In our industry, it’s not uncommon for entrepreneurs to become so mono-focused on the novelty of their product that they forget to innovate sufficiently around their business model. A disruptive business model can be at least as important as a discontinuous innovation.
On National Teacher Day, meet the 2024-25 Kenan Fellows
Startup Secrets - Game Changing Business Models
1. Proprietary and ConfidentialProprietary and Confidential
START UP
SECRETS
An insider’s guide to unfair competitive advantage
Disruptive Business Models to build Value
@underscorevc #startupsecrets
startupsecrets.com
2. Proprietary and ConfidentialProprietary and Confidential
Introductions & Case Examples
Established
• Google
Startup
• Acquia
• Demandware
Not for profit
• One Laptop Per Child
• Diagnostics For All (on the web)
2Disruptive Business Models to Build Value @underscorevc startupsecrets.com
3. Proprietary and ConfidentialProprietary and Confidential
Agenda
1. Finding a Disruptive Business Model
2. Focusing on CORE differentiation
3. Multiply and Leverage it with innovation
4. Designing for high value
Other side of the coin – GTM – next session
- Eg Segmentation, Channels etc
3Disruptive Business Models to Build Value @underscorevc startupsecrets.com
4. Proprietary and ConfidentialProprietary and Confidential
What is your model for
• Creating
• Delivering
• Harnessing
VALUE?
4
4
Business Model:
How do you make money?
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
6. Proprietary and ConfidentialProprietary and Confidential
Business Model as a Disruptor
Why?
• Time to market
• Market adoption
• Sustainability
Connecting the dots for you as a founder …
• Spend
• Cash efficiency
• Your ownership
• Valuation
6Disruptive Business Models to Build Value @underscorevc startupsecrets.com
7. Proprietary and ConfidentialProprietary and Confidential
New Market
& GTM
Disruptive
Business Model
Disruptive
Technolog
y
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
Perfect Startup Storm
7
8. Proprietary and ConfidentialProprietary and Confidential
How can your Business Model…
Change the game?
Rewrite the rules?
Cause an innovator’s dilemma
Be as disruptive
as your technology?
9
New Game
New playing field
New boundaries
New rules
YOU choose players
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
9. Proprietary and ConfidentialProprietary and Confidential
Symantec Antivirus for Mac (SAM)
Best seller – Licensed Product
Norton Antivirus for PC (NAV)
How to change the game
Best seller – Subscription Service
Ex 1: Symantec – many years ago (!)
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 10
10. Proprietary and ConfidentialProprietary and Confidential
Dramatic!
Game changing
• Flipped the model on it’s head
Competitors caught off guard
• Predictable profitable business model
Led to solution leadership vs. battle: “Data Security”
• Customer need met more effectively
• More value extracted
• 1.5 product / seat => 2.6x
11
Results?
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
11. Proprietary and ConfidentialProprietary and Confidential
Off balance sheet Publisher of US products
• Investment in Management, Sales, Marketing, Support, Translation & Localization
Acquired back by US corp when profitable
• Pooling of interest
• Non dilutive
• Growing earnings
Symantec example Win/Win
12
Ex 2: European Software Publishing
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
12. Proprietary and ConfidentialProprietary and Confidential
Win/win/win
• Customers = better local product, support, services
• Publishers = accelerated, off balance sheet setup of profitable business
• Shareholders = 97X return on original investment
Non technology disruptive business model
• Economies of scale
• Pooling of interests (tax)
• Time shifting expense -> Accretive outcome
13
Results?
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
13. Proprietary and ConfidentialProprietary and Confidential
Shared ownership (Zipcar)
Flash sales (Vente Privee)
Crowd sourcing (uTest)
Lead Gen (Mint.com)
Virtual goods/currencies (Tapjoy)
Combinations
• Acquia - OSS, SaaS
• AirBnB - Commission on P2P rentals
• Demandware - SaaS, success based rev share
• Groupon - broker, revshare
• Spotify -adbased, freemium
14
Sample Models
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
14. Proprietary and ConfidentialProprietary and Confidential
Process or Product?
Software or Services?
Open or Proprietary?
Content or Data?
Freemium or Premium?
Subscription or License?
15
Business Model – Sample Questions
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
15. Proprietary and ConfidentialProprietary and Confidential
Your
Capabilities
Of
Really
Exceptional
Value
Focus on it!CORE
First key question
What is your CORE value?
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 16
16. Proprietary and ConfidentialProprietary and Confidential
Where is your CORE value?
Software/other technology
Data
Content
Service, support
User network
Disruptively monetize it!
• To your competitive advantage
• Where are others most vulnerable?
17
COR
E
Cut to the CORE!
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
17. Proprietary and ConfidentialProprietary and Confidential
Google Apps vs. Microsoft office
• What is the C.O.R.E for each ?
Software, Data, Advertising ?
Don’t compete head-on
• MS Office = enterprise market
• Google Apps = consumer market
• Free vs $500 license
• Simple vs Complicated
• 80% solution vs Professional Tool
18
- Ex 1 Apps
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
18. Proprietary and ConfidentialProprietary and Confidential
How can you compete with a market leader who has 80% to 90% market share?
1. Don’t compete head-on
2. Innovators Dilemma – go for low end
3. Disruptive technology, business model, or market approach
4. Examples: Gmail, Google Apps, Chrome
19
– Competing with Market Leaders
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
19. Proprietary and ConfidentialProprietary and Confidential
Apple vs. Google
• What is the C.O.R.E for each ?
Hardware, Software, Content ?
Others in Ecosystem
• Samsung, HTC
Alternative approaches
• Amazon
20
– Ex 2 - Mobile
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
20. Proprietary and ConfidentialProprietary and Confidential
Who is winning?
Why?
Is technology the difference?
Apple, Google, & Microsoft strategies
• Always play to your strength
• Apple Mac, Google Search, Microsoft Windows
21
Android vs iPhone
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
21. Proprietary and ConfidentialProprietary and Confidential
Disrupt the market leader
• Apple disrupted carriers and manufacturers
Verizon, Sprint, Nokia, Motorola, RIM, Symbian
• Android allowed them to fight back
Disruptive business model
• Android is free
• Advertising business model
• Search, Maps, Local, Wallet, YouTube
22
Android vs iPhone
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
22. Proprietary and ConfidentialProprietary and Confidential
Business Models Matter !
Don Dodge
dondodge@google.com
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 23
24. Proprietary and ConfidentialProprietary and Confidential
Startup Secret: Co-Creating Value
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
Be Open and Extensible (eg Software APIs)
• Enabling external multipliers to your value
• Building on yourself
• Eating your own cooking
• Being your own customer
25
25. Proprietary and ConfidentialProprietary and Confidential
Be Open and Extensible (eg Software APIs)
• Enabling external multipliers to your value
• Building on yourself
• Eating your own cooking
• Being your own customer
Open Source
• Leverage through community
• Make the customer the product manager
Scratching their own itch
26
Startup Secret: Co-Creating Value
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
26. Proprietary and ConfidentialProprietary and Confidential
Dries Buytaert
Founder and project lead Drupal
Co-founder and CTO Acquia
http://buytaert.net :: @Dries
27Disruptive Business Models to Build Value @underscorevc startupsecrets.com
27. Proprietary and ConfidentialProprietary and Confidential
Meet Dries 12 years ago when he started work on Drupal ...
28
Compiler books
Collection of stamps
Chess board
Assembly books
All furniture is from IKEA
Student dorm in Antwerp
where I started Drupal
28. Proprietary and ConfidentialProprietary and Confidential
1 out of 50 websites in the world
10,000+ modules
300,000+ downloads/month
1.5M unique visitors/month
FREE
29
30. Proprietary and ConfidentialProprietary and Confidential
1. Freedom to run the program
2. Freedom to study the program
3. Freedom to modify the program
4. Freedom to re-distribute the program
31
Open Source is a software license
31. Proprietary and ConfidentialProprietary and Confidential
Drupal wins because it is less expensive
… yet technically superior!
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 32
33. Proprietary and ConfidentialProprietary and Confidential
3,800 people contributed to Drupal 8
Open Source is not just a software license,
it is also a development model
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 34
38. Proprietary and ConfidentialProprietary and Confidential
“Creative Destruction”
Joseph Schumpeter
39
Joseph Schumpenter,
Economist, 1883-1950
Drupal and Open Source is a
catalyst for
“Creative destruction”- Changes how we develop
software
- Changes how we build websites
- Changes a multi-billion dollar
industry
- Open Source enables business
model innovation
- Bonus: allows to do well, and do
good
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
40. Proprietary and ConfidentialProprietary and Confidential
Multiply and Leverage your CORE
Multipliers:
• Increase revenue
• Increase reach
• Increase coverage
Levers:
• Reduce time
• Reduce costs
• Reduce resources
CORE
Levers
Multipliers
Startup Secret: Multipliers & Levers
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 41
41. Proprietary and ConfidentialProprietary and Confidential
Multipliers:
• Added functionality
• Community reach
Levers:
• Community development
• Community marketing
CORE
Levers
Multipliers
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
Multiply AND Leverages CORE
Drupal, Open Source
42
42. Proprietary and ConfidentialProprietary and Confidential
Multiplier Examples:
• Sales & Marketing
– Tiered Pricing
– Freemium
– Channel partners
• Product
– Slippery products *
– “Russian Doll”
Packaging *
– Technology stacks
Lever Examples:
• Sales & Marketing
– Web
– Inside
– Inbound
– Viral
• Product, Support
– Offshoring
– Outsourcing
– Crowdsourcing
– Co-creation *
– Technology stacks
* Covered herein
Examples in Software
Startup Secret: Multipliers & Levers
CORE
Levers
Multipliers
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 43
43. Proprietary and ConfidentialProprietary and Confidential
Strategies that enable Multipliers and Levers to work
together around your CORE are the real winners
44
Get Multipliers & Levers working together!
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
45. Proprietary and ConfidentialProprietary and Confidential
• Provider of cloud-based solutions/support for
enterprises using the open source product, Drupal
• 2000+ customers
• 250+ employees
• 150% 4 year CAGR
• Global operations
• Highly predictable and repeatable model
• Land and expand strategy
46
PROPRIETARY AND CONFIDENTIAL - do not redistribute
Acquia at A Glance
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
46. Proprietary and ConfidentialProprietary and Confidential
Acquia Business Model
Drupal is FREE
It is also Open Source
So how do you make money from FREE and Open IP?
1. Create valuable products and services around the CORE of Drupal
2. Use FOSS as multiplier and a lever in R&D, sales and marketing
47
PROPRIETARY AND CONFIDENTIAL - do not redistribute
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
47. Proprietary and ConfidentialProprietary and Confidential
Acquia products around Drupal CORE
C OMMU N ITY C OMMER C EC ON TEN T
Enterprise Site FactoryDrupal
Gardens
Managed DeploymentsAcquia
Cloud
Drupal Management SuiteAcquia
Network
Drupal
Training
Professional
Services
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 48
48. Proprietary and ConfidentialProprietary and Confidential
As a multiplier AND a lever (in R&D, sales, marketing…)
49
Example Multipliers:
• Upsell value added
products & services
• Cloud & SaaS
Example Levers:
• Target installed base
• Expand usage through
partners
CORE
Levers
Multipliers
Free and Open Source Software
(FOSS)
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
50. Proprietary and ConfidentialProprietary and Confidential
Product feeds the business model…
• User experience
• Supportability
• Maintenance, updates (= lifecycle)
• Upgrades
• Upsells
Leads to 2 startup secrets
• Russian Dolls & SLIPPERY products
55
Designing for success…
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
51. Proprietary and ConfidentialProprietary and Confidential
• Simple
• Low to no initial cost
• Installs easily
• Proves value quickly
• Plays well with others
• Easy to use
• ROI is obvious
• Y customers can’t live without it
Think of how this improves
the Gain/Pain Ratio in our
Value Proposition
Workshop
Gain
Pain
Friction Free, SLIPPERY products
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 56
52. Proprietary and ConfidentialProprietary and Confidential
Simple: Update your site from the browser
Low to no initial cost: free
Installs easy: Windows/Mac installers + SaaS
Proves value quickly: Distributions + Start using immediately
Plays well with others: Lots of integrations with other platforms
Easy to use: Web-based
ROI is obvious: Better, faster, cheaper
Your customers can’t live without: flexibility and extensibility
57
What makes Drupal SLIPPERY?
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
53. Proprietary and ConfidentialProprietary and Confidential
Multi purpose strategy
• Packaging
• Pricing
• Distribution
• And more …
58
Startup Secret: Build a Russian Doll!
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
55. Proprietary and ConfidentialProprietary and Confidential
Limited
Free
Freemium …
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 60
56. Proprietary and ConfidentialProprietary and Confidential
Personal
Limited
Free
OEM Solution…
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 61
57. Proprietary and ConfidentialProprietary and Confidential
Workgroup
Personal
Limited
Free
Premium …
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 62
58. Proprietary and ConfidentialProprietary and Confidential
Corporate
Workgroup
Personal
Limited
Free
Sales enabler …
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 63
59. Proprietary and ConfidentialProprietary and Confidential
Enterprise
Corporate
Workgroup
Personal
Limited
Free
Adoption …
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 64
60. Proprietary and ConfidentialProprietary and Confidential
“Addiction before Adoption”
Gives you, your partners & your customers:
Digestible starting point
Upsell Options
Channel Flexibility
… and more
65Disruptive Business Models to Build Value @underscorevc startupsecrets.com
Startup Secret: Build a Russian Doll!
61. Proprietary and ConfidentialProprietary and Confidential
Acquire
On-board
Upsell /
Cross Sell
“Addiction before Adoption”
Acquia example = increasing LTV
“Land & Expand”
66
$0
$100
$200
$300
$400
2009 2010 2011 2012(e)
LTV
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
Startup Secret: Build a Russian Doll!
See example of 4A’s here
62. Proprietary and ConfidentialProprietary and Confidential
Create, Deliver & Harness Value
Putting it all together
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 67
63. Proprietary and ConfidentialProprietary and Confidential
Lifetime Value of Customer (LTV)
Cost of Acquiring Customer (CAC)
69
CORE
Levers
Multipliers
LTV ~3x >
CAC
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
Basic Startup Model
64. Proprietary and ConfidentialProprietary and Confidential
Repeatable
Scalable – with leverage
Profitable / Sustainable
Predictable
Valuable
70Disruptive Business Models to Build Value @underscorevc startupsecrets.com
What makes for a GREAT business model?
65. Proprietary and ConfidentialProprietary and Confidential
Development Target
Gross Margin 80%
R&D 100%+ 15%
Sales & Marketing 10%
G&A 45%
Profit (Loss) -100% 20%
71
• Example:
– Phases of a software company
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
% of Revenue spent…
66. Proprietary and ConfidentialProprietary and Confidential
Expenses as % of Revenue
62%
61%
53%
43%48%
29%
21% 19%
43% 50%
45% 44%
19% 14% 11% 11%
L/T Model
based on
profitable
subscription
based
software
company
62%
48%
43%
19%
51%
29%
65%
14% 11%
45%
21%
53%
44%
19%
44%
11% 10%
35%
15%
25%
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 73
67. Proprietary and ConfidentialProprietary and Confidential
• Today:
– 70% of all bookings are renewable subscriptions
– 30% are consulting services (key differentiator)
– 85%+ annual renewal rate for non-project work
• Long-term Model:
– 80% renewable subscriptions
– 20% consulting services
– 90% annual renewal rate for non-project work
Highly Predictable and
Repeatable Financial Model
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 74
68. Proprietary and ConfidentialProprietary and Confidential
New Geographies
New Partners
New Verticals
Potential M&A
Cross-sell
Up-sell
New Sites
New Products
New Customers Existing Customers
Result: Disruptive Business Model for Continued Growth
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
Total Revenue
70. Proprietary and ConfidentialProprietary and Confidential
2013 Revenue Multiples
Median 5.2x
Valuations - SaaS
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 77
71. Proprietary and ConfidentialProprietary and Confidential
2012-2013 Revenue Growth
Valuations - SaaS
2013 Revenue Multiples
Median 5.2x
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 78
75. Proprietary and ConfidentialProprietary and Confidential
14 x
leverage!
Upsell
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 83
76. Proprietary and ConfidentialProprietary and Confidential
Lifetime Value of Customer (LTV)
Cost of Acquiring Customer (CAC)
84
CORE
Levers
Multipliers
LTV ~3x >
CAC
Basic Startup Model
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
77. Proprietary and ConfidentialProprietary and Confidential
The Model Refined –
Enabling Retention & Upsell
Lifecycle Value of Customer (LCV)
Cost of Acquiring & Re-Engaging Customer (CARC)
85
CORE
Levers
Multipliers
Re-TrialUp-sell
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
78. Proprietary and ConfidentialProprietary and Confidential
Re-engagement Costs
Must be included in CARC
Example:
• Support
• Customer Service
• Professional Services
86Disruptive Business Models to Build Value @underscorevc startupsecrets.com
79. Proprietary and ConfidentialProprietary and Confidential
Connecting it to Gain/Pain
They are two views of the same principle:
• Customer view = Gain/Pain
• Vendor view = LCV/CARC
87
CORE
Levers
Multipliers
Re-TrialUp-sell
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
80. Proprietary and ConfidentialProprietary and Confidential
Start as you plan to finish...
88Disruptive Business Models to Build Value @underscorevc startupsecrets.com
81. Proprietary and ConfidentialProprietary and Confidential
A typical product lifecycle
But it doesn’t have to be this way !
89
See Try Buy Fly Die
Long, costly (CAC), slow payback, short lifetime value (LTV)
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
82. Proprietary and ConfidentialProprietary and Confidential
Adding Retention and Upsell
90
See Try Buy Fly Die
Re-TrialUp-sell
Extended
Lifecycle
Long, costly (CAC), slow payback, EXTENDED lifetime value (LTV)
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
83. Proprietary and ConfidentialProprietary and Confidential
Web
Self service
On demand
SaaS
Subscription
Open source
A disruptive & valuable Lifecyle
See Try Buy Fly Die
Re-TrialUp-sell
Extended
Lifecycle Re-Trial
Up-sell Extended
Lifecycle
short, low cost (CARC), quick payback, extended lifecycle value (LCV)
Disruptive Business Models to Build Value @underscorevc startupsecrets.com 91
84. Proprietary and ConfidentialProprietary and Confidential
Applied to Software
Installed by IT
Customized
Infrequent upgrades
Proprietary
License
92
1990+ 2010+
On demand, SaaS
Web based
Self service
Open Source
Subscription
Web
Self service
On demand
SaaS
Subscription
Open
source
Up-sell
Extende
d
Lifecycl
e
Up-sell
Extende
d
Lifecycl
e
short, low cost (CAC), quick payback, EXTENDED lifetime value (LTV)
Re-Trial
…a fundamentally disruptive & more valuable
business model
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
97. Proprietary and ConfidentialProprietary and Confidential
Summary
Disruptive Business Model – as significant as Technology
Focus on CORE differentiation
Multiply and Leverage it with innovation like:-
• Co-Creation
• Strategic Partners
• Russian Doll Packaging
• And Friction Free, SLIPPERY products
Design for high value using LCV & CARC
106Disruptive Business Models to Build Value @underscorevc startupsecrets.com
98. Proprietary and ConfidentialProprietary and Confidential
START UP
SECRETS
An insider’s guide to unfair competitive advantage
Hi
Disruptive Business Models to build Value
#startupsecrets
startupsecrets.com
Michael J Skok
99. Proprietary and ConfidentialProprietary and Confidential
T 617.303.0064
@underscorevc
53 State Street,
10th Floor, Boston, MA 02109,
USA
T 617.303.0064
@underscorevc
53 State Street, 10th Fl
Boston, MA 02109