Startup Secrets - Game Changing Business Models

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Proprietary and Confidential Proprietary and Confidential START UP SECRETS An insider’s guide to unfair competitive advantage Disruptive Business Models to build Value @underscorevc #startupsecr ets startupsecrets.com

Transcript of Startup Secrets - Game Changing Business Models

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START UP SECRETS

An insider’s guide to unfair competitive advantage

Disruptive Business Models to build Value

@underscorevc #startupsecrets  startupsecrets.com

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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)

2Disruptive Business Models to Build Value @underscorevc startupsecrets.com

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Agenda1. Finding a Disruptive Business Model2. Focusing on CORE differentiation3. Multiply and Leverage it with innovation4. Designing for high value

Other side of the coin – GTM – next session- Eg Segmentation, Channels etc

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What is your model for

• Creating• Delivering • Harnessing

VALUE?

4

4Business Model: How do you make money?

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TonightLet’s get creative and think specifically about startups!

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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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New Market &

GTM

Disruptive Business Model

Disruptive Technology

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Perfect Startup Storm

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How can your Business Model… Change the game? Rewrite the rules? Cause an innovator’s dilemma

Be as disruptive as your technology?

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New Game

New playing field

New boundaries

New rules

YOU choose players

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Symantec Antivirus for Mac (SAM)Best seller – Licensed Product

Norton Antivirus for PC (NAV)

How to change the gameBest seller – Subscription Service

Ex 1: Symantec – many years ago (!)

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Dramatic! Game changing

• Flipped the model on it’s headCompetitors caught off guard

• Predictable profitable business model Led to solution leadership vs. battle: “Data Security”

• Customer need met more effectively• More value extracted• 1.5 product / seat => 2.6x

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Results?

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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

Symantec example Win/Win

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Ex 2: European Software Publishing

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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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Results?

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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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Sample Models

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Process or Product? Software or Services? Open or Proprietary? Content or Data? Freemium or Premium? Subscription or License?

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Business Model – Sample Questions

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YourCapabilitiesOfReallyExceptionalValue

Focus on it!CORE

First key questionWhat is your CORE value?

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Where is your CORE value? Software/other technology Data Content Service, support User network

Disruptively monetize it!

• To your competitive advantage• Where are others most vulnerable?

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CORE

Cut to the CORE!

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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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- Ex 1 Apps

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How can you compete with a market leader who has 80% to 90% market share?

1. Don’t compete head-on2. Innovators Dilemma – go for low end3. Disruptive technology, business model, or market approach4. Examples: Gmail, Google Apps, Chrome

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– Competing with Market Leaders

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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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– Ex 2 - Mobile

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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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Android vs iPhone

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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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Android vs iPhone

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Business Models Matter !

Don Dodge

[email protected]

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Creating Value

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Startup Secret: Co-Creating Value

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Be Open and Extensible (eg Software APIs)• Enabling external multipliers to your value• Building on yourself• Eating your own cooking• Being your own customer

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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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Startup Secret: Co-Creating Value

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Dries BuytaertFounder and project lead Drupal

Co-founder and CTO Acquia

http://buytaert.net :: @Dries

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Meet Dries 12 years ago when he started work on Drupal ...

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Compiler books

Collection of stamps

Chess board

Assembly books

All furniture is from IKEA

Student dorm in Antwerp where I started Drupal

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1 out of 50 websites in the world10,000+ modules300,000+ downloads/month1.5M unique visitors/monthFREE

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71 of the world's top 100 universities use Drupal

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1. Freedom to run the program

2. Freedom to study the program

3. Freedom to modify the program4. Freedom to re-distribute the

program31

Open Source is a software license

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Drupal wins because it is less expensive

… yet technically superior! Disruptive Business Models to Build Value @underscorevc startupsecrets.com 32

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Open Source

Collaboration

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3,800 people contributed to Drupal 8

Open Source is not just a software license,

it is also a development model

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Open Source

Collaboration

Community

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Open Source

Collaboration

Community

Innovation

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Technically superior

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Joseph Schumpenter,Economist, 1883-1950

Drupal and Open Source is a catalyst for

“Creative destruction”- Changes how we develop software

- Changes how we build websites

- Changes a multi-billion dollar industry

- Open Source enables business model innovation

- Bonus: allows to do well, and do good

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Delivering & Capturing Value

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Multiply and Leverage your CORE

Multipliers:• Increase revenue• Increase reach• Increase coverage

Levers:• Reduce time• Reduce costs• Reduce resources

CORELevers

Mul

tiplie

rs

LCV

CARC

Startup Secret: Multipliers & Levers

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Multipliers:• Added functionality• Community reach

Levers:• Community development• Community marketing

CORELevers

Mul

tiplie

rs

LCV

CARC

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Multiply AND Leverages COREDrupal, Open Source

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Multiplier Examples:• Sales & Marketing

– Tiered Pricing – Freemium– Channel partners

• Product– Slippery products *– “Russian Doll”

Packaging *– Technology stacks

Lever Examples:• Sales & Marketing

– Web– Inside– Inbound– Viral

• Product, Support– Offshoring– Outsourcing– Crowdsourcing– Co-creation *– Technology stacks* Covered herein

Examples in SoftwareStartup Secret: Multipliers & Levers

CORELevers

Mul

tiplie

rs

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Strategies that enable Multipliers and Levers to work together around your CORE are the real winners

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Get Multipliers & Levers working together!

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Acquia

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• 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

46PROPRIETARY AND CONFIDENTIAL - do not redistribute

150% 4

year

CAGR

Acquia at A Glance

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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

Drupal2. Use FOSS as multiplier and a lever in R&D, sales and

marketing

47PROPRIETARY AND CONFIDENTIAL - do not redistribute

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Acquia products around Drupal CORE

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As a multiplier AND a lever (in R&D, sales, marketing…)

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Example Multipliers:• Upsell value added

products & services• Cloud & SaaS

Example Levers:• Target installed base• Expand usage through

partners

CORELevers

Mul

tiplie

rs

LCV

CARC

Free and Open Source Software (FOSS)

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One more thing…

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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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Designing for success…

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• Simple• Low to no initial cost• Installs easily• Proves value quickly• Plays well with others• Easy to use• ROI is obvious• Y customers can’t live without it

Think of how this improves the Gain/Pain

Ratio in our Value Proposition Workshop

Gain

Pain

Friction Free, SLIPPERY products

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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

extensibility57

What makes Drupal SLIPPERY?

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Multi purpose strategy• Packaging• Pricing• Distribution• And more …

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Startup Secret: Build a Russian Doll!

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Free

Incent

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LimitedFree

Freemium …

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PersonalLimited

Free

OEM Solution…

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WorkgroupPersonalLimited

Free

Premium …

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CorporateWorkgroup

PersonalLimited

Free

Sales enabler …

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EnterpriseCorporate

WorkgroupPersonalLimited

Free

Adoption …

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“Addiction before Adoption”

Gives you, your partners & your customers: Digestible starting point Upsell Options Channel Flexibility … and more

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Startup Secret: Build a Russian Doll!

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Acquire

On-board

Upsell / Cross Sell

“Addiction before Adoption”

Acquia example = increasing LTV“Land & Expand”

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2009 2010 2011 2012(e)$0

$100

$200

$300

$400

LTV

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Startup Secret: Build a Russian Doll!

See example of 4A’s here

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Create, Deliver & Harness Value

Putting it all together

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Lifetime Value of Customer (LTV) Cost of Acquiring Customer (CAC)

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CORE

Levers

Mul

tiplie

rs

LTV

CAC

LTV ~3x > CAC

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Basic Startup Model

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Repeatable Scalable – with leverage Profitable / Sustainable Predictable Valuable

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What makes for a GREAT business model?

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Development TargetGross Margin 80%R&D 100%+ 15%Sales & Marketing 10%G&A 45%Profit (Loss) -100% 20%

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• Example:– Phases of a software company

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% of Revenue spent…

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Expenses as % of Revenue

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• 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

Highly Predictable and Repeatable Financial Model

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New Geographies

New Partners

New Verticals

Potential M&A

Cross-sellUp-sell

New Sites

New Products

New Customers Existing Customers

Result: Disruptive Business Model for Continued Growth

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Total Revenue

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Valuable…

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2013 Revenue Multiples

Median 5.2x

Valuations - SaaS

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2012-2013 Revenue Growth

Valuations - SaaS

2013 Revenue Multiples

Median 5.2x

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Valuations - SaaS

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Valuations - SaaS

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Retention (Renewal)

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14 x leverage!

Upsell

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Lifetime Value of Customer (LTV) Cost of Acquiring Customer (CAC)

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CORE

Levers

Mul

tiplie

rs

LTV

CAC

LTV ~3x > CAC

Basic Startup Model

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The Model Refined – Enabling Retention & Upsell

Lifecycle Value of Customer (LCV) Cost of Acquiring & Re-Engaging Customer (CARC)

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CORE

Levers

Mul

tiplie

rs

Re-TrialUp-sell

LCV

CARC

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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

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CORE

Levers

Mul

tiplie

rs

Re-TrialUp-sell

LCV

CARC

GAIN

PAIN

Vendor View

Customer View

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Start as you plan to finish...

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A typical product lifecycleBut it doesn’t have to be this way !

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See Try Buy Fly Die

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

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Adding Retention and Upsell

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See Try Buy Fly Die

Re-TrialUp-sell ExtendedLifecycle

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

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Web

Self service

On demand

SaaS Subscription

Open source

A disruptive & valuable Lifecyle

See Try Buy Fly Die

Re-TrialUp-sell ExtendedLifecycle Re-Trial

Up-sellExtendedLifecycle

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

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Applied to Software

Installed by IT Customized Infrequent upgrades Proprietary License

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1990+ 2010+

On demand, SaaS

Web based Self service

Open Source Subscription

Web

Self service

On demandSaaS Subscription

Open source

Up-sellExtend

edLifecycl

eUp-sell

Extended

Lifecycle

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

Re-Trial

…a fundamentally disruptive & more valuable business model

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DEMANDWARE PRE-IPO

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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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START UP SECRETS

An insider’s guide to unfair competitive advantage

Hi

Disruptive Business Models to build Value

#startupsecrets startupsecrets.com

Michael J Skok

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T 617.303.0064 @underscorevc

53 State Street, 10th Floor, Boston, MA 02109, USA

T 617.303.0064 @underscorevc

53 State Street, 10th Fl Boston, MA 02109