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Unit of Value: A Framework for Scaling

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Jerry Chen, partner at Greylock and former VP of Cloud and Application Services at VMware, shares his Unit of Value framework for startups building a go-to-market strategy. He developed this strategy while managing product and marketing teams at VMware that shipped many “1.0” releases, including VMware VDI, Cloud Foundry, and vFabric, and continues to use the framework to evaluate companies as an investor.

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Unit of Value: A Framework for Scaling

  1. Unit of Value A Framework for Scaling Jerry Chen
  2. As a startup, you enter a classic battle of David vs. Goliath.
  3. Your Startup vs.
  4. Technology Deep Innovative IP Distribution Channel Sales Force Partners Existing Customers vs.
  5. Can a startup build distribution before the incumbent builds or acquires tech? - Aneel Bhusri Workday & Greylock
  6. To compete with giants, it becomes a race to scale and build go-to-market quickly enough with a product.
  7. Product - market fit New, innovative technology Large market How do you get your product to market? GTM
  8. Why does go-to-market matter? (And why do investors care?)
  9. Impacts how much money to raise Determines profit margins at scale Your cost of distribution must match what customers are willing to pay GTM
  10. GTM: Things to think about Channel Customer Acquisition Costs Partnerships Awareness & Trial PricingPackaging Unit of Value
  11. Unit of Value noun 1. The smallest measurable unit at which your product or service delivers value.
  12. Unit of Value noun 2. The unit of scaling used when increasing your product in pricing or services. 3. What your customers pay for. E.g. servers, TB of storage, API calls, users
  13. Your unit of value determines how you price, scale, and sell your product to your customers.
  14. A unit of value can vary from: small to large
  15. Single Units of Value : One User : One Server : One User : One Container
  16. Medium/Team Units of Value : Team or Department : Team or Department : Dev Team : 3-4 Sales Reps /
  17. Big Units of Value : Big data e.g. terabytes : Entire clusters of servers : HCM for entire company : ERP for entire company or LOB : Enterprise apps for entire company
  18. Every startup has a different size unit of value. Bigger is not better, smaller is not better.
  19. Bigger Units of Value -  Have bigger deals & longer sales cycles -  Big deals don’t mean it’s a big market. The Big Questions: -  How do I build a cost effective direct sales force? -  How do I build an advantaged go-to-market?
  20. Smaller Units of Value -  Have smaller deals & shorter sales cycles The Big Questions: -  How do I create a cost effective channel? -  How do I scale up the value?
  21. To reach $100M in revenue, there are a multiple unit of value paths to take.
  22. Rules of thumb to reach $100M Target Price GTM Volume $0.10 $100 <$10K $10-20K+ $100K 1B calls 1M >10,000 5000-10,000 1,000 API call self service dead zone inside sales direct sales
  23. Companies on either the far left or right tend to work well. Companies in the “dead zone” don’t reach $100M as easily. Target Price GTM Volume $0.10 $100 <$10K $10-20K+ $100K 1B calls 1M >10,000 5000-10,000 1,000 API call self service dead zone inside sales direct sales
  24. Case Study A: Company A (API Service) Pricing: < $0.10 per API call 50% of bookings are from customer paying $25k+ Takeaway: Company A has a small unit of value, but has managed to scale up customers to do big $25k+ deals. *Company name is kept anonymous for protection.
  25. Case Study B: Company B (Cloud app infra service w/ 50k users) Pricing: avg monthly customer < $50 5% of customers drive 50% of monthly recurring revenue Takeaway: Company B also has a small unit of value, but has scaled up a handful of customers to drive half of their revenue. *Company name is kept anonymous for protection.
  26. The Big Takeaway A few customers can drive sales. Companies A & B scaled up a handful of customers to be very profitable. .. But how?
  27. The goal is to create non-linear value. Sum of Units Value
  28. Going Non-Linear -  You want to build out your offerings so the more your customers consume, the more value they receive -  Sell additional products at scale (e.g. management, monitoring, security) -  Sell to a different / additional buyer (CTO, CIO, CFO)
  29. If you can scale non-linearly, it becomes harder and harder for you to be displaced.
  30. Ways to Increase Value 1.  Network effects 2.  Standardization 3.  Platforms
  31. Network Effects Metcalfe’s Law: The value of a network is proportional to the square of the number of connected users on the system. More users = More value
  32. Network Effects -  Build a product or service that will enable network effects to create non-linear value for your customers/users. Examples: -  collaboration tools -  communication platforms
  33. Standards Ask yourself: “Can this product be a de facto standard? Within a company, within a market, within an industry?”
  34. Standards are powerful -  They reduce complexity and costs for enterprises who standardize their apps. -  De facto standards + network effects often lead the winner of every industry to gain the majority of market share. Examples: -  Languages & frameworks -  MS .ppt & .doc formats
  35. .. but they can change -  The de facto standard within a company or even within an entire industry can change very quickly. Example: -  Browser wars
  36. Platforms -  Platforms take the longest to build but will yield massive economic benefits if built right. Ways to create non-linear value: 1.  Build a “system of record” e.g. a database 2.  Become the ”glue layer” between layers of tech 3.  Application and cloud platforms try to be both storage (data) and glue
  37. Platforms Create or find a system of record and build a platform on top of it. When you control that data, you can build analytics, third party apps, etc. to create non-linear value. Customer records Employer records Asset records
  38. Platforms Become the glue layer between technologies. As an intersection between multiple layers of tech, your product will become an important platform to build on top of. Infrastructure Storage Networking Monitoring Management Security
  39. Platforms Applications and cloud platforms aim to be both a system of record and a glue layer by storing customer’s data. They also connect the broader ecosystem of applications, API services, and other startups.
  40. Middleware Messaging Database Systems Monitoring Data Storage Database as-a-service ApplicationsStartups API Services Cloud Platforms Infrastructure Broader Ecosystem System of Record
  41. How to scale up your unit of value Sum of Units Value Aim to be the customer standard Sell additional products e.g. management, monitoring, security, etc. Create platform ecosystem
  42. Make a conscious choice. -  Don’t expect to fall into your go-to-market strategy. -  Don’t be pushed into your unit of value by your customers, partners, or competitors. -  Be thoughtful about how to charge and go- to-market and you can be highly disruptive.
  43. For example: Cost $ per user Free Unit of Value One User Eyeballs (one user’s attention) With Google Docs, Google made a conscious choice to charge differently than Microsoft for the same unit of value (users) and monetized attention for ads and search.
  44. Don’t be afraid to iterate. When thinking about your go-to-market strategy: hypothesize, try new things, and don’t be afraid to walk away if things aren’t working.
  45. How can I make this actionable for my team?
  46. First, define your unit of value. -  *Ask: What is the smallest unit of your product or service that’s delivering value to your customers? -  Make sure your go-to-market strategy matches your unit of value. * Be honest about it.
  47. And then, create a road map to increase that value as you scale. -  Identify ways you can increase your value as you and your customers grow. -  Figure out how you can layer and stack your services and technology on top of each other to create non-linear value over time.