In a recent presentation at Heavybit, Greylock’s Jerry Chen discussed how Docker’s unit of value is defined and how it serves as a way to measure the value of a developer tool company over time.
He offers, “A unit of value is how you price, it’s how you scale, it’s how you sell your product to your customers.” Chen believes cloud companies tend to offer value via a single unit, small team, or big unit. The concept here is that each of these units dictates how a company grows and how they determine their go-to-market strategy. Examples of how companies are able to scale their value (and in turn their revenue) might include:
- Single Unit: Dropbox’s value comes from a single user, VMware’s comes from a single server, Docker’s comes from a single container, and Office Suite’s value is derived from a single user. For these types of products, it doesn’t matter if the rest of a company is using the product or not. The barrier to entry for building value for these products is very low because they simply need to be utilized by one individual. That said, you have to sell a substantial number of units in order to really expand the business.
- Medium Unit or Small Teams: Salesforce’s value comes from three to four sales reps using the product, Box or Sharepoint requires that a team or department adopt it, and Atlassian and GitHub require a dev team to adopt the product in order for them to derive value. These products don’t require that an entire company adopt a product, but the true value comes not from a single user, but from collaboration and the ability to communicate across multiple users or teams.
- Big Units of Value: Hadoop is valuable when used for big data, Mesos is valuable in terms of a cluster of servers, Workday requires than an entire company use them for human resource and financial management, and both SAP and Oracle are most valuable when deployed across an entire enterprise company. The point here is that this type of product’s true value is only realized when customers go all in.
Chen argues that there’s no right or wrong way to create value for a product. But there are tradeoffs and different sales cycles for each. Companies built on big units of value require a longer sales cycle, a mature sales team and process, and a higher price tag per product to justify that cycle. Products built as smaller units of value require shorter sales cycles where customers often purchase the product with their company credit card. These “small unit” companies need to sell products more efficiently and while sales tend to bring in less revenue, they happen with higher frequency and minimal sales support. According to Chen, the question every company needs to ask is: “How do I create a cost effective channel? And how do I scale up that value?”
What are Investors Looking For?
Chen says investors like Greylock are looking for companies that have a clear path to growth. In the above chart, he calculates how long it would take for companies with different units of value to scale to $100 million in bookings or revenue. On the far left is a company where the unit of value is 10 cents per API call. To get to $100 million in revenue, they’d have to do a billion API calls. On the far right of this chart is a company with a very large unit of value ($100,000+). This company would only have to sell to 1000 customers to get $100 million in bookings but would likely require a fairly sophisticated direct salesforce. In between there are a number of other sales cycles and models, but in Chen’s experience the companies that sit squarely in the middle of this graph have not been successful.
He also talks about scaling non-linearly. So for example, rather than just selling more file storage etc., companies should think about how they’re creating more value over time and in turn, who their economic buyer becomes. Says Chen, “If you can scale non-linearly and create a lot of value for your customer, it gets harder and harder for you to be displaced. ..You might start with a developer, dev ops or system admin, but as you scale to a large consumption volume — you’re going to be selling to the CIO, CFO, CTO or Chief Security Officer.”
Among his suggestions to startups to increase non-linear value, he offers the following:
- Network Effect: Slack is a product where the value of it increases with the size of the network. In essence the more team members that flock to this product, the more useful it becomes for those early adopters.
- Defacto Standards: Amazon APIs became the de facto standard for cloud services and this type of non-linear value is extremely powerful to decisionmakers. Enterprises are willing to accept a company-wide or industry-wide standard in order to reduce complexity and standardize process. The idea is that if every team is speaking the same language, communicating becomes less cumbersome and the purchase becomes easy to justify.
- Platforms: “Platforms are the longest, the hardest to build, but also, you get the most economic rents if you build them correctly.” Chen sees Docker’s real opportunity as a platform saying, “Docker has a chance to be that glue layer between infrastructure, storage, networking, monitoring, management and security.” In this case, non-linear value of a platform comes from enterprise and third party investments in code, data sets and apps.
He urges companies that haven’t yet defined their unit of value to sit down and define their “small subatomic unit of a product, service or technology that customers are consuming and from which they’re deriving value.” For Chen’s complete Heavybit presentation visit heavybit.com/library.
Dana Oshiro is the Director of Programs for Heavybit– a nine-month SF-based program dedicated to helping companies build developer-facing products and services.
The New Stack is a wholly owned subsidiary of Insight Partners. TNS owner Insight Partners is an investor in the following companies: Docker, Real.