All language subtitles for Harvard i-lab Startup Secrets Part 3 Business Model - Michael Skok [English (auto-generated)] [DownloadYoutubeSubtitles.com]

[Music]

Okay, I think we'll get started um so we

can have time to get through all of

Michael's material tonight on it in a

timely manner. Um, for all of you who

have been here before, you know Michael

Scott. He's running a five session

series on startup secrets, how to give

yourself an unfair competitive

advantage. Tonight's discussion is going

to be around business model analysis.

And I know he's brought a number of his

portfolio companies to present as well.

Um, so it's going to be a lively

session. I'm really looking forward to

it. Um, without further ado, I'm going

to hand you over to Michael and his team

of people.

Well, welcome everybody. We should have

a lot of fun this evening. We're going

to talk about one as as Jody says of the

multiple things that we put on the

original topic and that being business

model. For those of you who've been at

the other sessions, this will feel like

it's in context. For those of you who

haven't been, I just want to get a show

of hands who's new here. Therefore, I

can try to cover some of the background.

Okay. Quite a number of new people

actually. Okay. Okay, so I will tell you

this right before I get going in which

case the value proposition session which

is up on the website

contracapist.com provides the background

to what is it that you do and how do you

do it uniquely well for who that's the

simplification of a very long one hour

monologue by me. Uh so there you go. You

skipped the one hour. You've got the the

essence of it. And based on the value

proposition, the business model is all

about figuring out how you take that to

market as a viable financial sales

marketing and uh even service and

support model. So even though you've

missed that, just think about whatever

idea it is you've got, we're going to

figure out how to build a business model

around it today. If you missed the

company formation piece, that was really

around building the team and obviously

hiring the people to make that a

successful basis to take your enterprise

u and execute and next session is very

much the other side of the coin to the

business model because business model is

so closely aligned to go to market

strategy. So that gives you a little bit

of context for those who haven't been

here. All right, first of all, I just

like to make some introductions. Uh

we've got a number of the portfolio

companies being kind enough to come in

as case studies this evening and also to

help out in the workshop. So you've got

real executives who have real day jobs,

real entrepreneurs who have real ideas

that can help you as you try to take

yours uh and figure out what your

business model is. So first of all like

to introduce the active endpoints uh two

representatives here, Mark Taber and

Eric Egson. If you just like stand up.

Mark's our CEO and Eric heads up sales.

Thank you guys for coming.

[Applause]

And then akibban we have uh David

McFarland and Oristat the CEO and

founder

[Applause]

respectively. And then from Demandware

who uh is represented by Jamus Driscoll,

I just say before he says anything

they're on the road show and so he's

basically been told not to say anything.

Say nothing. I don't exist. I was never

here.

So, unfortunately, we can't use his case

study, but he's assured me we'll use one

when they get through the road trip.

But, um, thank you for coming. He'll be

part of at least the workshop so he can

engage with you. Uh, and then I'm lucky

to have two of my partners here tonight,

too. Not quite sure why they're here

except to check that I don't say

something out of order, but uh, Jim

Moran from

[Applause]

Northridge. And then we also have

Carichel Roberts who's also brought some

special guests with him.

Car Michael. No. Okay. Well, we have I'm

going to get him right now. Don't worry.

We'll introduce him when he comes in.

He's brought another of his companies

actually because uh Jim and I mostly

work on software, but we did want to

make sure that people who are not

focused on software have a sense that

these business model techniques that

we're going to talk about tonight

actually do apply to many different

kinds of ventures. And so, in fact, he's

going to talk about one of his companies

called MCT10, which is in the material

space. Very good. So let's jump in with

our agenda. As I said, this is all about

building a business model. And I'm

particularly going to focus on just four

things. First of all, finding a

disruptive business model. You can all

go and discuss what a business model is.

You can read about it many different

ways. But if you're a startup, the

really important thing you're going to

try to do is bring disruptive innovation

into the marketplace. And that shouldn't

just be about technology. The business

model is a fundamental piece of it. But

how do you find that? Well, I'm going to

show you three key things. First of all,

finding your core differentiation. That

is absolutely critical to building a

business model. Secondly, what are the

multipliers that will help you spread

that value proposition in an effective

way getting great market share, great

reach, and ultimately great revenue. And

then third, very importantly, how do you

take the cost out of the equation uh

with levers? And levers, as you'll see,

are things that can be highly

advantageous to companies that figure

out how to use them in their business

model. And then last, I'm going to give

you a very quick insight into how that

plays out in the life cycle of working

with your customers. And particularly

important here is an example I'm going

to bring to light for you of how this

plays out in the software world, but

again, I would say it's applicable to

many different areas. I mentioned

earlier that um this is really one side

of the coin. The other side of it is go

to market. So you will feel in some

cases like I'm transgressing a little

bit into what does it take to go to

market but that's because there's clear

linkages here and then the most

important thing about tonight is of

course the workshop and we're going to

have a lot of fun with that. We've got

10 teams again tonight uh and 10 helpers

and Jody's organized for us to have the

whiteboards to see around the room so

everybody can go write their business

models up and come in and present them

and we'll have the usual voting at the

end. Excellent. Well, with that in mind,

I'm going to get the boring stuff right

out the way right away.

Everybody can go read this on the web.

There are actually some great books on

it. The basics of business models are

around creating the value. So that's

things like creating your product or

service, delivering it. That's things

like obviously how you take it to market

and then how you harness or monetize or

capture the

value. But we're here for a reason. We

want to talk about startups. And if

you're a startup, I want you to start

thinking about business models

creatively right away. Don't take

somebody else's business model as my

first piece of advice to you. There are

plenty of business models around. In

fact, it will be true to say that the

best example of business models of a

business model probably hasn't been

invented yet. And that's what I hope

we'll get from you is the next

generation of interesting business

models because this is all about how can

you make a breakthrough here. It's not

about picking somebody else's business

model and just applying it to your

situation. the chances are at that point

you're adding very little value in your

startup and you're probably not making

any major impact. So I really want you

to think about this literally as how do

you change the game? If you could come

in for example to a marketplace and

literally rewrite the rules on your own

game and cause somebody else to have an

innovator's dilemma. Imagine how

powerful that would be. I would argue

that that is at least as important as

having a disruptive technology. There

are many examples like that. What I

encourage you to do is to think about

whatever it is you're bringing to market

in those kinds of ways. Don't let

somebody else write the rules. You write

them. In fact, define the whole new game

the way that you can. So, what's an

example? I'm really going to date

myself. I put an exclamation mark here.

Um, 20 years ago, believe it or not,

there was this little company called

Semantic. It's a multi-billion dollar

company today. That's the good news. But

the bad news is at the time we were

actually a struggling company in many

ways and I would say that with uh tongue

and cheek because you know obviously

it's become very successful but I think

we had more than 20 products. We had

everything from add-ins for uh Lotus 123

if those of you remember back to that

was the first spreadsheet to uh we had

languages you know think C, think Pascal

on the Mac. Uh we had all sorts of

products. We had a database, we had a

word processor. I mean, it was just

unbelievable. And I'm particularly being

brought um uh this is all being brought

back to me right now because we're about

to have a 20-year reunion for the first

20 years of Semantic this weekend. And

all these products and so forth have

been coming to light. And so this

example just stuck in my mind and it's

really a business model example. The

product that was selling best on the

Macintosh back then was something called

Semantic Antivirus for Mac. And believe

it or not, the Mac was plagued with

viruses in those days. system 6 or 7 or

whatever it was at the time was was

really an issue and it was a very

successful product for us and we were

selling it as a licensed product. a you

know whatever it was dollars perpetual

license you bought it through uh the

time you know your local retailer and

because it was a chart topping product

you'd have said at that point great

we've got that business model nailed we

know how to produce that product package

it distribute it sell it it's the top of

the charts what should we do when we

introduce the PC

version the answer is why don't you just

copy the business model I just told you

I think that's a really bad idea and so

we also stopped and thought about Uh and

initially we got it slightly right in

that we decided it was important to

introduce the PC model with more of a

flavor of an upgrade service and an

update service because there were many

more viruses coming out for the PC. And

so in fact we were having to get people

updates initially once a quarter. Then

we realized wow it's happening sort of

once a month. Then we realized hey this

is happening regularly. It's probably

hard to believe this. At the time, there

were probably a maximum of about 100

viruses on the planet uh when this came

out. Now there are, you know, tens of

thousands and they come out very

regular. So, of course, what we did was

we flipped it all on its head. We

actually decided the software was worth

nothing because we needed to get that

out there as a platform for people to be

able to get the virus definitions

downloaded to prevent the viruses. And

so, the real value was not in the

software at all. the real value was in

having the virus definition before it

ever attacked anybody's machine. And so

that literally was the turning point if

you were to ask me personally, I think

you ask pretty much anybody at Sam at

the time on the fortunes of that company

because we suddenly created a

subscription model that was not a nice

to have. It was essential for

enterprises and they didn't care about

the software. They cared about the

person who had that virus definition

first. And suddenly we had a very

predictable business because every time

a virus came out we knew people were

going to want to download it. Therefore

we knew they were going to want the

subscription to be up to date. Therefore

we knew they were going to pay monthly.

Therefore we could see what our revenue

was going to be. And it was very very

gamechanging. So that's an example from

a product

standpoint. Any questions on that before

I go forward? So did you after that

change the Mac model? Yes. Yes we did.

Uh and in fact uh I'll give credit to

one of my sales guys here uh who was one

of the first guys who actually even

flipped the entire product line on its

head and said you know what we're

selling a bunch of things like backup

for example and Norton utilities was

another product we sold but people

really don't want to pay for the

software what they're really doing is

trying to get data security and prevent

data loss and so forth so we came up

with what he called and he really

deserves the credit for it a total

solution to data security and in the UK

for example we took full page ads in the

Financial Times and we went to an

extraordinary length to get people to

understand that what's the most

important thing to them that they're

actually producing with all this

software. It's their data. It's their

information. So, they really should put

that top in terms of creating data

protection. And suddenly, as a result of

that uh thinking, we actually started

selling a data protection service and we

bundled all of our products together in

what we called the total solution and

sales just took off. And if I would go

into it even one more level of detail

for you, I'd tell you this, which is we

used to on average sell one to one and a

half products per major enterprise per

seat. And by bundling five or six

products together, the actual natural

average of that turned out to be 2.6. So

in other words, we went from 1.5 to 2.6

the value uh just by bundling that

correctly and by taking the game up to

being a data security uh and information

protection game. extraordinarily

successful uh and my investors at the

time who were quite concerned to say the

least about us going and taking full

page ads out in in major newspapers uh

very quickly lost their concern and saw

tremendous

results. Okay, so next example this is

not a technology example. This is

absolutely a pure play business example.

At the time I was based in the UK and I

was observing that every major product

that came into the UK from a US

publisher was largely failing. Failing

because they didn't have the investment

in management, marketing, distribution,

sales, services, and support. And why?

Because if you look at the US market,

it's 10 times roughly bigger than the UK

market. So let's say you're a $10

million company in the US. You may have

some at that point relative critical

max, even $20 million going to the UK.

tenth the size and market you could be

maybe a $2 million company doesn't

really give you much room to invest in

marketing or management or distribution

or translation localization all these

other things so it was very tough for us

companies to be successful and they

typically went to just distributors and

said here we've got a great product you

know put it in distribution well

products don't sell themselves and so

without the marketing and support or

translation in some cases it was very

unsuccessful so I decided to come up

with a business model that basically

enabled us companies companies to bring

them to bring their products to us as

one entity, European Software

Publishing. And because we had multiple

products, we could get the critical mass

in all the things I just put up on the

on the management all the way through to

distribution. And as a result of that,

we were able to provide, for example,

introductions to the top uh times 100

companies. That's equivalent 41,000. And

if we'd already got that connection on

one product, when we took on another

product, it be very easy to open the

door and say, "Okay, here's the next

product." We do it very selectively. So

it wasn't like a, you know, a long

list. It was very successful financially

for the US companies, too, because we

would get these companies to about 20

to$30 million. In other words, highly

scaled, highly profitable at that point.

And then we would enable them to acquire

them back. But it was also acquired back

on a basis that there was something

called pooling of interest in those

days. But just think of it as a tax

efficient way to do it. It was

non-dilutive. So it cost them nothing in

terms of earnings per share if you will.

And it was ultimately uh acquiring

something that had growing earnings. So

the minute they acquired it, it was

adding to their top line as well as

their bottom line as therefore to their

overall stakeholder value. So it was

like incubating if you will these

companies till they got to the point

that they were successful and then

acquiring them back on this

anti-dilutive basis on this just highly

profitable basis and uh as an example

semantic itself which is one of the

companies that we brought over uh was a

huge win uh I put this picture up there

because I say it's a huge win but then

my wife always reminds me that the two

bibles that it took is that they were

huge thick things to conclude that deal

was the pain involved in it. So there

was a lot involved in doing that but the

win-win here for investors for the early

investors was a 97x on their money to

give you a sense of it. Um and yet

Semantic themselves doubled the value on

an on a accretive basis acquiring the

company. So the day after the

acquisition was acquired was announced

the company's share price went up and

also more importantly the continuing

earning streams continued to contribute

and semantic in the UK was their most

profitable uh business outside of the US

at the time. So everybody won. We we

made customers happy. We obviously made

our shareholders happy. And in the

middle of this thing, we made semantic

uh as an entity more successful. That

had nothing to do with technology.

Absolutely nothing. Although, by the

way, I was very passionate about

Semantic products and stayed on and and

continue to actually uh really enjoy

working with them. But my point is here,

this is an example of something that you

should be thinking about even if you've

got a breakthrough technology. What are

the things that will make a win-win for

you? So tonight I'm going to talk to you

about that and hopefully give you enough

examples about it. I don't think I need

to say more about this, but um I've

hopefully made it clear to you that it

is at least as important. But now I want

to give you a a specific reason why the

business model is as important as

technology. So before I give you the

answer, can anybody tell me why in

financial terms business model should be

considered as important as technology?

Any thoughts?

I've given you some examples, but can

anybody give me? Products don't sell

themselves. Sorry. Go ahead. Products

don't sell themselves. So, no matter how

good your technology doesn't matter.

Yeah, you're on exactly the right track.

Products don't sell themselves. People

don't even know about them. How are they

going to even find them even if they are

great? So, what does it cost to for

people to find out about your product?

Is that relatively the same as

developing the product? Is it more? Is

it less? Anybody?

Somebody heard saying more.

A show of hands. Who thinks it's more?

This is an easy way to Okay. Well, those

of you who said

more, you're right. The staggering thing

is how much more? It's usually double.

If you look at a software company, for

example, P&L, you'll see that on

average, companies will settle out at

around 15 to 20% of their P&L being

spent on R&D and 30 to 40%, in other

words, double on sales and marketing. So

what I'm pointing out to you here is

even if you've got a brilliant product,

how it'll end up playing out in your

business model is that double the amount

that you're spending on your product is

going to be spent just as u was

volunteered from the back there on

taking it to market. And that's what

this business model is all about. It's

about how you get multipliers and levers

to actually take the cost out and the

revenue

up. And in fact, I'll go one step

further. I will say that the perfect

startup storm by the time you finish

this session and the next session should

be very easy for you to define. It

should be a disruptive business model

with a disruptive technology and then

you obviously focusing on a new market

opportunity or target segment with an

innovative way to get it there. You get

those three things, you have my

attention. Now, I'm not saying by the

way that great companies don't get

formed with one or even two of those,

but if you have all three, you really

have the perfect startup store.

So, let's get you started on thinking

about some of these

models. Excuse me while I reattach my

mic. These models here are just a

sampling of the ones that I went to pick

up. The wonderful thing about them and

the reason I picked them is many of

these companies didn't exist, you know,

five or 10 years ago. Uh, one of the

fastest growing companies uh ever is

Groupon and they came up with a

completely new business model. Um, one

of my favorites which I used for a while

and didn't understand their business

model until I sort of thought about it

was Mint. It's not a company that's

actually trying to make money out of the

software the way Intuit did to process

your um, finances. It's actually a lead

genen business that's actually driving

lead generation to many of the financial

services providers. And in our own

portfolio, even though um Jamus can't

talk about it, Demandware has a very

innovative business model which written

in the S1 is all about revenue share.

And I could say no more than that. Uh

but it's an example of what I think I'm

making a point of here and that is every

one of these companies is at least in

part being successful because of a

disruptive business model. And we will

talk about some of these examples, but

they might be things that you've never

even thought about associated with

technology before. Such as, for example,

how do you do crowd sourcing? There's an

innovative company in Boston called

Utest that's actually taking people from

around the world to test mobile phones

uh in all the different environments

around the world. You might say, well,

why is that a big deal in a business

model? Well, think about the

alternative. There are so many different

phone types with so many different

carriers that can be used in so many

different places. There's no possible

way you could recreate an environment

that would test all the different

scenarios for mobile phones and mobile

applications. But if you crowdsource it

all around the world, you can get a real

sampling of what might be the way to

test things. So their business model

actually not only solves that problem,

but actually of course leverages lowcost

labor around the world as a lever to

help them be very effective in their

test. So, I would say any one of these

examples is one of many I could have

picked to again hopefully get you

thinking about what could you do to be

disruptive. So, what are the sample

questions I'd recommend you start with?

Well, amazingly, people come in and they

almost invariably say, "We have a

product." Yes, you may have a product,

but is it really a product or is there a

process associated with that product

being used? In which case, is the

process more valuable than the product?

Do you really only have software or do

you have to have services to actually

make this successful? In which case, is

the service more important than the

software? In open source, you will find

that the software is free. So, unless

you have services, there's no value. In

is it open or proprietary and and so on

and so forth. Here's one I'll pick out

for you, which I think is rapidly

emerging as an interesting new business

model. As we get networks of people

working around these products and

services, we're collecting tremendous

amounts of data on people. And in fact,

the best example of that is probably

going to be one of the most interesting

new IPOs this year. That's Facebook.

Facebook's value is not its software. I

mean, it's great software. It's

impressive that PHP scaled to be able to

do, you know, uh to serve hundreds of

millions of users. But that's not what

we're paying for. We're paying for

ability to connect to people. And guess

what they're monetizing? They're

monetizing the fact that we've all

connected and told them what we are

doing all day so they can figure out

what really is valuable to them. the

data behind that that enables them to

target us more effectively. So their

value is in their content or their data.

Maybe they would say simply their data.

My point being here this is an example

of where I would encourage you to

question early what is the set of values

that is at the core of your business. So

let's go to exactly that. Your first key

question should be what is your core

value? Those of you who haven't heard me

talk before, I've said this many times.

I was one of those students who needed

pneumonics to remember anything. So,

you'll find I use pneumonics everywhere.

Um, I could have said corny, but just

forgive me. This is a way that hopefully

you'll remember these things. The core

of your capabilities should be literally

what is it that you've got of really

exceptional value at the center of your

proposition that you could build around

that you could create a model around.

And when you tell me it's core, nine

times out of 10 when I'm sitting with an

entrepreneur and I really question it,

they haven't defined the core. They've

defined a bunch of stuff and when we

really press hard, we can actually get

even more focused. So I'll often hear,

oh, we've got a great software product.

Okay, let's talk about what that product

does and for who. And then when we

really get down to it, we'll find out

that a small piece of what somebody's

actually building is really the core

innovation. So uh in the case that we're

going to talk about tonight with a keep

you'll find out that they actually are

in the database business but the core of

their innovation is actually a very

critical new piece of how you process

data and they didn't need to recreate

the entire database infrastructure.

They're leveraging a lot of open source

to do

that. So let's have a look at some

examples from the ones we just talked

about. I already gave you a sense of how

to think about core uh in the example of

Facebook. their real uh innovation is

probably the user network but if you

went to the core I think it's data and

what they do with that data obviously in

in terms of using it for advertising as

a business model is really interesting

now they may change that they may decide

that at some point there are other

values but if they hadn't got that call

right early on I think it would have

been very difficult another one I think

that's that's just gone public so it's

topical would be Yelp Yelp could have

been thought about as community could

have been monetized in many different

ways but in the end the content's become

really the core of the value there.

Again, if you look at what's going on

now in uh the world of the net in

particular, a lot of times what people

are building is some form of

userenerated content around the network.

And there are many ways you can monetize

that. But I would say to you the most

important thing you should do is again

instead of just saying well how could I

monetize it and just say oh advertising

is the thing before you do that say well

who else am I competing with? And if

everybody's advertising, sorry, using

advertising in the same way as you are,

you probably don't have a competitive

advantage. So try to flip it. Try to

create an innovator's dilemma. You think

about what Christensen has has talked

about many years, which is creating some

way to do something that can't be

followed as opposed to just following

what everybody else has done. And so

when you think about monetizing your

core, think about where others are most

vulnerable of where you could do

something that again changed the game.

go back to that metaphor and rewrote the

rules and gave you some way of

monetizing that was really tough for

others to follow. I'm a huge proponent

of open source. If you haven't figured

that out, do a lot of investments in

that space. And the reason I love it is

that it's tough to compete with free,

which is really what open source is is

at its core. But it's very easy for open

source companies therefore to attack

existing marketplaces with an offering

that is delivering the same value at no

cost and focused on making the customer

successful with support because the

customer loves that and the competitor

can't compete with free. So think of

things in those ways whatever whatever

it is that you're addressing. And if

open source helps you think about it I'm

happy to talk to you more about why we

we love that as a business

model. Okay. So core is first point. Now

I'm going to introduce you to the next

two concepts multipliers and levers and

they work around your core. So these are

not you know separate to it. Once you

know what your core value is, how can

you multiply it? Meaning increase the

revenue, increase the reach of customers

you get to or increase the coverage or

market share that you get. That's really

what multipliers are all about. And I'm

going to bring these to life with some

examples in a minute. On the other side,

levers reduce the costs, reduce the

time, and reduce the resources involved

in producing your product or getting it

to market or in capturing that value.

And if you get both of these things

working for you, as the diagram

suggests, they really can create

extraordinary value on top of your

business model, the core of your value

proposition. So, what are some examples?

As you all know, my experience comes

from software.

Let me pause the question. What did you

mean by reduce resources? I thought you

need to have a lot of resources to be a

product. Great question. So the question

just so everybody heard it is what did I

mean by reducing resources when we just

said that for example taking products to

market requires a lot of resources. What

I mean is how could you reduce the

resources that are required to take it

to market. So, I'll give you a simple

example. Just I'm going to preview what

I'm about to talk about, but if you

could create viral marketing where your

user was actually selling for you,

that's obviously going to reduce your

cost. Does that make sense? So, that's

an example of a lever. And by the way,

people talk about viral marketing all

the time. It's a very tough thing to

define. There are all sorts of models

people have and coefficients they create

and everything else. I'll give you a

really example of important example of

viral

marketing. Reference selling. If you

really love something and you refer it

to somebody else, that's that's the

beginning of viral marketing right

there. So making happy customers is the

beginning of viral marketing and

figuring out how to get very happy

customer armed with the right way to

reference sell just giving them the

basics of of uh you know what what

typically is in most people which is

they want to justify the purchase

they've already made if they like it

anyway. So give them the tools to do

that and then of course you can do all

sorts of offers and things uh to promote

it. Anyway, did that answer your

question? Great. Any other questions

before I move

on? Okay. So uh for examples I as I said

I meant software so I'm going to use

these as as u talking points but I think

these apply to many different

businesses. So the first category that

we're talking about is exactly what we

just uh discussed which is sales and

marketing. It's usually such a huge part

of the P&L that if you can start to get

a multiplier working for you here, it's

very valuable. And things that make may

make a difference here are things like

tiered pricing. So in other words, if

you sell a product at one price in all

flavors, that's possibly the exactly the

right thing to do for simplicity sake.

But wouldn't it be better if you could

get people to get it free first of all?

set was literally frictionless to start

off with and then upgrade and upsell and

add value and obviously add capabilities

and so forth going forward because every

time you acquire a customer as long as

you keep them the ability to upsell is

obviously a lot less expensive than

creating a whole new customer

relationship. So I know that sounds

obvious but that's right there an

example of a multiplier and it's a

reason why tiered pricing and models

like premium can be so helpful. The

other typical multiplier you'll hear is

channels. This is definitely applicable

to almost any business. You could go out

and create a Salesforce for every

product, I'm sure. But wouldn't it be

more effective to use somebody else's

Salesforce, to use somebody who's

already got the customer relationship,

who's already written the contracts with

major uh part um uh enterprises and just

leverage those. I can tell you that's

one of the biggest challenges for

startups is that just the contracting

process alone in the Fortune 1000 is

horrifying. I'm seeing a few smiles at

the front here because we constantly sit

in boardrooms with you know the forecast

and we know that the the deal is closed

but the contract is still to come and

we're like okay is it EMC we're dealing

with or is it HP and you know everybody

knows their stories there. The point is

the channel in many instances will

already have the relationship with that

end customer. And so if they've already

written the contracts and they can just

add this as an addendum or slide it in

on an existing contract, you just took

all that friction out, reduced your cost

of selling and obviously are able to get

a multiplier in your business. So next

example would be in the product. Most

people think about products in a very

straightforward way uh as being, you

know, it's obvious that this is going to

be great value and therefore people

should want to buy it. That should be

the case, but you can get a lot smarter

than that. I'm going to introduce two

concepts to you tonight. Slippery

products. Yes, I said slippery. It's

another of my pneummonics. Um, which is

another way of saying frictionfree and

what I call Russian doll packaging. And

I think you'll have some fun with these

tonight when you get to the workshop. uh

but the last of which is technology

stacks and again I'll give you a simple

example of it and this is how you can

insert yourself into somebody else's

technology stack to get a multiplier out

of going to market with them. So let's

look at the levers. How do we take the

cost out? Well, the world has changed

dramatically since that 20-year-old

example I was telling you about at

semantic where we used to have to sell

through two-tier distribution and we

used to have to spiff salespeople at at

these ridiculously large distributors

that sold thousands of products and so

we had to get their attention. And now

you can get anybody's attention anytime

you want on the web and focus on doing

it in a very cost-effective way with

inbound marketing using inside sales for

example and creating things such as we

were talking about like viral campaigns

that dramatically takes down the cost of

selling a marketing that wasn't even an

option when I started this industry and

so I would use it and I would spend time

thinking right from the get-go about how

would you get your awareness your

interest your understanding up uh using

web and lowcost techniques like

And that's why I said this is one side

of the coin, the other side being go to

market that we'll talk about in the next

session. The second example is less

obvious and people typically think about

this too late in the game. So I'm

encouraging you to think about it right

up front which is how do you take the

cost out of producing your product,

creating your product and supporting it.

And there are many ways you can do this.

You can do it through offshoring or

outsourcing or crowd sourcing in that

example we talked about or something

called co-creation which I'm going to

give you an example of tonight and again

technology stacks. So probably a lot of

words up there. All I'll say is every

one of them can be thought of as a

potential lever. I don't think I need to

explain every one of them but I will

pick as I said co-creation to go into as

a differentiation.

And then here's the last piece of this

startup secret, which is you really want

to find examples of things that work

together. You've got a killer strategy

on your hands. If you can figure out how

you can get focused on your core, find a

partner to work with who will give you a

multiplier to market and a lever in

taking the cost out of uh either

building or delivering or supporting

your product. And so two examples of

that uh that I'd like to walk you

through now. First of all, one in

creating value, then another in

delivering and capturing

it. So, what is

co-creating? Well, the idea here is

pretty simple and it's going to come to

light in a software world, I think,

fairly easily. You could sit as a single

organization and build your product with

one development team. Or you could say,

what is at the core of our product? And

let's take an example that would make it

easy for everybody to think of.

Linux, it's an operating system, but at

the absolute core of Linux is literally

a kernel. And Linus thought about that

and realized that the problem with

existing operating systems was they've

got huge and bloated. And why they got

bloated? Because basically people had to

have different versions of them for

every single different kind of laptop or

PC or server and every kind of device

driver and everything else that went

associated along with it was yet another

piece that had to be added onto it. So

he wrote a brilliant call, super fast,

super efficient, but he made it possible

in a modular way for people to add onto

it using open source, created a

community, and got people thinking about

how could they extend the product. And

as a result of that, people like IBM,

who was literally at the time nowhere in

the operating system business, in fact,

you could argue was really struggling

with many different operating systems,

AS400, the Z series on the main frames,

etc. were able to take Linux and unify

their entire platform strategy with it

and they themselves using open APIs uh

and the open source nature of this were

able to write all the drivers for all of

their different products and get what

they needed which is a unified operating

system. What that did to Linux was

unbelievable. It literally accelerated,

actually I should have Carlos telling

the story since he's been involved in it

firsthand, but it literally accelerated

the adoption of a single operating

system that swept through the enterprise

very quickly because it was free, open-

source, and instantly much more uh

valuable to people as they were able to

focus on their differentiation and

people started building on top of it. So

that's an example and it's an open

source example. But if I jump to the top

and I give you just a little bit of

thinking around uh extensibility, this

is a simple concept. If you build

something that everybody wants to add

value to, needless to say, that's going

to multiply your value. I'm going to

start at the most basic level that you

can think of. Imagine you went to the

kitchen and you put on a a pot of

boiling water and you knew that

everybody wanted

soup. The first thing they're going to

need is the pot of boiling water. If

you're the only guy who's got the pot of

boiling water, people are going to come

to you and put the ingredients in. The

good news is they can add the stock to

start off with and if they decide, oh,

they want to add vegetables to that,

they could add vegetables, but maybe

some people don't want that. So, they'll

take a ladle out of it and they'll

create their own version derivative of

it and they'll add, you know, not

vegetables, but maybe meat to it because

that's the way they are. The next guy

comes along wants to add pasta to it.

The point is somebody thought about that

in a very basic way, and it's exactly

what I'd encourage you to do with your

product. They said, "What is the core

thing at the base of soup?" boiling

water. Think about your value prop in

that same way. And then think about how

easy would it be for people to come in

and take a label and take some out and

create their own version of it or add to

it. If you can find ways to do that,

that's why I love extensible open APIs

for software, for example, which is just

a fabulous way for people to do this.

And if you can do that really early on,

you'll be very successful. Here's the

next little detail but a super important

one. If you do it in a way that

internally you test that right away. So

in other words, let's say you're

building an application but the

application requires certain core

services like for example user input,

user validation and so forth. Why would

you write those as uh capabilities in

your platform that you had to build on

internally? So you had your team of apps

builders who know what the app

application logic should be but they

have to internally build on the APIs for

user validation user input user

experience etc. Immediately you're

creating a customer internally that is

testing your openness and your

extensibility of those APIs. And when I

see software companies who do that, they

build on themselves. I watch product

development go way way way quicker. And

I've seen it over and over again. Demand

where actually although Jamus can't talk

has done it superbly well internally.

They do exactly that with their

e-commerce application. Disagree. So

it's a small tip but it's a good

starting point. figure out how even

internally you can build around your

core and you can have customers uh from

you know one part of your organization

working on another piece of the

capability elsewhere. It's literally

eating your own cooking being your own

customer. Summarizing this I would say

as follows. You can get smart about

creation by thinking about who are all

the other people can contribute and if

you can find a way to actually incent

them to get value out of co-creating

with you, you're in a great starting

point. It's going to be both a lever in

terms of taking your cost down. It's

going to be a multiplier in terms of

those people obviously spreading the

word. Okay. Now, let's talk about

another example of levers and

multipliers in delivering and capturing

value. Uh delivering and capturing

value. Here is one which is pulled from

a list of 20 I could have talked about

which again is a favorite for me. It's

as simple as a strategic partnership and

yet it's as significant as to be a major

lever or multiplier for again almost

every software company I work with

figuring this out. And I'm going to give

you a specific example of what what

might make a great strategic partnership

where both levers and multipliers around

the core can make a difference. So if

you are a software company, you'll know

this without me telling you. You have to

figure out what are the key capabilities

that you're going to build around and it

always involves basic things like

compute and network and storage and

database. I could have added 20 things

in here. You probably don't have those

as distinctions unless you're a security

company or a database company. Um and

you want to go ultimately expose

applications and services at the top of

it. If your core capability can fit into

somebody else's stack right in the

middle and fill a gap for them. For

example, if you are able to be a load

balancer that enables people to scale

out and you do that on top of people's

database storage capabilities, then why

not fit into their stack? Why not go

build for their capabilities so that you

literally neatly can integrate and

create a much more fulfilled product

experience for anybody who's trying to

build applications at scale that need

load balancing. Well, obviously that's

what the opportunity is in a in a whole

product strategic partnership. And whole

product is a Jeffrey Moore term. As you

know, I'm a student of his. he'll be

here at the end of the series and it

really describes how you deliver a

complete solution to your customer. So

if you've only got a piece of it, you

can find partners, you've got the rest

of it. I would say this is a great

example of a multiplier that can work

for you. What happens when you do this

is best uh discovered described with an

example. Uh in one of the companies I

started in the analytics world, we had a

capability to do what we called real

time inline analytics. What the hell did

that mean? It meant that before that

point, everybody who was doing analytics

was typically getting reports, you know,

a week after things happened or maybe a

month after in some cases. And we said,

guess what? Before you even transact

with a customer, wouldn't it be helpful

to find out if they're a profitable

customer to deal with, what their

preferences are, what the things are

that they might also want to buy from

you. And that required real-time inline

analytics. But the trouble with that is

analytics is a tiny piece of the

challenge of getting that data putting

in a database uh cleaning it with what's

called ETL systems and then getting to a

place where you could actually do what

we did which was the real-time inline

analytics and then on top of that you

had all things people wanted to do with

them like present them and you know even

um analyze them further in Excel etc. So

we realized the big giant in this space

was IBM. So guess what? We did an

unbelievably obvious thing which was we

wrote right into the core of IBM stack

and made sure we worked better than

anybody else did with IBM's DB2 products

and also their web sphere products and

their middleware and also with their

tooling even. And the result was not

terribly surprising. We ended up getting

huge revenue uplift not just because

people were able to sell our products at

IBM but because it brought credibility

to us that IBM was actually partnering

with us and was taking our products to

market. It opened all the doors. And on

the other side of things, of course, it

dramatically reduced our time to market

because we weren't writing all their

technology around us and reduced our

development costs. Excuse me. And

ultimately resulted in them acquiring

the company, which in many instances, by

the way, even though it wasn't our

intention, is a great backs stop for a

small company to have had that strategic

partnership be so successful that you

know that if nothing else plays out in

your own, you know, ultimate success,

somebody's going to have you. so well

integrated they'd be a no-brainer for

them to acquire you. So I think

strategic partnerships and example being

a whole product strategic partnership

are great levers, great multipliers and

great back stops for for small

companies. One little detail and the

devil often is in the details and

certainly it's true with uh startup

companies. I hear people all the time

say, "Oh, it's fantastic. I've got this

new big company really interested in me

and they're going to co-sell

everything." Okay, who's incentive to

co-sell it? If they don't have their

salesforce incentive to do it, they

might be getting more advantage out of

you than you are out of them. There are

always details like that. It's really

worth paying attention to. If you get

them to resell it, might be great, but

if they suddenly bring you a thousand

customers and you've got all the support

cost, you might actually find you're

losing

money. Likewise, I often see small

companies make this mistake, too. They

go and write OEM deals and they think

they've got tremendous distribution

reach, but they've got no upsell

capabilities. They basically just gave

away the golden goose. Huge mistake. So,

here are some things you can do. The

first is actually a strategy not just to

OEM uh but also for in general helping

you with your product and how you get

multipliers and leverage out of them.

It's what I call building a Russian

doll. It's going to be very obvious, I

hope, where you might do this and then

I'm going to get uh one of our companies

come and talk about how they do this.

Come up with a version that's free.

Then find some way to give limited

access to it for a different price, some

upsell. Give a personal edition out once

it gets used by lots of people. Make a

workg groupoup edition. If lots of work

groups start using it, make a corporate

edition. Once it goes global, make an

enterprise edition. It isn't that hard.

But you'd be amazed how many times this

is the difference between, for example,

an OEM deal working or not. If you know

you've got all those additions and you

just do an OEM edition, for example, on

the personal edition or the workg

groupoup edition, you know, you can go

back and sell all the capabilities the

corporate edition or the enterprise

edition. And therefore, getting the

reach from the OEM made tremendous sense

because you can do the upsell, but don't

go in there without that in your back

pocket. Know up front what you're going

in there with. Know exactly up front

what you're going to do as an upsell.

And then to the point about going to

market in general, this strategy works

out for lots of other reasons. You'll

find that it's a great way of giving a

digestible starting point to people.

It's a great way of allowing people, as

I said, to taste a small piece of the

value. Uh, and if they if you can do

that free, that's a great strategy in

many instances. And then it gives you

all these upsell options. And it gives

you tremendous channel flexibility not

just with OEMs but you can go to for

example different channels for a

personal edition than you would for

example for an enterprise edition or you

can go to VA who want to build around

for example or systems integrators who

want to build around a very small piece

of your core functionality because they

want to differentiate with all the

capabilities they might bring in a

vertical market. Let's say they you go

to a VA for example that takes just the

core and takes it to to a medical market

and yet another one who takes the core

and goes after the financial market.

That's a great strategy that can play

out if you do Russian doll packaging. In

other words, if you figure out how to

get these capabilities, but if all you

come out with is one galactic edition,

which has everything for everybody in

every market, it's going to be really

hard for people to deal with you. And

you'll be again amazed how many times

the biggest problem when we see startups

is they try to put every feature for

every person into the first product. And

we all know that the result of that is

it usually collapses under its own

weight. So some of you will have read

Eric Reese's book on minimum viable

product. Minimum viable product is one

example of what I'm talking about. I'm

really talking about the business model

associated with it. That's the

technology piece. This is how do you

create the business flexibility around

it by packaging it in a way that you can

go to market in different ways. Okay.

I'd like to introduce a keeper now,

David McFarland, to give his example of

how he's created somewhat of a uh good

example not just in open source uh but

also with packaging different options

and giving himself this this uh

capability. David, you'd like to come

and join us.

So um uh just an opportunity to maybe

walk you through how we've actually uh

taken several of these capabilities and

combined them in this uh uh in this uh

go to market strategy. Just a reminder,

some of you may know from the prior

meetings, but at the very core of what

Keem does, what our keep our secret

sources, and it was this man in the

middle here who invented it, uh, is

something we call table grouping. Simply

put, we understand how an application

uses data, and then we group that data

together, and the net result is that

transactions and queries run 10 to 100

times faster. It's a huge breakthrough

uh, in terms of capability. So, what

we've done is that we've taken that core

capability and we've released that as an

open-source product. The idea is to

drive as much viral business as

possible. It's developers who drive

these technology decisions. It's the

developers that is the 10,000 100,000

strong uh salesforce that we can use to

compete with the likes of Oracles. What

we've also done is allowed those

developer communities to extend our

product by integrating it into uh their

uh own development environment. So for

for Ruby and Hibernate, we integrate

into their environment. So it becomes a

value ad to their stack and again they

drive it through their own distribution

and they own that value and they drive

that value. But what we did is we

created a pluggable architecture and as

a pluggable architecture it means that

we can add critical additional

components that will add unique value to

the product. So the first is something

we call my SQL replication. It just

means that you can take this and now

plug it into a pre-existing MySQL

application. If you built something on

the LAMP stack, it's not scaling well,

it's running slowly, you can take this

aon stack, plug it in, redirect the

queries, uh, and we'll run those queries

really quickly for you. And that's just

one example, but the key point here is

to have a whole series of these

capabilities that you can add and extend

the product with, which is what we've

done. And you can also use that in terms

of a multi-ter pricing strategy. And

then finally, as you build community out

there in the market, we've added a

series of electronic services that you

can add, things that you can deliver as

a SAS capability back out to that

market. It makes it easy for them to

adopt, but it also kind of locks them in

to your service and your brand. And even

within those uh additions, there are

certain community aspects like the

grouping algorithms. You get lots of

people to combine together to contribute

to different grouping strategies that

then can be shared across the community.

So those are just some of the examples

of how we extend it. Perfect. Thank you,

David. And I'll just leave that up for

one second. I think he's used pretty

much every example that I've already

said tonight. There's effectively a core

that is very clearly defined. And he's

actually made it open source so people

can extend it. And he's also said, look,

we're going to have several additions in

that Russian gold model. So we can sell

this through many different channels and

sell different capabilities. And he's

also said, we're going to have upsell

and cross-ell capabilities from that.

And in effect, he's got cost being taken

out through open source and co-creation.

He's got multipliers being created

obviously through the community and he's

got obviously multiple options uh

through the Russian build packaging. So

it it's a great example and I can tell

you that would it be fair to say well

you tell me I shouldn't need the

witness. Have how much time have you

spent on the business model as a CEO

relative to other things in your

business like building the product?

Well, the one thing I would say is like,

you know, from the very inception of the

product, we had these ideas in mind. So,

one of the things that was very

important that I would say to people is

that you really want to think about how

you're going to package this value up

and deliver it to the market. It isn't

necessarily that it was hugely

timeconuming for us to do that, but it

was really important that you think

about it right up front and you don't

wait to the end of the development cycle

to apply it. That's a terrific point.

What David's saying just to underline it

is if you develop the product in a

monolithic fashion then obviously going

to be really hard if you later decide

you want to slice it up and sell it in

different ways. So thinking about the

business model as early as you're

starting your product development is

actually not too early. It's exactly

right. So thank you David. Great point

David.

Okay. Apple made a launch today. No

Steve Jobs. So I'm going to have to do

as the poor substitute. One more thing

and actually I think it's a really

fundamental thing. There is actually a

tendency for people to think about these

things i.e. business models as

snapshots. Uh but in fact what you

really want to do is think about on an

ongoing basis. How is it your product or

service is sold? And so I'm going to

take you through a series of things that

will give you a sense of the product

life cycle. And it starts with something

that I've always really enjoyed watching

companies who get it right do. And that

is creating what I call slippery

products.

When I told my daughter this, she said,

"Dad, what have slippers got to do with

products?" Kind of missed the point, but

anyway, we'll see if we can get it

across tonight. Okay. Uh, the first

thing is creating a product that is

simple to use. Obviously, the simpler it

is, the more likely it is for people to

instantly get it. The second is low to

no initial cost. That takes more

friction out of it. The third is

installs easily. You'd be shocked how

many times, even if something's free as

an app on your iPhone, think about it.

If it takes a while for you to install

it and it actually isn't immediately

functional, it doesn't have some

component or it doesn't fill in too much

data or whatever it is to get it going,

you're not going to use it. And then how

does it prove its value really quickly?

If it instantly delivers something back

to you before you have to put a lot of

stuff into it, you're going to start

using it. Next on the list is obviously,

does it play well with others? In the

enterprise, this is incredibly important

because if it disrupts everything, even

if it's free and it's incredibly easy to

use and you're getting value from it,

but you have to replace everything

before you can use that, it's going to

be really

tough. Next is obviously ease of use.

But I say this and yet it's amazing how

many people spend zero time up front

thinking about user experience. The user

experience is everything. It's usually

what dep describes obviously defines

excuse me how often it gets used, how it

gets circulated and so forth. And so pay

attention to that up front. From a

business standpoint, we've been talking

about this. The customer is going to

look at payback and ROI. And so make it

obvious. Make it obvious right up front

why this pays for itself, why it

justifies itself. In the end, my

favorite one is the why. Why not? Why

customers can't live without this should

be what they should be thinking. Not why

might they try it, but why can they

literally not live without it? That's

back to that gain pain equation. For

those of you who are here, if you give

them so much gain and there's no pain

because it's so slippery, friction free

to adopt this product, they're going to

buy it. So I would actually say one of

the most important elements of the

business model is in fact creating

slippery products. It's creating

friction-free products. And oftentimes

people say, well, R&D's got nothing to

do with the business model. I say it's

got a ton to do with it. We just talked

about one example which David gave,

which is about how you chunk it up. But

actually, if you right from the get-go

figure out what your business model is

and you decide to create a slippery

product, you can take a ton of the

friction, in other words, the cost out

of marketing, distribution, sales,

service, and support. So, it's worth

taking that thought really early on into

your thinking as you define your

business

model. And to help bring this to life,

I'm going to introduce Mark Taber, our

CEO from Active Endpoints. And as Mark

comes up, I'm going to tell you a little

bit of story to set him up because uh I

actually inherited this investment and

that's never an easy thing when you're a

partner in a venture firm. Um I didn't

inherit Mark. I was lucky enough to go

recruit him. But uh it was a middleware

product. It was a tiny piece of a

product actually. They had something

called a Beetle engine. Yeah. You don't

need to know what that is. I'll just

tell you it was a feature. Uh, and so it

wasn't even a whole product. And Mark

came on and the first thing he said to

me when we were we're going through

recruiting is, I don't want to talk to

you about the product. I want to talk to

you about the business model. I've got a

vision for how I could take this thing

to market in and he didn't use the word

slippery although I think I've coaxed

him into using it now uh way. And it's

turned out that he's figured out how to

sell complex very difficult stuff to

sell anyway in any more way uh in an

exciting way. typically selling, you

know, something of of the order of tens

or hundreds of thousands of dollars

worth of value over the phone. This is a

company that's doing millions of dollars

of revenue, has has literally been

growing at at phenomenal rates every

year without having a single outside

salesperson. Extraordinary. So Mark, how

did you do that? Yeah. So in actuality,

we we did structure the whole company

out of this concept of making it simple

and how we bring it to market. process

automation, which is what we do, it's

been around for a long time. Business

process management, the corporate IT

people have been, you know, able to

accomplish things for their users for a

long time, but it's it's way too hard.

And so the concept of active endpoints

has been how can we enable the business

user to make their life simpler by doing

these things themselves. And so the

example that I that I've shown here is

how can we make the life of a

salesperson easier. They interact with

an application. Most of them use

something called Salesforce.com which is

really just a database to collect

information. But salespeople don't want

to write reports. They they don't want

to gather the information. And because

of that, they frequently miss common

things that they that they know they

should do, but they just forget and and

they don't do it consistently over time.

So what we did was we invented some

technology to allow a business user to

do their own automation. So in fact you

could use a mobile phone and the

texttospech

uh capability speech to text capability

that is for example in an iPhone using

Siri you can talk into the phone say

show me my meetings today. A guide will

come up and you can just speak into it

what happened at the meeting. You can

hit a button if you want a thank you

email to go out or whatever whatever it

is you normally do after a meeting. if

you want to set up a follow-up or

something like that, it will

automatically happen in the background.

And so this this is it's great in the

fact that we've done it, but the real

innovation is the fact that we allow the

business user to do it themselves. And

so we took that concept and really our

entire go to market really everything

about the technology and what we do

encompasses this comp, you know, this

concept of slippery, though I didn't

know the acronym until yesterday,

Michael. Uh but you know it

was but it but it's exactly what it's

exactly what we do. We tried to make

this this product as easy to use as

possible. We tried to make it as

frictionless as possible. So in fact you

could just go to our website you can

just enable yourself. You can try it.

You can use it. You can interact it. You

interact with it. You can get a free

version of it uh to use. I have Eric

Edggerson our head of sales. Maybe you

want to share like a you know how some

of our customers are doing that. Sure.

Sure. Mark, I'll just u mention one

customer. Plymouth Rock Energy down in

the New York City area. Traditionally

had been an old line supplier of coal

and oil to large facilities. That

business isn't such a great business

anymore. So they've transformed

themselves into a broker of energy

including electricity and natural gas.

Uh and they use Salesforce.com for all

of their new customer signups. So they

had to customize Salesforce.com

tremendously. Uh when you sign up a new

customer as an energy broker, you have

to specify the supplier, who the

distribution channel is going to be,

whether they're going to pay a premium

for green energy sources. Uh and it

turned out for the Salesforce.com users,

the sales rep signing up a new uh

customer, it was a very complex process.

They had to go through the Salesforce

screens. So we met a gentleman down at a

Salesforce.com

um event in New York City on a

Wednesday. The following Monday, we gave

him a demo via a go to meeting, via a

web meeting. Uh he was able to get on

our cloud hosted product, uh started

building his little process wizard the

next day that his sales reps could use

uh to go through this complex process of

onboarding a new customer. Uh by the end

of the week, he had it working and the

following Monday placed the order with

us. So, you know, going back to some of

the points, you can probably map what

happened there into these points, but

installs easily. He was able to sign up

on the web. could prove value in just a

couple of days by creating a wizard that

walked their users through these complex

um processes. And what else do I want to

say? Plays well with others. Having the

Salesforce.com integration has been

tremendously valuable to us, Michael. I

would call it both a lever because it

reduces our marketing cost tremendously.

We know who our market is and we're able

to get to them through Salesforce and

it's a multiplier um because uh we're

able to increase revenue by selling

users. Last one was we sell it per user

per month. The guy was concerned he's

only going to have 15 users to start

out. We said that's fine. You can buy 15

user license. When you add 10 more next

year, you just buy 10 more licenses.

Great. Thank you guys very much. And I

think you know you can pick lots of

companies. The the reason I chose active

endpoints is it would be a horribly

complex sale normally to be able to sell

middleware. And all of their competitors

by the way, people like IBM are going in

with three-legged sales sorry three

person sales calls. Six-legged sales

calls hopefully. uh and they're spending

a lot of money and they're having as a

result to charge orders of magnitude in

some cases more for their products and

services. And this company has taken

market share away on a consistent basis

been doubling year on year in some cases

in in their product sales through this

slippery product concept. And thanks to

the team for being so innovative

approaching it that way where we're at

the technology at the core of it. It's

interesting but in a very highly

competitive

market. So let's put it all together. Um

I want to give you a a very clear metric

which you've probably seen. If you

haven't, you certainly should know about

and that is this notion of coming um up

with an understanding of if your

business model is working or not. And

for startups, the metric that people now

are getting used to is lifetime value.

That is how can you how much can you get

from a customer over the lifetime of

working with them divided by the cost of

acquiring that customer. And in general,

if your lifetime value from a customer

isn't around three or greater the time

times the cost of acquiring that

customer, you probably don't have a

profitable business model. And

unfortunately in startups, most times

people don't really spend time to think

about this up front either. But all the

multipliers and levers that I talk to

you about should be factored into what

is it that you're doing to obviously

increase on the one hand the lifetime

value. How can you get more out of

customers over time with for example

that Russian doll packaging we're

talking about more and more versions or

additions or in reducing the cost of

acquiring the customer in the ways we

just talked about with things like

strategic partnerships and there are

many examples um that I didn't go

through like channels and so forth that

can give you reach and take cost out

too. In the end though, when you boil it

all down, you should find that this

ratio plays out, as I said, to roughly

three or more times uh value, the value

you're capturing than the cost you're

implying uh to get that customer

successful. Now, that model's been, I'd

say, pretty successfully adopted by many

of my customers, but I noticed something

over the last few years as it's become

accepted that's been missing. And so I

want to introduce this because what we

found is almost every startup just as

you heard Eric describe gets in at one

point and then has a relationship to

maintain the customer to get the full

value. And I find most people ignore

that latter set of re-engagement with

the customer. So I'm going to give you a

sense of what you really need to think

through. This refinement to me to keep

it interesting is a matter of life and

death.

I'm going to talk about a customer life

cycle in a very simple methodology to

start off with. See, try

buy. Think about it for a second. That's

basically what happens when you look for

products. You see it, you try it, you

buy it, you run it, fly, and ultimately

it dies some kind of death. And that

cycle is typically described by people

in this kind of a bell curve. And the

problem with it, at least in the

software business and many B2B

businesses, is if it really looks like

this, you have a long costly customer

acquisition cost, a slow payback period,

and very short lifetime value. And if

that's really what your business model

looks like, in my opinion, you're in

trouble. And unfortunately, it's what a

lot of startups I see exactly have as a

business model. And so, I'm going to try

to help you think about ways that you

could get beyond that.

We'll talk about this more in the go to

market session next week. But one of the

first things u I always see when I do

postmortems with companies is that they

haven't broken these stages down from

the simplistic C drive by fly model that

I talked to you about into much more

granular stages. And granular stages

just to give you an example of this

would be awareness. How do you even

discover somebody interest? How do you

get their interest? How do you get them

to understand what your capabilities

are? Then engage with you then try it.

Then purchase it. And I could go I could

probably pick 30 or 40 more if I really

wanted to break it down. We'll talk

about more of this as I said next week.

But just for now, think about this as

follows. Once I've bought the product,

how do I stay engaged with you? What is

it that I do to repurchase? So, I'm

going to introduce an obvious constant

obvious idea here, and that is how do

you re-engage the customer after they've

bought? How do you actually get them to

retry the next capability that you

introduce? either the upgrade or the

update or the whole new version that you

just came out with. So in this cycle of

re-engagement and repurchasing it, there

are a lot of steps that are basically

the same as you did when you first

introduced the product or connect with

the customer. And if you get them right,

it turns out you really dramatically

change the cycle. In fact, what you

really want to do is of course have the

cycle occurring over and over again.

customer keeps coming back to you as

your preferred supplier or as your

trusted source as or as a person where

they'll buy the next set of

capabilities. And if you can do that

successfully, what you'll find you can

do is dramatically extend the life cycle

of the customer. Uh and if you use

things like slippery products that we

just talked about, you'll have a much

more um simple experience up front and

take all the friction out. you'll have a

much rapid more rapid adoption with that

Russian gold packaging as an example of

how you might do that. And then very

importantly, you'll have a much extended

life cycle because you'll find ways to

re-engage the customer over and over

again. So, it's a lot to take in. And

what I felt like I should do is give you

an example of how actually you can avoid

the death that happens here uh in the

software world with an example of

exactly this. So how are you going to

have uh a long happy life is is really

the question in the software world. Well

when I started out as I said I'm dating

myself it was the only person who

installed stuff they were the only

people who customized it. There were

infrequent upgrades. Most of the stuff

actually sat on shelfware as we called

it. It was all proprietary and people

licensed it on a perpetual basis. The

poster child for this probably would

have been Oracle uh quite frankly. Um,

but it's all changed. And in fact, if

you use all the techniques we've just

said, what you can use is the web to

make it easy for people to trial stuff.

You can then make it easily uh

self-service as you just heard, you

know, Eric give that example. The

customer didn't have to come in for

training or figure out how to configure

or install the thing. They were just

using it on the web live trying it in

their own situation. It can be on

demand, so there's absolutely nothing

for them to actually buy initially. It

can be available literally over the

cloud. And software as a service is very

much the post child for that. And

obviously if you make it open source or

extensible in some way they can extend

it or add to those capabilities

themselves. And ultimately through a

subscription model they can buy it as

they need it and pay for it as they use

it. The result of all of that is what

this extended life cycle. It creates

this incredibly easy basis for people to

try things adopt them and then buy them

as they need them. and then on a

subscription basis keep reusing them and

underneath it the engine for it is very

important for you to think about which

is how do you keep engaging the customer

and I'll say again what I obvious often

observe with startups is they think

they've got the customer and they think

that just continuing to introduce new

innovations is the answer maybe u you

might have that kind of customer but how

many times have you downloaded an iPhone

app recently for example and then never

used it

again show of hands

Okay, a lot of you. That's exactly what

I mean by this green circle. I will tell

you that that's a big problem for mobile

app developers and it's just a bigger

problem for almost every example of

software in B2B or or other worlds too.

So, you really got to think about this

blue circles I put up there, this notion

of acquiring, not just acquiring, but

re-engaging customers. So, let's bring

that back to the the um the model that I

said earlier and just add that extra

layer. What this is about is not just

the levers and multipliers around your

core but also thinking about how you not

just acquire the customer but re-engage

them and continuously stay in touch with

them so that you don't get that iPhone

app dying but in fact you find some way

to to reconnect with them. It might be a

new map that you send them out if it's

GPS or it might be some new set of

content that you send them out if it's a

recommendation service or it might be

some new data that you send them out

that makes it obvious for them how they

can connect if it's a dating

application. Those things turn out to be

the difference between products that

have long life cycles that engage the

customers that get more lifetime value

out of them than anything else. And so I

reinvented that acronym and called it

customer cost of customer acquisition

and re-engagement. It's the R there. And

instead of it being lifetime value, it's

life cycle value. That's the L, the C in

there. And it really is important to

think about LCV, the life cycle value of

your customer. what can you get out of

them over and over again, not just once.

Uh and also what does it cost you to

re-engage? So when I describe this to

startups, I find that most people have

uh challenges initially getting what do

I mean by those kinds of things. So

here's an

example. Re-engagement costs are

typically things like support. Support

should absolutely be factored into it.

It's not just sales and marketing.

Keeping your customers often involves

customer service. And if you're in a B2B

environment and you're selling anything

like a complex product, it often

involves professional services. So all

of those costs should be factored in to

the the CAC, the cost of acquiring and

re-engaging

customers. Any questions before I move

on? We're nearly at the end. So to get

you to your workshop. Okay. So now you

have a model which I think is really

quite compelling to be able to work with

things. And for those of you who were

here when we talked through the value

proposition on gain pain, it also is

exactly the same concept and principle

as we talked about in gain pain. They're

just two views of the same problem. For

those of you were there for this

workshop, we talked about how could you

take the pain out of a customer getting

to grips with your product and give them

all visibility into the game. Well,

think about it for a second. That is how

the customer will view it. What you're

going to view on the other side is the

measurement of how much cost is it

taking for you to actually get the

customer to adopt the product. That's

the CC. And how much can you get from

that customer as they get those gains

over time throughout that life cycle.

That's the LCB. So they're just two

sides of the same principle. And they

work around this whole notion of the

core of your value proposition. So good

business models, you will constantly be

going back. I can I could make this

single template a basis for discussion

in every startup. What have we done to

take the pain out? How is that reducing

our cost of acquiring the customer? What

have we done to make it obvious to the

customer what gain they get right up

front? How can we make that work over

time to be a very large lifetime value,

life cycle value of a

customer? So with that, I'm going to

summarize and get us onto our workshop.

I have a question. I guess I um I was it

was unclear to me the concept around the

Russian goals. Um is the message that it

you're recommending to have various

versions of of a product a single user

or small business and enterprise or I

guess the counter for that is what

happens if your product is only geared

towards enterprise large companies and

you know a a single individual average

customer wouldn't have much value out of

that. Am I missing something? No, you're

not. You've actually got a great example

to challenge me on. So if your product

just to repeat the question, does the

Russian bull strategy work? For example,

if you've got a product that's only

valuable if you sell it to an entire

enterprise fairly, the answer is yes, I

believe it does because very rarely will

you be able to get an entire enterprise

to adopt a product in one go. It's just

indigestible. I mean, I've made this

mistake as a young entrepreneur. I've

tried to go sell people like FISA an

entire salesforce package for analytics

and say, "Hey, why don't you buy this

whole thing because your entire sales

force will get value out of it if you

can all see all the data on all the

products yourself." It's not going to

work because it's so difficult to get a

big enterprise to adopt any change. You

have huge pain in doing that and it's

going to take you months in a sales

cycle and you're going to spend a lot of

money doing it. But even though the

value might be the whole sales force, if

you gave them something right off the

bat, which is look, here is some data on

the benchmark of just one of your sales

teams, maybe even, you know, a small

region for example, of how they're

relatively performing in terms of their

sales effectiveness. That's immediately

valuable to them and that small team can

adopt it very quickly. If that team sees

success with it, they'll recommend it

elsewhere. And pretty soon you'll get

obviously largest regions will hopefully

hold groups divisions or theaters as

they call them large companies adopting.

So the reason I always think about it is

that it's all down to the same paying

game equation. You got to take the

upfront cost out of getting that

customer and you got to make it really

digestible and easy for the customer. So

if you don't want to call it Russian

doll, you want to call it, you know,

chunking up the elephant, I don't care.

The point is find digestible ways to get

that first intro introduction to your

customer to be as painless and slippery

as possible. Um, and then obviously it's

it's a great product that you can keep

re-engaging and that's why this piece is

so critical. You can keep re-engaging

them, adding more value, opening up more

and more of the the uh the dolls if you

will, exposing more value, then you will

get more and more lifetime value out of

that customer. Does that answer your

question? Yeah, it's it sounds like it's

a way to also gradually build your

credibility. Absolutely.

It's absolutely the biggest challenge

startups have and it's amazing how many

times we struggle this is just that one

word you use credibility and I think I

mentioned it on one of my slides often

times a strategic partnership is at the

top of the list providing a company

credibility uh an example from our

portfolio just to give people another

real world case study was we had a a

great entrepreneur we backed him again

actually Ashtosh in a storage world came

up with a concept in a company called um

app IQ to make it possible for people to

store data independent of the underlying

uh infrastructure. So in other words,

you matter whether you know storage from

IBM or EMC or Fuji or whatever. Uh the

application above could use that like

storage in a less cost effective manner.

It's a brilliant idea. But the problem

is applications are mission critical

storage is sold by big companies.

There's only about five of them in the

world who who own that marketplace. And

how the heck was a little company going

to get in the middle of those two

things? He did a genius thing and found

a way to make it possible for that to

become effectively very simple for

people, painless for people to try and

then he went and did a deal with one of

the major vendors and then it made it

obvious that all the other four needed

to play otherwise they wouldn't be

competitive and pretty soon he owned

that marketplace and had a great exit

and ended up being CTO of storage at HP

and now we're back in his latest startup

activity and he's doing it all over

again. uh but he really understands this

very very well. Maybe I'll get up to one

of the workshops. Does that answer your

question? Thank you. Any other questions

from people before we summarize

here? Okay. So, as you go after your

workshop, what I want to try to get you

thinking about is what is your

disruptive model going to be? How can

you make it as significant as your

technology? Can you focus on a core

differentiation? Not 20 things that you

do, but hopefully one. and what will be

the multipliers and leverage that you

will give it with innovations like we've

talked about this evening co-creation or

strategic partners uh or Russian gold

packaging or slippery products and then

how will you measure that not just once

but over the extended customer life

cycle with LCB and CC.

So I I hope everybody had some fun this

evening. I I must say I continue to be

blown away by what a great group this is

because if you look at some of the

things we were trying to do and we were

trying to figure out you know could you

come up with a core value problem. A

number of you took some pretty bold

moves to not declare it as the obvious

thing the technology but you focused on

things like data or data and analytics

or content in one case. You were quick

to figure out what your multipliers and

your levers were. Some of you found some

really great ways to make partnerships

that were win-win that would work on

both sides of of that. So multipliers

and levers and then a lot of you were

talking very clearly about just as you

heard how important the slippery product

concept is to make it easy for people to

get instant value out of this and and

instantly they're obviously start

spinning the wheel. Um, a few people

definitely picked up on this life cycle

concept and this notion of keeping

people engaged and I heard some good

examples of that. And overall, although

we didn't try to get you down to, you

know, actually calculating your uh, life

cycle value and your customer

acquisition and re-engagement cost, I

felt like a lot of you grasped this so

well that you would have no problem

doing those kinds of things. So, I want

to take my hats off to all of you and

say congratulations. Thank you.

[Music]