startup secrets - game changing business models
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START UP SECRETS
An insider’s guide to unfair competitive advantage
Disruptive Business Models to build Value
@underscorevc #startupsecrets startupsecrets.com
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Introductions & Case Examples Established
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
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Agenda1. Finding a Disruptive Business Model2. Focusing on CORE differentiation3. Multiply and Leverage it with innovation4. Designing for high value
Other side of the coin – GTM – next session- Eg Segmentation, Channels etc
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What is your model for
• Creating• Delivering • Harnessing
VALUE?
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4Business Model: How do you make money?
Disruptive Business Models to Build Value @underscorevc startupsecrets.com
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TonightLet’s get creative and think specifically about startups!
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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
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New Market &
GTM
Disruptive Business Model
Disruptive Technology
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Perfect Startup Storm
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How can your Business Model… Change the game? Rewrite the rules? Cause an innovator’s dilemma
Be as disruptive as your technology?
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New Game
New playing field
New boundaries
New rules
YOU choose players
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Symantec Antivirus for Mac (SAM)Best seller – Licensed Product
Norton Antivirus for PC (NAV)
How to change the gameBest seller – Subscription Service
Ex 1: Symantec – many years ago (!)
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Dramatic! Game changing
• Flipped the model on it’s headCompetitors 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
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Results?
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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
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Ex 2: European Software Publishing
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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
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Results?
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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
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Sample Models
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Process or Product? Software or Services? Open or Proprietary? Content or Data? Freemium or Premium? Subscription or License?
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Business Model – Sample Questions
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YourCapabilitiesOfReallyExceptionalValue
Focus on it!CORE
First key questionWhat is your CORE value?
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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?
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CORE
Cut to the CORE!
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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
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- Ex 1 Apps
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How can you compete with a market leader who has 80% to 90% market share?
1. Don’t compete head-on2. Innovators Dilemma – go for low end3. Disruptive technology, business model, or market approach4. Examples: Gmail, Google Apps, Chrome
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– Competing with Market Leaders
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Apple vs. Google• What is the C.O.R.E for each ?
Hardware, Software, Content ?
Others in Ecosystem• Samsung, HTC
Alternative approaches• Amazon
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– Ex 2 - Mobile
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Who is winning?Why?Is technology the difference?Apple, Google, & Microsoft strategies
• Always play to your strength• Apple Mac, Google Search, Microsoft Windows
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Android vs iPhone
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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
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Android vs iPhone
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Business Models Matter !
Don Dodge
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Creating Value
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Startup Secret: Co-Creating Value
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Be Open and Extensible (eg Software APIs)• Enabling external multipliers to your value• Building on yourself• Eating your own cooking• Being your own customer
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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
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Startup Secret: Co-Creating Value
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Dries BuytaertFounder and project lead Drupal
Co-founder and CTO Acquia
http://buytaert.net :: @Dries
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Meet Dries 12 years ago when he started work on Drupal ...
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Compiler books
Collection of stamps
Chess board
Assembly books
All furniture is from IKEA
Student dorm in Antwerp where I started Drupal
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1 out of 50 websites in the world10,000+ modules300,000+ downloads/month1.5M unique visitors/monthFREE
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71 of the world's top 100 universities use Drupal
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1. Freedom to run the program
2. Freedom to study the program
3. Freedom to modify the program4. Freedom to re-distribute the
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Open Source is a software license
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Drupal wins because it is less expensive
… yet technically superior! Disruptive Business Models to Build Value @underscorevc startupsecrets.com 32
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Open Source
Collaboration
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3,800 people contributed to Drupal 8
Open Source is not just a software license,
it is also a development model
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Open Source
Collaboration
Community
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Open Source
Collaboration
Community
Innovation
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Technically superior
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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
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Delivering & Capturing Value
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Multiply and Leverage your CORE
Multipliers:• Increase revenue• Increase reach• Increase coverage
Levers:• Reduce time• Reduce costs• Reduce resources
CORELevers
Mul
tiplie
rs
LCV
CARC
Startup Secret: Multipliers & Levers
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Multipliers:• Added functionality• Community reach
Levers:• Community development• Community marketing
CORELevers
Mul
tiplie
rs
LCV
CARC
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Multiply AND Leverages COREDrupal, Open Source
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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 SoftwareStartup Secret: Multipliers & Levers
CORELevers
Mul
tiplie
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Strategies that enable Multipliers and Levers to work together around your CORE are the real winners
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Get Multipliers & Levers working together!
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Acquia
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• 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
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150% 4
year
CAGR
Acquia at A Glance
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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
Drupal2. Use FOSS as multiplier and a lever in R&D, sales and
marketing
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Acquia products around Drupal CORE
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As a multiplier AND a lever (in R&D, sales, marketing…)
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Example Multipliers:• Upsell value added
products & services• Cloud & SaaS
Example Levers:• Target installed base• Expand usage through
partners
CORELevers
Mul
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LCV
CARC
Free and Open Source Software (FOSS)
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One more thing…
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Product feeds the business model…• User experience• Supportability• Maintenance, updates (= lifecycle)• Upgrades• Upsells
Leads to 2 startup secrets• Russian Dolls & SLIPPERY products
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Designing for success…
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• 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
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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
extensibility57
What makes Drupal SLIPPERY?
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Multi purpose strategy• Packaging• Pricing• Distribution• And more …
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Startup Secret: Build a Russian Doll!
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Free
Incent
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LimitedFree
Freemium …
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PersonalLimited
Free
OEM Solution…
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WorkgroupPersonalLimited
Free
Premium …
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CorporateWorkgroup
PersonalLimited
Free
Sales enabler …
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EnterpriseCorporate
WorkgroupPersonalLimited
Free
Adoption …
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“Addiction before Adoption”
Gives you, your partners & your customers: Digestible starting point Upsell Options Channel Flexibility … and more
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Startup Secret: Build a Russian Doll!
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Acquire
On-board
Upsell / Cross Sell
“Addiction before Adoption”
Acquia example = increasing LTV“Land & Expand”
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2009 2010 2011 2012(e)$0
$100
$200
$300
$400
LTV
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Startup Secret: Build a Russian Doll!
See example of 4A’s here
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Create, Deliver & Harness Value
Putting it all together
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Lifetime Value of Customer (LTV) Cost of Acquiring Customer (CAC)
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CORE
Levers
Mul
tiplie
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LTV
CAC
LTV ~3x > CAC
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Basic Startup Model
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Repeatable Scalable – with leverage Profitable / Sustainable Predictable Valuable
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What makes for a GREAT business model?
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Development TargetGross Margin 80%R&D 100%+ 15%Sales & Marketing 10%G&A 45%Profit (Loss) -100% 20%
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• Example:– Phases of a software company
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% of Revenue spent…
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Expenses as % of Revenue
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• 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
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New Geographies
New Partners
New Verticals
Potential M&A
Cross-sellUp-sell
New Sites
New Products
New Customers Existing Customers
Result: Disruptive Business Model for Continued Growth
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Total Revenue
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Valuable…
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2013 Revenue Multiples
Median 5.2x
Valuations - SaaS
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2012-2013 Revenue Growth
Valuations - SaaS
2013 Revenue Multiples
Median 5.2x
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Valuations - SaaS
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Valuations - SaaS
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Retention (Renewal)
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14 x leverage!
Upsell
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Lifetime Value of Customer (LTV) Cost of Acquiring Customer (CAC)
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CORE
Levers
Mul
tiplie
rs
LTV
CAC
LTV ~3x > CAC
Basic Startup Model
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The Model Refined – Enabling Retention & Upsell
Lifecycle Value of Customer (LCV) Cost of Acquiring & Re-Engaging Customer (CARC)
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CORE
Levers
Mul
tiplie
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Re-TrialUp-sell
LCV
CARC
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Re-engagement Costs Must be included in CARC
Example:• Support• Customer Service • Professional Services
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Connecting it to Gain/Pain They are two views of the same principle:
• Customer view = Gain/Pain• Vendor view = LCV/CARC
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CORE
Levers
Mul
tiplie
rs
Re-TrialUp-sell
LCV
CARC
GAIN
PAIN
Vendor View
Customer View
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Start as you plan to finish...
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A typical product lifecycleBut it doesn’t have to be this way !
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See Try Buy Fly Die
Long, costly (CAC), slow payback, short lifetime value (LTV)
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Adding Retention and Upsell
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See Try Buy Fly Die
Re-TrialUp-sell ExtendedLifecycle
Long, costly (CAC), slow payback, EXTENDED lifetime value (LTV)
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Web
Self service
On demand
SaaS Subscription
Open source
A disruptive & valuable Lifecyle
See Try Buy Fly Die
Re-TrialUp-sell ExtendedLifecycle Re-Trial
Up-sellExtendedLifecycle
short, low cost (CARC), quick payback, extended lifecycle value (LCV)
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Applied to Software
Installed by IT Customized Infrequent upgrades Proprietary License
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1990+ 2010+
On demand, SaaS
Web based Self service
Open Source Subscription
Web
Self service
On demandSaaS Subscription
Open source
Up-sellExtend
edLifecycl
eUp-sell
Extended
Lifecycle
short, low cost (CAC), quick payback, EXTENDED lifetime value (LTV)
Re-Trial
…a fundamentally disruptive & more valuable business model
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DEMANDWARE PRE-IPO
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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
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START UP SECRETS
An insider’s guide to unfair competitive advantage
Hi
Disruptive Business Models to build Value
#startupsecrets startupsecrets.com
Michael J Skok
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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