Building a Highly Valued Business (Model)

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One of the questions I get asked often by entrepreneurs is how they can build a really valuable business, and what metrics they should consider. It's a big question and there are so many qualitative and quantitative as well as subjective parts to this.

At a high level, the answer is that when you reach scale, the business will be valued by the size of your potential market opportunity, your demonstrated leadership and growth in the market, based on some differentiated and defensible advantage* with a business model that shows real financial leverage. And of course there will be many other elements such as the quality of your team and the trust in your brand.

Looking at the business model, I have been lucky enough to work with some terrific investment banks over the years while building, taking public and selling companies and asked Goldman Sachs to share the work done recently around SaaS and Cloud companies where I focus my investing.

Here are some introductory slides from our Business Model session that highlight the some of the key elements such as Retention and Upsell that can not only be correlated to, but drive high leverage in your valuation.

This is part of the workshop on Game Changing Business Models - itself part of the series on Startup Secrets, by Michael J Skok on how to get competitive advantage as a startup.

Michael's slides are the framework for the workshop, and are NOT self contained. For fuller coverage of the slides, visit Michael's website http://mjskok.com/

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Building a Highly Valued Business (Model)

  1. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To Market HiHi Harvard innovation lab #innovationlab @mjskok #startupsecrets www.mjskok.com START UP Building a Highly Valued SECRETS An insider’s guide to unfair competitive advantage Business (Model) Disruptive Business Models to build Value MICHAEL J SKOK & Featuring GOLDMAN SACHS North Bridge Venture Partners twitter: @mjskok mjskok.com 1
  2. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets For context and more information: See the overall Business Model session and other Case examples at : http://www.mjskok.com/resources/business-model Subscription SaaS On demand Self service Extended Up-sell Extended Re-Trial Up-sell …a fundamentally disruptive & more valuable Open Lifecycle Lifecycle source Web business model short, low cost (CAC), quick payback, EXTENDED lifetime value (LTV) 2
  3. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets What makes for a GREAT business model? • Repeatable factors • Scalable – with leverage Many • Profitable / sustainable • Predictable • Valuable…. 3
  4. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets What makes you valuable? Many factors, but some play more of a role than others in your business model… (with thanks to Goldman Sachs) 4
  5. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To Market Hi www.mjskok.com #innovationlab @mjskok #startupsecretsValuations – SaaS2013 Revenue Multiples Median 5.2x 2012-2013 Revenue Growth 5
  6. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To Market Hi www.mjskok.com #innovationlab @mjskok #startupsecretsValuations – SaaS2013 Revenue Multiples Median 5.2x 2012-2013 Revenue Growth 6
  7. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets Valuations – SaaS 7
  8. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets Valuations – SaaS 8
  9. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets An important refinement • Retention For HIGH • Upsell Leverage 9
  10. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets Retention 10x leverage 10
  11. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets Upsell 14x Leverage ! 11
  12. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets What makes you valuable? For the rest of the analysis and slides see http://www.mjskok.com/resource/buildi ng-highly-valued-business-model (with thanks to Goldman Sachs) 12
  13. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets Basic Startup Model • Lifetime Value of Customer (LTV) • Cost of Acquiring Customer (CAC) LTV ~3x > CAC Multipliers Levers CORE 13
  14. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets The Model Refined – Enabling Retention & Upsell • Lifecycle Value of Customer (LCV) • Cost of Acquiring & Re-Engaging Customer (CARC) Multipliers Levers Up-sell CORE Re-Trial 14
  15. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets Re-engagement Costs • Must be included in CARC • Example: – Support – Customer Service – Professional Services 15
  16. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets Connecting it to Gain/Pain See • They are two views of the same principle: http://www.mjs – Customer view = Gain/Pain kok.com/resou – Vendor view = LCV/CARC rce/building- compelling- value- proposition slide 29 onward for more details Multipliers Levers Up-sell CORE Re-Trial 16
  17. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets Build for a long lifetime… 17
  18. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets A typical product lifecycle But it doesn’t have to be this way ! Long, costly (CAC), slow payback, EXTENDED lifetime value (LTV)See Try Buy Fly Die 18
  19. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets Adding Retention and Upsell Extended Up-sell Lifecycle Re-Trial Long, costly (CAC), slow payback, EXTENDED lifetime value (LTV)See Try Buy Fly Die 19
  20. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To Market Hi www.mjskok.com #innovationlab @mjskok #startupsecrets A disruptive & valuable lifecyle Subscription SaaS On demand Self service Up-sell Extended Extended Up-sell Re-Trial Lifecycle Lifecycle Re-TrialOpen sourceWeb short, low cost (CARC), quick payback, extended lifecycle value (LCV) See Try Buy Fly Die 20
  21. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets Applied to Software 1990+ 2010+ • Installed by IT  Web based • Customized  Self service • Infrequent upgrades  On demand, SaaS • Proprietary  Open Source • License  Subscription Subscription SaaS On demand Self service Extende Extende d Up-sell d Re-Trial Up-sell …a fundamentally disruptive & more valuable Open source Lifecycl e Lifecycl e Web business model short, low cost (CAC), quick payback, EXTENDED lifetime value (LTV) 21
  22. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets Recent example – Demandware (NYSE:DWRE) See the full case example here http://www.mjskok.com/resources/business-model Demandware is an example of a company that leveraged it’s SaaS technology disruption with a fundamentally different business model to it’s competitors, creating innovation on demand for it’scustomer and making partners out them with a shared success model. 22
  23. Demandware business model – simplified summary Create: Development plus LINK partnerships – Traditional R&D with leverage from LINK partners for whole product Deliver: SaaS – On Demand Commerce Innovation NOT Infrastructure Harness: % of GMV payment – Shared success with customers Copyright 2012 Demandware, Inc. – CONFIDENTIAL | 23
  24. Commerce Innovation. Not Infrastructure.See the full case example herehttp://www.mjskok.com/resources/business-model
  25. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To MarketHi www.mjskok.com #innovationlab @mjskok #startupsecrets For context and more information: See the overall Business Model session and other Case examples at : http://www.mjskok.com/resources/business-model Subscription SaaS On demand Self service Extended Up-sell Extended Re-Trial Up-sell …a fundamentally disruptive & more valuable Open Lifecycle Lifecycle source Web business model short, low cost (CAC), quick payback, EXTENDED lifetime value (LTV) 25
  26. Harvard innovation lab : Michael J Skok : Startup Secrets : Go To Market HiHi Harvard innovation lab #innovationlab @mjskok #startupsecrets www.mjskok.com START UP Building a Highly Valued SECRETS An insider’s guide to unfair competitive advantage Business (Model) Disruptive Business Models to build Value MICHAEL J SKOK & Featuring GOLDMAN SACHS North Bridge Venture Partners twitter: @mjskok mjskok.com 26

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