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).
- Governments shouldn't obsess too much about making it easier to incorporate a company; while it is certainly nice when governments cut red tape, great entrepreneurs aren't going to be held back by some extra paperwork. Getting a company off the ground is by no means the most difficult part of the journey.
- Governments shouldn't decide what companies deserve funding or don't deserve funding. They will never be the best investors. Governments should play towards their strength, which is creating leverage for all instead for just a few.
- Governments can do quite a bit to extend a startup's runway (to compensate for the lack of funding available in Belgium). Relatively simple tax benefits result in less need for venture capital:
- No corporate income taxes on your company for the first 3 years or until 1 million EUR in annual revenue.
- No employee income tax or social security contributions for the first 3 years or until you hit 10 employees. Make hiring talent as cheap as possible; two employees for the price of one. (The cost of hiring an employee would effectively be the net income for the employee. The employee would still get a regular salary and social benefits.)
- Loosen regulations on hiring and firing employees. Three months notice periods shackle the growth of startups. Governments can provide more flexibility for startups to hire and fire fast; two week notice periods for both incoming and outgoing employees. Employees who join a startup are comfortable with this level of job insecurity.
- Create "innovation hubs" that make neighborhoods more attractive to early-stage technology companies. Concentrate as many technology startups as possible in fun neighborhoods. Provide rent subsidies, free wifi and make sure there are great coffee shops.
- Build a culture of entrepreneurship. The biggest thing holding back a thriving startup community is not regulation, language, or geography, but a cultural prejudice against both failure and success. Governments can play a critical role in shaping the country's culture and creating an entrepreneurial environment where both failures and successes are celebrated, and where people are encouraged to better oneself economically through hard work and risk taking. In the end, entrepreneurship is a state of mind.
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.