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

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Harvard innovation lab Michael J SkokStartup Secrets Business of Software

@innovationlab @mjskok #startupsecrets startupsecrets.com

STARTUP SECRETS

MICHAEL J SKOK

An insider’s guide to unfair competitive advantage

Hi Harvard innovation lab

startupsecrets.com

Business of Software

@mjskok

#startupsecretsTweet questions to:(Q&A at end)

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Why are we here?

• A story…

– Zero to a couple of billion dollars… – but NOT back again!

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If you want to build a billion dollar business…

Start with a MULTI billion dollar problem

Michael Skok

Create click to tweet for the slideshare version

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eCommerce…

Market: eCommerce:

• $4.7 trillion• ~7% penetrated• Growing in mid

teens

Problem:“Under siege”, Disruptions

• Offline -> Online• Physical -> Digital• Mobile -> Omni

Channel

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And if you want to build a business around it…

… you’ve got to make it RSVP

• Repeatable, • Sustainable, • Valuable, • Predictable

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Tasters…

• Value prop - fundamentals• Business model - basics• Product – friction free, “slippery”

products• Metrics – that matter• Cloud – the second front

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Value Proposition

… customer view

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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,RISKGain

Pain

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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”

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Demandware

• Commerce, NOT infrastructure

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Business Model

… your view

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Basic Startup Model• Lifetime Value of Customer (LTV)• Cost of Acquiring Customer (CAC)

CORE

Lever

s

Mult

iplie

rs

LTV

CAC

LTV ~3x > CAC

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A typical product lifecycle

See, Try, Buy, Fly, Die…

See Try Buy Fly Die

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A typical product lifecycle

• How do we avoid:– Pain, time and cost of adoption?– Premature decline?

See Try Buy Fly Die

Long, costly (CAC), slow payback, EXTENDED lifetime value (LTV)

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Adding Retention and Upsell

See Try Buy Fly Die

Re-TrialUp-sellExtendedLifecycle

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Retention

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Upsell

14 x leverage!

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The Model Refined – Enabling Retention & Upsell

• Cost of Acquiring & Retaining Customer (CARC)• Lifecycle Value of Customer (LCV) = incl.

Repurchase, Upsell

CORE

Lever

s

Mult

iplie

rs

Re-TrialUp-sell

LCV

CARC

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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

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Value Prop & Business ModelTOGETHER

customer view & your viewTOGETHER!

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Value Prop & Business Model• They are two views of the same

principle:– Customer view = Gain/Pain– Vendor view = LCV/CARC

CORE

Lever

s

Mult

iplie

rs

Re-TrialUp-sell

LCV

CARC

GAIN

PAIN

Vendor View

Customer View

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Web / Mobile

Self service

On demand

SaaSSubscription

Open source

An extended & valuable lifecycle:“Land & Expand”

See Try Buy Fly Die

Re-TrialUp-sellExtendedLifecycle Re-Trial

Up-sellExtendedLifecycle

short, low cost (CARC), quick payback, extended lifecycle value (LCV)

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Web / Mobile

Self service

On demand

SaaSSubscription

Open source

An extended & valuable lifecycle:“Land & Expand” without friction

See Try Buy Fly Die

Re-TrialUp-sellExtendedLifecycle Re-Trial

Up-sellExtendedLifecycle

short, low cost (CARC), quick payback, extended lifecycle value (LCV)

Frictionless, SLIPPERY

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Demandware

• Software is free, it’s a shared success model

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How do you take away the pain, and reduce friction?

… make it SLIPPERY

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Friction Free, SLIPPERY products

(Reduce the Pain in the Gain/Pain Ratio)

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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

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Simple

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Which is better?

Microsoft Sony

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Neither! = Less is More!

Microsoft, Sony Apple

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Simple ≠ Easy to do

• Simple ≠ Easy !

• Simple often means complex technology that makes your product “magic”

• Simplification Innovation(search algorithms in the cloud)

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Example

Knowledge Management vs. Capture

EvernoteLotus Notes

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Less is More…

features are the enemy of function

functionality can overwhelm users

applicability is all that ultimately matters

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Demandware

• Retail practice group – best practice for merchants

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Why are we here?

• A story…


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Welcome Scott Dussault

former CFO

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Metrics that Matter

• Annualized Revenue per Customer (“ARPU”)

• Renewal Rate/Churn

• Revenue per Employee• Cost of Acquiring and Retaining a

Customer (“CARC”)

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VOCS 0.0x

TRAK

CRM

SPSC

BCOV BVIL

SQITNGO

FLTX

MRIN

CTCT

N

CVT ECOMULTI CNQR

DWRE

LPSN

MKTG JIVERP

SREV

16.0x

14.0x

12.0x

CSOD

TXTR

R² = 0.6577

2.0x

4.0x

6.0x

8.0x

10.0x

20.0x

0.0%

10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

CY14

E EV

/ Sa

les

Source: FactSet, Stifel estimates

18.0x

WKDY

Now MKTO

Estimated CY14 Organic Growth Rate

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Total Revenue

Live Customers

Live Sites

ARPU

Subscription Gross Margins

Dec. 31, 2008

Dec. 31, 2013

$515,000

820

204

$103.7M

82%

100% Cloud

$7.5M

23

50

$250,000*

37%

*Excluding Neckermann GmbH

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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…

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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

Michael Skok

Note my addition

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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

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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

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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

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.

Qu

art

erly

Re

ven

ue

BaseSubscription

Customer Expansion

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

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Frictionless, SLIPPERY+ Land & Expand = ?

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Frictionless, SLIPPERY+ Land & Expand = fastest growing software companies

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“Addiction before Adoption & Expansion”

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ADDICTION(Free, Open Source)

Delight,ADOPTION

UpsellEXPANSION

Year

1

Year

2

Year

3

Year

4$0

$50$100$150$200$250$300$350$400

LCV

“Addiction before Adoption & Expansion”

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Why are we here?

• A story…


THE FUTURE OF

4TH ANNUAL SURVEY 2014

NORTH BRIDGE FUTURE OF CLOUD COMPUTING SURVEY IN PARTNERSHIP WITH GIGAOM RESEARCH

@North_Bridge @mjskok

@futureofcloud#futureofcloud

CLOUD COMPUTING

http://bit.ly/2014FutureCloud

http://bit.ly/2014FutureCloud

THE FIRSTCLOUD FRONT

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@futureofclo

ud

#futureofclo

ud

http://ctt.ec/W3fxe

http://ctt.ec/W3fxe

http://ctt.ec/W3fxe

TRANSITIONING

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LEGACY APPLICATIONS:

ecommerceERPCRM

@futureofclo

ud

#futureofclo

ud

@SALESFORCE @WORKDAY @DEMANDWARE

http://ctt.ec/W3fxe

http://ctt.ec/W3fxe

http://ctt.ec/W3fxe

THE SECOND CLOUD FRONT

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@futureofclo

ud

#futureofclo

ud

http://ctt.ec/W3fxe

http://ctt.ec/W3fxe

http://ctt.ec/W3fxe

GROWTH IN WEB APIs SINCE 2005

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

1 186 299 438 593865

12631546

20262418

3422

5018

7182

9011

10302

11,493

Source Programmable Web

@futureofclo

ud

#futureofclo

ud

http://ctt.ec/W3fxe

http://ctt.ec/W3fxe

http://ctt.ec/W3fxe

REIMAGINING APPLICATIONSIN THE CLOUD

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@futureofclo

ud

#futureofclo

ud

http://ctt.ec/O726x

http://ctt.ec/O726x

http://ctt.ec/O726x

UBER

THE SECOND CLOUD FRONT:

MANY CLOUD SERVICES =>RE-IMAGINED APP

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@futureofclo

ud

#futureofclo

ud

http://ctt.ec/W3fxe

http://ctt.ec/W3fxe

http://ctt.ec/W3fxe

AMAZING BECAUSE

CLOUD

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From:

@futureofclo

ud

#futureofclo

ud

http://ctt.ec/W3fxe

http://ctt.ec/W3fxe

http://ctt.ec/W3fxe

IMPOSSIBLE WITHOUT

CLOUD

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To:

@futureofclo

ud

#futureofclo

ud

http://ctt.ec/W3fxe

http://ctt.ec/W3fxe

http://ctt.ec/W3fxe

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@innovationlab@mjskok #startupsecrets startupsecrets.com

Why are we here?

• A story…


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@innovationlab@mjskok #startupsecrets startupsecrets.com

Tasters…

• Value prop - fundamentals• Business model - basics• Product – friction free, “slippery”

products• Metrics – that matter• Cloud – the second front

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Redefining the (Business of) Software

• Installed by IT

• Customized

• Infrequent upgrades

• Proprietary

• License

1990+ Now +

On demand, SaaS, Cloud

Web / Mobile / Self Service Restful APIs, Extensibility

Open Source, Open Data Subscription, Recurring

Web

Self service

On demandSaaS

Subscription

Open source

Up-sell

Extended

Lifecycle

Up-sell

Extended

Lifecycle

short, low cost (CAC), quick payback, EXTENDED lifetime value (LTV)

Re-Trial

… fundamentally more Repeatable, Sustainable, Valuable & Predictable… RSVP = YES!

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STARTUP SECRETS

MICHAEL J SKOK

Hi Harvard innovation lab

startupsecrets.com

Thank You BoS!Slides at

mjskok.com/bos2014

@mjskok

#startupsecrets

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

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