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What XaaS Platform Leadership Looks Like

Notes on the Twilio IPO Filing

"As software developers, and as a business, we see the world through the lens of building blocks."

Jeff Lawson

Cloud-native “building block” product models & partner-first distribution strategies can be powerful levers of growth in the "anything as a service" (XaaS) economy. The Twilio IPO filing is an opportunity for founders and senior leadership of cloud startups to look under the hood of a XaaS category winner and see exactly how powerful.

Introduction:

Churn Kills "As a Service" Startups ..... NOT!

Imagine for a moment that 96+ percent of the 900,000 “Free Trial” accounts acquired by your software-as-a-service startup had churned out over the life of the business, and your team was monetizing less than 4% (or 28,000) of your Free Trial signups.

"Danger Will Robinson", right? Churn kills. That's what every direct-to-user B2C or SaaS inbound marketing growth hacker will tell you.

I say not so fast.

Assume for the moment that this seemingly anemic sub-4% cohort of Free Trial developer adopters embeds one or more of your XaaS building blocks inside their B2C & B2B apps, clouds, networks, systems, marketplaces, or digital experiences---and as they succeed and scale, you succeed and scale. Sometimes churn doesn't kill. Sometimes churn clarifies.

It clarifies what a future B2D2B software superpower with a usage-based monetization model looks like.

That’s the success pattern I see when I look under the hood at the Twilio S1 IPO filing document. It's not just about their category-defining communications-as-a-service platform. It's also about their developer-advantaged, partner-first monetization formula---A formula capable of generating an annual revenue run rate approaching $250 million from that single digit cream of the crop they monetize. Hallelujah "negative churn"!

And here’s the organic icing on the Twilio cake. They’ve achieved this growth and increasing returns category leadership by burning only 23% of revenue on sales/marketing.

To put that achievement in perspective--That's less than a third of what other high buzz "as a service" IPOs have spent for "customer acquisition" or CAC. For my money, Twilio is what true XaaS category leadership and multimodal XaaS distribution strategy look like in 2016 and beyond.

Put another way, Twilio is my new poster child for what happens when a XaaS platform is strong, and its developer/partner "platformula" is even stronger.

If you're in management at a cloud, XaaS, SaaS, or IoT startup, I urge you to spend some quality time deconstructing the Twilio S1 filing for yourself. In the meantime here's 3 relevant growth strategy takeaways that jumped out at me.

TAKEAWAY 1: That Building Block Mojo

"We do not aim to provide complete business solutions, rather our Programmable Communications Cloud offers flexible building blocks that enable our customers to build what they need." Twilio S1

Let's begin with the most counter-intuitive thing you're going to read all day. Startups regularly fail because their strategies are TOO USER FOCUSED.

I hear you. How can a startup be too user focused? Here's how.

A startup is too user-focused when their entire product marketing strategy centers exclusively on directly engaging users downstream--and fails to get creative about how to engage and plug into partners upstream--partners that already have an installed base of users and customers.

Twilio's building block model (i.e. which takes the form of an API-as-a-product) is a case study in how to grow a XaaS economy startup by focusing on embedding cloud functionality as a must-have ingredient service inside the experiences of their customers and partners.

This ingredient services approach provides Twilio with tremendous flexibility to scale their business across multiple cloud communications use cases, from call center modernization to multi-factor authentication to mobile messaging to the new generation of multi-sided marketplaces.

If your startup has historically been a 100% user-focused SaaS deal with a high sales/marketing burn rate and on again/off again traction, you can begin embracing building block "mindset" in many ways-- e.g. by integrating with established digital players and tech incumbents and leveraging their reach, or by packaging your offering as a 1-click cloud marketplace add-on, or by actively participating in and helping commercialize key open source communities, or by reframing your branded product as a white label platform, and more. Many more.

Simply put, building block mindset is about delivering highly sticky, "partner viable products" in the XaaS economy.

TAKEAWAY 2: That Partner First ABM Thing

"We recently began to supplement our self-service model with a sales effort aimed at engaging larger potential customers, strategic leads and existing customers through an enterprise sales approach. Our sales organization targets technical and business leaders who are seeking to leverage software to drive competitive differentiation." Twilio S1

From a monetization & growth standpoint, all "developers" are NOT created equal.

Streetstart XaaS startups rightly apply "separation of concerns" thinking not just to their API product design, but to their monetization strategy as well--and make a distinction between LSUD (large sets of unknown developers) and SSKD (small sets of known developers).

From the standpoint of growth, this means that there are two parallel (and increasingly symbiotic) engagement patterns in a XaaS building block business like Twilio--developer self service and partner-focused ABM (account based marketing).

Here's a simple visual to illustrate these two patterns side by side.

On the left side we see an industry-standard developer self-service model focused on the long tail of app developers. Per their S1, this developer evangelism approach has generated 900,000 free developer account signups over the life of Twilio as a company.

But as pointed out in the above quote, Twilio also focuses on monetizing the cream of the crop of these 900,000 accounts via targeted account based marketing, turning 28,000 of them into true alpha customers/partners that embed Twilio cloud communications inside their offerings.

Twilio successfully orchestrates these two parallel engagement patterns, as well as the synergy between them, and this is why you now see the company articulating not simply a 'developer first' value prop, but a true partner first value prop including it's marketing message to business execs--execs like the CEO of Uber.

This is an important point for developer-focused XaaS "building block" startups seeking to close deals with alpha partners. Developers may be the "new kingmakers" but business shotcallers are still in the mix--especially if you want to get baked in to their app, marketplace or digital experience.

TAKEAWAY 3: That "Three Things" Framing

"Cloud platforms are emerging across a range of categories, including analytics, communications, computing, mapping, payments and storage. These cloud platforms are enabling every organization, from small startups to Fortune 500 enterprises, to experiment, prototype and deploy next-generation applications." Twilio S1

Platforms are great. A well-crafted "platformula" is even better. Twilio has both.

In its "Twillio is 3 Things" umbrella messaging, the company is effectively communicating not just the value of its platform to investors--It is also communicating its end-to-end success formula for the marketplace customers and ISV partners it serves.

For example, the Twilio "Super Network" provides the globally distributed communications fabric by which Twilio customers and partners can rapidly enter disparate geographic markets. This is in fact the success ingredient referenced by the Uber CEO above, in his customer testimonial on behalf of Twilio. The Twilio Super Network delivers what I describe as a "Ticket to the Game" value prop. Here's an example.

Twenty plus years ago, during the explosive growth of the PC OEM market, Microsoft Windows was a "ticket to the game" or must have ingredient enabling the rise of literally thousands of PC clone providers around the world. Twilio's Super Network is a similar kind of "ticket to the game" ingredient for marketplace businesses seeking to go global.

Then there's their "Business Model for Innovators". Free developer trials, usage based pricing, developer community support (including a Twilio Fund), and a recently rolled out Twilio marketplace for add-on products from its partners. I suspect this is only going to get better going forward, given Twilio's recent expansion into "un-carrier" mobile services in partnership with T-Mobile.

I see Twilio's end to end platformula as a textbook example of what I call "3rd foothold" disruption. Here's what I mean. In a December 2015 piece in HBR, Clayton Christensen and colleagues took Silicon Valley to task for forking his theory of disruption to pretty much mean anything anybody does that is competitive with an incumbent. In the essay Christensen clarifies and expands on his view that disruption originates in either "low end" or "new" markets--i.e. there are "two footholds" for disruption.

In the spirit of embracing and extending his thinking in the XaaS economy,  I argue that there is a 3rd foothold for disruption--an "ingredient foothold" that provides a path to mainstream adoption of startup offerings based on inside/out innovation--e.g. the kind of "building block" services innovation that Twilio delivers.

So I return to what I said at the outset. Twilio is my new poster child for what happens when a XaaS platform is strong, and its developer/partner "platformula" is even stronger.

Hey, that actually makes Twilio 4 things!

The 4th thing?

A reference case and role model for every XaaS building block startup on the planet!

Joseph Bentzel is the founder and senior consultant at Platformula1.

Contact him at Joe@platformulagroup.com

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