Don't forget Microsoft
https://luttig.substack.com/p/dont-forget-microsoft
Despite its scale, Microsoft is one of the most overlooked companies in tech.
But there is a lot more to Microsoft than meets the eye. If it plays its cards right, Microsoft can become the first $10T company. And startup founders would be wise to learn from the behemoth in Redmond.
Azure reached a $10b run rate by early 2019, just nine years after launch. This is faster than AWS, which became generally available in 2006 and hit a $10b run rate by 2016, and GCP which launched in 2009 and hit $10b revenue in 2020.
Today, Azure is a monster with over $30b in revenue, and several $100m+ TCV deals in the Fortune 100. And while Microsoft doesn’t break out the Azure margins separately, we know it’s an attractive business at scale: AWS has 30% operating margins, driving the majority of Amazon’s net income.
Is Azure the fastest B2B product of all time to reach $10 billion of revenue? Azure puts the fastest growing software companies of the past 25 years to shame:
Part III: Lessons for startups
Market over execution. Execution is critical, but riding an S curve is the path to win in tech
Compound products win. The classic consideration for VCs is whether incumbents can copy the startup’s technology before the startup copies the incumbents’ distribution. For the past 20 years, the answer was almost always no – startups achieved escape velocity across categories, seemingly immune from incumbents’ distribution power.
But don’t let that fool you: there is a real bundling effect in software. See Parker Conrad’s Compound Startup thesis, playing out in real-time via Rippling. Office 365 has its weaknesses but is a truly compound product – Microsoft Teams, for example, outpaced Silicon Valley darling Slack just 3 years after launch.
The power of cross-sell. Microsoft already has distribution into every Fortune 1000 IT department. This makes it much easier to sell new products than from a cold start. A myriad product line suggests a lack of focus, yet Microsoft is more profitable than all of FAANG – that is the power of cross-sell.
First mover advantage is overrated. For first movers, the lesson is clear: don’t rest on your laurels. But this should also be encouraging for second movers: there is probably more room for new entrants than you think. Think of the degree of competition in other industries like retail or finance – tech has lots of room for new companies before we reach a saturation point.
Consumption-based pricing is a bet on yourself. It may feel less “safe” than pure SaaS because the customers are not guaranteed to renew, but it lowers the barrier to adoption. Consumption-based pricing is the best way to bet on the quality of your own product: it perfectly aligns product, customer success, and sales. If customers are engaging with your product, it is a win-win.
Capital: a true moat. The tech industry doesn’t talk about capital as a moat, probably because it benefits those that have already made it. But Azure proves that it works: it spent billions to achieve economies of scale, but the prize is a comparably massive profit center.
Few companies have the competence to ingest truly scaled capital. When it works, it can really work. The $535m DoorDash Series C, one of the first Silicon Valley mega-rounds, was an extraordinary case study: it quickly won over 50% market share, and was poised to capture the food delivery market expansion during COVID.