop - fundamentals • Business model - basics • Product – friction free, “slippery” products • Metrics – that matter • Cloud – the second front
  61. 61. Harvard innovation lab Michael J Skok Startup Secrets Business of Software … fundamentally more Repeatable, Sustainable, Valuable & Predictable… 61 @innovationlab @mjskok #startupsecrets startupsecrets.com Redefining the (Business of) Software 1990+ Now + • Installed by IT • Customized • Infrequent upgrades • Proprietary • License  Web / Mobile / Self  SReersvtficuel APIs, Extensibility  On demand, SaaS, Cloud  Open Source, Open Data  Subscription, Recurring Web On demand Self service SaaS Subscription Open source Up-sell Extende d Lifecycl e Up-sell Extende d Lifecycl e Re-Trial RSVP = YES! short, low cost (CAC), quick payback, EXTENDED lifetime value (LTV)
  62. 62. Harvard innovation lab Michael J Skok Startup Secrets Business of Software 62 @innovationlab @mjskok #startupsecrets startupsecrets.com Thank You BoS! Slides at mjskok.com/bos2014 STARTUP SECRETS #startupsecrets MICHAEL J SKOK Hi Harvard innovation lab startupsecrets.com @mjskok

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Presented at Business of Software 2014, Michael Skok (North Bridge Ventures) looks at what it takes to create a scaleable billion dollar business. Full of insights and practical tips. Read if you're in the early stages of a startup, considering strategy or wondering how to accelerate.

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