How Axon's Founder Built a $35bn Business: 10 Lessons from Rick Smith
10 Lessons from our hundreds of hours of research on Axon.
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Background.
Axon is a leading law enforcement technology solutions provider. Founded by Rick Smith in 1993, their first product was the TASER, which was created in the 1970s, but languished under poor management. Axon improved and popularized the TASER to the point where they now are essentially the sole provider of TASERs globally.
However, they didn’t stop there. When their law enforcement customers were getting litigated for using the device, they innovated by attaching cameras to the TASERs to film incidents. Realizing that this ability to record law enformcent interactions was useful in a wide range of circumstances, they were the first to roll out body cameras.
However, unlike competitors initially, they insisted that the body camera be integrated with their own software so video uploading and management took little to no incremental time. Whereas competitor body cams burdened their users with tiresome and manual video uploads, Axon not only created the devices to upload automatically, but they added features to the platform like transcribing and file transfers with a legal chain of custody.
From this wedge into law enforcements' software stack, they continued to expand into tangential areas like records management and a real-time control command center that integrates all of their hardware devices, as well as 3rd party’s, into a unified platform.
Their revenues have grown from just $3mn in 2000 to almost ~$2bn today, and the market price of their stock has increased an incredible ~800x since 2001 or at a 33% CAGR. Today they are worth over $30bn and founder Rick Smith still owns 5% of the company, making him a billionaire.
Here are 10 lessons we learned from spending hundreds of hours researching Axon. There is even more insight and explanations on their business in our full research report, which you can access by becoming a full Speedwell Member here.
10 Lessons.
Below are the 10 Lessons we will be elaborating on more in the rest of this memo.
Know the Best Way to Sell Your Product and You will Only have to Sell it Once.
Solve Ancillary Problems to Create New Businesses and Revenue Streams.
Build Solutions, not Products.
Stand by your Product and Your Customer.
Use One Product to Build Relationships & Trust for Others.
Make Everyone in the Organization Understand Your Customers.
Show The Product’s Impact Holistically.
Own Distribution.
If Something Doesn’t Work Initially, Understand Why and Do Not be Afraid to Try Again.
When you have a Strong Intuition, Stick with it Through the Doubts.
1) Know the Best Way to Sell Your Product and You will Only have to Sell it Once.
When Axon started selling TASER’s to law enforcement agencies they initially sold them as any other product. It was a one-time outlay that agencies would have to find surplus budget to support the purchase of. In ~5 years when the devices needed to be replaced, Axon would have to again push them to find surplus in their budget to upgrade. With each sales cycle, the salesforce was fighting all the other items in the law enforcement’s budget for a small portion of this “surplus budget”.
The way law enforcement budgeting works, and like many publicly funded administrations, is they look to last year to see what to cut or add. Then if there is excess money to spend, they may look to new expenses to take on. If Axon could get into the “normal budget” then it was very unlikely it would ever be cut.
However, if they were stuck fighting for surplus budget, then not only would they have to hope their was surplus to fight for, they would also have to restart this process ever few years. Essentially, they figured out they needed to move from one-time “Capex” to regular, on-going “Opex”.
As we noted in our Axon report:
“it was much easier to get an expense approved into a budget on an ongoing basis than try to fight for what was left after all normal operating expenses. Instead of it being an extraordinary capex outlay, they become a normal operating line item. The benefit to Axon was not only easier sales, but a much higher chance of recurring revenue and the department continuing to be a customer. This is because once something becomes enshrined in the budget one year, it is less likely to be questioned the following year.”
Instead of essentially restarting the sales cycle each time they had a new TASER model, they would sell them on an annual program which packaged together TASERs, cartridges, training, service, and free upgrades. This meant that once the law enforcement agencies agreed to acquire the devices through the program, it entered into their regular budget. Every year that line item was there and so when the program was up for renewal, the status quo was much more likely to be maintained.
2) Solve Ancillary Problems to Create New Businesses and Revenue Streams.
When the TASER was originally rolled out to law enforcement agencies, they regularly received hundreds of lawsuits. Since the device was new and it could optically look excessive with the electric convulsions, it was a lightning rod for attracting lawsuits. Instead of leaving police departments to fend for themselves, they not only took on helping the defense attorneys (more on this in #4), but they engineered a solution to put an end to the frivolous lawsuits: cameras.
The TASER CAM, which was mounted onto the TASER, automatically filmed the incident when deployed. This gave a court video evidence that often vindicated the officers use of force. Not only did this help them defend lawsuits cheaper, it also gave the law enforcement agencies a new reason to upgrade their TASER devices. And, as mentioned in the intro, this also directly lead to creation of the body cam, which is an even better solution for police accountability and defending against frivolous claims.
It is key to understand that Axon had no idea that adding a camera to the TASER would eventually lead to a business that surpassed their existing business. Instead they were simply focused on solving their customers' issues. It is this process focus that tends to lead to the best outcomes. Rather than probing for new business ideas, focus on how you can better serve your customers and let the business idea follow from that.
Today the TASER devices and cartridges are just about 1/3rd of their total business. Had Axon not been focused on their customers, they may be a much smaller company that never expanded beyond their original single product.
3) Build Solutions, not Products.
Similar to Clay Christensen “Jobs to be Done” framework, instead of just building a product and focusing on the features, Axon focuses on the “job” of each product. It is because of this use-case-focus that when they rolled out the body cams, they knew that the software would be key to winning as it would allow police agencies to have on-officer video without creating more problems in terms of video upload, storage, and management. Competitors were solving the problem of "how do we give police videos of an incident", whereas Axon was solving the problem of "how can we help police agencies improve accountability and protect themselves".
The latter required a holistic solution that was about more than video, but also allowing videos to be stored in the cloud for ease of use and transferred digitally (as opposed to the old means of physical disk and hand-delivered mail that required signatures).
Before the body cams, they also broadened their vision with the TASER as Rick Smith notes below:
4) Stand by your Product and Your Customer.
As mentioned, when the TASER was new many unscrupulous “ambulance-chaser” lawyers would sue the police for excessive force. In some rare instances, the assailant suffered health problems and, in some cases, died. Instead of letting the police handle these claims on their own, they were very proactive in helping the defense prove that the TASER was not the primary cause of death (often many suspects had consumed illegal substances or had underlying health issues).
Axon aggressively defended all excess use-of-force cases when the TASER was used and this built a lot of goodwill with law enforcement agencies.
5) Use One Product to Build Relationships & Trust for Others.
When Axon released the Body Cams, there were many competitors that quickly popped up. While Axon had a superior solution, they also had something that many competitors lacked: trust. After defending so many law enforcement agencies, they built trust that if something went wrong with their product or service, they would make it right.
This was key to getting police agencies to outsource the handling of digital evidence, which they considered highly sensitive and could often be the difference between a criminal being prosecuted successfully or not. This trust was especially important because Axon had to convince law enforcement departments to move to the cloud and not keep the evidence on their local servers. An upstart, without a history of working with law enforcement or building trust through defending them in litigation, would have had a much harder time convincing them to make this transition, despite how logical it may have been on paper.
6) Make Everyone in the Organization Understand Your Customers.
As exemplified by the quote below, it is key that everyone in the organization understand the customers that they are building services and products for.
We can see the importance of being cognizant of the customer's preferences in the below quote. Rick Smith notes they achieved impressive engineering feats with a new TASER called the X3, but they made advancements in areas customers didn’t care about and at the cost of stuff they did care about.
(This idea that consumers have a variety of preferences and it is the businesses job to best fulfill those preferences is touched on in this piece on the Consumer’s Hierarchy of Preferences, and this piece on what sort of product you should build).
7) Show The Product’s Impact Holistically.
The TASER didn’t just help an officer incapacitate an assailant, but actually reduced officer injuries. (Before the TASER, an officer was much more likely to have to physically confront an assailant). This reduced the amount of workers comp the department had to pay out and thus also increased the number of officers that were available for field duty. Both of which are cost savings that are usually unappreciated at the outset of a department deploying TASERs.
When Axon rolled out the Taser CAM, they didn’t just make defending officers in court easier. It also meant that with video there would be less of a police officer’s time wasted in court and less money spent in defense—benefits they made sure that the police departments realized.
With their body cam, again it wasn’t just the fact that they gave police officers new capabilities, but that they also saved their time by auto-uploading and organizing videos. When selling Axon body cam’s they would compare the amount of time it would take an officer to upload a competitor's “cheaper” product to their solution, showcasing that the inexpensive product actually is more expensive when you consider all of the officers’ time that is wasted.
More to the point, with new AI capabilities like OneDraft which uses AI to write the first draft of a police report they are able to free up an extraordinary amount of the officers time—sometime in excess of a 50% reduction in the amount of time it takes to write a report. Since officers can spend around 40% of their time writing reports, this means that ~20% of their time is freed up and can moved back to field work, which increases the availability of officers and reduces the need for overtime or an increase in headcount.
Showing each product’s holistic cost savings and productivity improvement is key to helping Axon sell their solutions.
8) Own Distribution.
When they went public in 2001 they primarily sold through distributors, who they relied on to market their products. The problem with this was that the distributors never knew the product as well as Axon and didn’t have the same incentive to really sell the product— rather distributors only carry product if it sells itself.
By 2016 they rationalized their distributors from 23 in 2011 to just 3. Taking control of distribution allowed a sales force who was more dedicated to the product and could better cross-sell. With this change, warranty sales went up, gross margins improved, and it opened up a direct channel to their customers so they could understand their concerns and more easily receive feedback. Additionally, cross-selling new products was also easier as they already had an existing relationship.
9) If Something Doesn’t Work Initially, Understand Why and Do Not be Afraid to Try Again.
The original TASER was invented in 1975, but never reached wide use among police officers. This initially was in part because of regulations and restrictions that were put on the device and the original business set up to commercialize the product went bankrupt.
A second attempt was made in the mid 80s by a company called Tasertron. Except the device wasn’t as reliable or effective as it needed to be, making it hard to sell with police officers. They did get some notable deployments in Southern California, but in one test it was reported to work only around 56% of the time.
The TASER essentially treaded mediocrity for the better part of 2+ decades until Rick Smith saw its potential. He made some improvements to the device with the product’s inventor, Jack Cover, and relaunched it.
The moral of the story is that just because a business didn’t work, doesn’t mean the product was a bad idea. The TASER is now very commonly used by Police Departments across the U.S. and is gaining in use abroad as well. It is a critical policing tool as it is the only way an officer can incapacitate an assailant without doing lasting harm (the other options prior to the TASER were using their gun or baton). It fact, they can honestly say that it has saved many lives, but it almost sputtered out into irrelevance!
Rick Smith saw the potential in the device and decided that the past failures of the TASER businesses were not destiny.
10) When you have a Strong Intuition, Stick with it Through the Doubts.
Axon’s largest business today (the body cam + Evidence.com software platform) was almost shut down just before it started to see succuss. Axon President Luke Larson recalls that around 2013 most employees thought they should exit the body cam business, but Rick Smith disagreed and charged ahead.
(If you enjoyed reading this, check out our memo on 10 Lesson's from Copart's 40 years in Business.)
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