Stories and a Startup Secret from decades of business model innovation
It has been consistently proven over decades that business models will always be a critical element of any startup:
- Back in the early 80’s, despite having created a Computer Aided Design system that was a breakthrough in ease of use and an order of magnitude better prices performance as a workstation solution compared with what were then minicomputer and mainframe based solutions, we met resistance selling to architects because they were not used to high Capital Expenditures we changed our business model and figured out how to lease the equipment to them. It changed the game and our business took off dramatically, seizing outsized market share and a leadership position.
- When trying to sell Symantec / Norton Anti-Virus software in the early 90’s we realized it was not really the software people wanted but the ongoing protection from rapidly changing viruses. So we gave the software away and began to charge a subscription for the virus protection updates. Again it changed the game and we took the industry by storm, becoming the market leader, despite at some times, even having inferior technology!
- When addressing the rush to eCommerce in the dot com era, Stephan Schambach, the founder of one of the first eCommerce platforms (Intershop) lost out to bigger players. So when we invested in his second business, Demandware it was because of his vision to make it a simpler SaaS solution avoiding the complexity of running the full commerce stack, something foreign to brands, merchandisers and retailers. Yet there were still many challenges with top brands trusting their shopfront to a startup. However once the business model was evolved to essentially paying a small percentage of the sales that Demandware was enabling online, the business took off, becoming a highly successful multi billion dollar investment outcome as a public company and eventually a billion dollar revenue company post it’s acquisition by Salesforce where it still prevails as their “Commerce Cloud”.
- Drupal changed the game for people building websites from a closed source battle of feature functionality to an open source opportunity for anyone to create and integrate anything that helped serve customer engagement online. I was lucky enough to back the founder of Drupal, Dries Buytaert as he formed Acquia to commercialize and invest in the growth of Drupal. Open Source was disruptive but monetizing it required various evolutions of the business model for Acquia from Core Support (which failed) to PaaS (Platform as a Service) to SaaS with many Services, eventually creating a unicorn investment outcome and a multi hundred million dollar highly profitable business that continues to grow today.
In all these cases, the customer was being served the way they wanted to be served, with value being captured in line with their needs being met.
Startup Secret : By prioritizing the needs of your customers, you have the power to not only disrupt the industry but also establish a strong and defensible business model.
Related reading:
Customer-Centric Models🎙 Hear how Michael taught it the lecture, cleaned & woven in
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Let me give you some war stories from decades of building companies, because they prove you do not even need a technology breakthrough to create huge value in the marketplace. Sometimes the business model is the only thing you disrupt.
European Software Publishing: a 97x, off-balance-sheet business model. This had zero to do with technology. Based in the UK, I observed that nearly every major US software product coming into Europe was failing, not for lack of a good product, but for lack of investment in management, marketing, distribution, sales, services, and support. The US market is roughly 10 times bigger than the UK market, so a $10 or $20 million US company arriving in the UK might be only a $2 to $2.5 million company there, with no room to invest in marketing, management, distribution, or translation and localization. US companies typically just handed products to distributors, but distributors distribute, they do not localize, translate, support, or provide a tangible presence for major customers like British Petroleum or Royal Dutch Shell. And for a company like Symantec (then only about a $20 to $30 million company preparing to go public), setting up a European organization is very costly in time, management energy, and real dollars, and it hits your P&L right when you are trying to become profitable.
So I created European Software Publishing to be the critical mass across multiple publishers, putting the right quality of management, marketing, distribution, and even translation and localization behind a series of companies that each benefited from the economies of scale. If I had already sold to Royal Dutch Shell and had that relationship, bringing in the next product was easy (lower cost of customer acquisition, more effective sale and support), and we did it very selectively (introductions to the equivalent of the Times 100 companies). Then the business model behind it: we enabled the US publishers to buy us back once we became profitable, on an “anti-dilutive” basis using a mechanism called pooling of interest (a tax-efficient structure you cannot do today). We took on the expense and P&L hit of building the European business, and when it became profitable the publisher acquired it, which was immediately accretive to their earnings per share and added to their value, non-dilutively. So the minute they acquired it, it added to both their top and bottom line. We effectively incubated these companies until they were successful and then let them acquire them back on a highly profitable, non-dilutive basis, time-shifting the expense.
Everybody won. The publisher gained accelerated access to the market; customers got a local organization doing a much more comprehensive job of bringing products to market, translated and supported; Symantec became their most profitable business outside the US, and the day after the acquisition was announced their share price went up while the earnings stream kept contributing. And the early investors got a 97x return on their money. The only pain: the two huge Bibles of legal paperwork that sit on my shelf as a reminder of what it took to conclude the Symantec deal. Nothing on the technology side of the balance sheet, just economies of scale and a clever, disruptive business model that created millions of dollars of value.
Startup Secret: the best business model probably has not been invented yet, so start as you plan to finish. Do not pick somebody else’s business model and apply it to your situation, because at that point you are adding very little value. Think about business models as creatively as you think about technology, right from the get-go, and design in the multipliers, levers, retention, and upsell from day one. If you know you are trying to build a valuable company, why not design it that way from the start? These are 20-year-old stories, but the same fundamental principles play today; we just use more specific terms now, like retention, upsell, land-and-expand, and recurring revenue. Take a step back from whatever you are innovating on and innovate around how you create a disruptive business model. It is at least as significant as the technology.