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The end of ownership: the zero-marginal-cost economy

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. I'm cross-posting it to my blog.)

The business behind Open Source

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.

Acquia acquired TruCentric

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.

Acquia raises $50 million series F

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!

The investment case for employing a Drupal core contributor

I've long been convinced that every well-run Drupal agency of 30 people or more can afford to hire a Drupal core contributor and let him/her work on Drupal core pretty much full-time. A healthy Drupal agency with 30 people should be able to do $5MM in revenue at a 15% net profit margin #1. This means they have $750k in profits that can be invested in growth, saved as reserves, or distributed among the owners.

There are many ways you can invest in growth. I'm here to argue that hiring a Drupal core contributor can be a great investment, that many Drupal agencies can afford it, and that employing a Drupal core contributor shouldn't just be looked at as a cost.

In fact, Chapter Three just announced that they hired Alex Pott, a Drupal 8 core maintainer, to work full-time on Drupal core. I couldn't be more thrilled. Great for Alex, great for Drupal, and great for Chapter Three! And a good reason to actually write down some of my thoughts.

The value of having a Drupal core contributor on staff

When Drupal 8 launches it will bring with it many big changes. Having someone within your company with first-hand knowledge of these changes is invaluable on a number of fronts. He or she can help train or support your technical staff on the changes coming down the pipe, can help your sales team answer customer questions, and can help your marketing team with blog posts and presentations to establish you as a thought-leader on Drupal. I believe these things take less than 20% of a Drupal core contributor's time, which leaves more than 80% of time to contribute to Drupal.

But perhaps most importantly, it is a crucial contribution that helps ensure the future of the Drupal project itself and help us all avoid falling into the tragedy of the commons. While some core contributors have some amount of funding — ranging from 10% time from their employers to full-time employment (for example, most of Acquia's Office of the CTO are full-time core contributors) — most core contribution happens thanks to great personal sacrifice of the individuals involved. As the complexity and adoption of Drupal grows, there is a growing need for full-time Drupal contributors. Additionally, distributing employment of core contributors across multiple Drupal organizations can be healthy for Drupal; it ensures institutional independence, diversified innovation and resilience.

Measuring the impact of a Drupal core contributor on your business

While that sounds nice, the proof is in the numbers. So when I heard about Chapter Three hiring Alex Pott, I immediately called Chapter Three to congratulate them, but I also asked them to track Alex's impact on Chapter Three in terms of sales. If we can actually prove that hiring a Drupal core contributor is a great business investment, it could provide a really important breakthrough in making Drupal core development scalable.

I asked my team at Acquia to start tracking the impact of the Drupal core contributors on sales. Below, I'll share some data of how Acquia tracked this and why I'm bullish on there being a business case.

For Acquia, high quality content is the number one way to generate new sales leads. Marketers know that the key to doing online business is to become publishers. It is something that Acquia's Drupal developers all help with; developers putting out great content can turn your website into a magnet. And with the help of a well-oiled sales and marketing organization, you can turn visitors into customers.

Back in December, Angie "webchick" Byron did a Drupal 8 preview webinar for Acquia. The webinar attracted over 1,000+ attendees. We were able to track that this single piece of content generated $4.5MM in influenced pipeline #2, of which we've managed to close $1.5MM in business so far.

Even more impressive, Kevin O'Leary has done four webinars on Drupal's newest authoring experience improvements. In total, Kevin's webinars helped generate $9MM in influenced pipeline of which almost $4MM closed. And importantly, Kevin had not worked on Drupal prior to joining Acquia! It goes to show that you don't necessarily have to hire from the community; existing employees can be made core contributors and add value to the company.

Gábor Hojtsy regularly spends some of his time on sales calls and helped close several $500k+ deals. Moshe Weitzman occasionally travels to customers and helped renew several large deals. Moshe also wrote a blog post around Drupal 8's improved upgrade process using Migrate module. We aren't able to track all the details yet (working on it), but I'm sure some of the more than 3,200 unique viewers translated in to sales for us.

Conclusion: investment returned, and then some

Obviously, your results may vary. Acquia has an amazing sales and marketing engine behind these core contributor, driving the results. I hope Chapter Three tracks the impact of hiring Alex Pott and that they share the results publicly so we can continue to build the business case for employing full-time Drupal contributors. If we can show that is not just good for Drupal, but also good for business, we can scale Drupal development to new highs. I hope more Drupal companies will start to think this way.

Footnotes

#1 I assumed that of the 30 people, 25 are billable and 5 are non-billable. I also assumed an average fully-loaded cost per employee of $125k per head and gross revenue per head of around $180k. The basic math works out as follows: (25 employees x $180k) - (30 employees x $125k) = $750k in profit.

There are 365 days per year and about 104 weekend days. This means there are 260 business days. If you subtract 10 legal bank holidays you have 250 days remaining. If you subtract another 15 business days for vacations, conferences, medical leave and others, you have 230 business days left. With a blended hourly rate of $130 per hour and 75% utilization, you arrive at ~$180k gross revenue per billable head.

I confirmed these numbers with several Drupal companies in the US. Best in class digital agencies actually do better; they assume there are 2,000 billable hours in a year per head and maintain at least a 85% chargeability rate (i.e. 1,700 billable hours per head). Many companies do less because the maturity of their business, the market they are in, their geographic location, their ambitions, etc. It's not about what is "good" or "bad", but about what is possible.

#2 "Influenced pipeline" means that the content in question was one factor or touch point in what ultimately lead potential customers to become qualified sales leads and contacted by Acquia. On average, Acquia has 6 touch points for every qualified sales lead.

Acquia drops non-compete clauses

In a world where innovation is only accelerating, shackling employees with non-competes doesn't make sense anymore. At Acquia, we believe that innovation is about openness and collaboration, and that working together is based on trust and loyalty, something that was born out of our Open Source background. It's been a long time coming but we decided to kill our non-competes. It is the right thing to do. Here is what we just sent to all Acquia employees:

From: Tom Erickson <tom@acquia.com>
To: Everybody at Acquia
Date: Friday, May 2, 2014

Acquians,

We have an amazing team, it's the thing I am personally proudest about.  
When asked by others what's the best thing about our company, I don't
hesitate to answer "our team".

There are many things to value in each of you, from your commitment, 
your integrity and certainly your passion!

The goal that Dries and I have always set was to have a company where
everyone is challenged, has the opportunity to grow and has some fun
along the way.  Most of the time we're successful at that as a company, 
though sometimes we fail.  Yet even when we fail, we want everyone to 
continue to do the right thing and sustain mutual respect.

To this end, the exec team has decided to eliminate non-competes from 
our employment agreements.   We believe its the right thing for our 
team members, for the company and for the industry.  There are many 
reasons why companies have used non-competes in the past, but we 
believe that times have changed and individuals today value the 
companies who value them.  This may seem contradictory .. "value me, 
but let me go to a competitor" .. but we believe that a company who 
respects our team members in this way will actually be a better magnet 
for talent.

While we are getting rid of non-competes, we are not eliminating other
terms, notably the non-disclosure.  So while we do not want to restrict 
free movement of talent, it's important that company confidential 
information remains just that, confidential.  

We do not plan to change existing employment agreements, as that would 
be an administrative burden, and we have many other issues to deal with.
This email should suffice as an assurance that existing non competes 
below the executive leadership level will not be enforced.  

All new hires, with certain exceptions at the executive level, will not
have non-competes.  

Viva Acquia!
Tom

Entrepreneurship is 80% sales and marketing

Background in business is a 'nice to have', not a 'must have' for an aspiring entrepreneur. I had no solid business background when I founded Mollom or Acquia (I launched them roughly at the same time).

Other than the standard things (an idea, passion and the willingness to act), the most important thing that aspiring entrepreneurs need is the understanding that 80% of entrepreneurship is sales and marketing. If as a founder, you're not obsessed with sales and marketing, you're a liability rather than an asset.

You don't have to be the best sales and marketing guy (I am far from that), but you better enjoy getting other people excited about your project, company or product. It will help you not only with finding customers, but also with recruiting a world-class team, raising venture capital, and more. So if there is one thing you should learn before starting a company, it is "sales and marketing" (in the broad sense) — and you better be passionate about it, because you'll invest years of your life to selling and evangelizing to make your company a success. Without customers or a team, you won't need any other skills, because you'll be out of business.

You need to be talking about your idea all the time. Too many entrepreneurs believe that if they build a killer product, customers will come. It almost never works like that. Smart entrepreneurs do it backwards; they find customers first and build their product only when they have customers ready to start paying. Not testing the market by selling from day one can lead to months, if not years, of wasted time and money. So stop being so secretive about your idea. You will never find your product-market fit by keeping your idea secret until it is perfect. If you're afraid of people telling you that your idea is stupid, chances are you may not be ready to be an entrepreneur.

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