Business Model Jujutsu
The big moment in the history of TACODA (a company we invested in early this decade that was sold to AOL in 2007) was when they went from charging customers to paying customers.
I was reminded of that yesterday when Paul Forster, the CEO of Indeed, said this at our portfolio summit yesterday:
We tried charging for our API without much success. Then we paid developers to use it and it took off.
It is such an interesting move to make on the market. In the case of TACODA, they initially built a powerful behavioral targeting solution for publishers to segment their audiences and sell them to advertisers. They sold the technology to about twenty large online publishers. But the sales cycles were long and the license fees were smaller than they needed them to be.
So TACODA built an ad sales force and said to publishers, give us your inventory and we'll send you back money. That was a much easier sell all around and the business took off.
In the case of Indeed, they initially offered online publishers the ability to pay for a real time search API of online jobs. Not many took them up on that offer. But when they injected their sponsored jobs into the API and offered to share the revenue with publishers, the demand was huge.
Not every company that has an API can do this jujutsu move on the market, but many can and should. It makes life much easier.
Comments (Archived):
Along the same lines, you could argue that Apple and FB are ‘paying’ developers to provide applications for their respective platforms.
yes. that is why i think the funds launched by platforms are promising (i.e. fbfund), because they are getting to the core of the matter. i think this will end up drastically changing how internet companies are financed.
I’m not sure I’d want the platform I am building on to own a piece of my company. That sure feels like how the cable business was built. You couldn’t launch a channel unless you let liberty have a big piece of your business. Imagine if FB, apple, and twitter took that approach. It would suck so bad
we are all ultimately building on top of something else; a programming language, a server, a currency, etc. i think the internet simply enables anyone to launch their own platform. in doing so, it makes building on top even easier, which further reduces entrepreneurial risk. the end result i think will be something like a world of microbusinesses connected by APIs conducting business according to their own standards and with their own currency.
I agree with that vision of where we are going. Just not sure we want patforms investing in services built on them
It’s a very interesting way of developing their business model, paying their complements to do it for them.
This is a nice approach and one of those that seems “obvious” but is not b/c that is not often how companies think. The typical approach is “we built this API, they should thank us” when the real goal is “use” and a lift to overall engagement, whatever that may be. Very smart of have the developer community “participate” in the revenue model, it is a win-win incentive.As David says below, it is like what Apple and FB does for apps. I’m not sure with the business model of Twitter’s API, but as revenue models gear up there, it will be interesting to see if this type of model takes hold and develops diverse set of revenue models on the communication stack.
this was good for me to read today. Sometimes your weight and propulsion is leaned in one direction and you read a post like this and makes you realize you should check that. If that doesn’t sound like mental jujitsu. ; )
They shifted the risk away from the publishers to carrying it themselves. Anytime you can do that its a good thing.
Had the same realization easier. It becomes a much different conversation when you can say, “hey, how about we provide you a bunch of value, and then pay you for it, on top of that.”
On a side note, whenever I come to your blog I’m being asked to provide a username and pwd for readwriteweb.com. Not sure why.
that’s a problem. where on the blog does it ask you for that?
i know im in the presence of giants on this blog so i’m probably missing something but i dont really get the jujitsu part of this post.in the examples it just appears that both companies have gone from trying to capture value with their API’s to trying to create value. As such, is it really that surprising that they’ve seen positive effects?
Well I don’t know about for Indeed, but for Tacoda going from a technology provider and seller, to a sales driven media network company is a major risk and takes incredibly calculated planning to pull off, which they did.
twitter has a huge opportunity here to do the same with their api
Agreed
Twitter should follow the indeed model – provide publishers goodcontent (as fresh as possible about topic x) and sprinkle in sponsoredads.
Fred -Great post. It can be hard to completely flip a paradigm like that and this particular example is super-relevant to my startup. I was hoping you or someone else in the community could help me find some links to more information about the TACODA/Indeed business model.Also, great to see the response to the Donors Choose missive you posted. Sometimes it takes a little push.-Austin
It is basically the ad network business model merged with an api model
This is a very validating post… Love the comment about a large potential customer going with a competitor based on their age / experience. Leaves more bandwidth to focus on the innovative young customers who are creating the next youtubes, and facebooks. Growing and learning together is a beautiful thing.
great post boss. monetizing APIs is huge and essential. most companies are not pursuing this strategy aggressively enough, in my opinion. it is probably the leading reason why my default response to most Internet startups is bearishness — most aren’t playing the API game the way it needs to be played, which you’ve outlined in this blog post.
I agree. We had a very lively discussion about this at our portfolio summit. Not everyone agrees with this though
A wish for young CEOs: that someday, someone will post to YouTube videos of a series of sales meetings in which a young company struggles to sell a mature company a new product or service over a period of twelve to eighteen months. I don’t think many newly-minted entrepreneurs really understand how incredibly difficult it can be to sell a new technology to an executive at a mature company – especially if the technology is new, there are few (or no) reference customers, the asking price is above a certain level, and the ROI is still unproven. TACODA’s approach of assuming the financial risk and sharing the upside takes a potential loss (something virtually all executives at mature companies will avoid like the plague) and turns it into a potential revenue stream – something an executive at almost any level can get behind. This approach will indeed make life much easier for young companies.
We have a bunch of young companies in our portfolio (many led by young entrepreneurs) doing exactly thatI got a call last week from a potential customer of one of them giving me some feedback. He said our portfolio company’s product was superior but their competitors gave a better pitch, wore suits, and were not youg enough to be his boss’ children.Ugh
So why not hire professional salesmen with experience in related industries to present your portfolio companies’ products? It depends on the companies you’re trying to sell to, of course, but when I sold to financial industry firms while working for a start-up, I always wore suits. As a general rule, I think it’s best not to dress more casually than the folks to whom you are presenting (I gave a presentation at the Union Bank of California once where that would have been almost impossible: one of the tech guys was wearing shorts and sandals in the meeting).
It might cost more to hire an experienced sales guy than the entire burn rate of some of our companiesNot saying we shouldn’t do it, but it would require a cultural shift from ramen to steak
Why not try hamburger instead? In this economy, there ought to be some decent sales guys available who won’t break the bank.
We have not found many of them. The good ones are mostly still employed in high paying jobs
you ever need a song for your portfolio companies to sing when they are presenting their products/services feel free to holla at me
I like this approach – but clearly it doesn’t apply to every business model or business feature. Both of your examples feel like some modern form of what Peter Drucker has advocated for a long time – i.e. converting the supplier into a partner. It’s refreshing to see young companies inherently getting this concept.
As long as you can leverage your partnership into revenue it works out.But what if the revenue never materializes? Seems like a last option. Identifying the customer should be an early part of the business process, not an afterthought.I think Steve Blanks customer development process covers this pretty well.
I think the supplier to partner jujitsu move is available to more people than you might think
Partner, yes. Paying the supplier, I don’t think so.
Couldn’t agree with this more.
Hi gavin. Nice to see you on AVC!
This is a very valuable post.Kudo’s to Tacoda’s management to make a very shrewd, and gutsy decision to switch to the ad network model.The BT platform for publisher model is very difficult to sustain: there’re only so many premium publishers out there. As a tech provider who paid on rev share basis, you had no visibility into how much sales the publisher has generated besides reporting by the publishers. It’s like an honor system.And ultimately, in the online advertising game, the dollars are from advertisers. It’s easier to make money if you can stay closer to where the money is. 🙂
I like that last line. I’m going to use it
I love this idea because I think it is a great general idea. it’s like eating nut butters. Sure, you could eat a whole bottle of nut butter by yourself. Or try selling it to a friend to have him/her eat it by himself.But it seems like so much of a better idea to split the yummy fat of nut butter by getting a slice of bread and shmearing it on. You can sell subslices of nut butter goodness, each good for the right sort of person (not eveyone wants lots of nut butter) and even keep a little for yourself. So in the end, by taking on some of the risk of the fat of nut butter, you have an easier time selling off the rest of it. And you get a delicious sandwich and some friends along the way.Tacoda= API = nut butterPublishers = content =breadshmear knife = advertisementsSandwiches for everyone!Ok, I admit to being slightly hungry for a whole wheat, almond butter and honey sandwich…
What if you were building a nutt butter sandwich business that sold sandwiches to 7-11. But then you realized that no sevs were buying your sandwiches, so you instead rented shelf space in 7-11. If your sandwiches still aren’t selling are you sunk?Seems like a last ditch effort to pay developers to use your API. But when it works, it unlocks pretty big market value.
If I am not mistaken, that’s how major supermarkets determine what goes where on the shelves, which is why the non-major brands are never at eye-height.You could be the lux nut butter or the .99 nut butter: It might be that one of the reasons this is working is that this model spreads the risk because it is more clearly known what the risks are to spread within the technology.The technology itself may not even be the product- it is what it does, and that is what screams risk. Spreading the obligations of the risk around gives people a comfort zone in which to operate: especially because there are always going to be a variety of different, similar technologies to serve a variety of needs that develop over time (just liek there are a variety of services to place ads on the net.)
I guess that all depends on how good your Sandwiches are. If they are no good, than renting a shelf won’t save you either.
Go get lunch shana!
How different is this from the genius of Google Ad Sense? It’s a brilliant value exchange that directly aligns incentives.
It is the adsense model. But there are variants of it. Many
Fred, JohnSharp has it right here. We were selling in a far better macro environment than exists today but we were creating a category-BT and the publishers were a hard sell. At the high water mark we actually had closer to thirty-five blue chip names licensing our tech but the amazing stat is that in September 2005, four and a half years after we started selling tech and only three months after we launched the network, monthly ad revenues surpassed tech revenues.
What business curt?
sorry…i was the coo (and later ceo) of tacoda when we morphed into an ad network.
Thanks for the context, I should have picked it up from “we were selling…”.So your customer changed, did what you guys focus on shift as well? How’s your company doing in the current market?Any tips to help early entrepreneurs target a better customer from early on?
Ok this is an example of why public two way social media is the bestI write a post, we have a discussion, and one of the key figures in the story jumps in corrects me on a few things, and emphasizes the key pointThanks curt!
When Yahoo introduced BOSS, i thought they were really onto something along the lines of your post. Yahoo would let developers have access to their search stream through an API to create their own search capability, and Yahoo would pay the sites a piece of the revenue from sponsored ads. i don’t think they have had much suceess (I don’t even know if it is still available), and I realize that they were not trying to get partners to pay for their API, but i thought it was a briliant “jujitsu” move because it would turn their distribution partners into the search innovators, and potentially drive more searches for Yahoo and more revenue.
Back in the Day, Tacoda Traditional Media Clients’ salesforces were not very motivated to sell digital media extensions. So Tacoda was smart to sell themselves. But in today’s advertising market, Tacoda is competing against their own clients for a piece of a shrinking pie.So today, I suspect advertising revenue based technologies may find there is an opportunity to sell a package of a technology license and sales training/consulting. (Isn’t this how IBM sold new upgrades to clients). Today, I suspect Traditional Media salesforces are more receptive to learning how technology can make traditional + interactive media can be 1+1=3. Katherine Warman Kern@comradity
This reminds me of Bill Gurley’s discussion of what Google is doing to the GPS market with free turn-by-turn navigation: “less than free”.http://abovethecrowd.com/20…