Here is a very simple thesis on how to disrupt billion dollar industries:
Content platform + user platform = BOOM!
That is a bit cryptic, so let me explain.
Traditional retailers like RadioShack and Barnes & Noble were great "content platforms"; they have millions of products on shelves across thousands of physical stores. Amazon disrupted them by moving online, and Amazon was able to build an even better content platform with many more products. In addition, the internet enabled the creation of "user platforms". Amazon is a great user platform as it knows the interests of the 250 million customers it has on file; it uses that customer information to recommend products to buy. Amazon built a great content and user platform.
Businesses with a content platform that aren't investing in a user platform will most likely get disrupted. To understand why user platforms matter, take a look at a traditional media company like The New York Times -- one of the world's best content platforms, both online and offline. But it's also one of the world's poorest user platforms; they don't have a 1-on-1 relationship with all their readers. By aggregating the best content from many different sources, Flipboard is as good of a content platform as The New York Times, if not better. However, Flipboard is a much better user platform because all of its readers explicitly tell Flipboard what they are interested in and Flipboard matches content to users based on their interest. For The New York Times to survive, their strategy should be to invest in a better user platform: they should spend more time getting to know every single reader and serving curated content that matches the user's interest. The New York Times seems well aware of this problem, with its decision last week to host its articles directly on Facebook to get access to Facebook's user platform with 1.4 billion users.
Similarly, Netflix is disrupting both traditional broadcasters and cable companies because they built a great user platform capable of matching movies and shows to users. To many Netflix users' frustrations, traditional TV broadcasters still have the better content platform, but that hasn't stopped the growth of Netflix. Furthermore, Netflix is investing heavily in becoming a better content platform by producing their own shows, including original series such as House of Cards and Orange Is the New Black. Unless traditional broadcasters invest in becoming great user platforms and matching content to users, they risk losing against Netflix.
The challenge for newspaper organizations or cable providers is usually not with the technical evolution, but with changing their business model. Take the cable providers, for example. Legacy constraints like distribution models, FCC regulations and broadcast spectrum requirements prevent them from moving as fast in this direction as a Netflix might. Fortunately for most cable providers, they are also the internet providers, which allows them to become user platforms if they too can master the personalization and contextualization equation.
Facebook, Twitter, Apple and Google are some of the world's best user platforms; they know about their users' likes and dislikes, their location, their relationships and much more. For them, the opportunity is to become better content platforms and to match users with relevant products and articles. By organizing the world's information, Google is building a massive content platform, and by launching services like Gmail, Google+, Google Ads, Google Fiber and Google Wallet, they are building a massive user platform. Given that they have the world's largest content platform and the richest user platform, I have no doubt that Google could dominate the web the next couple of decades.
The examples above are focused on print media, television and radio, but the thinking can easily be extended to commerce, manufacturing, education, and much more. The thesis of content platforms adding user platforms (or vice versa) is very basic but also very powerful. Adding user platforms to existing content platforms enables a transformative change in the customer's user experience: content can find you, rather than you having to find content. Furthermore, brands are able to establish a 1-on-1 relationships with their customers allowing them to interact with them in a way they were never able to in the past. By establishing 1-on-1 relationships with their customers, brands will be able to "jump over" the traditional distribution channels. If we've learned one thing in the short history of the internet, it is that jumping over middlemen is a well-known recipe for success.
Anyone building a digital business should at least consider investing in building both a better content platform and a better user platform. It's no longer just about publishing content; it's about understanding what uniquely delights each user and using that information to manage the entire experience of a site visitor or customer over time. The idea of using interests, location, user feedback, past behavior and contextual information to deliver the best user experience is no longer a nice-to-have; it is becoming a make-or-break point. It is the next big challenge and opportunity for everyone building digital experiences. This is why I'm passionate about content management systems needing to evolve to digital experience management systems and why Acquia has spent the last two years building software that helps organizations build user platforms. As I talked and wrote about years ago, I believe personalization and contextualization will be a critical building block of the future of the web, and I'm excited to help make that a reality.
I believe that for the web to reach its full potential, it will go through a massive re-architecture and re-platforming in the next decade. The current web is "pull-based", meaning we visit websites or download mobile applications. The future of the web is "push-based", meaning the web will be coming to us. In the next 10 years, we will witness a transformation from a pull-based web to a push-based web. When this "Big Reverse" is complete, the web will disappear into the background much like our electricity or water supply. We'll forget what 'www' stood for (which was kind of dumb to begin with). These are bold statements, I understand, but let me explain you why.
In the future, content, products and services will find you, rather than you having to find them. Puma will let us know to replace our shoes and Marriott will automatically present you room options if you missed your connecting flight. Instead of visiting a website, we will proactively be notified of what is relevant and asked to take action. The dominant function of the web is to let us know what is happening or what is relevant, rather than us having to find out.
Facebook and Flipboard are early examples of what such push-based experience looks like. Facebook "pushes" a stream of personalized information designed to tell you what is happening with your friends and family; you no longer have "pull" them and ask how they are doing. Flipboard changes how we consume content by aggregating the best of the web and filtering it based on our interests; it "pushes" the relevant and interesting content to you rather than you having to "pull" the news from multiple sources. Also consider the rise of notification-centric experiences; your smartphone's notification center provides you with a stream of relevant information that is pushed to you. More recently, these notifications have become interactive; you can check in for a flight without having to open your travel app. You can buy a product without having to visit their website.
What people really want is to tune into information rather than having to work to get information. It saves them time and effort and in the long run, an improved user experience always wins. In most cases, "Show me what I want" is more useful than "Let me search around and see what I can find".
With some imagination, it's not too hard to picture how these kind of experiences could expand to other areas of the web. The way the e-commerce works today is really no different than having to visit a lot of separate physical stores or wading through hundreds of products in a department store. We shouldn't have to work so hard to find what we want. In a push-based world, we would sit back as if we were watching a fashion show -- the clothing presented could come for hundreds of different online brands but the stream is "personalized" to our needs, budget, sizes and style preferences. When the Big Reverse is complete, it will be the end of department stores and malls. Keep an eye on personalized clothing services like Trunk Club or Stitch Fix.
Ten years from now we're going to look back and recognize that search-based content discovery was broken. Today the burden is put on the user to find relevant content either via directly typing in a URL or by crafting complex search queries. While pull-based experiences might not go away; push-based experiences will dominate as they will prove to be much more efficient.
Many of you won't like it (at first), but push will win over pull. Healthcare is going through a similar transformation from pull to push; instead of going to a doctor, we'll have web-enabled hardware and software that is able to self-diagnose. Wearables like activity trackers are just the start of decades of innovation and opportunity in healthcare. Helped by the web, education is also moving from pull to push. Why go to a classroom when personalized training can come to you?
We are at the beginning of a transition bridging two distinctly different types of economies. First, a "push economy" that tries to anticipate consumer demand, creates standardized or generic products in large amounts, and "pushes" them into the market via global distribution channels and marketing. Now, a "pull economy" that—rather than creating standardized products—will create highly customized products and services produced on-demand and delivered to consumers through one-on-one relationships and truly personal experiences.
This new paradigm could be a very dramatic shift that disrupts many existing business models; advertising, search engines, app stores, online and offline retailers, and much more. For middlemen like online retailers or search engines, the push-based means they risk being disintermediated as the distribution chain becomes less useful. It marks a powerful transformation that dematerializes and de-monetizes much of the current web. While this might complicate the lives of many organizations, it will undoubtedly simplify and better the lives of consumers everywhere.
From time to time, people ask me how much money to raise for their startup. I've heard other people answer that question from "never raise money" to "as little as you need" to "as much as you can".
The reason the answers vary so much is because what is best for the entrepreneur is seemingly at odds with what is best for the business. For the entrepreneur, the answer can be as little as necessary to avoid dilution or giving up control. For the business, more money can increase its chances of success. I feel the right answer is somewhere in the middle -- focus on raising enough money, so the company can succeed, but make sure you still feel good about how much control or ownership you have.
But even "somewhere in the middle" is a big spectrum. What makes this so difficult is that it is all relative to your personal risk profile, the quality of the investors you're attracting, the market conditions, the size of the opportunity, and more. There are a lot of parameters to balance.
I created the flowchart below (full-size image) to help you answer the question. This flowchart is only a framework -- it can't take into account all decision-making parameters. The larger the opportunity and the better the investors, they more I'd be willing to give up. It's better to have a small part of something big, than to have a big part of something small.
Some extra details about the flowchart:
My view is that of an entrepreneur having raised over $120 million for one startup. If you're interested in an investor's view that has funded many startups, check out Michael Skok's post. Michael Skok is Acquia's lead investor and one of Acquia's Board of Directors. We both tried to answer the question from our own unique viewpoint.
Building a successful company is really hard. It is hard no matter where you are in the world, but the difficulty is magnified in Europe, where people are divided by geography, regulation, language and cultural prejudice. If governments can provide European startups a competitive advantage, that could come a long way in helping to offset some of the disadvantages. In this post, I'm sharing some rough ideas for what governments could do to encourage a thriving startups ecosystem. It's my contribution to the Belgian startup manifesto (#bestartupmanifesto).
The older I get, the quicker the years seem to fly by. As I begin to reflect on a great 2014, one thing is crystal clear again. People are the most important thing to any organization. Having a great team is more important than having a great idea. A good team will figure out how to make something great happen; they'll pivot, evolve and claw their way to success. I see it every day at Acquia, the Drupal Association or the Drupal community. I'm fortunate to be surrounded by so many great people.
By extension, recruiting is serious business. How do you figure out if someone is a great fit for your organization? Books have been written about finding and attracting the right people, but for me the following quote from Dee Hock, the founder of Visa, sums it up perfectly.
"Hire and promote first on the basis of integrity; second, motivation; third, capacity; fourth, understanding; fifth, knowledge; and last and least, experience. Without integrity, motivation is dangerous; without motivation, capacity is impotent; without capacity, understanding is limited; without understanding, knowledge is meaningless; without knowledge, experience is blind." — Dee Hock, founder of Visa.
Most hiring managers get it wrong and focus primarily on experience. While experience can be important, attitude is much more important. Attitude, not experience, is what creates a strong positive culture and what turns users and customers into raving fans.
Business model innovation is usually more powerful than technical innovation; it is more disruptive and harder to copy than technical innovation. And yet, so many companies are focused on technical innovation to compete.
Consider Airbnb. What makes them so successful is not a technical advantage, but a business model advantage that provides them near-zero marginal cost. For a traditional hotel chain to increase its capacity, it needs to build more physical space at significant cost. Instead of shouldering that setup cost, Airbnb can add another room to its inventory at almost no cost by enabling people to share their existing houses. That is a business model innovation. Furthermore, it is extremely difficult for the traditional hotel chain to switch its business model to match Airbnb's.
The same is true in Open Source software. While it is true that Open Source often produces technically superior software, its real power may be its business model innovation: co-creation. Open Source software like Drupal or Linux is a co-created product; thousands of contributors build and enhance Drupal and everyone benefits from that. A large Open Source community produces vastly more software than a proprietary competitor, and shares in the production and go-to-market costs. It disrupts proprietary software companies where the roles of production and consumption are discrete and the production and go-to-market costs are high. While established companies can copy key technical innovations, it is extremely difficult to switch a proprietary business model to an Open Source business model. It affects how they build their software, how they monetize the software, how they sell and market their software, their cost structure, and more. Proprietary software companies will lose against thriving Open Source communities. I don't see how companies like HP, Oracle and SAP could change their business model while living quarter to quarter in the public markets; changing their business model would take many years and could disrupt their revenues.
Take Amazon Web Services (AWS), one of the most disruptive developments in the IT world the past decade. While AWS' offerings are rich and often ahead of the competition, the biggest reason for the company's success is its business model. Amazon not only offers consumption-based pricing ('pay as you consume' vs 'pay as you configure'), it's also comfortable operating a low-margin business. Almost 10 years after AWS launched, at a time that vast amounts of computing are moving into the cloud, HP, Oracle and SAP still don't have competitive cloud businesses. While each of these companies could easily close technical gaps, they have been unable to disrupt their existing business models.
If you're in a startup, innovating on a business model is easier than if you're in a large company. In fact, an innovative business model is the best weapon you have against large incumbents. Technical innovation may give you a 6 to 18 month competitive advantage, but the advantage from business model innovation can be many years. Too many startups focus on building or acquiring innovative or proprietary technology in order to win in the market. While there is usually some technical innovation around the edges, it is business model innovation that makes a successful, long-standing organization -- it tends to be a lot harder to copy than technical innovation.
Society is undergoing tremendous change right now -- those of us who enjoy services like Uber and Kickstarter are experiencing it firsthand. The sharing and collaboration practices of the internet are extending to transportation (Uber), hotels (Airbnb), financing (Kickstarter, LendingClub), music services (Spotify) and even software development (Linux, Drupal). While the consumer "sharing economy" gives us a taste of what it's like to live in a world where we own less, perhaps there is an equally powerful message for the business community. Using collaboration, companies are dramatically reducing the production cost of their goods or services.
Welcome to the zero-marginal-cost economy, a way of doing business where ownership of a core process is surrendered to community collaboration. In economic terms, the cost of a product or a "good" can be divided into two parts. The first part is a "setup cost", which is the cost of assembling the team and tools needed to make the first unit. The second part is called the "marginal cost", or the cost of producing a single, additional unit.
For decades, competitive markets have focused on driving productivity up and marginal costs down, enabling businesses to reduce the price of their goods and services to compete against each other and win customers. A good example of this approach is Toyota, which completely reinvented how cars were made through lean manufacturing, changing the entire automotive industry. Japanese cars were produced much more quickly than their American counterparts, created via traditional assembly lines in Detroit, ultimately driving down the final cost for consumers and shrinking margins for companies like Ford. Software development methodologies like the lean startup methodology and Kanban are modeled after the Toyota production line and have made software development more efficient.
Today, the focus is changing. Within service industries like hospitality and transportation, new entrants are succeeding not by optimizing production, but by eliminating production cost altogether. Consider Uber versus traditional taxi companies. For a traditional taxi company to add another taxi to its fleet, a car and license need to be acquired at significant cost. Instead of shouldering that setup cost, Uber can add another taxi to its inventory at almost no cost by enabling people to share their existing cars, all coordinated via the internet. Airbnb does the same for renting properties vs. acquiring more physical space. The fact that both these companies have near zero-marginal-cost production is threatening longstanding business and regulatory models alike.
In the software industry, the low marginal cost of producing Open Source Software threatens to our equivalent of longstanding business models: proprietary software companies. Free Open Source Software essentially can undermine the way proprietary software companies make money -- by selling software licenses. By sharing the cost to develop software, organizations can increase their productivity, accelerate innovation and bring down their setup costs.
The open source ideology extends even further beyond software. Last month, Elon Musk open sourced the patents for Tesla. His main reason? Pushing the automotive industry to create more electric cars. If Elon Musk is an indicator for industries across the board, it's further proof that capitalism is starting to become more collaborative rather than centered around individual ownership.
Great businesses can be built by adding value on top of a low-marginal-cost community that is owned by many. For example, my company, Acquia, creates value on top of the open-source Drupal software by providing support and software-as-a-service tools. Similarly, Uber adds value by providing consumer-friendly, on-demand services beyond just increasing the supply of available cars on the road. In both cases, the companies' products grow stronger as their communities grow, even as the acceleration of those same communities brings down marginal costs. The power of the community vastly improves previously inefficient base process (such as waterfall software development or taxi regulations) and creates a forcing function for business to generate profit based on products and services that appeal directly to users.
Within the next decade, businesses will need to become much more open and collaborative to survive in an increasingly zero-marginal-cost economy. Those who develop proprietary software are finding it harder and harder to sustain "business as usual". The sharing economy and collaborative development will further streamline capitalism, and organizations that figure out how to master this dynamic will succeed. A community model can work in any number of industries -- we just have to challenge ourselves to as entrepreneurs to discover how.
(I originally wrote this blog post as a guest article for The Next Web.)
A few days ago, I sat down with Quentin Hardy of The New York Times to talk Open Source. We spoke mostly about the Drupal ecosystem and how Acquia makes money. As someone who spent almost his entire career in Open Source, I'm a firm believer in the fact that you can build a high-growth, high-margin business and help the community flourish. It's not an either-or proposition, and Acquia and Drupal are proof of that.
Rather than an utopian alternate reality as Quentin outlines, I believe Open Source is both a better way to build software, and a good foundation for an ecosystem of for-profit companies. Open Source software itself is very successful, and is capable of running some of the most complex enterprise systems. But failure to commercialize Open Source doesn't necessarily make it bad.
I mentioned to Quentin that I thought Open Source was Darwinian; a proprietary software company can't afford to experiment with creating 10 different implementations of an online photo album, only to pick the best one. In Open Source we can, and do. We often have competing implementations and eventually the best implementation(s) will win. One could say that Open Source is a more "wasteful" way of software development. In a pure capitalist read of On the Origin of Species, there is only one winner, but business and Darwin's theory itself is far more complex. Beyond "only the strongest survive", Darwin tells a story of interconnectedness, or the way an ecosystem can dictate how an entire species chooses to adapt.
While it's true that the Open Source "business model" has produced few large businesses (Red Hat being one notable example), we're also evolving the different Open Source business models. In the case of Acquia, we're selling a number of "as-a-service" products for Drupal, which is vastly different than just selling support like the first generation of Open Source companies did.
As a private company, Acquia doesn't disclose financial information, but I can say that we've been very busy operating a high-growth business. Acquia is North America's fastest growing private company on the Deloitte Fast 500 list. Our Q1 2014 bookings increased 55 percent year-over-year, and the majority of that is recurring subscription revenue. We've experienced 21 consecutive quarters of revenue growth, with no signs of slowing down. Acquia's business model has been both disruptive and transformative in our industry. Other Open Source companies like Hortonworks, Cloudera and MongoDB seem to be building thriving businesses too.
Society is undergoing tremendous change right now -- the sharing and collaboration practices of the internet are extending to transportation (Uber), hotels (Airbnb), financing (Kickstarter, LendingClub) and music services (Spotify). The rise of the collaborative economy, of which the Open Source community is a part of, should be a powerful message for the business community. It is the established, proprietary vendors whose business models are at risk, and not the other way around.
Hundreds of other companies, including several venture backed startups, have been born out of the Drupal community. Like Acquia, they have grown their businesses while supporting the ecosystem from which they came. That is more than a feel-good story, it's just good business.
We’re excited to announce that Acquia acquired TruCentric, a software-as-a-service company that is focused on providing personalization for websites. Earlier this year we launched Acquia Lift, which brings testing and personalization capabilities to Drupal sites. With TruCentric, we acquired not only a great complementary product that we will integrate with Acquia Lift, we also gained a great team with a long history and strong leadership in marketing automation technologies.
TruCentric uses real-time and historical data to build a deep understanding of both anonymous and authenticated visitors. Every action that a visitor takes and every piece content that they look at continuously updates this profile. TruCentric can infer a visitor's persona, interests, preferred content, and level of engagement as well as site-specific characteristics such as favorite team (for example on a sports destination), favorite products (such as on an e-commerce site), or favorite activities (for example on a travel site). This data can be married with existing customer and audience data, and tied together across multiple online destinations. Profiles can also be connected together across the different devices that a visitor uses.
Paired together with Acquia Lift, the joint solution will provide a powerful level of understanding about a website's visitors resulting in much more effective testing and targeting. Additionally, the solution will incorporate TruCentric's content recommendation and marketing offer capabilities. Content recommendations suggest and promote links to content that are most likely to interest a user, increasing engagement and time on site. Marketing offers enable the most relevant promotions, sign-ups and other types of calls-to-action to be selectively shown to site visitors, increasing conversions. Both offers and recommendations can be easily configured by site builders or marketers by selecting from a variety of rules, algorithms and filtering criteria.
Longer term, I'm particularly excited about the impact of Acquia Lift (with TruCentric) on e-commerce. Many brands and corporations today offer fragmented and poorly integrated shopping experiences that confuse the customer, are difficult to manage, and ultimately, leave money on the table. Top e-commerce brands have proven that content-rich product stories with the deep personalization and seamless e-commerce integration increase conversion rates significantly. We believe that building a software platform that uses the world’s best personalization practices in combination with the best possible content management capabilities presents us with a really big opportunity.
We've got great news to share today; we are announcing that Acquia raised $50 million, the largest round of financing we’ve ever completed.
The round is led by New Enterprise Associates (NEA), one of the world's top investors in our space. They have made various great investments in Open Source (MongoDB, Mulesoft, etc.) as well as SaaS companies (SalesForce, Workday, Box, etc.).
With the new funding, we can continue to go after our vision to help many more organizations with their digital platform and digital business transformation. In addition, Acquia is charting new territory in the world of software with a very unique business model, one that is rooted in Open Source and that helps us build a web that supports openness, innovation and freedom.
We have such a big and exciting opportunity ahead of us. This vision will not come to life on its own and the proprietary competitors are not resting on their laurels. We'll use the funding to double down on all aspects of our company; from increasing our investment in products to deeper investments in sales and marketing.
In addition to lead investor NEA, other investors include Split Rock Partners, and existing investors North Bridge Venture Partners, Sigma Partners, Investor Growth Capital, Tenaya Capital, and Accolade Partners. The new funding will bring Acquia’s total fund-raising to $118.6 million.
Of course, none of this success would be possible without the support of our customers, the Acquia team, our partners, the Drupal community and our many friends. Thanks so much for supporting Acquia!
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