Not created equal: Evaluating enterprise sales strategies.

image

Recently, I met with a startup team in the enterprise software space. I’ve known these guys for a long time and have been tracking their steady progress for years. But now, they have finally hit their stride. Sales are exploding, revenue is ramping - things are good.

As they were updating us on their strategy and sales traction, and listing new and impressive customer wins, one of the entrepreneurs paused for moment, reflected, and said, “as a matter of fact, I’m amazed we have any customers at all.

Realizing that he may have confused his listeners, he explained what he meant. Let me paraphrase him: “In our market,” he said, “the competition is so fierce, the marketing messages are so confusing, and the customers are so large and slow to adopt new technologies from new vendors - that it’s amazing that we have achieved the customer penetration that we have.” 

He’s right. And I admire his humility - a humility that I think has contributed directly to their success so far. Anytime a small startup is able to get a large enterprise to write a check, it’s a minor miracle - and that got me thinking. 

Can this be generalized? How do small startups penetrate the enterprise? Is there a recipe?

There is no recipe, of course, but in my experience there are three principal levers that a small startup can use to drive enterprise adoption.

These three “enterprise sales levers” are:

  1. value,
  2. operations, and
  3. product. 

Interestingly, however, each of these levers can be used in negative and positive ways to drive sales forward. Sometimes, tactics used by startups to drives sales actually hurt their prospects for growth or - at least - reduce their ability to convince VCs that rapid scaling is going to be likely. For lack of a better term, I’m going to refer to this as “sales leverage.” Negative sales leverage refers to sales strategies that can actually reduce enterprise value even as they increase sales. Positive sales leverage, by contrast, refers to sales strategies that tend to increase enterprise value.

Let’s quickly go through the three types of levers, and look at what “positive” and “negative” leverage might mean in each case:

1. Value-based sales leverage

  • Positive value leverage: Technical superiority. One of the best and most impressive ways for a startup to drive enterprise adoption is to offer something that the competition simply can not deliver. Usually, good entrepreneurial teams can fix other issues, They can improve sales teams, marketing skills, etc. But winning on technology is probably the most compelling type of sales leverage because it can constitute a significant barrier to entry.
  • Negative value leverage: Below-market pricing. Startups can drive enterprise adoption by dropping prices to below market levels. While this can increase revenues and generate solid reference accounts, it is negative leverage because too much of this can suggest that the only way a startup can generate sales is by being the price leader. That can be great in the early stages, but its usually not a strategy that leads to market leadership and dominance - unless it’s coupled with enough positive sales drivers to lead to massive market share.

 
2. Operational sales leverage

  • Positive operational sales leverage: Sales tenacity & discipline. These are two forms of positive operational sales leverage. Old-fashioned tenacity goes a long way in displacing competitors and winning the enterprise account. It’s a kind of “DNA” indicator that I consider a huge positive. Likewise, discipline in sales operations (inbound lead management, outbound lead generation, inside sales pro, and field sales) can help even the smallest company outsell its competition. Discipline and a well-oiled marketing and sales machine is a repeatable driver of sales - something that both VCs and acquirers like to see.
  • Negative operational sales leverage: Relationships. All startups use personal relationships with customers to drive sales in the early stages. They’d be crazy not to. But personal relationships don’t scale - and they don’t drive the intrinsic value of a business. I’m always wary when startups have only managed to penetrate customers because of past relationships, investor ties, friends and family etc.

 3. Product-based sales leverage

  • Positive product-based sales leverage: Clarity of product/marketing fit: When competing with enterprise software giants, a small company can sometimes achieve disproportionate success through superior clarity around specific use cases and benefits. This can be true even when technology alone is not enough to win the day. Large competitors can’t respond to every marketing message and can’t adjust their product fast enough to stop a small determined company from reaching the market with a clear, crisp message that converts into sales.
  • Negative product-based sales leverage: Custom Project Work. Small companies can often win large and seemingly impressive accounts by doing customized product work or even customized integration work. This is always seductive, but it usually amounts to a massive discount and significant defocussing. VCs (and sharp CEOs) tend to focus on the amount of pure “product” versus professional services revenue as key indicator of scalability. Too much customization can kill growth prospects and indicate that sales aren’t going to be repeatable.

To subscribe to this blog, click this link. I’ll buy you an espresso.


22nd May 6:36 PM
View Gil Dibner's profile on LinkedIn

Democratizing the Datastore: Why we invested in Crate

Today, Crate announced that Sunstone and DFJ Esprit led the company’s EUR 1.5M seed financing round. This is my first investment as Partner at DFJ Esprit, and I’m absolutely delighted to be working with the exceptional team at Crate and with Nikolaj Nyholm, our partner at Sunstone.

So why did we invest in Crate?

Exceptional team with deep domain knowledge. Jodok Batlogg, who founded Crate, is one of Europe’s leading big data practitioners, having served as CTO for both StudiVZ (over 15M users at the peak) and SevenLoad. Additionally, Jodok is a leading open source contributor (to both the Zope web server and the Plone CMS). Crate’s CTO, Bernd Dorn, is a true database guru, and Christian Lutz is an experienced operator with a track record of, quite literally, doing the impossible (in this case, rescuing Polaroid).

Big market screaming out in pain. No matter how you slice it, the database market is massive and evolving. It’s also a market that has received a disproportionate share of VC investment, with VCs plowing funding into a long list of database related market segments including: NoSQL, Hadoop, graph databases, open-source SQL, cloud-based databases, visualization, etc. But for all of that innovation, the process of setting up and running very large database remains either expensive or complicated. Expensive because large databases still often require expensive hardware and/or licenses. Complicated because setting up a massive cluster of commodity machines to run a database requires a ton of administrative work and expertise that not a lot of people have. It’s this administrative complexity that Crate is out to eliminate – and that’s the real story behind the investment: the democratization of database cluster management. Crate’s real claim to fame is that it allows developers – any developer – to easily set up a massively scalable data store on commodity hardware with sub-second query latency simply and within minutes.

Open source vision. Crate comes to market as an open source offering. Europe, after all, has been home to the open source movement in many forms, most notably through projects such as MySQL, Neo Technologies, Elasticsearch, Zend, and others. Linux itself has strong European roots. Crate hopes to join this list of European open source winners. In many ways, open source is the right way to do software. Increasingly, open source has gone from being an impediment to enterprise adoption to being a driver of enterprise adoption. A healthy open source community can help ensure the long-term viability of a software architecture, and can act to reduce risks for the enterprise. When code is open, it can be readily understood, tested, and extended to meet enterprise needs. I believe firmly that this is a great time to invest in enterprise software, that Europe and Israel are great places to build enterprise software companies, and that open source is going to be an increasingly important route to market going forward.

A roadmap that matters. At Crate, we draw some inspiration from Marc Benioff of Salesforce, who famously drew a line through the word software to help illustrate that SaaS meant you didn’t need to worry about buying and deploying software anymore. Similarly, Crate hopes to draw a line through the word database – making it insanely easy for developers and companies to deploy massive datastore clusters and use them in both applications and analytics, but without having to worry too much about how to set up and deploy the databases that underpin the cluster. That’s a big vision and it’s going to take some time to get there – but this is exactly the kind of real technology that makes venture capital in Europe a great place to be.

Visit Crate at www.crate.io, follow them on twitter at @cratedata and check them out at Github at https://github.com/crate.

Like this blog? Subscribe here!


24th April 6:36 PM
View Gil Dibner's profile on LinkedIn

The Era of Facebook is an Anomaly

image

This interview with Danah Boyd is one of the most interesting pieces I’ve read this year. She makes several observations, and I encourage you to read both the interview and - probably - her book.

She argues:

  • That the era of Facebook is an anomaly because “everyone was on one site.”
  • That part of the reason we are seeing photo-sharing on Snapchat and Instagram is becuase photos aren’t searchable and people don’t want to be searchable.
  • That agreed fictions are part of normal social interactions and must also be part of digital social interactions.

I find this particularly intriguing because - in a digital sense - I am a child of Facebook. I am 37 today, and I came of age as an adult, a professional, and a person in an era when Facebook was dominant. You were either on Facebook, or you didn’t exist digitally. And as a VC in the era of Facebook, if you didn’t exist digitally, you didn’t exist at all.

But I too was shocked when a younger generation of people started using Facebook in ways that I wasn’t expecting - like cold-messaging me with pitches. I realized then that social networks were triggering a re-engineering of basic human interaction - or were they? A cold email is a cold Facebook message is a cold Tweet. On a human level, these interactions are the same - the interesting thing is how human behavior moves from platform to platform as those platforms are increasingly or decreasingly perceived as the right place to do things.

On a very personal level, there are two observations I want to make. First, while I am still a relatively young VC, I am already too old to have experienced Snapchat or Tinder as an entire generation of people in their twenties and early thirties are doing today. I know what these platforms are intellectually, but must acknowledge that they do not play any role in my life - does this limit my ability to understand them? Probably. At the very least, I’ve got to recognize that I have generational biases that I’ll need to overcome in order to understand where some of these trends are headed.

Second - and more importantly - is the observation that Facebook was an anomaly that is not likely to repeat. Facebook is both a fundamental revolution in human affairs AND an ephemeral fad with no more staying power than a hoola hoop. Part of what Facebook brought to the world - the sharing, the user-generated content, and the tremendous volume and quality of data about user behaviors - will probably be with us forever. But let’s also focus, as Boyd does, on the parts of Facebook that might be a passing fad: the idea that everyone is going to be on one network - THE social network for everyone and everything. That idea - which seemed obvious to me as a member of the Facebook generation - shaped so much of how we think advertising and content and marketing and startups are going to evolve.

But this is probably a flawed idea. The commodotization of technology has led to a proliferation of “social networks” of every possible type and for every possible purpose. Perhaps the exits of the winners may be a bit smaller - but it’s a fascinating time to be in technology for exactly this reason. So I’m excited for the future, but a bit wistful for the past. Human society never organized itself in one place before, and it will probably never do so again. But for about a decade - on Facebook - it did. And it was amazing. 

If you’ve enjoyed this post, consider subscribing to my blog by clicking here. You won’t miss another post, and my mom will be proud.


3rd April 10:47 AM
View Gil Dibner's profile on LinkedIn

Whatsapp got to do with it?

What can founders actually take away from Whatsapp’s massive exit to Facebook?

image

Last week, a question was asked at a panel discussion in which I took part. It was another variant of the same question that has been asked by a lot of people in a lot of places:

  • What do you think of Facebook’s $19 billion acquisition of Whatsapp?
  • Did Facebook overpay?
  • Is Whatsapp really worth $19 billion?
  • Does Whatsapp prove that we in a valuable bubble?
  • Nineteen billion – are you kidding?

My answer is simple: I don’t know if Whatsapp is worth $19 billion or not. Like most people, I’m not privy to Whatsapp’s internal metrics or to Facebook’s strategic calculations. So why am I blogging about Whatsapp?

I think the real question for most of us is this: What can I learn from the Whatsapp transaction as an entrepreneur or a VC that might be relevant for my day-to-day work?

When we look through that lens, I think there are three main lessons for the rest of us:

First, Whatsapp reminds all of us of the adage that great companies are bought and not sold. Whether or not the valuation of Whatsapp was too high or not, part of what drove the valuation for Whatsapp was certainly that it had become deeply strategic to the company that bought it. The same is true of Google’s Waze acquisition, Google’s Nest acquisition, Rakuten’s Viber acquisition, and nearly every other big headline-grabbing acquisition. Every entrepreneur and investor in every startup ignores this observation at their peril.

One of the many paradoxes of entrepreneurship is that great CEOs need to simultaneously never think about the exit (to concentrate on building) and always think about the exit to make sure they don’t miss an opportunity to maximize enterprise value for their shareholders.

I’m not advocating an obsession with building for an exit – not at all – but Whatsapp is an unmistakable reminder that the value of your startup (in an acquisition) is the value that an acquirer sees in your business, your technology, your team, your promise, etc. It’s not just the value of your EBITDA that gets acquired (and certainly not your “revenue” as Bill Gurley has passionately pointed out). By thinking carefully about the dynamics of an acquisition scenario, you can maximize your exit by taking concrete steps to position your companies in someone else’s sweet spot – ideally that of several potential acquirers.

For more thoughts on the “bought vs. sold,” see here from Ed Sim (parts 1 and 2), Fred Wilson, Raju Reddy, and (a contrarian view) from Ryan McFadden.

Second, Whatsapp illustrates the shift in financing patterns brought about by the global IP infrastructure roll-out and the ever-increasing power of software to create value. To explain what I mean by that, let’s look at what Whatsapp managed to do, and lets focus on some of the four numbers that Sequoia used to explain the acquisition. In short, Whatsapp managed to build a user base of 450 million people with only 32 engineers (55 employees), zero marketing spend, and around $60M in total venture investment. For a sense of scale, let’s look at the world’s top three mobile carriers by subscriber volume:

  • China Mobile has 763M subscribers.
  • Airtel (India) has 487M subscribers.
  • Vodaphone (UK HQ) has 453M subscribers.

So Whatsapp built a user base equivalent in size to the third largest mobile carrier in the world. In five years. With $60M in financing. And 55 people.

“But wait!” you’ll argue. “That’s not a fair comparison. Whatsapp is an app and the mobile carriers are infrastructure providers. They have to build and manage a very expensive network of base stations and cable and servers…”

That, I think, is exactly the point. Twenty years ago, if you wanted to build an application (say voice calls, or SMS or pagers) that would connect 450 million people, you would have had to spend billions of dollars on spectrum, right of way, equipment, manpower, etc. And it would have taken years to get up and running. Not to mention the expense of explaining to people why they should allow new technology into their lives and pay for it.

Today, all of that infrastructure has been built already. The “dumb pipes” which carry our smart applications exist. Ubiquitous internet connectivity in our homes, offices, cars, and hands is the infrastructure on which applications get built. Not unlike the roll out of the first nationwide electrical networks (a technology revolution in which my great-grandfather played a role in the 1930s). You can’t sell a GE lightbulb or microwave until enough houses are wired up with electricity. And you can’t roll out a Whatsapp (or a Waze or a Viber or an Uber or a Hotel Tonight or even a Nest) until everyone has a smartphone in the palm of their hands, Wifi, and a 3G connection. But now they do. And now you can. So the second unambiguous lesson from Whatsapp is that we live in a world of ubiquitous IP infrastructure – and there are tremendous rewards for those that can leverage it with software and new devices applications.

The third lesson from Whatsapp is that as software eats the world, the working capital required to grow a tremendous business is sometimes far less than what it has historically been. Whatsapp built a kind of (OTT) telecommunications company with only $60M in investment. The existence of app stores, low operational costs, increasing comfort with new technologies, and the fact that we are all turning into early adopters dramatically eased Whatsapp’s path to growth. True, average revenue per user is only $1/year, but marketing costs are close to zero – and I’ll take that CAC/LTV ratio any day. I think this general observation applies to a great number of companies – and not just in the consumer world. Salesforce pioneered the SaaS model and showed that if adoption frictions were lowered far enough, a whole new generation of business users would be willing to try-and-buy enterprise software from the grassroots up as opposed to from the CIO’s office down. For example, I met an Israeli company last week that had reached over $6M in annualized recurring enterprise revenue with only $6M of investment and was approaching breakeven. We are talking about enterprise sales here – but far more efficiently than was previously the case. SaaS payment structures, cloud-delivered software, and open-source/freemium penetration strategies have revolutionized marketing, even for some of the hardest enterprise applications. We live in a world of increasing marketing and sales efficiency. The primacy of technology has led to a widespread realization that you either adopt new technology early or get left behind - and that shift in mindset is a technology marketer’s best friend.

So yes, some of the insane valuations we are seeing in the valley are a result of a bubble mentality and a fear of missing out. But some of them actually reflect the fact that the best software companies in both the consumer world and the enterprise world have been able to scale their businesses far more efficiently than previously. This means that when a company raises capital to enable further growth, they may be further down their growth curve than one might assume. In the 1990s, enterprise software companies might raise a $5M A-round in order to secure their first handful of paying customers. In the 2010s, we are seeing enterprise software companies raising $10M A-round after having achieved $2-3M in recurring revenue and an installed base of thousands.

As a caveat, we must guard constantly against the utopian belief that technology has created “new economics.” This cognitive error contributed to the first dotcom bubble and crash around 2000. But, at the same time, we must recognize that technology has, in fact, changed the landscape on which companies compete. It may be harder to find true barriers to entry, and harder to differentiate – but for companies that have achieved the beginnings of scale – growths seems to happen faster and more efficiently today than ever before.

Hate this post? Comment!

Love this post? Subscribe to the mailing list and don’t miss the next one!


17th March 11:36 AM
View Gil Dibner's profile on LinkedIn

Why I hate your product demo video

image

Apologies for the rant, but yes - I hate your product demo video. Instead of just bottling up my frustration, I wanted to package it and share it. 

Why I hate your product demo video?

  1. Because I need to be online to view it
  2. Because I need to dig out my headphones
  3. Because it’s too slow. It doesn’t really take 3 minutes to explain the basics of what you do
  4. Because the first half of it is usually generic and has nothing to do with your specific product
  5. Because it dumbs things down to the lowest common denominator (and, for VCs, that’s pretty low)
  6. Because I can’t quickly flip back to important sections or images once they’ve disappeared
  7. Because video is great for selling/buzz but not for details on tech, features, competitors
  8. Because those cartoons and that music are so 2010, and totally commodized by now
  9. Because it slows me down to the slowest speed of any of your viewers, and it’s hard to skip ahead

There. I feel much better now.


5th March 7:27 AM
View Gil Dibner's profile on LinkedIn

A watershed moment in human-machine interaction

image

On Thursday of last week, Google announced that voice search was going to be integrated by default into its chrome browser for the desktop. 

I noticed this story today, and it occured to me that this is a watershed moment for human-machine interaction (HMI). Since the invention of the mouse in 1950 (!) by Douglas Engelbart, not too much has changed on the desktop. Most of the HMI innovation has concentrated on the mobile device - where traditional input methods simply weren’t going to work. This reality brought us the T9 keyboard, the now-ubiquitous but originally magical touch screen, bluetooth enabled keyboards, Siri, “swipe” text entry, and eventually the “OK Google” interface that we first saw with Google Glass but that quickly spread back to the mobile phones. Other HMI innovations such as 3D vision have, so far, been limited to fairly specialized settings such as gaming had not had a massive impact on most people.

The announcement of voice search on the desktop, however, signals that we’ve reached a critical point in the world of HMI: speech recognition is now so accurate, natural language processing so powerful, and computational resources so prevalent that speech will soon be by far the easiest way to interact with a computer - even easier than reaching for the mouse or resting one’s hands on a keyboard. In truth, we have been here for some time and, equally true, most of us won’t notice this or adopt these interfaces for a while - but they are coming - and they are as clear a signal as any that we live in a world where extremely powerful computational capabilities will be broadly distributed and will surround us in ways we cannot even imagine.

Open the pod bay doors, Hal, we’ve been waiting for you.

To subscribe to the Yankee Sabra Limey blog, click here.


3rd March 10:50 AM
View Gil Dibner's profile on LinkedIn

Hegel and the two Bitcoins

image

So far, the best analysis of Bitcoin I’ve heard is Hegelian. Bitcoin is the antithesis to the thesis of traditional online banking and payments. Something wonderful might come out of the synergy between the two, but not necessarily out of Bitcoin itself as it stands today. 

Today, I saw a datapoint that, apparently, half of all bitcoins belong to 927 individuals.

I think we need to separate “Bitcoin: the brilliant distributed validation protocol” from “Bitcoin: the ponzi scheme.” It seems to me that both are true.

With the massive caveat that I am not an algorithms expert… it seems that Bitcoin’s algo rewards early participants disproportionately, something which is consistent with a ponzi scheme mentality and inconsistent with the “freedom to the people” ethos Bitcoin fans espouse. While I accept that the increasing complexity of solving the blockchain is part of the security mechanism that is built into the protocol, it still strikes me as a feature that is more consistent with a ponzi-like scheme (get rich quick for early participants) than with a truly “democratic” (i.e. “level playing field”) online transaction system. Algo experts may argue that this is necessary from a security point of view (and that the “get rich quick” for early adopters is, therefore, a necessary evil of the protocol before it gets to critical mass), but I think we should be questioning that.

I’m increasingly convinced that the kind of distributed validation algorithm that Bitcoin represents is an important part of the future of online payments and transactoin validation. But I’m also increasingly concerned that Bitcoin as it stands today has too many features that suggest ponzi-like dynamics, instability, and lack of transparency.

Another thought: The Mt. Gox bankruptcy exposes an underlying social truth about Bitcoin itself. If the idea is to get rid of “government,” then the good parts of government go away as well (in this case, the regulation, FDIC insurance, and monetary policy levers we’ve come to rely on). Advocating for Bitcoin is akin to advocating for handing out guns to citizens in lieu of a centralized police force. Great in theory…until things go wrong.

I’d love your thoughts on this either in the comments or directly.

To subscribe to this blog, please click here


2nd March 9:57 AM
View Gil Dibner's profile on LinkedIn

A quick note on Varonis and IRR

Last week, another Israeli VC-backed company - Varonis - joined the “billion” dollar club. While most of the VC/startup world’s attention is still focussed on Whatsapp’s incredible four-year journey from zero to the largest VC exit in history at $16B, it’s worth remembering that the vast majority of extremely successful VC exits look nothing like that.

Varonis, for example, went public on Nasdaq on Friday. The shares soared from an IPO valution of just under $500M to around $956M by the close of trading. Varonis was founded in 2005, so this has been a 9-year journey to the exit. That’s a long time, but not unreasonable and representative of the long, hard slog that the majority of successful enterprise software companies experience on the journey to exit. 

Even so, assuming a valuation of $10M in 2005, Varonis’ seed investors would have seen an IRR of 66% from seed to exit. Not bad at all.

Congratulations to the Varonis team, to Accel Ventures, and to my friend Rona Segev from Pitango on a very successful exit. And thank you for the reminder that not success doesn’t always come overnight.

To subscribe to the Yankee Sabra Limey blog, click here


2nd March 7:01 AM
View Gil Dibner's profile on LinkedIn

Startups and the pricing pivot: Part 1: Raising prices

This is the first of a few of posts on pricing. I’m going to use real-life examples, but without identifiable information. Company names and price points have been changed, but the essence of pricing strategy issues has been left as close to the true case as possible.

We startup people talk a lot about product/market fit. A third, and often missing, element of the equation on the path to startup nirvana is pricing. In the end, those three elements (and several more…) need to combine to create a scalable business.

Pricing strategy consists of two principal levers that a company can adjust:

  • price level (how much?) and
  • price structure (for what?).

And like every other truly strategic decision, there are no easy textbook answers. In some cases, there is (some) room for innovation around pricing strategy. On the other hand, many mission-driven entrepreneur tend to ignore pricing or defer pricing decisions. It’s very easy to get pricing levels wrong (too high scares off customers and impedes sales, too low leaves money on the table and devalues your offering), and pricing structures can quickly become so complex that they defy analysis, bewilder customers, and leave CEOs perplexed by their own creations.

So what to do? If I had a list of easy answers I would just write them up – but I don’t. Instead, I have a set of real world examples that I’ll talk about in an effort to shed some light. If you have one you want to contribute, email me and maybe we’ll add it to the list.

The first case I want to talk about is the case of Alpha Company (not a real name). Alpha delivers cloud-based IT infrastructure services. Pricing is for running instances on a per server basis, let’s say $10/server/month. Customers would get one server for free and then have to pay for additional servers. And the company had been doing well – driving to several thousand users (non-paying) and several hundred customers (paying), at roughly a 10-20% free-to-paid conversion rate – not bad at all for an enterprise IT startup with a non-existent marketing and sales team and a minimal budget.

The company’s customer base ranged from one-man operations paying $10/month to much larger enterprise customers that were paying much much more than that. Naturally, the vast majority were made up of smaller guys with 1 or 2 servers, and only a small minority were big companies with dozens of servers or more. Both small and large customers were starting to demand increased support. The small guys would call up and consume developer time and resources (there were no support people yet) and the big guys were basically signaling that if the company would offer enterprise-grade support there would be much larger contracts available. Meanwhile, Alpha’s CEO and CTO were planning a range of additional offerings that could significantly drive up per server revenues if customers adopted them.

Alpha’s CEO didn’t want to alienate his user base by withholding support, didn’t want to drive them away by charging too much for support, and didn’t want to leave money on the table with the big customers by including too much support and services at too low a price. What to do?

After a lot of discussion back and forth with the CEO, we realized that the answer to this particular pricing question seemed to rest in the product and market definitions themselves. Without getting into detail, we reached the conclusion that the product we were building really wasn’t designed for the small customers. They used it and loved it (and pricing was very attractive to them), but two factors were complicating matters: (1) they were using it on projects of very limited economic value to them (small website, apps with no users, etc.) and (2) for that sort of limited need there were other good solutions out there, even for free. So Alpha Company had managed to win a large number of small customers through sheer product awesomeness, but that really wasn’t the raison d’etre of the company. The real reason the CEO had built the tech was for larger SMBs and enterprises working on high value applications. In that use case, he believed, the technology made a significant difference in performance and operational costs. Moreover, Alpha Company’s R&D roadmap was full of product ideas and extensions that would drive significant value for large customers but would be largely irrelevant for smaller ones.

One option would be to fork the company: set up a product and pricing strategy designed to continue to win the small customers and a separate product and pricing strategy to capture maximum value from the large ones. Alpha Company, an early-stage startup, couldn’t do this. It would require resources they didn’t have and defocusing that could kill them. Instead, they decided to use their pricing strategy to focus their business around their original thesis. Instead of using pricing to create more options, they used it to focus their whole operation.

First, the company decided to focus product and pricing around driving and capturing value for larger accounts. Instead of asking larger enterprises to pay an incremental (per server or per seat) price for “enterprise features,” many of these features were going to be including in the basic per server price. Some additional features would be charged for separately, especially where those features drove higher delivery costs for Alpha Company, but basically the product was going to include all the key features an enterprise needed to get comfortable using the product.

Second, the company decided to raise prices on a per server basis across the board, effectively doubling pricing. While they were nervous that this would annoy some customers, they had only one customer complaint, no increase in churn, and no discernable reduction in the overall pace of signups. They continued to allow users to run one development server instance for free – but didn’t promise support to those free users in the same way they have been doing until now. The strategy was basically to allow freemium users to experiment with the software as much as they wanted, but to send a clear signal to the market: “This is an SMB/enterprise product with enterprise-grade features. It saves you massive amounts of time and money, and we expect you to pay for it accordingly.” So far, the strategy seems to be working – but we won’t know definitively for a while.

Third, support was no longer going to be offered on a best efforts (i.e. CEO available 24/7 by phone) basis to all customers. Instead, support would also be tiered. All users would get best effort (email only) support, but the company would charge a premium for higher levels of responsiveness – consistent with the enterprise-grade approach the company was taking with product.

What Alpha Company did is, I think, a great example of using pricing strategy to focus. Instead of adjusting their pricing strategy to accommodate whatever users happened to come across their service and keep everyone happy, they decided to use pricing strategy to send clear signals to their customers and market about what their product was and was not. In combination with smart product design, I think it has a good chance of working. Now that product and pricing are aligned, the company is very well positioned to expand its marketing activities in earnest – in a manner targeted at the customers they can best serve – and in a way where the unit economics make sense across the board.

To subscribe to this blog, click this link


17th February 11:14 AM
View Gil Dibner's profile on LinkedIn

Thoughts on Viber’s $900M exit to Rakuten

 image

Today brought the announcment of another near-billion Israeli exit. Viber, a free VOIP-based calling app for smartphones. It’s a pretty amazing story, and a lot of it has been covered well by the tech press. Here are links to stories by Techcrunch, Re/Code, GigaOm – and there will be lots more I’m sure.

As an interesting historical footnote, Viber’s exit is roughly twice the size of ICQ’s exit to AOL in 1998. ICQ was the first major Israeli consumer-oriented internet exit. It was the spark that lit the fire of consumer tech innovation in Israel. Now, almost two decades later, Israeli companies are still innovating, still driving immense value for consumers worldwide – and doing it at the billion-dollar level.

I wanted to call attention to a few things, sparked by the Viber story.

  1. We can officially declare the age of “wondering about whether or not Israel will produce big exits” to be over. This was a hot topic for many years, and as a VC based in Israel, we spent a lot of time trying to convince LPs that founders wouldn’t sell out early and convincing founders not to sell out early. And every time there was an early exit, as a community we would all wring our hands and hold our heads down in shame and bemoan the lost opportunity to build an Israeli Nokia or an Israeli Facebook. The past two years, however, has seen Israel riding the same wave of M&A and IPOs that have driven venture returns to solid levels around the world. Israel has seen the exits of Wix, Waze, Trusteer, Intucell, PrimeSense, and several others in the 300M+ club. Now, Viber joins that list at $900M. Yes, billion-dollar exist are rare – but they do happen – and they are happening in Israel at a fantastic pace that should encourage even the biggest skeptic to look again at investing in Israeli tech.
  2. What’s an Israeli company? Viber’s CEO lives in NY. It’s incorporated in Cyprus. The tech team is multi-national and based largely in Tel Aviv, with a development center in Belarus. Is Viber Israeli? American? Cypriot? The answer is who cares. It has DNA from all of those places. Digital businesses are global by definition. All of us (CEOs, product people, marketers, investors, LPs) must think in a global way in order to really capture the best opportunities and drive them to the biggest possible success.
  3. Not just US acquirers. Israeli VCs have been talking about the “opportunity in Asia” for a while now. With Viber’s acquisition by Rakuten, this taken on new significance. Internet adoption and mobile-adoption is a global phenomenon – and if successful web services have appeal in multiple geographies to a growing list of potential acquirers with money to spend and an increasingly sophisticated understanding of how tech acquisitions can shape their strategy. The US looks likely to remain the major hub for enterprise software, SaaS, and B2B exits for some time – but when it comes to consumer-focused businesses, it is absolutely a level playing field.
  4. Execution and product win, even in crowded marketplaces. Viber entered what was arguably a crowded marketplace. Messaging apps abounded. Google hangouts, Facebook video chat, Skype - all of these things existed or could easily have been predicted. But Viber executed well, delivered great product to users, was blindingly easy to use – and the user base speaks for itself. I probably would not have been smart enough (gutsy enough) to invest in Viber (I didn’t have the chance – see below), but I would have been wrong not to. Competitive analysis be damned.
  5. Beyond VCs. Viber didn’t raise money from VCs. As far as I know, they didn’t even raise growth capital from VCs. This was entirely funded by the founder himself, using the proceeds from previous successful internet businesses that he had established. Talmon Marco knows how to build web businesses and had the resources to do it on his own. No VC is going to have Viber in their LP presentation. Instead of taking profits, Talmon invested in his own expertise, his own success. It’s an inspiring story – and it takes the “lean startup” concept to another level. This is a textbook example of cross-business bootstrapping, and it’s simply awesome.

Here’s to the success of Viber and to many more to come!

To subscribe to this blog (and I hope you do!) please click here.


14th February 1:55 PM
View Gil Dibner's profile on LinkedIn