This is a summary of Dharmesh Shah‘s Business of Software 2012 presentation.
Your company should be coming from a place of love. Zynga’s motto is “do evil.” It is one of the most evil places from a culture perspective, and in its business approach. Before you gamify your product, you should decrapify it.
big great or go home. Attention is finite, problems are infinite. Build companies that solve problems. Work on a problem you care enough about that you’d be happy even if someone else solved it.
Valuation vs. Value
The valuation equation -> Valuation = Revenue x Multiplier
Valuation is based on revenue?! Not profits?! Yup. This isn’t Dharmesh’s rule. He’s just telling you how things are done.
The multiplier for SaaS companies is around 5.0. Historically the multiplier is around 3 for software companies.
So how do I get my multiplier to that? Growth is hugely important. The faster your revenues are growing, the higher the multiple goes. Profitability is negatively correlated with the multiplier for companies about to go public. The market rewards growth. They are investing in growth, they don’t want dividends.
Factors affecting the revenue multiplier:
How to increase revenue:
At this point Dharmesh used a car metaphor to highlight a few important points.
How important is culture?
How do I scale my team without losing my culture?
Strive not just to build a great startup. Strive to build great entrepreneurs.
Warren Buffet quote: “Build a moat around your castle.” The idea is that you want to make it hard to attack your castle (i.e. create a barrier to entry).
Determining your revenue multiplier is determining your risk. Mitigate your risk, because your success will attract competitors.
You don’t just want customers. You want crazy, loyal fans, because this discourages competition. The most attractive thing to your competitors is when you suck as far as your customers are concerned.
Technical switching costs should be low, and emotional switching costs should be high. This makes an awesome barrier to entry.
Porter’s five forces is a framework for industry analysis and business strategy development. The five forces determine the competitive intensity and attractiveness of a market. Attractiveness refers to the overall industry profitability. An “unattractive” industry is one in which the combination of these five forces acts to drive down overall profitability.
Pick markets where the barrier to exit is low. If your competitors can get out easily, they won’t fight to stay in.
Really, I can build my business on your platform? Platform partnerships are awesome…until they’re not. It’s easy to fall into this trap. When you get awesome (i.e. big enough), they will either buy you or kill you. Unless you’re so big the costs will outweigh the benefits.
BUSINESS OF SOFTWARE – FOR PEOPLE BUILDING GREAT SOFTWARE BUSINESSES.
This year will be the 7th Business of Software Conference – 15-17th September 2014, Boston.
A three day conference for founders who want to build sustainable, profitable software businesses. BoS has always been a special conference for our delegates and we want to keep it special. Attendance is restricted to just 400 attendees in 2014. Registration open now.
This year we are also running Business of Software Conference Europe, 25-26th June. For more details, visit the dedicated BoS Europe site. Two days in the birthplace of computers – Cambridge, England.
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