Developed for the Harvard Innovation Lab workshop series on Startup Secrets.
This is part 3 of the 5 part series by Michael J Skok on how to get competitive advantage as a startup.
Michael's slides are the agenda for the workshop, and are NOT self contained. For fuller coverage of the slides, visit Michael's website http://www.mjskok.com/
Strategize a Smooth Tenant-to-tenant Migration and Copilot Takeoff
Game Changing Business Models - V2! - with case examples - Competitive Advantage for Startups
1. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
Hi
Hi Harvard innovation lab
#innovationlab @mjskok #startupsecrets www.mjskok.com
START UP
SECRETS
An insider’s guide to unfair competitive advantage
Disruptive Business Models to build Value
MICHAEL J SKOK
North Bridge Venture Partners
twitter: @mjskok mjskok.com
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2. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Startup Secrets - Series
• Sep 11: Perfect Pitch
• Oct 11: Value Proposition
• Oct 16: Company Formation
• Nov 13: Business Model
• Dec 4: Go-To-Market Strategy
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Introductions & Case Examples
• Established
– Google
• Startup
– Acquia
– Demandware
• Not for profit
– One Laptop Per Child
– Diagnostics For All (on the web)
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Agenda
1. Finding a Disruptive Business Model
2. Focusing on CORE differentiation
3. Multiply and Leverage it with innovation
4. Designing for high value
Other side of the coin – GTM – next session
- Eg Segmentation, Channels etc
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Business Model:
How do you make money?
What is your model for
• Creating
• Delivering
• Harnessing
VALUE?
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6. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Tonight
Let’s get creative and think specifically about
startups!
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7. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Business Model as a Disruptor
• Why?
– Time to market
– Market adoption
– Sustainability
• Connecting the dots for you as a founder …
– Spend
– Cash efficiency
– Your ownership
– Valuation
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8. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Perfect Startup Storm
Disruptive
Business Model
Disruptive New Market
Technolog & GTM
y
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9. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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How can your Business Model…
• Change the game?
• Rewrite the rules? New Game
• Cause an innovator’s dilemma New playing field
New boundaries
• Be as disruptive New rules
as your technology?
YOU choose players
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10. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Ex 1: Symantec - 20 years ago (!)
Symantec Antivirus for Mac (SAM)
Best seller – Licensed Product
Norton Antivirus for PC (NAV)
How to change the game
Best seller – Subscription Service
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Results?
• Dramatic!
• Game changing
– Flipped the model on it’s head
• Competitors caught off guard
– Predictable profitable business model
• Led to solution leadership vs. battle: “Data
Security”
– Customer need met more effectively
– More value extracted
– 1.5x product / seat => 2.6x 11
12. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Ex 2: European Software Publishing
• Off balance sheet Publisher of US products
– Investment in Management, Sales, Marketing, Support,
Translation & Localization
• Acquired back by US corp when profitable
– Pooling of interest
– Non dilutive
– Growing earnings
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Results?
• Win/win/win
– Customers = better local product, support,
services
– Publishers = accelerated, off balance sheet setup
of profitable business
– Shareholders = 97X return on original investment
• Non technology disruptive business model
– Economies of scale
– Pooling of interests (tax)
– Time shifting expense => Accretive outcome
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14. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Sample Models
• Shared ownership (Zipcar)
• Flash sales (Vente Privee)
• Crowd sourcing (uTest)
• Lead Gen (Mint.com)
• Virtual goods/currencies (Tapjoy)
• Combinations
– Acquia -OSS, SaaS
– AirBnB - Commission on P2P rentals
– Demandware - SaaS, success based rev share
– Groupon - broker, revshare
– Spotify -adbased, freemium
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Business Model- Sample Questions
• Process or Product?
• Software or Services?
• Open or Proprietary?
• Content or Data?
• Freemium or Premium?
• Subscription or License?
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16. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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What is your CORE value?
First key question
Your
Capabilities
Of
CORE Focus on it!
Really
Exceptional
Value
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17. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Cut to the CORE!
Where is your CORE value?
• Software/other technology
• Data
• Content
• Service, support COR
• User network E
Disruptively monetize it!
– To your competitive advantage
– Where are others most vulnerable?
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18. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Google – Ex 1 Apps
• Google Apps vs. Microsoft office
– What is the C.O.R.E for each ?
• Software, Data, Advertising ?
• Don’t compete head-on
– MS Office = enterprise market
– Google Apps = consumer market
– Free vs $500 license
– Simple vs Complicated
– 80% solution vs Professional Tool
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19. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Google - Competing with Market Leaders
How can you compete with a market leader
who has 80% to 90% market share?
1. Don’t compete head-on
2. Innovators Dilemma – go for low end
3. Disruptive technology, business model, or
market approach
4. Examples: Gmail, Google Apps, Chrome
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20. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Google – Ex 2 - Mobile
• Apple vs. Google
– What is the C.O.R.E for each ?
• Hardware, Software, Content ?
• Others in Ecosystem
– Samsung, HTC
• Alternative approaches
– Amazon
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21. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Android vs iPhone
Who is winning?
Why?
Is technology the difference?
Apple, Google, & Microsoft strategies
– Always play to your strength
– Apple Mac, Google Search, Microsoft Windows
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22. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Android vs iPhone
Disrupt the market leader
– Apple disrupted carriers and manufacturers
• Verizon, Sprint, Nokia, Motorola, RIM, Symbian
– Android allowed them to fight back
Disruptive business model
– Android is free
– Advertising business model
– Search, Maps, Local, Wallet, YouTube
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23. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Business Models Matter !
Don Dodge
Google
dondodge@google.com
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24. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Creating Value
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25. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Startup Secret: Co-creating Value
• Be Open and Extensible (eg Software APIs)
– Enabling external multipliers to your value
– Building on yourself
– Eating your own cooking
– Being your own customer
• Open Source
– Leverage through community
– Make the customer the product manager
• Scratching their own itch
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26. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Startup Secret: Co-creating Value
• Be Open and Extensible (eg Software APIs)
– Enabling external multipliers to your value
– Building on yourself
– Eating your own cooking
– Being your own customer
• Open Source
– Leverage through community
– Make the customer the product manager
• Scratching their own itch
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32. Drupal and Open Source is a
catalyst for
- “Creative destruction”
Changes how we develop
“Creative Destruction”
software
- Changes how we build
websites
- Changes a multi-billion
dollar industry
- Open Source enables
business model
innovation Joseph Schumpeter
Joseph Schumpenter,
- Bonus: allows to do well, Economist, 1883-1950
and do good
33. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Delivering & Capturing Value
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34. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Startup Secret: Multipliers & Levers
Multiply and Leverage your CORE
Multipliers: Levers:
• Increase revenue • Reduce time
• Increase reach • Reduce costs
• Increase coverage Multipliers • Reduce resources
Levers
CORE
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35. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Drupal, Open Source
Multiplies AND Leverages CORE
•Multipliers: •Levers:
• Added functionality • Community
• Community reach development
• Community marketing
Multipliers
Levers
CORE
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37. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Get Multipliers & Levers working together!
• Strategies that enable Multipliers and Levers
to work together around your CORE are the
real winners
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38. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Acquia
Mary Jefts, CFO
Fastest growing software company in the US
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39. Acquia At A Glance
• Provider of cloud-based
solutions/support for
enterprises using the open
source product, Drupal
• 2000+ customers
• 250+ employees
• 150% 4 year CAGR
• Global operations
• Highly predictable and
repeatable model
• Land and expand strategy
PROPRIETARY AND CONFIDENTIAL - do not redistribute
40. Acquia Business Model
• Drupal is FREE
• It is also Open Source
• So how do you make money from FREE and Open IP?
1. Create valuable products and services around the CORE of
Drupal
2. Use FOSS as multiplier and a lever in R&D, sales and
marketing
41. Acquia products around Drupal CORE
Professional Drupal
Services Training
Drupal Enterprise Site Factory
Gardens
Acquia Managed Deployments
Cloud
Acquia Drupal Management Suite
Network
CONTENT COMMUNITY COMMERCE
42. Free and Open Source Software (FOSS)
• As a multiplier AND a lever
- in R&D, sales and marketing
Example Multipliers: Example Levers:
• Upsell value added • Target installed base
products & services • Expand usage through
• Cloud & SaaS partners
Multipliers
Levers
CORE
43. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Strategic Partnership
EG: “Whole Product” Strategic Partnership
Multipliers: Levers:
• Increase revenue • Reduce time to market
through fuller Services • Reduced dev costs
solution Multipliers Application
s
Lever
• Increase reach CORE
Database
through their sales
Storage
force, channel etc.
• Credibility
Integrate your CORE
into their technology stack
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44. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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What makes a partner strategic?
• Symbiotic multipliers & levers (win-win)
+ Product
+ Distribution
+ other
• 1+1 > 2 in joint market leverage
– Ousting competitors, driving share
• Can create potential exit
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45. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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An ideal ideal (win-win)
Strategic Partner Example
What You Get What They Get
• Complete your • Competitive advantage
“WHOLE Product” • Interested ARPU
- Increase Value (LTV)
• Time to Market
• Channels to reach YOUR
target customer
- Reduce Selling Cost
(CAC)
• Credibility
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46. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Devil in the Deal tails
For example
• Co-sell – who is incented?
• Resell – who is supporting?
• OEM – what is your upsell?
Traps to Avoid!
• Co-dependent risk
• Dependence on
other startups
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47. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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One more thing…
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48. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Designing for success…
• Product feeds the business model…
– User experience
– Supportability
– Maintenance, updates (= lifecycle)
– Upgrades
– Upsells
• Leads to 2 startup secrets
– Russian Dolls & SLIPPERY products
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49. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Friction Free, SLIPPERY products
• Simple
• Low to no initial cost
Gain
• Installs easily
Pain
• Proves value quickly
• Plays well with others
Think of how this improves
• Easy to use the Gain/Pain Ratio in our
Value Proposition
• ROI is obvious Workshop
• Y customers can’t live without it
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50. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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What makes Drupal
SLIPPERY?
• Simple: Update your site from the browser
• Low to no initial cost: free
• Installs easy: Windows/Mac installers + SaaS
• Proves value quickly: Distributions + Start using
immediately
• Plays well with others: Lots of integrations with other
platforms
• Easy to use: Web-based
• ROI is obvious: Better, faster, cheaper
• Your customers can’t live without: flexibility and 50
51. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Startup Secret: Build a Russian Doll!
• Multi purpose strategy
– Packaging
– Pricing
– Distribution
– And more …
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52. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Incent
Free
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53. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Freemium …
Limited
Free
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54. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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OEM Solution…
Personal
Limited
Free
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55. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Premium …
Workgroup
Personal
Limited
Free
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56. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Sales enabler …
Corporate
Workgroup
Personal
Limited
Free
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57. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Adoption …
Enterprise
Corporate
Workgroup
Personal
Limited
Free
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58. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Startup Secret: Russian Doll Packaging
“Addiction before Adoption”
Gives you, your partners &
your customers:
• Digestible starting point
• Upsell Options
• Channel Flexibility
… and more
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59. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Startup Secret: Russian Doll Packaging
“Addiction before Adoption”
Acquia example = increasing LTV
“Land & Expand”
Upsell
LTV
On- / Cross
$400
board Sell $300
$200
Acquire $100
$0
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Putting it all together
Create, Deliver & Harness Value
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61. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Basic Startup Model
• Lifetime Value of Customer (LTV)
• Cost of Acquiring Customer (CAC)
LTV ~3x >
CAC
Multipliers
Levers
CORE
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62. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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% of Revenue spent…
• Example:
– Phases of a software company
Development Target
Gross Margin 80%
R&D 100%+ 15%
Sales & Marketing 10%
G&A 45%
Profit (Loss) -100% 20%
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64. Target Business Model: Acquia
62%
62% 61%
51% 53% L/T Model
48% 53% 43% based on
48%
29%
29% 44%
21%
21%
19%
19%
25% profitable
43% 50% 15% subscription
43% 65% 45% 45% 44%
44% 35% based
19% 19%
14% 14%
11% 11% 11%
11% 10% software
company
65. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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What makes for a GREAT
business model?
• Repeatable
• Scalable – with leverage
• Profitable / Sustainable
• Predictable
• Valuable
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66. Highly Predictable and Repeatable Financial
Model
• Today:
- 70% of all bookings are renewable subscriptions
- 30% are consulting services (key differentiator)
- 85%+ annual renewal rate for non-project work
• Long-term Model:
- 80% renewable subscriptions
- 20% consulting services
- 90% annual renewal rate for non-project work
67. Overall Result: Disruptive Business Model
for Acquia’s Continued Growth
New Existing
Customers Customers
New Geographies Cross-sell
Up-sell
New Partners New Sites
New Verticals New Products
Potential M&A
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What makes you valuable?
Many factors, but some play more of a
role than others in your business
model…
(with thanks to Goldman Sachs)
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Valuations – SaaS
2013 Revenue Multiples
Median
5.2x
2012-2013 Revenue Growth
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70. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Valuations – SaaS
2013 Revenue Multiples
Median
5.2x
2012-2013 Revenue Growth
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Valuations – SaaS
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Valuations – SaaS
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73. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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An important refinement
• Retention
• Upsell
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Retention
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75. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Upsell
14 x
leverage!
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76. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Basic Startup Model
• Lifetime Value of Customer (LTV)
• Cost of Acquiring Customer (CAC)
LTV ~3x >
CAC
Multipliers
Levers
CORE
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77. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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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
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Re-engagement Costs
• Must be included in CARC
• Example:
– Support
– Customer Service
– Professional Services
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Connecting it to Gain/Pain
• They are two views of the same principle:
– Customer view = Gain/Pain
– Vendor view = LCV/CARC
Multipliers
Levers
Up-sell CORE Re-Trial
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Build for a long lifetime…
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81. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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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
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82. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Adding Retention and Upsell
Extended
Up-sell
Lifecycle Re-Trial
Long, costly (CAC), slow payback, EXTENDED lifetime value (LTV)
See Try Buy Fly Die
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83. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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A disruptive & valuable lifecyle
Subscription
SaaS
On demand
Self service Up-sell Extended
Extended
Up-sell Re-Trial
Lifecycle Lifecycle Re-Trial
Open source
Web
short, low cost (CARC), quick payback, extended lifecycle value (LCV)
See Try Buy Fly Die
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84. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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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)
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85. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
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Case example – Demandware
(NYSE:DWRE)
See the full case example here
http://www.mjskok.com/resources/business-model
Demandware is presented as 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’s
customer and making partners out them with a shared
success model.
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86. 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 | 88
87. Commerce Innovation. Not Infrastructure.
See the full case example here
http://www.mjskok.com/resources/business-model
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Summary
• Disruptive Business Model – as significant as
Technology
• Focus on CORE differentiation
• Multiply and Leverage it with innovation like:-
– Co-Creation
– Strategic Partners
– Russian Doll Packaging
– And Friction Free, SLIPPERY products
• Design for high value using LCV & CARC
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89. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
Hi www.mjskok.com
#innovationlab @mjskok #startupsecrets
Startup Secrets - Series
• Sep 11: Perfect Pitch
• Oct 11: Value Proposition
• Oct 16: Company Formation
• Nov 13: Business Model
• Dec 4: Go-To-Market Strategy
91
90. Harvard innovation lab : Michael J Skok : Startup Secrets : Business Model
Hi
Hi Harvard innovation lab
#innovationlab @mjskok #startupsecrets www.mjskok.com
START UP
SECRETS
An insider’s guide to unfair competitive advantage
Business Model
MICHAEL J SKOK
North Bridge Venture Partners
twitter: @mjskok mjskok.com
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Editor's Notes
Building communities is not simple Scratch your own itch
Market share
Market share
Market share
Strategies that enable Multipliers and Levers to work together around your CORE are the real winners
Create valuable products and services around the CORE of Drupal
But it has to be win/winOEM, relies on upsell
Could you find a larger strategic partner who needed you to complete their “whole product” AND that had channels to reach your target customers AND that multiplied your go to market value and effectiveness?