Presentation given at the Business of Software Conference, Boston, MA September 2014. Michael Skok discussed what it takes to go from zero to IPO with Demandware as a case example. Co-presenting with Scott Dussault, former CFO of Demandware, they discuss getting DWRE Repeatable, Sustainable, Valuable and Predictable ready for IPO. The presentation also covers introduction to many Startup Secrets such as how to build Friction Free, SLIPPERY products, linked form this presentation.
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Redefining the Business of Software
1. Harvard innovation lab Michael J Skok Startup Secrets Business of Software
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Redefining the Business of Software
STARTUP
An insider’s guide to unfair competitive advantage
SECRETS
#startupsecrets
MICHAEL J SKOK
Hi Harvard innovation lab
startupsecrets.com
@mjskok
Tweet questions to:
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Why are we here?
• A story…
– Zero to a couple of billion dollars…
– but NOT back again!
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If you want to build a billion dollar
business…
Start with a MULTI billion dollar
problem
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E.G. eCommerce…
Market:
eCommerce:
• $4.7 trillion
• ~7% penetrated
• Growing in mid teens
Problem:
“Under siege”,
Disruptions
• Offline -> Online
• Physical -> Digital
• Mobile -> Omni
Channel
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And if you want to build a
business around it…
… you’ve got to make it RSVP
• Repeatable,
• Sustainable,
• Valuable,
• Predictable
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Startup Secrets - Tasters…
Our agenda today includes some small samples
from the Startup Secrets series:-
• Value prop - fundamentals
• Business model - basics
• Product – friction free, “slippery” products
• Metrics – that matter
For the full details of these and other workshops
see www.startupsecrets.com
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Value Proposition - excerpt
… customer view
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Customer view = Gain/Pain
• Revenue
• Cost savings
• Time
• People
• Competitive advantage
• Reputation
• Etc..
• Inertia
• Switching costs?
• Default = do nothing
• Alternatives?
• Good enough =
good enough!
• RISK on a startup
• Find (See)
• Try
• Buy
• Implement
• Deploy
• Own – eg.TCO
Inertia,
Gain RISK
Pain
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Customer view = Gain/Pain
• Revenue
• Cost savings
• Time
• People
• Competitive advantage
• Reputation
• Etc.
• Inertia
• Switching costs?
• Default = do nothing
• Alternatives?
• Good enough =
good enough!
• RISK on a startup
• Find (See)
• Try
• Buy
• Implement
• Deploy
• Own – eg TCO
Inertia,
RISK
Gain
Pain
>10
“An order of
magnitude”
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Demandware
• Commerce, NOT infrastructure
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Business Model - excerpt
… your view
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Basic Startup Model
• Lifetime Value of Customer (LTV)
• Cost of Acquiring Customer (CAC)
LTV ~3x >
CORE
Levers
Multipliers
CAC
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A typical product lifecycle
See, Try, Buy, Fly, Die…
See Try Buy Fly Die
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A typical product lifecycle
• How do we avoid:
– Pain, time and cost of adoption?
– Premature decline?
Long, costly (CAC), slow payback, EXTENDED lifetime value (LTV)
See Try Buy Fly Die
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Adding Retention and Upsell
Extended
Lifecycle
Up-sell Re-Trial
See Try Buy Fly Die
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Retention
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Upsell
14 x
leverage!
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The Model Refined –
Enabling Retention & Upsell
• Cost of Acquiring & Retaining Customer (CARC)
• Lifecycle Value of Customer (LCV) = incl.
Repurchase, Upsell
CORE
Levers
Multipliers
Up-sell Re-Trial
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Retention Costs
• Must be included in CARC as you drive down
Churn
– Examples:
• Support
• Customer Service
• Professional Services
• Also include any Re-engagement costs
associated with any Upsell as you drive up
ARPU
– Sales, Marketing etc
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Value Prop & Business Model
TOGETHER
customer view & your view
TOGETHER!
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Value Prop & Business Model
• They are two views of the same principle:
– Customer view = Gain/Pain
– Vendor view = LCV/CARC
CORE
Levers
Multipliers
Up-sell Re-Trial
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Up-sell Extended
Extended
Lifecycle Re-Trial
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An extended & valuable lifecycle:
“Land & Expand”
Self service
Web / Mobile
On demand
SaaS
Subscription
Open source
Up-sell Re-Trial
Lifecycle
short, low cost (CARC), quick payback, extended lifecycle value (LCV)
See Try Buy Fly Die
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Up-sell Extended
Extended
Lifecycle Re-Trial
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An extended & valuable lifecycle:
“Land & Expand” without friction
Self service
Web / Mobile
On demand
SaaS
Subscription
Open source
Up-sell Re-Trial
Lifecycle
short, low cost (CARC), quick payback, extended lifecycle value (LCV)
See Try Buy Fly Die
Frictionless, SLIPPERY
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Demandware
• Software is free, it’s a shared success model
(business model can be more important than
product in reducing friction)
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How do you take away the pain,
and reduce friction?
… make it SLIPPERY
(Reduce the Pain in
the Gain/Pain Ratio)
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Friction Free, SLIPPERY products
• Simple
• Low to no initial cost
• Installs and integrates
• Proves value quickly
• Package for progress
• Experience is compelling
• ROI is obvious
• Your customers can’t live without it – it’s stickY
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Simple
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Which is better?
Microsoft Sony
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Neither! = Less is More!
Microsoft, Sony Apple
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Simple ≠ Easy to do
• Simple ≠ Easy !
• Simple often means complex
technology that makes your product
“magic”
• Simplification Innovation
(search algorithms in the cloud)
With thanks to Will Koffel @wkoffel www.clearlytech.com
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Example
Knowledge Management vs. Capture
Lotus Notes Evernote
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Less is More…
features are the enemy of function
functionality can overwhelm users
applicability is all that ultimately matters
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Demandware
• Retail practice group – best practice for
merchants
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@mjskok #startupsecrets startupsecrets.com
Why are we here?
• A story…
– Zero to a couple of billion dollars…
– but NOT back again!
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Welcome Scott Dussault
former CFO
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Metrics that Matter
• Annualized Revenue per Customer (“ARPU”)
• Renewal Rate/Churn
• Revenue per Employee
• Cost of Acquiring and Retaining a Customer
(“CARC”)
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TRAK
VOCS 0.0x
CRM
SPSC
RP
BCOV BV
IL
SQI
TNGO
FLTX
MRIN
CTCT
N
CVT ECOM
ULTI CNQR
DWRE
LPSN
MKTG JIVE
SREV
20.0
x
18.0
x
16.0x
14.0x
12.0x
CSOD
R² = 0.6577
TXTR
10.0
x
8.0
x
6.0
x
4.0
x
2.0
x
0.0
%
10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
CY14E EV / Sales
Source: FactSet, Stifel estimates
WKDY
Now MKTO
Estimated CY14 Organic Growth Rate
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ARPU
• Higher ARPU indicates value delivered
– “SLIPPERY” products will drive sequential and year
over year ARPU growth
• Increasing ARPU driven by upsell
– Chance to demonstrate how well your customers re-engage
(which is demonstrably better than re-sell)
• Investors view ARPU as THE driver of CLV and,
most importantly, revenue growth…
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Renewal Rate/Churn
• Renewal rate/churn is unique for every business
– Need is to demonstrate stickiness
– Dollar value renewals, churn count, long-term
contracts
• Rule of thumb is “needs to be better than 90%”
– So figure out a metric that magically results in 90% or
better…(MJS: but don’t lie to yourself!)
• Investors view renewal rate/churn as THE metric
for visibility and long-term revenue growth
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Revenue per Employee
• Cloud software is a technology delivery model
that provides significant operating leverage
– Most if not all have subscription revenue models that
enable predictable revenue streams
• Subscription revenue models on their own may
not provide significant operating leverage
• Legacy software models are inherently
profitable, but not predictable
• Revenue per employee greater than $250,000 is
a benchmark for inherently profitable models
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CARC
• Cost of acquiring a customer
– Unique metric for each business – what is the sales
model? How does marketing play in?
• Cost of re-engaging a customer
– What are the costs for operating a customer? How do
customers renew?
• High gross margin businesses with less touch on
re-engagement will have the best CARC metrics
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Customer
Expansion
Base
Subscription
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Frictionless Land and Expand, Drives ALL
of these Metrics
Q1 Q2 Q3 Q4
Year 2
Q1 Q2 Q3 Q4
Year 3
Q1 Q2 Q3 Q4
Year 1
Quarterly Revenue
$200,000
$180,000
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$0
Cohort analysis includes a family of third-party solution partner customers who share a minimum level of subscription revenue and 56 customers all of which have been
operating on Demandware’s platform for a minimum of three years through December 31, 2013. Analysis excludes two customers operating on the platform for three years –
one invoiced through a third party and Neckermann GmbH.
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Frictionless, SLIPPERY+ Land & Expand
= ?
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Frictionless, SLIPPERY+ Land & Expand
= fastest growing software companies
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Frictionless, SLIPPERY+ Land & Expand
= fastest growing software companies
“Addiction before Adoption & Expansion”
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“Addiction before Adoption & Expansion”
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Frictionless, SLIPPERY+ Land & Expand
= fastest growing software companies
Delight,
ADOPTION
ADDICTION
(Free, Open Source)
Upsell
EXPANSION
$400
$350
$300
$250
$200
$150
$100
$50
$0
LCV
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Why are we here?
• A story…
– Zero to a couple of billion dollars…
– but NOT back again!
49. @North_Bridge @mjskok
@futureofcloud
#futureofcloud
THE FUTURE OF
CLOUD COMPUTING
4TH ANNUAL SURVEY 2014
http://bit.ly/2014FutureCloud
NORTH BRIDGE FUTURE OF CLOUD COMPUTING SURVEY IN PARTNERSHIP WITH GIGAOM RESEARCH
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Why are we here?
• A story…
– Zero to a couple of billion dollars…
– but NOT back again!
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@innovationlab
@mjskok #startupsecrets startupsecrets.com
Tasters…
• Value prop - fundamentals
• Business model - basics
• Product – friction free, “slippery” products
• Metrics – that matter
• Cloud – the second front
60. Harvard innovation lab Michael J Skok Startup Secrets Business of Software
… fundamentally more Repeatable, Sustainable, Valuable & Predictable…
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Redefining the (Business of) Software
1990+ Now +
• Installed by IT
• Customized
• Infrequent upgrades
• Proprietary
• License
Web / Mobile / Self
SReersvtficuel APIs,
Extensibility
On demand, SaaS,
Cloud
Open Source, Open Data
Subscription,
Recurring
Web
On demand
Self service
SaaS
Subscription
Open
source
Up-sell
Extende
d
Lifecycl
e
Up-sell
Extende
d
Lifecycl
e
Re-Trial
RSVP = YES!
short, low cost (CAC), quick payback, EXTENDED lifetime value (LTV)
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Thank You BoS!
RESOURCES at mjskok.com/bos2014
STARTUP
SECRETS
#startupsecrets
MICHAEL J SKOK
Hi Harvard innovation lab
startupsecrets.com
@mjskok
Notas do Editor
Amazon
Sustainable – with operating leverage
And ultimately applicability to the customer’s need and job to be done…
We sit at the convergence of three significant sectors; 1) global retail, 2) digital commerce and 3) cloud computing software delivery
We serve a large and growing market
We deliver a mission critical, consumer facing enterprise-class application in a SaaS delivery model
Our unique platform & shared success value proposition has created a significant barrier to entry
DWRE is a growth story
Revenue has grown from $21.4 million in 2009 to $103.7 million in 2013
Growth has been achieved because we have multiple growth vectors
1) New customer acquisition
2) Customer growth through site growth
3) Customer growth through site launches
All leading to expansion of ARPU, $515k as of June 30th and increasing every quarter since we started tracking at the end of 2008
Modern explosion in Cloud Services (SaaS services and APIs)
Engineer your differentiation as your CORE
Everything else? Lucky You, there’s a service for that – “outservice” it!
Cloud Services + Outsourcing = “Outservicing”
When developing frictionless, SLIPPERY products, the S in SLIPPERY = Simple and Cloud Services can simplify your development and your offering.
While significant value was created in the Software1.0 era, we are in the midst of a significant shift in how software is developed, deployed, and monetized
The last 20 years could be characterized as DIY computing - where applications were installed and customized by IT, requiring significant resources and ongoing maintenance on thousands of servers and desktops -- in the 2.0 world, the software is hosted and delivered over the Web / Mobile with no installation or maintenance required
<click> in the 1.0 era, customization often took months, if not years -- while in 2.0 it is configured rapidly to meet customer needs
<click> the customer was at the mercy of a the vendor’s infrequent upgrade and bug fix cycle – while now update cycles have shrunk from years to weeks, with updates happening often without the customer being aware
<click> applications were proprietary requiring vendors to write large amounts of undifferentiated code and only a small amount on their unique value add -- while today open software taps into developers worldwide, leveraging the community and innovation outside to allow vendors to focus on their differentiation
<click> the 1.0 world required a significant up front capital investment that didn’t keep the vendor on the hook – in the 2.0 world we see a recurring subscription model which scales up and down with usage, providing a pay-by- the drink model for the customer and an annuity stream for the vendor
<click> much software purchased was never successfully deployed (aptly called shelfware). In the 2.0 world, we coin a new term, Proofware, because if a vendor can’t prove their offering delivers value, the customer will turn it off and move on.
The changes I am talking about are not merely a simple deployment change for vendors. It is <click> a fundamentally different business. These changes threaten today’s multi$B software companies and create a significant opportunity.