Creating a Sustainable Business Model: Key Strategies for Startups

[Music] so what are we going to do tonight we have we're going to conclude what is

this semester set of classes and they come together at the point where we have to figure out how do we actually make a

business that's going to be either profitable or sustainable I know a lot of you have not for-profit Ventures and

so we also have a not for-profit case example tonight and delighted to have Jason here to talk about that but what

we want to make sure is that before you go too far too fast down the pro the process of taking your product to Market

that you think about what's the way that you're actually going to create the value and how you actually going to

deliver that value and harness it in a way that makes your business really sustainable so that's really what this

is about but before I go there as usual the value is not me talking it's me setting up the guest speakers tonight

with the framework and so I want to quickly introduce everybody if they could just be ready to stand up we've

got aqua's CFO here Dennis Morgan Dennis welcome good to have you here we've got from form lags Max good

to have you Max from diagnostics for all Jason Rolland nice to have you here and uh

from Opex engine Lori Lauren Kelly great to have you [Applause]

Lauren so at different points tonight we're going to introduce what they do and so don't worry if you haven't got a

handle on that right now we're going to be able to introduce them with context tonight and the agenda is going to be at

the simplest level to help you think about how you will find a disruptive business model and one of the reasons

that that's so important is that what you do is often not going to be fully valued until you do that so think about

how are you going to get the value that you build actually received in a way that helps you build a company and it

requires us finding what we talk about here is your core differentiation and then two key Concepts around that how do

you multiply it and lever it uh with innovation in the way in which you either build for example the product or

you deliver it to Market and one of the things that we had a lot of feedback on on the original first couple of years of

doing this was people really are thinking in many instances at this stage about how do they design their product

to build that value so tonight we're not covering that because this is good news we ended up make uh making a whole new

section about that called products to companies how do you turn products into companies and we gave our first workshop

on that uh last year in the spring so those of you want to see that that's online again at mj.com or on Harvard

iLab site and you can see more of that information there because it's certainly a key part of what you do in terms of

building the product and designing it to actually fit your business model but we're not covering it tonight because it

ended up being as I said such a highly requested thing we broke it out now the other side of the coin which people

should know about is coming up in the spring session so so next semester is how do we actually take products to

Market and that's often a key part of your business model so again we don't cover that tonight because it's a big

subject and it's it's broken into things like for example strategic positioning segmentation channels Etc so for those

of you are interested in that that's coming up in the spring all right let's Jump Right In business

model is typically about how do you make money and even if you're not for profit the key thing is you've got to figure

out the three components of your business model how do you create your value how do you deliver it and how do

you harness it and it's really a key opportunity to step back and say what can you do in this regard that is not

just me too but how can it be disruptive and for me this means things like what are the important ways that

you can reduce your time to Market get your market adoption down and make it sustainable and for an rur these are key

things because if you build a brilliant product but it isn't adopted easily and it costs too much to deliver it then

you're very quickly going to get frustrated with the challenges that obviously uh you want of to to get over

of how do you get customer feedback quickly how do you actually get the momentum going in the marketplace to try

and build a position that you can actually sustain so the connect uh connecting the dots for you as a Founder

what I want you to try and think about is this is so core it's so critical to you that if you get it wrong you're

going to spend more you're obviously going to take more cash as a result your ownership or um you

know your potential stake in the company is going to go down and it's also going to reduce things like your valuation but

by contrast and you know I've got some very specific things on the website that talk to this for example if you get your

business model right it can drive significant value in your business and you can be valued higher just because of

the way in which you take your products to Market and the way in which you think about your business model and there's a

whole section on that on my site um which we did in conjunction with Goldman Sachs which I'm not going to go into to

detail on tonight but it points out that you know those companies that get their business model right can have literally

5 to 10x higher valuations than those that don't so think about that for a second you're doing all this great stuff

to produce your value prop which we've been through in some of the other sessions but now somehow somebody does

something smarter than you in their business model and they're worth 10 times more than you how did that happen

well it does happen it happens all the time and that's why this is such an important session and one which we we

want to get you started thinking about it now the startup world is different so I specifically want you to think about

this tonight in different ways than for example you would you would approach this if you were a larger company larger

companies have constraints and they in many instances have customers and those those are whether they like it or not a

restraint to what they can do but as a startup you have none of that you literally are not constrained at all

you're not constrained by any past practices and so you can think completely out of the box about what

could you do to differentiate your business model and I like to think about this as sort of a a three-part it could

be multi-art but three in particular part you've got a disruptive business model but obviously you hope to build

something in the way of a discontinuous Innovation either that's your product your service and in the go to market

piece that comes next semester we'll talk about how if you can get that segmented to Target it a new white space

you really end up having a perfect storm because at that point it's very hard for somebody to come after you you're you're

disrupting the way in which they you're delivering something as well as what you're delivering and you're doing it in

a space that's as yet untaken so this is why I call this the startup storm um the perfect startup storm but it's also uh

not going to stand alone for example if you built a brilliant business model but you really hadn't figured out how to

identify the right segment and how to get it to Market um to you know to lead that segment it's not going to stand

alone on its own right it's a piece of the puzzle think of it as a three-legged stool and this is one of the key legs

but I will say this and this is quite uh rare that you'll hear me be so emphatic about it most of the time I I hear

people saying that I've got an absolutely breakthrough product or service and they don't even think about

these other two they believe that you know the better mouse trap is going to cause people to beat a path to their

door not only do I not think that's true but I will tell you a lot of the best businesses that are being built right

now don't even have this they're actually the same kinds of products and services but they've got a fundamental

disruptive business model and that's what changes the game now if you don't believe me next month we're going to

have the CEO of a little company Red Hat come and tell us how they took basically a commodity product actually a free

product called Linux and built what's now A10 billion valued business so he's coming to talk about that case example

and you're all invited um so you get a chance to hear that and there is very little that was truly Innovative about

Linux at one level in the sense that it was just another operating system and in many instances it was way behind the

operating systems that it was competing with at the time such as Solaris from Sun Etc but what was differentiated was

their business model and that's what enabled them to break in so it's why I want you to pay attention to this so how

can your business model literally change the game the way red hat did or rewrite the rules and say we're going to give

something away and create an innovators dilemma obviously Clayton Christenson does a wonderful J of explaining the

innovators dilemma syndrome so I'm not going to get into it but the net of it is that you basically create something

that interrupts people's traditional business as usual and causes a path that they can't follow and when you think

about the business model there are so many ways that you can do that and as I said I believe it can be at least as

disruptive as your technology in many instances more disruptive but let me pause here for a second just think about

this would you rather walk onto a playing field where you've got to play by a whole bunch of rules that you've

never heard of that the competitor set out for you and you got to figure out on the Fly you know what are the different

plays that will work or would you rather walk out there and change the whole playing field around reorient it set out

your rules for yourself and then let the competitors on and come figure out how to play by your rules obvious right

you're going to want to do the latter that's what I'm talking about I'm talking about you stepping back and

saying how could you rewrite or literally create a whole new game in which everybody else has to come and

learn to play by your rules that's what business models are all about so I'm too old to be able to do anything other than

give you my history here uh and I'm going to date myself very quickly uh by telling a story that's well over 20

years ago so in fact when I first gave this cas case example it happened to be the the 20th anniversary of santic and a

bunch of us got together and we pulled out some of these old momentos of of products we used to sell in those days

but before I go any further does anybody even know who semantic is these days who knows semantic oh good all right so I

guess we created some somewhat of an injuring company it's a it's a multi-billion dollar company today but

uh in these days by the way to give you a sense of it our Revenue was less than 50 million in fact a lot less I think

we're only about 20 $30 million and we had a product that was the bestselling antivirus product for the Macintosh

and so we were quite excited about that we thought it was awesome and you know in those days when you're under 50

million if you're doing $5 million of Revenue in any product you think it's big and trust me we thought we were like

the bees knes we thought we would you know we'd broken through but a funny thing happened we realized that actually

um we really weren't actually seeing the the wood for the trees here in that the real Marketplace was on the PC because

that operating system was much more vulnerable and so as viruses started to come out on the PC of course we said we

need to bring out an virus product and so we did those of you know we also acquired a company called Pete Norton

way back then turned out to be a very critical thing that we did for the company and so we we changed the brand

from sanch to Norton and that was because Pete Norton was better known in those days for things like utilities and

again just to date people here how many people have ever used a Pete Norton product would even know what that is oh

good there's a few of you quite a few okay so it used to be used for things like disc recovery and and backup and

things like that so we changed the brand that was the easy part um and that certainly helped but let me tell you

what really changed was much much more interesting it was the business model now looking as where we are today

backwards this is going to seem so obvious but at that time nobody had ever thought about giving away software free

they just there wasn't such a thing we just didn't do freemum models there wasn't the web so giving away software

actually cost you something you had to manufacture the stuff and ship it to people so there was real cost in it but

that's what my team decided to do in fact we had a tremendous amount of debate internally there was all sorts of

challenges about well should we do that over in the UK which is where we were based or should we do that in the US and

where should we test this thing and what happens if everybody decides that this is really you know a new trend and we

can't make money I was like it was terrifying but anyway we decided to do it and what we did was we turned this

into basically a troan horse we said we'll give away the antivirus software because guess what where's the value

think about it for a second is it the actual software or is it being able to scan and pick up the virus

it's in the definition of the virus and what was really going on then was there was just more and more and more and more

viruses coming out and so by giving away the Trojan Horse and saying no no you pay a subscription when the new viruses

come out we started to collect the real value and it just completely turned the the industry on its head and I will tell

you it was a turning point for sanch it changed everybody's rules and we had Rewritten effectively that point how we

competed and we had a a competitor called Central Point who we basically put out a business and you know you can

talk about all sorts of different things about what shaped companies but I'll tell you that was a defining moment for

what's now a multi-billion dollar company I'm not saying it was the only one because it's a ton of execution and

many other things but it was a critical one and it had nothing to do with technology zero so this is why this is

so important okay the results just to to put it on uh you know the Simplicity of what we're talking about today also

drove the bottom line all the way down to a predictable profitable business model because now instead of worrying

about how many units do we sell of our software every month we we got that out as far and wide as we could we didn't

care about how we distributed all we needed to worry about was how quickly could we turn these virus definitions

around and we knew that basically as they started to come out more and more rapidly we basically would end up having

a monthly subscription service and guess what people don't want to turn off their virus um software especially back then

by the way it was it was you know pretty potent so we had a very predictable monthly recurring Revenue model and that

now back to Value became highly valuable and Lauren's going to talk about this later on but the more predictable your

business is the more valuable it is it's as simple as that so A very exciting thing now there was a follow on

everybody started to talk in in our company about hey this business model thing's kind of cool actually we didn't

use those terms in those days because I hadn't been to Harvard I wasn't smart enough so we would talk about things

like well how do we get more Revenue out of our customers and so we did something really interesting we said you know what

the customers aren't really buying virus software what they're really buying is protection for their data so why don't

we talk about that and we took out full page ads by the way I was was not an investor in these days and my board had

a heart attack when I told them I was going to take full page ads out things like the Wall Street Journal and

financial times they like are you kidding me you know how can you afford to do that but we needed to do it we

went on radio and TV and godess what else to change the game to talk about what the customers cared about which was

data security and we took a thought leadership position instead of a feature position because as it turned out it's

okay to talk about this 20 years later because it's it was embarrassing the time our virus software was not that

great it turned out that there's a little guy called Dr Solomon in the UK who was doing a better job of this with

about a tenth of the number of people and his virus software was actually better than ours I like ye what are we

going to do about this so instead of getting into a feature war with him we turned this thing into no we are the

best data protection company and actually what we did was we got customers to believe that we had a

complete Suite of products we called it the total solution they did everything from protect your data from viruses to

doing backup to being able to restore your data all sorts of things so the game became a much bigger thing which is

really a business benefit and the result of all of that was really exciting in fact I can be very specific about it we

used to sell one and a half products per customer in other words per seat if of all of our different products of our

backup and all these other tools and because of doing this campaign it went up to

2.6x so in today's world we talk about this as upsell so we got a 2.6x upsell on customers versus 1.5 it

was huge it just meant like our revenues went from a very unpredictable you know we got to sell one product to time and

try to sell the add-on to this extremely predictable subscription based model where we're selling 2.6x more you can

imagine what that did to the company we went public often that's the bottom line and this is the kind of thing that is

gamechanging for companies and yeah I know the story is 20 years old but I can tell you it still plays today and what's

interesting about it is we talk about these things in more specific terms like retention and upsell today but it's the

same fundamental set of principles so Lauren will be here again to give you some examples that are more real okay

you're getting starting to get convinced more about business model getting a sense that this is actually important I

see some nodding heads the rest of you enjoying your dinner um good so I've got one more example and it has zero to do

with products so as it turned out the setup of sanch itself was a different business model so it was in a company I

started called European software publishing and the idea here was that we would actually create an off-balance

sheet model to bring companies to market the idea here was this sanch themselves had actually been very successful in the

US but had a multiple times brought their products into Europe through Distributors and Distributors do exactly

what they that that mon sounds like they distribute stuff but they don't localize they don't translate they don't support

and they basically don't provide a tangible presence for major customers like for example British Petroleum and

others that we had to feel comfortable there was a company there so the problem is that if you're sanch and you're only

about a 20 $30 million company and you're trying to get ready to go public to go and set up an organization in

Europe is very costly it actually costs both time Energy Management as well as real dollars and it also hits your p&l

and so it's not a very easy thing to do when you're trying to get yourself profitable which you had to do in those

days by the way before you went you went public so what we did is we went along and said you know what we'll do this all

off balance sheet for you we'll create some fun terms we'll make it possible you can't do this all today tax rules

have changed but we make it possible to be a pooling of Interest which basically was a tax advantage non-dilutive So when

you buy us back when we set up Sam anch over there you buy us back it's creative to your earnings per share and so you

can grow your earnings so everybody's going to win and that's exactly what happened these two huge Bibles that sit

on my shelf are the actual deal so I didn't enjoy the legal work I have to say that went into this that happened

but uh the outcome was a huge win-win in fact customers got better local product support and services by setting it up

the Publishers semantic themselves were accelerated to getting their profitability and their growth in the

marketplace and ultimately my investors who I brought in got a 97X return on their investment and yet it was still a

creative to semantic so this was zero to do with technology I I mean literally I didn't value any part of that business

on technology it was all based on coming up with a business model that worked so a non-technology totally disruptive

business model that got economies of scale for this and uh a tax benefit and effectively time shift shed expenses

created millions of dollars of value a 97X return so i' what I said to you now I hope you've got some proof on which is

you don't even have to have a technology breakthrough sometimes to make huge value in the marketplace you just have

to think about what are you trying to do how can you do it in a disruptive way and how can that be interesting to your

business okay enough of my you know old Legends let's bring some real world fun stuff

in how many of you use zipa okay I think you lots of you so I think you are the beginning of a major

movement that's going on here which is just generational I mean and I love it by the way my daughter's part of this

generation you guys probably lots of you don't even think about buying cars I mean what a crazy idea you only use a

little while why don't you just share it uh so this shared ownership model which is Al also penetrating into things like

Airbnb uh or the sort of communal economy as I call it it's a huge movement and I think it it has a

penetration of you know this compared to the potential of this today in all of the products and services we use in the

world so tremendous potential there whether it's you know shared offices or it's shared cars or it's shared

resources I think we're going to see massive disruption in this still flash sales how many of you have ever used a

flash s site okay can you tell me anybody any of you guys why did you use it what what

was the what was the bases behind it just not to pick on you but since you've used one um just a really good discount

really good discount M okay did you ever think about sorry just bring the mic up so people can hear sure really good

discount did you ever think about what was going on in the business model behind

that um it's obviously uh it's obviously an investment from these businesses to get you to come after that initial

discount so they're looking for people to come back but uh from what I've read of you know Groupon's business model it

doesn't seem to work for a lot of businesses so you good be careful with it well we're obviously at Harvard

because we're getting smart answers here so um absolutely right I mean it's in many instances is a Leen model actually

you know you get people to your site you may lose money on the first thing that you sell them but you've attracted and

board a customer for effectively the potential to upsell or resell them new things but it can work um very well or

it can fail like in the case of BR if you don't figure out how to keep a sustainable set of offers that actually

makes money for you so you got be very careful with it thank you though so here's another one that's really fun

if you look at what's going on at mint there's actually zero value that you're col you're being asked to pay you

don't pay for what used to be you know Quicken uh you get it for free so again what's that doing it's pretty obvious

it's Leen nobody thought that would be successful but it's actually an extremely successful business it's been

hugely disrupted to into it and in fact they ended up having to buy it so again not a technology shift there just a

business model shift now we're lucky enough to have Aqua with us tonight and um

uh just yesterday actually though was it yesterday or two days ago we got that's right we we were all in Vegas but but

not just gambling I should say uh we were all there for this Amazon's U web services conference but anyway yeah

Tuesday night they just uh became nominated as the fastest growing uh private company in America in the fast

500 second year in a row because they were here last year talking about it and again this is a company that has zero to

collect from its core product Drupal it's free so when you get Dennis up here ask him how did you do that because

there are some incredibly important things they did in that business model you talked about Groupon this is an

interesting one because when we first had it up here and I was first giving these seminars everybody thought group

one was going to be the biggest thing ever but there's a big challenge in Groupon's model and we'll talk about it

tonight which is how do you actually keep it sustainable so that your core value is actually coming to the four and

it's not clear that Groupon's got that nailed uh which is why I've never invested in it but there are lots of

models that are coming out that I think you know people are quite excited about that are yet unproven that may be very

disruptive for example changing things from you know buying to renting as we were talking about earlier you know why

buy the songs if you only want to listen to them and you really don't need to own them well that was obviously the Spotify

model the question is how does that become sustainable so in all of this what I want you to think from all of

these models and there's many others I bet you can think of is how can you be disruptive what will you do to change

the game and what I'm going to suggest is you know know I don't like giving you answers because I don't believe I have

any but i' like to give you questions to think about what is it that you could change in your approach to building your

business so here are some sample questions first of all do you have a process or a product most people think

they have a product but in some instances you don't so I'm sure we all use Amazon so I'm not going to ask for a

show of hands on that do we think Amazon is a product or a service it's a service okay it's pretty

obvious but there's a huge amount that goes into making that that uh uh service actually feel like a frictionless

product so for example within it one click buy is a huge key differentiator it was one of the biggest things they

changed then the next product or service that they introduced actually there were a whole list but I'm just picking some

out was obviously you know Amazon Prime huge way to keep customer attention and it seems extremely attractive to the

customers so they find a way to make it you know a win-win again if you can think about which one are you and how do

you distinguish between them that's a big help don't get stuck on the product piece because most people are most

people feel so early on if they've got something distinct in the way of a technology breakthrough they've got to

productize it and they've got to sell it as product I wouldn't do that I'd ask whether your software or services at

that point the way we were talking about Amazon then ask questions like do we really need to be open or proprietary

again there's a tendency to say oh I invented this I've got to own it it's got to be proprietary I've got to defend

it maybe but what if you could actually give give it away and get others to contribute to its value and monetize

something different like the content from it do we think Yelp is a product service single why well Yelp

wasn't new there was e pinions there was things that predated it that were pretty similar okay so we we think it's a

service what do we think is the essence of it do we think it's that just they they process your queries to find you

know local services or or what else is there in it GE fencing is there any content in

it lots of people noding yeah I that's why you go there you go there for the content exactly Yelp would be useless

without the content I mean it could be brilliantly simple but if they didn't have the content of what the local

Merchants were offering and they didn't have the ratings and reviews from people it' be absolutely useless so why don't

you just focus on that figure out how to get to what I'm now going to describe is the core the essence of what I want you

to do is say what is it that you have and this is just a Monica for it that is really at the core of your value and if

it's content then monetize the content don't get distracted about trying to sell the product or the service or

anything else figure out what it is that you have that's unique and differentiable that you can actually

build on that's what the core is really all about so the first question you should have and I would literally as a

founding group make sure you do not give up until you've debated this to the nth degree is what is the core of our thing

of our product or our service or our deliverable that is so exceptional that we think we could defend it against

everything else and everything else around it we'd be willing to give away and if you look at all the things we've

been talking about like I just picked out Yelp if they knew that right away it became very easy for example for them to

start to think about how do they integrate everything else and give it away think about Facebook for a second

imagine if Facebook had have charged you a subscription to get online would you have used it of course you wouldn't

but they didn't care because they knew right away that the real value was the network and think about this for a

second if somebody wants to come along compete with Facebook today we all know that you could actually recreate

Facebook at least at a technology level pretty simply I mean it's photo sharing and it's connections and things but you

could get a lot of that in open source today what's the value the value is if I go onto a brand new network that's got

way better features than Facebook and I can't find anybody else on it dead absolutely useless the value is they use

a network and they realized that early on and that's why it was so disruptive because it rapidly became something that

for free we could all get value out of but they could monetise obviously what were the profiles that they were

building there for things like advertising and so forth and that's really The Story You're going to hear

when you come to see Jim wherst and red hat he realized that the real value around Linux was not the core of Linux

being another operating system it was that in order for it to be broadly used it needed to be certified for all of the

different platforms and supported in all the different ways it might get used and guess what that's really valuable so the

key thing is for you to think about what can be your competitive Advantage where are others most vulnerable and try to

make those both of those things work in like a a double-sided a two-sided sword you know it should cut to the core for

you and it should cut across what would be the differentiation against your competitors and give you competitive

Advantage so there are many many examples of this but but I'm going to bring it to life um by giving you the

obvious one which is Google so this actual case example was given last semester and so you can find the video

of this um from Don Dodge who came to give it but I'm just going to take you through it very quickly Google's problem

when they entered the marketplace um was pretty simple they wanted to continue to attract users and search was one way

obviously that they started to win but in the apps Marketplace they had a huge competitor actually Microsoft to State

the obvious so how do you win if you've got Google Docs which has got no users and you've got a Compu with Microsoft

that basically has 90% dominance in the marketplace well you have to go back and say what's the core for each and I would

argue that Google I don't have to argue actually because they did this so um if they had decided to go and compete

headon feature for feature where they would have lost we all know that I mean you know Microsoft had huge market share

they had Decades of development gone into it billions of profits literally billions of dollars worth of profits

coming out of that division but now what do you do you say well hang on a sec don't let's compete on on let's let um

Microsoft for example own the Enterprise Market we'll come in with Google Docs and we'll go off the consumer market so

pick a different segment and guess what we'll give it away free we don't want to compete on the licensed business and

we'll make it simple so that we're not competing on features we're actually trying to make it easier to use and

we'll get the ad20 right which is actually the key of what people were struggling with which was that office

was over complicated and quite bloed after 10 years but much more important than that what was going on I mentioned

court that anybody want to tell me what was going on there and this is this is all a product you know and and Market

piece what was actually going on what are we talking about tonight that was changing there attracting everyone to

their platform basically Google verus Microsoft absolutely right they were attracting

people to their platform and they were giving away software to do it and why could they afford to do

that what what were they going to monetize uh the users themselves by advertising absolutely that is the key

differentiate that was going on here what they were really doing was they were saying look forget the software we

don't care about that to this gentleman's point we're attracting our users here with some more value because

the more users we get the more profiles we get the more people we can advertise to so we don't care about the money on

the apps we want to give it away in fact as far and wide as it can get used so much the better so guess what they did

exactly what we were talking about they created an inovator dilemma Microsoft could not follow that because they could

not afford to give $3.8 billion worth of profit away that year that's what it would cost them just to be extremely

clear to have made their office sweet free there had hundreds of people working on it they had thousands of

businesses that were just reliant on it so it was not going to be given away free because even the support cost alone

would have killed them even if they could have you know just given up the revenue so what was so disruptive here

was not the technology it was the business model and in fact if you hear uh Microsoft um you know in their years

of trying to compete with us I can tell you I know a board member who hope she'll remain nameless but he was on a

board with us who was on the Microsoft board who was sitting there watching their stock as a dial tone throughout

this period because it didn't matter what they added in the wear features they were just competing on a different

level and in fact the more features they added the more bloat they had they redesigned office and they came up with

clippy the the you know the little office character which drove everybody crazy and then the next thing they did

they changed the toolbars and everybody went crazy because now they had to relearn the thing and what was going on

here was this like complete you know mismatch uh so this is the kind of ruption we want you to to come up with

and so there's more about this in the case you can watch the video online the second one I find really

interesting is in the mobile world because this is going on right now and it's not played out yet so I won't go

into this in too much detail except to say that if you stop and think about this Apple and Google are actually

selling apparently the same product you know iPhones versus Android phones except they're selling it in very

different ways um Google is giving away again the operating system in Android they've open sourced it and there's some

good and bad going on with that you know fragmentation being the bad the good being they've got lots of people

adopting it um but again if you think about what they want they want users they don't really care about that

Revenue coming out of the operating system Apple by contrast has got a very deep set of things that it's monetizing

it's not clear to any of us who are on the outside which one of those is really going to work for them they they pretty

much make no money out of their content the apps is an interesting business for them but again they take 30% of the

revenue not 70% so again it's attracting apps to drive their platform and in the end they've probably got an endtoend

play here which is actually open for disruptive so who is winning and why is actually a question and I'll tell you

one thing I don't think it's got anything to do with technology at the end of the day as to who wins this

there's no question in my mind that Apple for me is a better experience I've tried Android but there are lots of

people who completely disagree with me but it's not the point I think what will win out here is somebody's business

model is going to be much more appealing and much more successful so um all I'll simply say here is Google is clearly

playing this again to disrupt the market leader is changing the game and they're doing it in a pretty interesting way for

example the way Apple disrupted the carriers was to to provide an end-to-end solution which wasn't something that the

carriers had wanted at that point in time but then now Google's coming along and saying yeah but we can actually you

know take a lot of the cost out of that and provide a way for you to to leverage this ecosystem more effectively without

being proprietary so it's going to be very interesting to watch the bottom line is if you haven't already figured

it out business models really matter three big companies that are wrestling today are all wrestling around business

models more than they're wrestling around technology or at least as much okay so now we finally hopefully have

your attention how do we create value let's start with the first uh component of

this and I'm going to introduce my case example here of Aqua uh well first of all there are many ways to create value

but for tonight's case example I'm going to give you one startup secret you can co-create value and take a lot of your

costs out so for example in the software business an easy way to think about this is by

being open and extensible even if you're not going to go open source I highly recommend that you find a way to build

on yourself in other words make sure that your platform or your core value as we've talked about it is something that

you yourself use to build on top of so build your product on itself and in this world of cloud services for example do

things like open up your apis the single biggest growth in My Cloud survey which is a big survey among 60 collaborators

that again you can find details on my site um that we saw in the last three months is a conversation around how

important it is to have open apis so your products can get integrated but even at the beginning of developing if

you create open apis for your own developers internally to build on top of your product then you not only have an

internal customer but you're also going to open up the beginning of an ecosystem potentially for others externally to do

that so it's a very exciting way to start thinking about things so for software that's a no-brainer startup

secret that I would almost invariably recommend to companies it's not always possible and then the second one to set

aquer up is of course open source get leverage through the community and make the customer the product manager allow

them to scratch their own itch so what better way to introduce this than to have uh Dennis here our new CFO at Aqua

Dennis come on up and tell us a little little bit about aquer and how do you guys make money out of the open source

world I'm good I'm M thanks thanks Michael um hi everyone I'm Dennis Morgan I am the CFO of Aquia Aquia is based in

Burlington just outside the city and um uh we leverage Drupal as an open- Source uh platform who here knows what Drupal

is a few people so who here knows what Linux is many more Linux which do you think is the bigger open source project

Linux uh Drupal is the largest open source platform in the world Drupal is an open source platform for web content

content management basically it's a uh programming system for running websites um some of which you may have heard of

before um so so we so we built a business model around an open- Source software platform um and we'll get to

how how we do it but the key the key benefit of building around open source is is the following there are a thousand

people who contributed to Drupal 7 Drupal 8 is now in release Drupal 8 has 2,000 people contributing to it overall

uh in active development we have 28,000 people working on Drupal um at Aquia today we have I think 50 engineers and

that drives Innovation the community people like this who are all Drupal Engineers Drupal devel Vel opers

uh are able to create a product open source the collaboration the community leads to product Innovation that you

cannot get with a 400 person organization that has 50 engineers in it and that's the benefit of working on on

an open source product the challenge that creates though is how do we build a business model around it uh we took

Drupal and we enable organiz to run Drupal at industrial strength we do this but we provide a cloud platform for them

to you know a platform for them to run the website we provide tool de developer tools we provide uh software that that

you can add on to run on your website we provide Professional Services such as training we provide insights into what's

going on on your website Etc uh the result of which is if you're running a Drupal website if you're a big

organization running a Drupal website uh that website runs uh much much better on Aquia than it does on any other platform

that you can run so again industrial strength support for Drupal is the uh is the business model we created uh and

we've now built that I think I'm actually I think I'm jumping ahead now no it's okay that's good so what are

some of the largest customers we have just give people a sense I mean why do people care about service and support

for so I'll give you a great example um any New Yorkers in here yes so we moved the New York MTA that's the New York

Transit Authority we moved New York Mt the New York mta's website onto Drupal a matter of as it turned out a matter of

weeks before superstorm Sandy hit last year uh and when everything went down in New York City uh we kept the MTA website

running all through the storm and its aftermath so all of us who are in New York trying to figure out how to get to

work that website continued to run uh and and tell people what they needed about their commute about their commute

um uh Warner Music this is an interesting case so uh the music business has a very interesting

challenge with websites because music the music industry Warner Music has you know hundreds and hundreds of artists

with a website for each artist and how do they manage the governance just the control of all those different websites

and yet each artist wants to create custom cool websites for their own you know that reflects who they are as an

artist by using Drupal by and by hosting it on Aquia we enable Warner Music to take 300 artist websites run it on one

infrastructure and yet each of those artists gets the creative freedom uh that they're looking for uh so there's a

couple of examples of what we do excellent thank you very much so what you can hear is that the core value

turned out to not be the software uh there's a ton of things that are needed to support the infrastructure of running

a global website whether it's a Warner Music or ge.com which is another customer and it's critical for them that

their websites are up all the time that their customers see the face of their business as being highly scalable that

they don't you know crash and that they get you know submillisecond response times for things like you know how do

they find a train or a product or whatever it might be so there's real value in that and the point about this

is how we actually create deliver and harness value and open source is very different to how you do it in a

traditional business and in fact we're now going to talk about the second part of that which is the delivering and

harnessing of value and I'm going to introduce the first of two concepts um which I talk about

multipliers multipliers are things that increase the revenue around your core so once you've identified what your core

is if it's content or it's data or it's products or whatever it is the othera of the multiplier is it's something that

will help you increase your Revenue increase your reach out to your customers or increase your coverage of

your product and if you think about some of the examples we've talked about with things like Google they gave it away in

order to increase reach they basically said you know why pay for something that you can get for free if all we're

interested in is capturing more customers then we'll do that we'll use that as a multiplier but that's the sort

of if you like um the one hand side of this thing the other side of it is what you were hearing from Dennis which is

there's what I call levers which are things that reduce time or reduce costs or reduce resources delivering your

product or service and those might be things that are more interesting in terms of for example how do you build

your product as I said with co-creation or with a community like Drupal has and if you can figure out how to do that you

can have instead of you know thousands of Engineers you can have tens of Engineers and just to be very specific

about it Microsoft had for example or has I think a few hundred Engineers on SharePoint which is today a huge content

management platform but how on Earth could they possibly compete with nearly a million people who are basically

constantly innovating around the Drupal platform they're never going to compete they'll never even understand the sets

of things that are needed at the scale or reach that Drupal has they just can't compete and the reason that therefore

it's such a lever for aqua is that that Community continues to reduce the cost of meeting all the needs that are out

there while at the same time it's also increasing the reach of people who are trying it and developing it and at the

core of it what aqu has created as a business model where they're monetizing obviously what the value is the customer

needs for things like security and support and scalability and reliability etc etc so the secret here is very

simple you want to find ways that your multiplier can do things like in sales and marketing uh bring out tiered

pricing um enable you to do things like freemium to to reach new customers uh easier get yourself engaged with Channel

Partners uh and then this is now their asteris for a reason uh there are a whole bunch of things you can do in your

product design which is in that uh products to companies uh session that's on my website and again people who don't

know it it's up on the top right hand side if you want that URL mj.com so there are whole sets of things you can

do in your product design that will actually give you a multiplier in terms of reaching your Marketplace and getting

out uh to increase your value at the at the front end and then on the other side of things you want to be looking for

levers in sales and marketing too and there are things like how can you use the web instead of sending out people uh

on the road and in fact um max is going to talk about this from formlabs but so max I know from day one without even

saying what what formlabs does you decide that you didn't want to send salespeople on the road you probably

didn't think about it as as a a lever per se but but why did you think about it why did you decide you didn't want

salespeople so uh you know I think it it's it was really holistic part of of building a product that was lower cost

and easier to use and so the kind of the purchasing process and the way the customer interacted with us should also

reflect that and so we didn't want people have having to call up and you know wait to schedule uh you know a

meeting with a salesperson and get a pitch and get a quote should be able to buy it direct through the web and have

everything you need there you know ready for you to make the purchasing decision great so what what was also going on

with Max's example is Not only was he making it easier for customers to reach him but he was making it easier for him

to support them so by thinking early on about how could he use the web and you should do the same thing think about how

you can use inside or inbound marketing inside sales or inbound marketing or viral techniques for example you can

dramatically take the cost down of how you get get your product to Market and I would say the other thing that people

typically forget is how do you use your um your levers to for example take out the cost of the backend things things

like supporting your product and there are some fantastic things you can do today that never even existed a few

years ago like for example crowdsourcing support or crowdsourcing testing there's a fantastic company it's a case example

on my site called utest that has come up with a way to test for example all mobile products in a completely

crowdsourced fashion if you just think about this for a second how would you possibly replicate all the different

phones and different operating systems and all the different environments and networks and carriers and locations in

the world in your own lab incredibly expensive right you you you just be way too difficult to do yet that's what

people used to do until UT test came along and said no no no we'll crowdsource that we'll sort of Outsource

it to people in the crowd and enable that to be tested by providing a platform that reaches it brilliant

business model and by the way highly valuable and differentiated as a result of it so two takeaways for tonight are

um around your core figure out how can you get multipliers and how can you get levers and if you've got your core right

what you'll find is this you can get them working together and the key is to get strategies and multipliers that

around your core create a distinction in your business model when you do that you're into a good spot so again to

bring it back to life I'm going to ask Dennis to jump up and share with you just how does this really work when you

get done to the the gross Roots at at Aquia yeah so how do you make money on free and

opsource software so as we talked about we create products around the core of Drupal and we use that uh free and open

source as a multiplier and lever in R&D sales and marketing and it's really the community that does this for us so the

community those 28,000 Developers that we talked about are constantly innovating the product that is Drupal um

they're constantly making it better again in a scale that we cannot replicate as one

organization um more importantly uh they provide levers and

the levers happen in the sales model as well as in the development model so a great example of a lever is a lot of our

a lot of our clients we cut we get are just just inbound inbound requests so on Tuesday as uh as as michelo mentioned uh

I had the chance to speak at the aw uh partner conference partners are all of the Consulting shops and people like

that who who develop for customers for their clients who are using AWS to run their websites um as a result of that we

had numerous people come up to our booth there at AWS afterwards and say I have a client who's running Drupal and we need

help please help us right that's no there's no better a sales call a sales lead that you can get than that so

Drupal is the sales lead we have GE as a client we have a GE as a client because there was a guy working in GE who was a

Drupal he was a Drupal developer and they needed a quick website so he built a quick website in Drupal and uh the the

folks in GE are like wow that was really easy if I called it to get that done it would take two months uh let's do more

of that and then again as I talked about earlier there's still reluctance for a big company like GE to

fully adopt open source without having anyone to pick up the phone and be able to call when they've got issues so

that's where Aquia comes in Aquia provides that industrial strength support uh for something that people are

using already those are the multipliers and the levers the multipliers and levers in the development and the sales

leads that it that it that it gives you um as a result we are we're we're now as as Michael just named or just mentioned

we were just named the second fastest growing company in all of America over the last uh four or five years I forget

which one which one it is um and this is on a on a real scale you know we're doing we don't really disclos our

numbers but we're doing uh uh north of $50 million in Revenue we've grown 250% compound annual growth rate over the

last three years we have almost 4,000 customers again over 400 employees oh and another thing another that's great

about it uh we're Global so Drupal is used in 238 different countries something like that I'm not even sure

how many countries there are but it seems like if there's a country it has a Drupal website in it uh so when we

figure out one of the great challenges you'll have uh as a growing company is what countries do I I know I need to go

International but where well it's really easy for us we look for where are there where is their heavy Drupal usage and

then we go and put people and find the business right in those countries uh it's a very you know it's a flywheel

business where Drupal reinforces what we do but it works the other way we have um we have a number of um uh uh our our our

um core values at at Aquia one of our core values is committed to awesomeness and committed to awesomeness is

important because in order to get you to pay us to use something for free what we do has to be awesome so committed to

awesomeness try we try to envelope in everything that we do um and uh another one is give back more give back more

means lots of things it means charity of course that's why I have the crazy mustache um but it also you know by us

providing this industrial strength support for Drupal it helps further spread Drupal as well it gets companies

like GE that you know would normally not use an open- Source platform for an for a production website for GE to use that

so again that's the reinforcing model uh that comes from aqu and Drupal and here it is sort of in a nice graphic so 70%

of the prospects we have in our business have already selected Drupal to build their websites um they come in and then

then it goes from there another part of the flywheel is it usually starts where they put one or two a small number of

websites um on on our platform on aqua and then they realize how well this works how much success they have with

not only just Drupal but with Aquia supporting Drupal they put more and more of their websites on that and all of a

sudden it's you know that's what's called a land and expand strategy land in with a couple websites and initial

amount of support show how good this is now and today uh companies have more and more websites large pharmaceutical type

companies have literally excuse me literally thousands of websites so if you can penetrate that and and get just

a handful of them initially on your platform show how valuable they are pretty soon you start uh expanding into

everything that they're doing uh not only just on the on the computer web but Drupal flows across mobile and social

Etc and that's how the model all comes together great so what you can see from this is a real world example of a

company that's figured out how to use its core of a a web platform that people can get access to free easily and upsell

all the value added products and services and then U doing what they they do best use their core values those of

you who are here by the way for the uh culture session you can hear Dennis is you know is the CFO and here is talking

about their core values of you know committed to awesomeness and give back more in the culture driving the business

model which is what we talked about there and that's how they're getting uh for example the community to actually

engage them and then by the way the customers are actually giving back what they develop too so you may not realize

it but a lot of our government runs on Drupal white house.gov and a bunch of other stuff fortunately not any of the

healthcare initiatives I should be quick quick to point out although we'd like to fix that problem uh but we're actually

getting the government to contribute back their open source code too because when they find things that they can

deliver that's valuable to other people everybody wins so it's really a virtuous circle that occurs when you get your

multipliers and levers right so I would say this is a a great example of something that you can think about

obviously in your context ways that you might create a core ex and then multipliers and levers around and and

hopefully you got a sense of that from tonight now I try to add always some some new sections and one of the

questions I get asked a lot is how does small companies get big it's an easy question but it's a hard one to answer

and one of my key startup Secrets is through strategic Partnerships and so we've often glossed over this I'm going

to cover it in a little bit of detail tonight it turns out that if you can stand on the shoulders of giants as a

startup you can probably figure out how to get big quicker and so let's talk about this a little bit the most obvious

one that I see a lot is what I call the whole product strategic partnership that is to say you very rarely as a startup

have an entire end to-end solution or a whole product for those of you who were here the first year we had Jeffrey Moore

of uh crossing the kasm Fe who talk about and defined a lot of the whole product concept come in and talk about

this so you can find that out again on the website but the real essence of it is this if you don't have a whole

solution end to endend then figure out who does and figure out how you could partner with them to insert yourself in

their value chain so that is a win-win for you both to go to market together and there are many ways that I could uh

you know give this as a as an example but I'll tell you my own story and it was in the analytics space now big data

is hot today but if you look at Big Data what you'll see is in almost every case it's like an iceberg what you see at the

top that little piece of the iceberg that's sticking out it's the analytics or the dashboard that may measure for

example customers and click through and all that kind of stuff that is actually supported by a massive Iceberg of how do

you collect the data how do you transform it so that it's actually normalized so it can actually be

analyzed how do you make sure that it's stored in the way that can be reaccessed or reported on Etc and those kinds of

things actually have a lot of different partners they have storage Partners they have database Partners they even have

application server server Partners they have even log on uh you know authentication Partners they have many

many different pieces before you can actually get to say the deliverable at the top of your anal ICS application so

in this example if you are the guy who's delivering say the dashboard at the top you're not going to go and try to build

all that other stuff that would be insane even though it's absolutely critical for you to have it so why

wouldn't you go and partner with the other players that have that because if you enable their storage for example or

their database or their application services to finally be shown in a really you know dramatic way that shows value

they're going to love you they're going to see that you pull their products through now I'll give you one example

from my current portfolio which is a company called unidesk they pull through 10 times the amount of soft of hardware

for Dell than software they sell do you think Dell likes them sure they do they like them a lot they like them so much

they invested and in fact that model is so successful that we have leads coming from Dell that literally are one in uh

one in three of them are turning into customers so Dell is qualifying doing all the hard work and bringing us the

leads because they know that whenever we sell they're going to get you know that huge multiple on our software for all

pulling all the hardware storage and everything else that Dell sells now that's how small companies get big and

it's easy to say but let's just look at it in the multiplier and levels model and and remind us what's going on here

what's going on here is we're managing to increase our Revenue through a much Fuller solution we'll get more value

when we can deliver an end-to-end product we're increasing our reach through somebody else's sales and

channel because they're going to take us to Market through their channels or for example and sent their Salesforce and

that's by the way a very key uh detail we'll come to in a minute is how you do that and of course if you're a small

company what what do you think's a better business card to walk in with unidesk who probably none of you have

ever heard of or Dell which I guess a lot of you have heard of easy right Dell even though Dell might be your Top

Choice here in this room at the moment for your personal computer I can tell you in the Enterprise They count um so

it's obvious but these things are all multipliers in your business model and they're all things that you can do by

establishing something like a whole product strategic partnership now let's talk about the levers does it reduce