Here’s the link to the full Business Insider post… http://www.businessinsider.com/techstars-chicago-2013-5?op=1
This is another cross post from the Launching Technology Ventures blog. It was a response to the CloudFlare HBS case that we discussed in class…
In the CloudFlare case, there was a discussion regarding the fact that it’s $1B+ valuation was perhaps based on the assumption that they could introduce advertising into their business model. What I found amazing about CloudFlare was that very quickly they were able to route approximately 1% of the entire internet’s traffic through their network. The investors’ enthusiasm seems to be built on a particular premise which is: If you build a bunch of roads and you can get people to drive on them, you can put up billboards and tollbooths and make a lot of money.
Now in the physical world, once you build efficient roads that become well traveled it is incredibly difficult to alter a person’s commuting behavior. Because of the capital expenditure needed to build alternate roads, you can go so far as to install tollbooths without fear of adverse customer or competitive response. In the physical world, direct sources of income (tollbooths) are used when alternatives are few and indirect sources of income (billboards) are used when alternatives are plentiful. In the physical world, revenues from tollbooths greatly exceed those from billboards but the question is whether this dynamic remains true on the internet and if so how sustainable can a toll road be in the ever changing virtual landscape.
While I think Cloudflare is an amazing company, I think it is worth thinking about whether their valuation was based on the assumption of tollbooth revenues (SaaS pricing), billboard revenues (advertising revenue), or both and whether that assumption was appropriate for their company at the time. A cautionary tale that is an interesting analog to CloudFlare is Cisco Systems. At one point Cisco was the most valuable company in the world with a market cap of $555B. The reason they were valued at such an astronomical amount was the fact that they held the lion’s share of the networking hardware market. Amid the heady Webvan and Pets.com fueled euphoria of the dotcom 90s, the prevailing belief in Cisco’s worth was based on this same tollbooth and billboard theory. The internet was going to be a big deal for a long time to come and as the primary manufacturer of the internet’s routers, switches, and gateways, they would be able to make a lot of money for a long time. Basically, they built the only roads that mattered and were able to charge heavy tolls (leasing/selling their equipment and software) and so their high valuation was justified.
So what happened? Well the internet evolved, software requirements changed, and startup competitors arose with better hardware and better pricing. Today Cisco is worth a mere fifth of what they formerly were valued at. Despite having a near monopoly on the roads and having access to all of the traffic, they failed to realize their investors’ expectations because someone was willing to challenge the status quo and built a comparable road with fewer tollbooths and billboards. Like we so often observe, the dominant player in the market was disrupted by the scrappy startup willing to offer more at smaller margins.
Now what does this mean for CloudFlare who find themselves to be the scrappy startup trying to disrupt a huge and established industry? CloudFlare has built software and server based express lanes that promise faster loading times, greater security, at low prices. The expectation is that once they scale to a certain level, the experience will be so sticky that customers will not change routes even if a few tollbooths go up and the roads are littered with billboards. This is a dangerous expectation for sure. While Moore’s law may be slowing down as far as transistor density goes, the pace of evolution of software and internet technologies continues to accelerate at an unprecedented pace. Someone will build a better road or perhaps develop the internet equivalent to air travel and the meticulously built roads will once again lose relevance.
This post is not a criticism of CloudFlare’s business model but simply a question regarding the optimism investors place on internet infrastructure in light of rapid technological change. As an innovator in a new space, perhaps you can enjoy the luxury of charging tolls without deterring too much traffic but competition inevitably forces you to either continuously build better roads or switch to a lower margin product like billboards to retain traffic. With that in mind and using history as a proxy, I would argue that you would want to use a pretty substantial discount rate when valuing a company such as CloudFlare given the inevitability of technological disruption and internet economics.
I’m cross-posting this blog I wrote from the Launching Tech Ventures blog.
Having spent the last twelve years of my life studying and applying lean methodologies in production and corporate environments, I was surprised upon arriving at HBS that the language of Lean had become a fundamental part of entrepreneurship in this community. In a manufacturing environment, labels didn’t matter (call it Lean, Six Sigma, TPS, Continuous Improvement, HMM, etc.) and mindset was everything. At the end of the day, the goal was the relentless pursuit of eliminating waste best expressed as a “zero loss” mentality. This impossible ideal focuses an organization on profitable customer value creation above all else.
However, what I observed at times was the danger of taking process frameworks, arming people with tools and verbage, and unleashing them upon organizations. The end result is a rigid and sterile outcome that only superficially mimics the intent of the process improvement rather than genuinely applying it. For example, a workplace organization process that is often used is 5S (sorting, set in order, systematic cleaning, standardizing, and sustaining). This process has real value in many manufacturing environments where having tools, material safety sheets, emergency equipment, etc. readily and consistently available at hand is critical to operations. However, many overly enthusiastic Six Sigma black belt aspirants take this “letter of the law” approach to process tools which results in tape outlines being placed on desks for staplers which have been dutifully labelled. When you think about the dozens and dozens of process tools that exist in Lean (e.g. VSM, DMS, PBED, FI, YY, 5S) it is easy to lose sight of the proverbial forest for the acronym-filled trees.
This is the danger that I see with the Lean Startup movement. The manufacturing industry has been grappling with Lean techniques and philosophies for the better part of a century and this maturation process has resulted in dogmatic philosophies being replaced by rational and pragmatic thinking along with a healthy dose of self moderation. However, with the Lean Startup, Eric Ries has created something very dangerous. He and others like Steve Blank have codified pragmatic approaches toward efficiently building businesses, borrowed liberally from Lean methodology, created verbage around it, and let the message be spread by small armies of zealous startup people. The end result is FIELD 3. We saw 900 highly intelligent and motivated students talking about “achieving” Minimum Viable Products and congratulating each other on “pivoting”. It’s not our fault. We were led to believe that a magical formula for creating successful businesses had been discovered and we simply had to follow these simple steps to transform any marginal business idea into a runaway success.
Now I’m sure that Eric Ries, Steve Blank, and the many professors at HBS cringe each time a wantrapreneur rattles off Lean buzzwords incoherently, but the problem isn’t simply one of dilution of the Lean lexicon but of actual comprehension of the true intent of Lean philosophies.
In a nutshell, here is my take on Lean Startup:
- Does what you’re building create value for your customer? (expressed as intent, usage, engagement, and ultimately $$)
- If yes, keep doing it… and make it better (expressed as higher retention/lower churn, higher Net Promoter Score, higher willingness to pay, higher LTV, lower CAC, or higher conversion)
- If no, build something else or quit.
- What is the cheapest/easiest/quickest way to find out the answer to Question 1?
- Rinse repeat.
Compare that to my take on Lean Manufacturing:
- Does what you’re manufacturing create value for the customer? (expressed as top-line sales growth, profitability, brand equity, etc.)
- If yes, keep doing it… and make it better (remove ALL waste from the product – waste being defined as anything the customer would not pay for)
- If no, redeploy resources toward something the customer values
- What losses exist in the current process that can and should be eliminated and where can any cost savings be reinvested most efficiently? (remove ALL waste from the process – again waste being defined as anything that doesn’t add value to the customer)
- Rinse repeat.
While very similar, the distinction is that Lean Startups has a bit more of a cost-efficient slant to it versus Lean Manufacturing which has more of a process-efficient slant. That makes sense as most manufacturing organizations have financial resources that dwarf that of most startups. However, what is core to both is the customer value proposition and particularly an optimization around revealed preferences (as opposed to expressed preferences).
What’s key to note here is that Lean isn’t about simply cutting costs or being cheap but rather deploying resources ONLY in value creating ways. That is a mindset that needs to be part of The Lean Startup movement. Eric Ries cannot claim to be taking inspiration from Lean Manufacturing while simultaneously claiming that he is incorporating the Scientific Method into building businesses. Lean is certainly not a science because creating value for customers is not a science. Instead, Lean is a mentality or philosophy focused on doing things better every day (continuous improvement), aspiring for zero loss, and serving the customer. That’s exactly the things that startups should be focusing on and that’s the Lean Startup that I aspire to build.
Well it has been ages since I posted here but I just wanted to pop in really briefly to say that we launched an alpha product of Peoplematics recently. It’s a Chrome plugin that reimagines how you can search your Gmail account. It’s just a start but we’re pretty proud of it. Please check it out if you have a chance and let me know what you think!
This is an article in progress that reflects some of the things that are going through my mind as I work to build Peoplematics into an amazing software company with real impact.
I am a child of broken promises and failed expectations… and I’m not alone. Growing up a child of Baby Boomer parents, I was told that if I work hard, manage my finances frugally, and was loyal to a company, I would be able to happily raise a family with some sense of security. What I’ve found as I’ve grown up is a world that has moved on from those sensibilities and rather than looking to my generation with hope, they disparagingly label me as Generation Y, Millenial, or Echo Boomer. We have become the poster children of recklessness, selfishness, and the most damning word of them all… entitlement.
Of course each generation has always seen moral decay and the ethical destruction of society in each subsequent generation but this time it feels different. There is a greater misalignment of expectations particularly in the workforce than there ever has before. So is this post simply one more of many speaking about the betrayal of Boomers toward Millenials or alternately the abandonment of Generation X by corporations? In part yes but I believe this misalignment of expectations is more psychographic than demographic in nature and the attribution of psychographic characteristics to an individual based on the year they were born is lacking nuance and inherently flawed. Furthermore, it creates an environment where age-based prejudice becomes acceptable in the workplace when it absolutely should not be.
While many factors from upbringing, socio-economic status, personality, ethnicity, etc. can influence our behavior and our motivation, let’s look at it from a workplace standpoint. To understand what forces are shaping the workers of America today, we need to find someone who well represents their cohort. Without too much trouble, we find Michael although let’s call him Mike. Mike is a 44 year old white male who works in management. (Pretty average according to the Department of Labor Statistics.) While his father served in Vietnam and his grandfather served in WWII, Mike never served in the military. Mike was not at Woodstock (since he was 1) but he’s seen the movie.
Despite not being a part of many of the transformational events and social movements that have come to define this past century, he has seen much in his short life. It may be going too far to say that he has been damaged or traumatized by what he has experienced in the workforce, but something is keeping him up at night. It is not the indignant anger of an assembly line worker whose job is being outsourced to China nor the nostalgic platitudes of those who decry the supposed death of the middle class. Rather it is the feeling of helplessness and frustration that keeps Mike up at night. Sometimes it’s okay to be a boat adrift at sea if you know what direction you’re drifting.
So let’s briefly run down some of the more significant events that have impacted Mike’s perception of corporate life and career paths in his short life.
- 1980s – recession, supply-side economic policies, the rise of Japanese manufacturing, corporate raiders with their leveraged buyouts, and the the growing popularity of outsourcing
- 1990s – Dot-com boom and bust, NAFTA, rise of Chinese manufacturing and Indian IT
- 2000s – Enron/Worldcom/Tyco, Sarbanes-Oxley, real estate boom and bust, subprime mortgage crisis, Lehman Brothers/Bear Stearns/AIG, Bernie Madoff, TARP/Auto Industry Bailout
- 2010s – Dodd Frank Act, The Great Recession, unemployment nearing 10%
These experiences have shaped Mike’s expectations regarding his career, his security, and his future. The Greatest Generation served our country in the military and with support from the G.I. Bill, they were able to receive an education, find employment, and afford to purchase a home. Corporations such as General Electric welcomed these new employees, nurtured them within their organization, and promised them life-long careers. Mike on the other hand, grew up with these same promises but has had to face the hard reality that corporations have compromised their sense of social accountability in their desperation to compete and remain relevant in an increasingly global economy. Home ownership is a luxury now rather than an attainable right and career progression is less determined by “what have you done for the company throughout your career” to “what have you done for the company this past fiscal quarter.” Underfunded retirement accounts, uncertainty around Social Security, and corporate malfeasance has made Mike wish he had simply stuffed his savings under his mattress. For the first time in American history, Mike and his generation (Gen X) may actually make less than their parents. Mike is playing the role of a corporate Sisyphus toiling to roll a boulder uphill only to have it roll back down forever.
Now in the midst of this rather depressing scene, we see the wonderful evolution of the American worker. This new American worker will transform the entire working landscape and serve as a forcing function that will distinguish superior companies from the marginal ones. Whether they are Boomers, Gen Xers, or Millenials, people have started taking control of their careers in a powerful new way. Actually that last sentence is poorly worded. People will start taking control of their working life in a powerful new way. The career, ideologically speaking, is dead.
The number of jobs an individual has in their lives will most likely remain constant as we go forward at around 11 but the concept of what makes up a “career” has fundamentally shifted. Careers were once thought to be a linear progression and at some point in the 80s and 90s, this shifted to a more binary understanding where a person was expected to start and stop multiple “careers” throughout their lives. Today, the path toward some particular life goal or milestone of personal accomplishment is far more varied and discrete. We have all been counseled our entire lives that the journey matters more than the destination and it appears that more and more people are taking that to heart than ever before. What matters more and more is the concept of fulfillment for the individual. Some may call this selfishness or entitlement but I’d like to argue that it is simply a rational shift in priorities given the new employment landscape. No longer is it acceptable to endure work as an investment toward the potential of some far off future role that increasingly has become less attainable. Rather, the priority is twofold: development and optionality. Employees want to develop their skills, capabilities, and knowledge today in every role. In turn the hope is that this will lead to greater options in the future and the personal freedom to seek, find, and choose the right path for themselves.
So what does this mean for all the businesses out there that are experiencing this shift in employee mindset? It means that life will get much more challenging and competitive from a talent retention standpoint as well as from a business continuity standpoint. Candidates for open positions will have increasingly diverse and non-traditional backgrounds, individuals will assess and accept roles based on their ability to thrive and be successful in that particular role, and they will consider the optics of a particular role from a future optionality standpoint.
Taking all of this into consideration, employers who are able to minimize friction in these workplace transitions will have a significant competitive advantage. How can they do this? Mentorship, thoughtful training, and aligning roles with employees’ personal passions can go a long way but they also cannot fail to ignore the actual mechanics of the transition. A common statistic in HR circles is that it takes a new employee 6-9 months to regain the productivity lost in the transition and the cost of employee turnover is around 1.5 times an employee’s annual salary. This dynamic for most professions is not one caused by a lack of training or technical skills but rather the difficulty in teaching someone how to form that relationship network necessary to succeed within organizations. The future will not tolerate such a significant waste of time/energy/money. Life is far too exciting to spend the better part of a year struggling to keep your head above water and feeling the insecurity and self-doubt that comes with underperformance.
We are all learning the power of social networks in our personal lives but it’s time to distill that down to something meaningful and apply it to the one area of our lives where we devote the most time: our work. Technology has marvelously increased the number of people who we can work and collaborate with but it’s time to close that loop. In our excitement to connect with more and more people, we can’t forget that all of that will be for naught unless we can learn how to really connect with people and form meaningful relationships that matter. Perhaps that is the real future of the Enterprise 2.0 software movement. Enterprise software up to this point has enabled connectedness at a cost of actually increasing workplace friction. Using Sharepoint, SAP, or Oracle software to name just a few of the many entrenched enterprise software “solutions” are daily struggles for many of us. I believe the de-evolution of software will change the enterprise in the same way that lightweight mobile applications have changed the consumer software space.
The trend with software is moving from feature-rich software solutions that attempt to do everything to focused software that is both intuitive to use and where the value proposition resonates deeply with each user. 37 signals has been a long-time champion of this software movement and newer entrants such as Yammer and Asana are also embracing this philosophy. In an enterprise landscape filled with huge players and amazing amounts of IT bureaucracy, it is heartening to see the whispers of the the common employees crescendoing into a deafening plea. Beautiful software that reduces friction in the workplace is coming… and it’s going to change everything.
Do you remember that post awhile back where I said that I was getting good at saying no? Well, I lied. I’ve just accepted the position of Publisher for The Harbus (HBS student paper). I’m excited about the challenge of running a paper that serves a specific community (HBS students) but at the same time creating content that resonates with people around the world. There are also challenges in managing operational strategies for both old media (printed news) and new media (digital strategy) concurrently. Fortunately, the old Harbus team has really set us up for success. They have done an amazing job this year and it’s been my pleasure working with them.
Of course this means that I will be running a paper and working on a business while continuing to engage in my classes and spend time with my wife. I can handle it only because of the caliber of those around me (my wife, my team, my co-founders, etc.) Also, coming from large organizations, I will definitely learn a lot about managing a small entrepreneurial team at the Harbus, having PNL responsibility, reporting to a board of directors, and using data (both online and offline) to drive good strategic decisions. It definitely will be a great challenge and learning opportunity for me. Wish me luck!
The idea behind an MVP is to find ways to quickly and cheaply test a hypothesis around a particular business idea so that you can learn and iterate. The goal is to not waste time putting efforts into non-value added work and failing quickly if necessary to move you quicker toward your goal of finding a valid business model and product-market fit. This is a methodology inspired by Lean Manufacturing and turned into a startup framework by Eric Ries (check out his awesome The Lean Startup book).
With this in mind, a good friend and I are in the process of starting a software company called Peoplematics. We applied to HBS’ MVP Award competition and we are fortunate to have been one of the winners of this award. It provides some small amount of money with which we can advance our understanding of the viability of our proposed business and more importantly, we get to work with some exceptional mentors who are leaders at various venture capital firms. I can’t wait to talk more about this but we’ve been working hard at this and I really think we can create something that will add crazy amounts of value to businesses and to people in general.
Here’s my latest article in the Harbus. There’s also a lot of fun stuff going on with my startup Peoplematics but I’ll talk more about that soon!
For most of my adult life, I’ve been considered “the kid.” Whether it was as a manager leading older people or as a kayak instructor teaching students who were my parents’ age, I was always conspicuously young. And yet, here at HBS, at the sprightly young age of 30, I find that I have been relegated to play the role of the cranky old guy shaking his fist at the neighborhood kids. Fortunately I’m not alone. There are at least a handful of classmates who can wax nostalgically with me about pagers, life before the internet, and Depeche Mode. An even larger number of classmates share with me the experience of having a spouse on campus, which has both changed and enriched my time here at HBS.
So what’s so great about being old and married at college?
Well, to start, I know what I want to be when I grow up… since I’m already grown up. Without the luxury of time, I’ve made the choice to ignore transitory jobs such as consulting and just go out and do what I’m meant to do. I’m not looking for a job after school, but rather a career. Currently, all signs are pointing toward starting a business of my own immediately upon graduation. Another benefit of being old is that I have many years of experience to draw from for our daily case discussions. While my atrophied brain can’t handle adding two numbers together, I can ramble on for hours about what I did “back in the day.”
Even better than being old is being married. While my wife is now working full-time, I really enjoyed having lunch with her each day when she was still at home. I haven’t experienced any homesickness for the Midwest since home came with me. Also, I’m thrilled that I get to avoid trying to date at b-school. I’ve never been so busy in my life and I can’t imagine trying to juggle the ups and downs of a new relationship while going through all of this. My wife also keeps me grounded. Dropping the H-bomb has no effect on her and in her warm and funny way, she reminds me on a daily basis that I’m not that smart. Plus, as the person who encouraged me to go back to school, I owe her every minute of every day I spend here.
Yes, I’m now sore for days after playing tennis. Yes, I have to skip section events at times to spend time with my wife. Yes, traveling and going to any events cost double. And yes, I’m willing to be extorted by HRES to pay for a slightly larger closet… I mean apartment for us to live in, but it’s all worth it and I wouldn’t have it any other way.
While I’ve definitely been catching up on sleep these last couple of weeks following an exhausting first semester, in the back of my mind, I’ve been really curious/excited/nervous about the upcoming FIELD trip abroad. For my part, I’m heading to India (Mumbai and Dehli) later today and I just realized this morning that I didn’t have my schedule straight so I still need to book a hotel for at least one night in Mumbai. I’ll be gone for 2 weeks and my team is helping a large retailer develop an online grocery service. I still need to pack, do laundry, tidy up my apartment, etc. While I’ve been to Europe a couple times, this will be my first trip to Asia and I’m really dreading the 24+ hours of traveling ahead of me. I’m sure HBS will take great care of us and I’m excited to be immersed in a new culture but just the thought of the travel seems exhausting. Hopefully I’ll have more to report from India and when I get back, I promise to post updates on how my work on my startup is going. :)
Here’s a pretty good article on the trip for those who are curious.
Sorry for not being able to update this for awhile. It’s been a crazy ride both academically as well as professionally over these last couple of months. While I haven’t been formally recruiting, since I’ve devoted myself to go down the entrepreneurial path, I’ve been working on that every spare moment that I have. It’s exciting, scary, fun, scary, tumultuous, and scary. I have finals coming up in a week or so, I have my FIELD study trip to Mumbai to prepare for, and meanwhile, I’m meeting with alumni and entrepreneurs to get feedback on an idea that I’m working on. Good times.
I did have a chance to write a couple articles for the Harbus (our school paper) and most recently I got the opportunity to take the CON position on the Occupy Harvard movement. A couple guys from Harvard Kennedy School took the PRO position. Here’s the article for your reading enjoyment.