Lessons learned by Adobe in selling software by subscription

adobe

Adobe is one of the most venerable software companies extant. They had their start in life courtesy of Steve Jobs, who invested in Adobe.  Adobe created the Postscript driver that made Apple’s Laserwriter a breakthrough success, as the Apple/Adobe alliance launched the desktop publishing industry last century (along with Aldus’ Pagemaker).  And as a venerable software company Adobe mov from system software (Postscript) to consumer and professional software entailed shipping their software on disks, packaged in boxes and sold in computer stores.

For those of you, like me, interested in technology history, the VentureBeat article by , Adobe’s path from $200 million to $5 billion in recurring revenue presents the lessons learned as Adobe transformed itself from selling boxes to selling subscriptions – software as a service.

You can’t get close enough to your customer

When Adobe went from shipping software in shrink-wrapped packages to distribution through the cloud they went from customer-blind to seeing the full customer experience, namely their usage.

Adobe SVP of go-to-market and sales Rob Giglio said. “We’re taking signals from customers in real time.” Now, the product is part of the marketing — perhaps even the biggest part.

You can’t have enough data

Adobe now uses predictive modeling  based on usage data  to deliver the right tutorial at the right time. From usage data Adobe can tell which customers are having usability or learning issues, and which ones are at risk of churning.

You can’t stand still

Adobe has gone from yearly updates of their software to continuous improvement –  every day is launch day. “You can make the product better, easier, faster, and more bug-free. Accumulating enough incremental value over time means you not only keep existing customers, but add new ones.”

Test, test, and test again

Adobe runs about 200 tests on Adobe.com each week and wants to up that by an order of magnitude to about 2,000 tests each week.

Automate, automate, automate

There’s no way you can run 2,000 tests every week manually. You can’t interact with millions of customers in totally manual fashion either. So the answer has been automating these tests.

What’s been the business impact of moving from shrink-wrapped boxes to a subscription licensing model? Adobe has gone from $200 million a year in recurring revenue to over $5 billion! And their stock is up 300% in five years. So while some people say cash is king and other say content is king, I say the business model – how you make money – is king. At least that has proven true in Adobe’s case.

4 tips from a billionaire founder that are worth heeding

bhavin

I’m a heavy user of FlipBoard, as it often surfaces worthwhile stories about founders and mentoring. However, I’ve noticed over the past few months that it has presented more and more clickbait, “The single secret to immortality,” “How to get rich while you sleep,”, “How to become rich and famous even if you are over 70!” and more!

I always ignore these headlines, but for some reason I read the Entrepreneur.com article 4 Lessons From an Entrepreneur Who Became a Self-Made Billionaire Before Turning 40, by Daniel Priestley, which even sports a clickbait subtitle, Bhavin Turakhia and his brother Divyank started their billion-dollar journey with a $375 loan. This turned out to be an article worth reading and annotating for my readers.

Not only has Indian entrepreneur Bhavin Turakhia built and sold three companies for a total of over $1 billion, he and his brother have never raised external funding!

Bhavin is a massive advocate of bootstrapping a business unless it is absolutely essential to seek investment. He says, “When you truly believe in the value of what you are creating, diluting the equity is the most expensive way to grow.”

Here are four lessons he passes on the first two of which I’ve not seen before in the hundreds of articles and books I’ve read about startups. And these are all lessons well worth learning.

Lesson 1: Value creation over valuation

Many of the founders I mentor are obsessed with raising money and once you enter that process you quickly become obsessed with your valuation, as it determines how much dilution your equity will suffer in direct proportion to how much money you raise. But Bhavin believes that founders must focus not on valuation, which is an important number only to founders and investors, but on the value you provide to your customers. But how do you measure customer value? Rather than get snagged in the typical founder metrics of eyeballs, traffic and employee headcount, Bhavin focuses on net-promoter-score (NPS), customer satisfaction, and profit. Heed Bhavin’s words, “Valuation is a side-effect, not a goal.”

Lesson 2: Creativity over cash

Well this seems counter to the prevailing wisdom, isn’t cash king?! Well Bhavin sees two common problems companies have that raise too much capital: one, they end up overpaying for customer acquisition, rather than employing no-cost, low-cost guerilla marketing techniques to acquire customers. Hiring an agency to conduct a focus group foregoes the needed face to face interactions with your customers. Here’s another great quote from Bhavin: “Adversity causes innovation.” “If a business is too well-funded, there’s always a temptation to throw money at problems rather than digging deep for an innovative solution.” Also known as “Necessity is the mother of invention.”

Lesson 3: Quality of people over quantity of people

This is what I preach to my mentees: getting too much investment too soon can easily lead to hiring too quickly, which tends to favor growth in the size of the company – a number easily shared and bragged about – over the quality of your team, something less obvious. Here’s a great quote from the Daniel Priestley about the dangers of hiring too many people too quickly:

Every new hire adds complexity to your culture. Each person brings with them baggage and experience. If you hire average people, they dilute the focus of the rock stars. Companies that do not have deep pockets should recruit just a few brilliant people and they will probably have an edge over the 100-person company that expanded their team too quickly.

Lesson 4: Staying focused

This is my Lesson 1! And it is so important that I would make it lesson 2 as well. Seriously, one of the biggest problems I see with startups is that they all want to boil the ocean. They seem to have an irrational fear that if they focus on only one thing they will be leaving lots of other opportunities to their competitors.  But to quote Bhavin again, “Success is directly proportional to the level of focus you can put into solving a problem.” As the author wisely adds, “Investors who are not in control of the running of the company need to diversify their risk across many companies, but entrepreneurs need to choose a big problem and focus all their energy into solving it better than anyone else can. ” I’m in violent agreement with Bhavin, who says, “One of the biggest things that kill startups is defocusing.”

So sometimes it’s well worth taking the bait, even if it’s click bait!

What’s the key factor in your startup’s success?

network

Previously I’ve posted about the top reasons startups fail, according to Bill Gross of Idealab. According to his research the most important reason is timing. But today’s post is the mirror image, what is the key factor in making your startup a success?

The secret to creating a successful startup is your contacts book, A big data analysis of 42,000 startups has found there’s one key thing that encourages growth according to the article on Wired by Chris Stokel-Walker.

Moreno Bonaventura and his colleagues at Queen Mary University of London analyzed 41,830 companies across 117 different countries over the course of 25 years, from 1990 to 2015. They defined success as achieving an exit either going public (IPO) or being acquired by another company.  The key success factor was the network of the founders and they staff they hired. This isn’t surprising as the vast majority of VCs I’ve met with rank the team as the most important factor in their decision on whether or not to invest in a startup. They would prefer an “A” team with a “B” idea to a “B” team with an “A” idea. The “A” players will either make a success of the “B” idea or pivot to a better idea; the “B” team will more than likely fail to execute on the “A” idea.

But simply amassing a bunch of Facebook friends or connections on LinkedIn is not sufficient.  People at the very top of the rankings may not have the time to help you. And the first rule of business development is nurture valuable contacts by helping them whenever possible. Bonaventura concluded that the more connections a person has means there’s a greater “opportunity and knowledge” that can be gained. I would go beyond that to the quality of those connections. Simply having a lot of connections isn’t  enough, they need to be in the market you are targeting.  A great resource for the founders I mentor at MIT is the MIT alumni directory, which enables searching by type of business. I assume most universities have alumni directories of their own.

“A person that ranks higher is a person that doesn’t just know many contacts, but has connections that allows them in a few hops to reach something that’s needed in a work environment,” says Bonaventura.

Valeries Ciotti, who works with Bonaventura adds that “it’s best  to hire people who have quite a wide variety of knowledge, with connections from different companies.” Beware of monocultures. While it can be tempting to hire solely from your alma mater or your last employer, you risk running into a kind of groupthink that can be eliminated by hiring from diverse companies and even markets. Studies have shown that diverse groups – those having men and women, majorities and minorities – make better decisions than all male, all white groups.

And I have to add a maxim of I borrowed some time ago: It’s not who you know, but who knows you. As an individual you may know hundreds of people, but through media relations or social media marketing you can become known by thousands or even hundreds of thousands, thus opening up your venture to opportunities that come in “over the transom.” Or as a former partner of mine once said, back in the age of business phone systems and landlines, “We’ll know we are successful when the number of
in-bound calls starts exceeding the number of our outbound calls.”

From hardware maker to content platform

roku

It is the received wisdom that hardware suffers from low margins but platforms, where everything from apps to content are sold in an online marketplace has much higher margins. That is why so many startups I see are trying to become platforms. But it isn’t easy, as platforms by their nature are two-sided marketplaces, where the middleman has to satisfy both buyers and sellers while also maintaining the platform software and paying hosting and bandwidth cost.

By what’s at least one order of difficulty greater is transitioning from a hardware maker to platform provider, a feat recently achieved by streaming TV set-top box maker Roku. The article on The Motley Fool by Rick Duprey, Roku’s Transition Is Paying Off in a Big Way lays it out. The sub-title tells the story:

Moving away from being simply a hardware maker could have been risky, but instead it is becoming hugely profitable.

Other tech companies — like GoPro and Snap — that have attempted the same maneuver and stumbled hard can only look on in envy. TiVo said it would stop selling hardware altogether last year.

Roku has now become a content aggregator. Its advertising supported Roku Channel has quickly become one of top channels on Roku devices, based on hours streamed. Much like iTunes, Roku aggregates video and sells the set top box.  Roku ended 2019 with over 27 million active accounts, having added 8 million last year alone, which led to the number of streaming hours rising 9.2 billion year over year to 24 billion.

Roku has adopted the Gillette razor business model of practically giving away the device to sell the ad-supported content. Fourth-quarter gross margins on players were just 2.4%, a 75% decline from the year-ago period. Margins for its platform business, on the other hand, stand at around 75%.

There are two lessons for founders in the Roku story: one, yes the margins on contents and software are far greater than those on hardware, and two, while it’s best to build a platform from day one, Roku has demonstrated that hardware makers can transition into platform providers given the will and the means.

 

 

Every company’s dream – to become a platform!

marketplace1

I admit I haven’t kept track of all the startups I’ve mentored over the past nine or ten years, but a sizable percentage of them aspired to become platforms. And when you look at the success of Amazon, eBay, Netflix et al, why not?

But it surprised me to read the ZDNet article by  entitled Most companies aspire to be platform providers, and APIs will get them there. And the sub-title summarizes the article neatly: A majority of IT managers see their companies evolving into platform providers, and see APIs as critical to making the connections. The basis of the article is a survey of 350 IT managers released by Cloud Elements which finds 62% of organizations aspire to become platform providers to integrate with partners, maintain stickiness with customers, or find new revenue opportunities.  Platforms are two-sided marketplaces where buyers meet sellers. Even Apple plays the game with its App Store where independent iOS app developers sell their wares to everyone with an iPhone or iPad and pays 30% of their sale for the privilege. And Google does the exact same thing with Google Play. In fact you can’t turn around in the crowded Internet ecommerce space without bumping into a platform or two.

But as I counsel my mentees, two-sided marketplaces are subject to the dreaded “chicken and egg” problem: buyers won’t come to a platform without [consumer goods] [apps] [movies] [tv shows] [games] [etc.] and developers of all this stuff have no interest in a platform that can’t boast serious traction with buyers of their goods. So how do you prime the pump and supply either chickens or eggs or even both to jumpstart your platform?

The answer I always get from founders is “social media” – the marketing marvel that will drive both sides to meet at the platform. Unfortunately the days when upstarts like Amazon and eBay could go from startup to rocket ship in a two-sided market are probably long past unless you can find a small enough niche, as many founders have done by putting together specialized professionals, like graphic artists, with customers, such as companies too small to have a graphic arts department. Another way of looking at two-sided market is to consider the platform providers as simply brokers, a business model that probably goes back centuries. One that many are familiar with are real estate brokers, who put together landlords with tenants or owners with buyers, taking a commission on their sales.

The problem with this model, as Amazon will attest, is that margins are razor thin. In fact, without the totally counter-intuitive genius move by Jeff Bezos to act as a platform for other sellers of goods who compete directly with Amazon, it’s unlikely he would be the richest man in the world today. He wrote in his recent annual letter to shareholders that Third party sellers are kicking out first party butt. Badly. How?

Why did independent sellers do so much better selling on Amazon than they did on eBay? And why were independent sellers able to grow so much faster than Amazon’s own highly organized first-party sales organization? There isn’t one answer, but we do know one extremely important part of the answer:

We helped independent sellers compete against our first-party business by investing in and offering them the very best selling tools we could imagine and build.

So Jeff has given you founders the secret sauce to running a platform: you must add value beyond simply handling the financial transaction. Though as eBay found, even handling the financial transaction wasn’t easy, which is why they ended up buying PayPal.

In fact, I would highly recommend that founders to aim to create a platform study Mr. Bezos’ annual shareholder letters (and anything else they can find about the success of Amazon).

As quoted so neatly from Alex Moazet of Applico: Platform businesses don’t, to use a common phrase, own the means of production- instead, they create the means of connection. In fact if you look at Facebook they too can be considered a platform business as they are the broker between consumers who swap their personal data for free access to friends and family in exchange for being subjected to a barrage of advertising based on that personal data. Google and Facebook both make money by pairing user-generated content and personal information with advertising.

Going back to the title article this post is based upon, APIs can act as the means of connection. Those IT managers who were surveyed saw APIs as critical to making the connections needed to attain this new business model, opening up online assets to partners, and vice-versa.

The key success factor for platform providers is adding value to both sides of the business connection: demand and supply.  Once you start thinking about platforms you realize you probably are a customer of many of them, such as Uber, which connects drivers with riders by supplying both with state of the art location-based apps and a frictionless means of payment.

So if you want to grow up to become a platform provider my best advice to you is to find a crusty old marketplace with lots of friction, where you can successfully enter by providing value to both sides of the economic transaction. While I won’t go so far as to say bootstrapping a platform is impossible, gobs of VC money can help you spin up the two-sided marketplace. But what investors will be looking for will be what is your sustainable competitive advantage? What tools or APIs or whatever will you be providing to attract, engage, and retain not just one set of customers – the buyers, but two sets, buyers and sellers? A lot of VC-backed marketplaces attempting to be the “eBay of lab equipment” or ‘eBay or X” are buried in the startup graveyard because simply facilitating a sale isn’t enough, which is why you see Uber re-engineering itself as a logistics company and its competitor Lyft attempting to go deep as a consumer transportation company by getting into bikes, motor scooters, and probably soon, skateboards.

 

 

9 Critical Success Factors Startup Founders Always Forget

founder

Here’s a great list of things founders need to keep in mind from Jason M. Lemkin, Partner at SaaStr Fund on Quora. I’m going to keep the headings, but provide you with my own take on why you can’t afford to forget these success factors:

It almost always takes at least 24 months to really get off the ground from Day 1.

The rule of thumb I was given about startups is that they will always take twice as long and cost four times as much. But this was back in the days of setting up your own server, buying Oracle, etc. I’d say things will only cost 2x your projection. But the most important thing is to work backwards from a launch date 24 months from your founding and focus on meeting weekly, monthly, and quarterly milestones in those 24 months. Simply setting a goal of launching in 24 months is a sure way to fail to meet that goal. Every day when you wake up you need to think “What are the three things I need to do today to move the company forward?”

VCs do not fund very many companies.

The reality is only a tiny fraction of startups get VC funding. It’s an order of magnitude harder than getting into Harvard or Stanford. The year we got funded in my first company Greylock only funded two startups. Jason’s rule of thumb is very good: in medium size funds each partner does about two investments a year; in large funds it is  often just one investment per partner per year; and even in seed funds each partner only does three to four. Make sure you are investor ready.

You can’t hire some magic salesperson to “get you more sales”. You have to figure it out first yourself.

Too many engineer founders believe in the magic salesperson! What they don’t realize is that really great salespeople are hard to hire, expensive, and extremely picky about choosing to work at a startup. In fact, hiring a great sales person means your company probably has a good chance of success. But before you start recruiting you need to build a great product and achieve product/market fit. Great salespeople scale a company, they don’t build it. They are like VC funding – adding fuel to a rocket that is already built and on the launchpad.

Free and Freemium are not marketing strategies.

Again, I see too many founders believe this to be true. The reason is they don’t understand the difference between a business model – which is how you make money, who pays you for what and why – and a marketing strategy – how you will acquire customers. In fact too many  decks these days go very light on customer acquisition – a big mistake.

If your co-founder is not as committed as you, he/she will leave, and before it really takes off

Well it’s very hard to judge the commitment of a partner. And sometimes life intervenes, like a death in the family, the spouse of a partner getting a job offer they have to take but it half way around the world, illness, and other “acts of God.” Do your absolute best to bring on a partner you know and have worked with before. If you can’t do that then consider any other partner to be on probation and make sure you give them enough tough assignments early on that test their commitment. Because when everything is going great everyone looks great. But when things go off the rails the true nature of your partner(s) will come out.

Slow growth after a certain point is a sign of a lack of product-market fit.

You have to know when to hold ’em and when to fold ’em.  Otherwise you may either give up on a great product too early or hang on to a bad product too long.

First-to-market matters, but so do many other things. Focus instead on being first to do something important 10x better.

Credit where credit is due, Peter Drucker, management guru first said that to displace the market leader the upstart must be 10X better than the incumbent. But how are you 10X better: cheaper? You probably don’t want to compete on price. faster? That’s a spec,  how does it translate into a benefit? More features? Will customers actually use them? Figuring out how you are better is critical!

VCs are not out to get you.

You need to understand VCs are portfolio managers who answer to their limited partners. Where you fit in their portfolio in terms of growth, product market fit, buzz and deployment of capital will determine how well you get treated. As a Greylock partner told me, “Build a great company and the exit strategy will take care of itself. And if you don’t, the exit strategy will also take care of itself. Your job is simply to build a great company.”

You don’t have to spend 100 hours a week in the office. But … Work-life balance is a myth

I totally agree with Jason: you must be obsessed! That doesn’t mean counting the number of hours you spend in the office, but if you aren’t obsessed with making your company 24x 7 you need to get a regular corporate job. It’s that simple.

The first mover’s advantages vs. fast followers’ advantages

 

footraceBack in the late ’90s during the dot.com boom everyone was trying to be first to market to gain first mover advantages. But what are those advantages?

  • Media relations – if you are first to market you are bound to garner more press and other media’s attention than being seen as an “also ran”.
  • If your market is not growing, then market share becomes a zero-sum game. Thus by being a first mover you may able to grab more market share, or at least grab the low hanging fruit first. Those following you will have to fight harder to gain share in a static market.
  • Attracting talent. Engineers like to be with “hot” companies, as they assume those companies will grow the fastest, exit the fastest, and make them richer than a following company.
  • Partnering – by being first to market you will have the pick of distribution, marketing, and other types of partners.
  • Exclusivity – you may be able to forge exclusive agreements with suppliers, partners and even customers, thus shutting out companies that follow you.
  • Intellectual property – if you can both file first and apply your patent first you may well get that patent or patents granted, potentially shutting out or slowing down competitors.

Going first seems like the smart strategy. But why is that behemoth companies like Apple and Microsoft are fast followers? For example, the iPhone was not the first smart phone, but it was the first to elegantly integrate the touch screen UI into a sleek form factor that enabled users to surf the web, send messages, take photos, listen to music and even make phone calls. So what are the advantages for fast followers?

  • The saying that “pioneers are the ones that get the arrows in the back” has some truth to it. There are all sorts of issues that a first mover can’t foresee that can trip them up, from government regulations to new technical standards.
  • Fast followers can sit back and see if there’s actually a market for the first mover’s product. Perhaps it is too small to bother with. Or it may be the wave of the future, as the cloud is. Amazon gained first mover advantage with AWS, but Microsoft, is closing fast from the fast follower position.
  • Fast followers can observe customer behavior: what do customers like about the first mover’s new product? What don’t they like? What features aren’t even used? What features are missing? Is it performance or a slick UI that attracts customers?
  • Determining the right business model is one of the toughest problems innovators face. By being a fast follower you can study the market and see if the pioneer’s business model is working. Perhaps the first movers try to price their product a la carte, but the fast follower sees that a subscription model would work better. First movers are then faced with having to change their business model, which may upset customers, whereas the fast followers can launch with the right business model in place.
  • Setting pricing is another one of the tough problem the first mover’s face with their new product. Perhaps they have priced the product too high, which leaves room for fast follower’s to undercut the market leader. Or perhaps the first mover looks like they have left money on the table, enabling fast followers to start with higher prices without having to deal with customers who object to price increases.
  • What’s the USP (unique selling proposition) for customers? Fast followers can observe the market and see if the pioneers had an effective USP or if that prize is still up for grabs.

You see that the list of advantages for fast followers is longer than that for first movers. But don’t be fooled by the number of bullet points. Analyze your market and your customers’ behavior. Typically it is large, established companies like Apple and Microsoft that are the fast followers. The bigger the company the slower they tend to move, and they are typically risk-averse. This is why startups often defeat large companies with more resources. As Kris Kristofferson sang, “If you ain’t got nothin’, you got nothin’ to lose.”

Whether you chose to be a first mover or a fast follower, be aware of the advantages you may have, but also the disadvantages and make the trade-offs strategically. Too many startups just assume they need to be first movers, only to establish a market that bigger companies then enter with more resources and market power. And whatever you do, if you are successful you will have imitators. You need to build a sustainable competitive advantage, such as patents or exclusive distribution agreements. While there can only be one first mover, there can be dozens of fast followers!

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