Return to site

 

 

 

 

 

THE

PARTNER FIRST

STARTUP

Part 1: "Creativity More Than Cash"

"I argued that Uber “won” because they used cash as steroids to hack liquidity. Going forward, the same tactics simply will not work. Access to capital will not be as readily available, and thus, companies will need to rely on creativity more than cash." Simon Rothman, Greylock Ventures

RIP Capital Addicted Startups?

In 12 step recovery programs there's a popular saying. "Surrender to win".

Simply put, this means that addicts need to own the problem statement (i.e. their active, ongoing addiction) before they can own their solution.

VCs are now lining up for surrender chips and keytags at the "steroid startup" detox center, thanks to sober-thinking folks like Simon Rothman, quoted above. And he's not alone. To borrow his frame for a moment, a"creativity more than cash" sobriety wave appears to be building inside the startup funding ecosystem.

A June 9 piece in Mattermark by Alex Wilhelm shines a light on problems in "sales efficiency" for user focused SaaS players. As the chart below indicates, sales efficiency--the relationship between "As a Service" revenue and the sales/marketing spend you need to grow that revenue at publicly traded SaaS companies--has been going in the wrong direction.

I made this very point two years ago in my Medium post "Software Is Eating the Income Statement" but went even further, characterizing downstream "User First" SaaS go-to-market models as "SaaS 1.0", and counterposing this high cash-burn (low sales efficiency) approach to my own SaaS 2.0 or partner-advantaged XaaS model.

Here's a brief section of that piece where I compare the SaaS 1.0 direct-to-user "ground game" to a SaaS 2.0 partner-advantaged "passing game".

Given the ongoing saga of user-focused unicorn startup "post mortems" being tracked by popular research firms like CB Insights---alongside the documented decline in the formation and funding of new direct-to-user SaaS businesses--let's explore some key attributes of what a "creativity more than cash" As-a-Service "passing game" looks like.

I call it the Partner First Startup.

Ten Attributes of Partner First Startups in the XaaS Economy

"While the ecosystem of API-based companies is early in its evolution, we believe the attributes of these companies will combine to create ultimately more capital-efficient and profitable business models." Matt Murphy, Menlo Ventures

Are you building "user experiences" or ingredients in user experiences?

It's a key question every startup founder needs to answer...and soon. Why? The recent highly successful IPO of cloud communications-as-a-service market leader Twilio has shined a light on the power of API-based XaaS "building block" or digital ingredient business models. In Twilio's case that power takes the form of a $250Million run rate at IPO, and a million-strong developer community of Twilio API-consuming customers and partners.

And here's the payoff to what VC Matt Murphy is referencing relative to "more capital-efficient" business models in the above quote. Twilio made it to IPO with 96+% churn inside its trial developer account base, monetizing only a single digit percentage of it's long tail developer funnel.

What's more, Twilio made it to IPO by burning only a fraction of what downstream "user first" SaaS companies spend on sales/marketing (aka CAC). For my money, the Twilio XaaS pattern is one incredibly relevant expression of the kind of "creativity" VC Rothman was referring to in his quote above, and Murphy is referring to in his "more capital efficient and profitable" observation.

And here's the thing. Twilio's API-as-a-product model is just one go-to-market "configuration" of a Partner First building block business in the XaaS economy--albeit an extremely popular configuration. Given the rise of microservices APIs, container stores, cloud marketplaces, IoT cloud/fog services, white label SaaS, and more, there is much "creativity" to come relative to the technology, marketing, monetization, and sticky partner-advantaged distribution strategies of digital building block businesses.

So given the rising interest in building block and API-based startup success models, here's 10 core "attributes" of a XaaS Partner First business that I pay attention to--attributes that set them apart from "steroid startup" user-first approaches.

1. Product Focus

Building block mindset is the starting point for the Partner First Startup.

On today's XaaS landscape, monolithic software stacks are being deconstructed into microservices, containers, 1-click cloud marketplace add-ons (e.g. AWS AMIs), APIs, and more. These ingredient or "new stack" building block services can be incorporated into the apps, clouds, networks, systems, solutions, and experiences of your partners. And in 2016 it's not just about XaaS as simply a DevOps "infrastructure" play. XaaS building block companies are increasingly succeeding in selling business processes as white label platforms, e.g. marketplace-as-a-service.

And some SaaS players that began life as user-first startups, are recognizing and capitalizing on the building block pattern and pivoting from their exclusive focus on user first products--embracing platform models to drive additional revenue. And enterprises are rapidly joining the "building block" movement, exposing their internal data and systems as APIs & cloud services to drive "digital transformation", fend off competitive disruption. and engage with new partners in new markets. Building block product focus provides an incredible amount of flexibility in terms of developing a leveraged growth strategy that is more "creativity" than cash. I'll go into this in more detail in a future installment of this serious focused on "Partner Viable Product" strategy.

2: Path Dependence

Building block businesses follow a different path to mainstream adoption than user-first businesses.

During the recent period of capital excess, Silicon Valley's focus on "user first" startups has been rationalized by "disruption" theory. One could even argue that Silicon Valley has turned "disrupt or be disrupted" into a form of strategic religion magnified by continuous echo chamber marketing. But in December 2015, disruption theory creator Clayton Christensen pushed back on the watering down of his ideas, specifically calling out Silicon Valley for framing any attack on an incumbent competitor as "disruption". This kind of erroneous thinking about disruption narrows the path to success for XaaS startups. Why? Because symbiotic alignment with incumbents & open developer ecosystems that serve established customer networks has tremendous value to XaaS startups (& growth stage players).

Ten years ago, I described this form of path dependence that capitalizes on the strategic advantage of incumbents and open adoption software (OAS) as "asymmetric marketing". Placing this concept in the context of Christensen's theory, I call it "3rd foothold" (or inside/out) disruption. Partner First startups are 3rd foothold disruptors, and their path to mainstream market adoption runs through the installed base of their partners.

3. Distribution

Partner First startups pay more attention to incumbent "attach surface" than incumbent "attack surface".

Partner First startups creatively identify, target, and capitalize on the many embedded, tightly coupled, and loosely coupled distribution modalities available for XaaS innovators who seek to attach and monetize their value proposition inside of or adjacent to, the products and services of their partners and customers. When startup leaders detox from false consciousness around "user first" disruption, they can get incredibly creative about how they profitably attach to the pre-existing customer networks of their partners.

And "attach" doesn't simply mean that you only target "developers". Product managers, marketplace program managers, open source community managers, integration managers, bizdev & partner managers, & corpdev executives can all serve as "top of the funnel" targets for Partner First engagement. Legacy "channel" ecosystems (e.g. VARs) are also reinventing themselves into MSPs and new breed cloud services brokers with "as a service" revenue models. Factor them into your growth plan. Partner First growth marketers think "sell through", not just "sell to".

4. "Growthtone"

Partner First businesses organize their growth team around full-spectrum "growth tone".

Today's growth hacking movement is largely centered around User First online marketing. Some of its celebrity thought leaders even go so far as to minimize or marginalize Partner First growth models in favor of online inbound models as the preferred starting point for company growth. This downstream-focused "user experiments" approach is insufficient to anchor and scale a building block XaaS startup or enterprise digital initiative.

Instead, think in terms of "growthtone", i.e. the total sales/marketing/growth capacity your team has assembled across all targets of opportunity. For an early stage bootstrapped or seed funded XaaS company, growthtone often nets out to "Developer Community" + ABM (account based marketing). Caution. Some building block startups that hold the view that developer marketing alone is the differentiator are leaving money on the table. As pointed out above, building block businesses have naturally high rates of churn and need to selectively prioritize and monetize their highest value partners via ABM. This pays huge dividends.

5. Partner Growth "Inheritance"

"Partner First" startups fanatically prioritize "First Partner" activation.

Why? Because they receive a tangible and intangible partner "DNA inheritance" from engaging with early "targets of asymmetric opportunity" (TAO) that supercharges their next phase of growth and development. Beyond the revenue generated from the partnership, this growth inheritance takes the form of permissioned access to the partner's installed base and in-place developer/channel ecosystem. It also includes the brand association benefits from announcing the relationship, which serves as a catalyst triggering market interest from new potential partners.

The inheritance can also takes the form of event participation and access to the partner's forward product roadmap. Partner First startups can then message and communicate the validation they receive from their first partner and other early partners to drive ongoing traction. "First Partner" is both product validation and a magnet that attracts the next round of partners, and in some cases corporate venture investment.

6. Sales Efficiency

Partner First businesses have better sales efficiency (and it's not just about "developer self service").

Both Twilio and New Relic, an innovator in the application performance monitoring segment, target developers with free trials to drive "top of the funnel" lead generation. But there's a big difference between these two XaaS vendors when it comes to sales efficiency. Twilio spends only 22.5% of revenue on sales/marketing (CAC) while New Relic burns 72% of top line revenue on marketing and sales spend--closely mirroring the CAC model of a user-first SaaS vendor. This 50% marketing/sales spend gap between Twilio and New Relic means that a XaaS building block player like Twilio can invest more in R&D around new products.

If your startup's sales/marketing spend numbers look closer to New Relic than to Twilio, you need to assess your growth programs ASAP, and determine where you can cut or redeploy resources to improve. To flip the script on Rothman's point, this spend gap is indicative of "cash more than creativity" at New Relic. As Jerry Seinfeld said to George Costanza, "When every instinct you have is wrong, then the opposite would have to be right!" Which translates into "creativity more than cash" is the new startup guideline needed to improve sales efficiency.

7. Scale Driver

As an indicator of future growth, "Product/Partner Fit" beats product/market fit.

When you ask a downstream user-first marketer about scale, they will dutifully parrot Marc Andreessen and utter the phrase "product market fit." Product/market fit is a construct that its advocates see as pre-condition to entering the scale phase of a startup. But user adoption is fickle and can be stopped and even undone by concerted head to head competition. And some prominent growth hackers don't even factor revenue into their definition of "fit"--just user adoption. On the other hand, "product partner fit"--in which your building block services are embedded inside of or attached to an established partner's app, cloud, network, solution, or experience--is a better scale readiness indicator.

Product/partner fit is highly sticky, and renders your innovation less vulnerable to competitive attack. When Google the startup attached its search box to the Yahoo home page--that's product/partner fit in action. In 2000, Yahoo had the user traffic and wanted to monetize search with text ads. Google received immense benefits from this sticky attachment to what was then the world's leading portal. Similarly, when Microsoft DOS was selected by IBM as the OS for their new PC, Microsoft the startup achieved product/partner fit and laid the foundation for it to dominate the PC industry for an entire generation. When dotCloud pivoted to become Docker it traded the search for Product/Market Fit in the nascent PaaS market for Product/Partner Fit in the new container technology market it seeks to enable.

8. Pricing & Incentives

Partner First startups see pricing & incentives as part of their "platformula".

The overwhelming majority of user first SaaS vendors build tiered subscription pricing models hoping to drive users to their highest priced tier in order to offset their high cost of sales/marketing and associated low sales efficiency. Partner First XaaS startups benefit from usage-based elastic pricing that enables their partners to incorporate more of their technology over time. This elastic pricing approach is one of the reasons an API-as-a-product company like Twilio has grown its revenue despite high churn. VCs call this phenomenon"negative churn".

Partner First startups (and new partner-focused enterprise initiatives) also factor in economic and market-based incentives to create a success formula that drives adoption of their platforms. In brief, they think "platform good, platformula better". Platformulas are unique to each startup or enterprise digital initiative. For example, despite its own massive consumer marketing muscle, user-focused innovator Apple pivoted from its original Apple MVNO vision for the iPhone and granted 5 year territorial exclusivity to AT&T and other regional telcos to drive early Partner First adoption. This single component of Apple's iPhone platformula was key to product/partner fit and drove users to switch to AT&T to acquire an iPhone. Similarly, Partner First startups need to think outside the box on partner incentives and partner success formulas specific to their XaaS category. As incumbents are attacked by new players, they often need new technologies and open cloud services to close gaps in their product lines. You can often anchor your platformula around these product gaps. M&A is not the only way incumbents acquire new capabilities.

9. Landscape Fitness

Partner First startups are more rugged and self-sufficient than user-first startups with direct sales models.

Even experienced industry analysts get confused when it comes to the landscape fitness of "as a service" companies--as in the recent "puzzling acquisition" of SaaS marketing automation pioneer Marketo by a turnaround investment banking firm. I wasn't puzzled in the least by the Marketo acquisition. Marketo went private because it is an example of a cash-dependent user-first player that had low sales efficiency and unsustainably high sales/marketing spend. As of its most recent quarter, Marketo burned 67% of subscription revenue on sales/marketing or CAC, and lost $18 million. I'm not even going to touch on the irony here that Marketo's business is marketing "automation" and yet they still faced massive growth challenges. Here's how management describes their sales model.

"Our direct sales force has separate sales teams for the enterprise market and for the SMB market. Within our direct sales force, we also have a team that is responsible for selling to existing customers who may renew their subscriptions, increase their usage of our platform and applications, acquire additional applications from our product family, or broaden the deployment of our solutions across their organizations. In addition, we utilize distributors, agencies, resellers and OEMs, who resell or use our platform to provide managed marketing services to their end customers. To date, substantially all of our revenue has been derived from direct sales."

SaaS players like Marketo--i.e. for whom high cash burn, low sales efficiency and user first marketing is the primary revenue status quo--are obvious beneficiaries of Partner First mindset.

10. Winner Take Most

Partner First startups benefit from "winner take most", increasing returns economics.

Tech markets tip in the direction of "winner take all" aka winner-take-most or "natural" monopoly. But some are now arguing that the "platform economy" is an exception to the basic laws of tech market economics and that "winner take all" doesn't apply--That user-first "network effects" operate in reverse as well, e.g. social first mover MySpace losing the social platform market to Facebook.

Circling back to the beginning of this post, VC Simon Rothman makes a related point relative to Uber, stating that Uber's success was cash-driven--that they "bought" adoption and scale. And that innovators that don't have access to "steroid startup" VC cash will not succeed in the way "platform" players like Uber have.

But Partner First, "building block" platform innovation consistently tips in the direction of winner take most. And it doesn't matter whether these Partner First innovations originate in startups or established players. Microsoft's natural monopoly market power in X86 PC operating systems--established based on Partner First OEM marketing strategy--has continued for more than 2 decades--even allowing it to "lose" in search, CRM, & smartphones and remain a dominant software superpower. Similarly, AWS--an innovation that came from an established company that decided to expose its internal assets "as a service" to new partners and enterprise customers--enjoys winner take most economics in cloud.

And if the history of AWS teaches us anything, it's that the cloud native XaaS economy and "new stack" architectures enable Partner First building block startups and digital enterprise innovators to drive asymmetric outcomes.

Final Thoughts

When venture capital firms tell you that we're operating on a startup landscape that now favors "creativity more than cash", and the most recent tech IPO showcases the power of developer-advantaged, Partner First growth models, it's important that startup founders and senior marketing leadership pay attention.

While user-first inbound marketing models continue to garner buzz among the growth hacking community, it's important that startup and enterprise leadership focused on revenue growth go back to school on Partner First strategy.

For Cloud-Native XaaS Building Block Startups: As stated above, developer marketing is great as a top of the funnel driver. It worked for Twilio. But "creativity more than cash" also means you need to be focused on intelligent, targeted monetization via ABM (account based marketing). Developer marketing has extremely high levels of churn and you need to separate the keepers from the tire kickers.

For User-First SaaS Startups: Streetsmart SaaS players recognize that low sales efficiency and high sales/marketing spend can kill user-first SaaS startups. So they pivot their businesses and re-invent their value proposition as APIs and white label platform offerings that can be consumed upstream by new partners.

For Digital Enterprise Initiatives: Over the past few years we've been bombarded with the message that enterprises have to function like user-first unicorn startups. Not so fast. In fact, enterprises like Amazon and Apple--both mature companies when they launched their cloud and smartphone initiatives--prove that large, established businesses that think Partner First can build dominant positions in "as a service" markets.

What's Next?

In future installments of "The Partner First Startup" I'll discuss the "Partner Viable Product", and differentiate it from the user-first "Minimum Viable Product" (MVP). I'll also go into how Partner First XaaS distribution differs from user-centric adoption frameworks like AARRR. Stay tuned.

Joseph Bentzel is the founder and senior consultant at Platformula1.

If you'd like to build a Partner First startup or enterprise digital initiative, contact him at Joe@platformulagroup.com

All Posts
×

Almost done…

We just sent you an email. Please click the link in the email to confirm your subscription!

OKSubscriptions powered by Strikingly