July 2023 - The Myth of Capitalism by Jonathan Tepper with Denise Hearn

We learn about the fun history of many monopolies and anti-trust! While I can’t recommend this book because its long and poorly written, it does reasonably critique aspects of antitrust and monopoly formation. Its repetitive and so aggressively one-sided that it loses credibility. The fact that the author used to advise and now runs a hedge fund that owns monopoly businesses tells you all you need to know.

Tech Themes

1. Consumer Welfare. Tepper’s fundamental argument is that since the 1980s, driven by Regan’s deregulation push, the government has allowed corporate mergers and abuses of market power, leading to more market concentration, higher prices, greater inequality, worse worker conditions, and stymied innovation. Influenced by the Chicago School’s free market ideas and Robert Bork’s popular 1978 book Antitrust Paradox, the standard for antitrust enforcement morphed from breaking up market-abusing companies to “consumer welfare.” With this shift, antitrust enforcement became: “Does this harm the consumer?” A lot of things do not harm consumers. Broadcast Music, Inc. v. CBS, Inc. (1979) is widely regarded as one of the first antitrust cases that shifted the Rule of reason towards consumer welfare. CBS had sued Broadcast Music, alleging that blanket licenses constituted price fixing. Broadcast Music represented copyright holders and would grant licenses to media companies to use artist’s music on air. These deals were negotiated on behalf of many artists, and did not allow CBS to negotiate for selected works. The court sided with BMI because the blanket license process was simpler, lowered transaction costs by reducing the number of negotiations, and allowed broadcasters greater access to works. They even admitted that the blanket license may be a form of price setting, but concluded that it didn’t necessarily harm consumers and was more efficient, so they allowed it. The consumer welfare ideology has recently come under fire around the big tech companies - Apple, Microsoft, Google, Meta, and Amazon. Lina Khan, Commissioner of the Federal Trade Commission (FTC) wrote a powerful and aptly titled article, Amazon’s Antitrust Paradox, highlighting why in her view consumer welfare was not a strong enough stance on antitrust. “This Note argues that the current framework in antitrust—specifically its pegging competition to “consumer welfare,” defined as short-term price effects—is unequipped to capture the architecture of market power in the modern economy.” The note argues that Amazon’s willingness to offer unsustainably low prices and their role as a marketplace platform and a seller on that marketplace allow it crush competition. Google is currently being sued by the Department of Justice over illegal monopolization of adtech and its dominance in the search engine market. The government is attempting to shift antitrust back to a more aggressive approach regarding monopolistic behavior. From a consumer welfare perspective, there is no doubt that all of these companies have created situations that benefit consumers (“free” services, low prices) and hurt competition. The question is: “Is it illegal?”

2. The ACTs - Sherman and Clayton. The Sherman Antitrust Act, passed in 1890, was the first major federal law aimed at curbing monopolies and promoting competition. The late 19th century, often referred to as the Gilded Age, saw the rise of powerful industrialists like J.P. Morgan, John D. Rockefeller, and Cornelius Vanderbilt, whose massive corporations threatened to dominate key sectors of the economy. Public outcry over the potential for these monopolies to stifle competition and exploit consumers led to the passage of the Sherman Act. Senator John Sherman, intended the law to protect the public from the negative consequences of concentrated economic power. The Sherman Act broadly prohibited anticompetitive agreements and monopolization, empowering the government to break up monopolies and prevent practices that restrained trade. However, the Sherman Act's broad language left it open to interpretation, and its early enforcement was inconsistent. President Theodore Roosevelt, a proponent of trust-busting, used the Sherman Act to challenge powerful monopolies, such as the Northern Securities Company, a railroad conglomerate controlled by J.P. Morgan. The Supreme Court's decision in the Standard Oil case in 1911 further shaped the interpretation of the Sherman Act, establishing the "rule of reason" as the standard for evaluating antitrust violations. This meant that not all restraints of trade were illegal, only those that were deemed "unreasonable" in their impact on competition. The Clayton Antitrust Act, passed in 1914, was designed to strengthen and clarify the Sherman Act. It specifically targeted practices not explicitly covered by the Sherman Act, such as mergers and acquisitions that could lessen competition, price discrimination, and interlocking directorates. The Clayton Act also sought to protect labor unions, which had been subject to antitrust prosecution under the Sherman Act. The passage of these acts led to a wave of significant antitrust cases. Prominent examples include: United States v. American Tobacco Co. (1911): This case resulted in the breakup of the American Tobacco Company, a dominant force in the tobacco industry, demonstrating the government's commitment to using antitrust laws to dismantle powerful monopolies. United States v. Paramount Pictures, Inc. (1948): This case challenged the vertical integration of the film industry, where major studios controlled production, distribution, and exhibition. The court's decision led to significant changes in the industry's structure. United States v. AT&T Co. (1982): This landmark case resulted in the breakup of AT&T, a telecommunications giant, into smaller, regional companies. This case marked a major victory for antitrust enforcement and had a lasting impact on the telecommunications industry.

3. Microsoft. The Microsoft antitrust case, initiated in October 1998, saw the U.S. government accusing Microsoft of abusing its monopoly power in the personal computer operating systems market. The government, represented by David Boies (yes, Theranos David Boies), argued that Microsoft, led by Bill Gates, had engaged in anti-competitive practices to stifle competition, particularly in the web browser market. Gates was famously deposed and shockingly (not really) came away from the deposition looking like an asshole. The government alleged that Microsoft violated the Sherman Act by: Bundling its Internet Explorer (IE) web browser with its Windows operating system, thereby hindering competing browsers like Netscape Navigator, manipulating application programming interfaces to favor IE, and enforcing restrictive licensing agreements with original equipment manufacturers, compelling them to include IE with Windows. Judge Thomas Jackson presided over the case at the United States District Court for the District of Columbia. In 1999, he ruled in favor of the government, finding that Microsoft held a monopoly and had acted to maintain it. He ordered Microsoft to be split into two units, one for operating systems and the other for software components. Microsoft appealed the decision. The Appeals Court overturned the breakup order, partly due to Judge Jackson's inappropriate discussions with the media. While upholding the finding of Microsoft's monopolistic practices, the court deemed traditional antitrust analysis unsuitable for software issues. The case was remanded to Judge Colleen Kollar-Kotelly, and ultimately, a settlement was reached in 2001. The settlement mandated Microsoft to share its application programming interfaces with third-party companies and grant a panel access to its systems for compliance monitoring. However, it did not require Microsoft to change its code or bar future software bundling with Windows. This led to criticism that the settlement was inadequate in curbing Microsoft's anti-competitive behavior. History doesn’t repeat itself, but it does rhyme and Microsoft is doing the exact same bundling strategy again with its Teams app.

Business Themes

1. Monopoly Markets. Tepper lays out all of the markets that he believes are monopoly, duopoly, or oligopoly markets. Cable/high speed internet (Comcast, Verizon, AT&T, Charter (Spectrum)) - pretty much the same, Computer Operating Systems (Microsoft) - pretty much the same but iOS and Linux are probably bigger, Social Networks (Facebook with 75% share). Since then Tiktok, Twitter, Pinterest, and Snap have all put a small dent in Facebook’s share. Search (Google), Milk (Dean Foods), Railroads (BNSF, NSC, CSX, Union Pacific, Kansas City Southern), Seeds (Bayer/Monsanto, Syngenta/ChemChina, Dow/DuPont), Microprocessors (Intel 80%, AMD 20%), Funeral Homes (Service Corporation International) all join the monopoly club. The duopoly club consists of Payment Systems (Visa, Mastercard), Beer (AB Inbev, Heineken), Phone Operating Systems (iOS, Android), Online Advertising (Google, Facebook), Kidney Dialysis (DaVita), and Glasses (Luxottica). The oligopoly club is Credit Reporting Bureaus (Transunion, Experian, FICO), Tax Preparation (H&R Block, Intuit), Airlines (American, Delta, United, Southwest, Alaska), Phone Companies (Verizon, Sprint, T-Mobile, AT&T), Banks (JP Morgan Chase, Bank of America, Citigroup, Wells Fargo), Health Insurance (UnitedHealthcare, Centene, Humana, Aetna), Medical Care (HCA, Encompass, Ascension, Universal Health), Group Purchasing Organizations (Vizient, Premier, HealthTrust, Intaler), Pharmacy Benefit Managers (Express Scripts, CVS Caremark, Optum/UnitedHealthcare), Drug Wholesalers (Cencora, McKesson, Cardinal Health), Agriculture (ADM, Bunge, Cargill, Louis Dreyfus), Media (Walt Disney, Time Warner, CBS, Viacom, NBC Universal, News Corp), Title Insurance (Fidelity National, First American, Stewart, and Old Republic). Since the book was published in 2018, there has been even more consolidation - Canadian Pacific bought Kansas City Southern for $31B, Essilor merged with Luxottica in 2018 in a $49B deal, Sprint merged with T-Mobile in a $26B deal, and CBS and Viacom merged in a $30B deal. Tepper’s anger towards lackadaisical enforcement of antitrust is palpable. He encourages greater antitrust speed and transparency, the unwinding of now clear market consolidating mergers, and the breakup of local monopolies.

2. Conglomeration and De-Conglomeration. Market Concentration. The conglomerate boom, primarily occurring in the 1960s, saw a surge in the formation of large corporations encompassing diverse, often unrelated businesses. This era was fueled by low interest rates and a fluctuating stock market, creating favorable conditions for leveraged buyouts. A key driver of this trend was the Celler-Kefauver Act of 1950, which, by prohibiting companies from acquiring their competitors or suppliers, pushed them towards diversification through acquiring businesses in unrelated fields. The prevailing motive was to achieve rapid growth, even if it meant prioritizing revenue growth over profit growth. Conglomerates were seen as a means to mitigate risk through diversification and achieve operational economies of scale. Many conglomerates formed that operated across completely different industries: Gulf and Western (Paramount Pictures, Simon & Schuster, Sega, Madison Square Garden), ITT (Telephone companies, Avis, Wonder Bread, Hartford Insurance, and Sheraton), and Henry Singleton’s Teledyne. However, the conglomerate era ultimately waned. The government took a more proactive approach to acquisitions in the late 1960s, curbing the aggressive approaches. The FTC sued Proctor & Gamble over its potential acquisition of Clorox and merger guidelines were revised in 1968, setting out more rules against market share and concentration. Rising interest rates in the 1970s strained these sprawling enterprises, forcing them to divest many of their acquisitions. The belief in the inherent efficiency of conglomerates was challenged as businesses increasingly favored specialization over sprawling, unwieldy structures. The concept of synergy, once touted as a key advantage of conglomerates, came under scrutiny. Ultimately, the conglomerate era was marked by performance dilution, value erosion, and the realization that strong performance in one business did not guarantee success in unrelated sectors.

3. Industry Concentration. A central pillar to Tepper’s argument that the capitalism game isn’t being played fairly or appropriately, is that rising industry concentration is worrisome and indicative of a broken market system. He uses the Herfindahl-Hirschman Index (HHI) to discuss levels of industry concentration. According to the Antitrust Division at the DOJ: “The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30, 30, 20, and 20 percent, the HHI is 2,600 (302 + 302 + 202 + 202 = 2,600). The agencies generally consider markets in which the HHI is between 1,000 and 1,800 points to be moderately concentrated, and consider markets in which the HHI is in excess of 1,800 points to be highly concentrated.” The HHI index is relatively straightforward to calculate. It can be a quick test to see if a potential merger creates a more significantly concentrated market. However, it still falls prey to some issues. For example, market definitions are extremely important in antitrust cases and a poorly or narrowly defined market can cause the HHI to look overly concentrated. In the ongoing Kroger-Albertson’s Merger case, the FTC is proposing a somewhat narrow definition of supermarkets, which excludes large supermarket players like Walmart, Costco, Aldi, and Whole Foods. If Whole Foods isn’t a super market, I’m not sure what is. And sure, maybe they narrowly define the market because Kroger and Albertsons serve a particular niche where substitutes are not easily available. Whole Foods may be more expensive, Aldi may have limited assortment, and Costco portion sizes may be too big. However, if you have a market that has Kroger, Walmart, Costco, Aldi, and Whole Foods serving a reasonable size population, I can almost guarantee the prices are likely to remain competitive. In some cases, high industry concentration does not mean monopolistic behavior. However, it can lead to monopolistic or monopsonistic behavior including: higher prices, lower worker’s wages, lower growth, and greater inequality.

   Dig Deeper

• Microsoft Volume II: The Complete History and Strategy of the Ballmer Years

• Lecture Antitrust 1 Rise of Standard Oil | Walter Isaacson

• Anti-Monopoly Timeline

• How Xerox Lost Half its Market Share

• (Anti)Trust Issues: Harvard Law Bulletin

December 2022 - We Are Legion (We Are Bob) by Dennis E. Taylor

This month we take a view into the future to see what a futuristic society full of AI, 5G, and easy space travel.

Tech Themes

1. Artificial General Intelligence. One of the most significant technological themes in the book is the development of AGI. Exhibiting artificial general intelligence would mean a computer could perform any task that humans could perform. While this is the ultimate vision of the AI hypetrain, there remains a big gap even between current iterations of GPT-4 and AGI. While Bob is able to seamlessly create VR experiences, recognize missles in flight, and upgrade himself, the world of computing today lacks the technology to fit all of these things into a sentient program. A 2019 article hypothesized by 2060 that we’d have full AGI. Other predictions suggest its 200 years away. It is still early days in the world of AGI, and there needs to be a lot more innovation before we get full AGI.

2. Programs Programming Programs. In the book, Taylor explores the concept of self-programmability when Bob discovers he can rewrite portions of his own code. Bob begins to set up virtual reality simulations for himself, complete with a cat, virtual baseball, and a butler. These VR “home” simulations offer a sense of normalcy that Bob dearly misses after reawakening as an AI. Later, Bob realizes that he is able to replicate his code. Code replication is similar to a type of AI called, Genetic Computing. In Genetic Computing, a program models the reproduction of a population based on a fitness measure and a mutation rate. When Bob replicates himself, he notices that each new Bob has a slightly different personality that all stem from his original personality. These personality changes make some replicants better suited for exploration vs. war vs. maintenance, which could be seen as their individual fitness functions. Genetic algorithms can be used to solve a whole host of machine learning and computing programs.

3. Technology and Emotion. Before he was killed in a car crash, Bob had sold his successful software company, netting him millions. With the extra money he paid the cryogenic service that would preserve his mind in the event something bad happened to him. After his death, Bob is awoken as an artificial intelligence. Similar to Ender’s Game, he finds himself being trained for an unknown objective, although he quickly understands its military related. Over time he becomes aware that other AI’s are going crazy and discovers that when left alone to process their fate as a war-faring AI, many become immensely depressed. Bob recognizes the immensity of time as a computer, with a clock that can work at the nano-second level. This theme raises important ethical questions about the implications of creating self-aware machines, notably the mental health consequences of inventing self-aware machines that experience the world differently than humans do.Therefore time feels extended beyond comprehension. After a while, Bob discovers an endocrine switch that overrides emotion. He’s curious about its function and switches it on, and immediately becomes overwhelmed with emotions: “You know that sinking feeling you get when you suddenly realize you’ve forgotten something important. Like a combination of fast elevator and urge to hurl. It hit me without any warning or buildup. Maybe it was the sudden release, maybe it was an accumulation of all the suppressed emotions, whatever, I wasn’t ready for the intensity. My thoughts swirled with all the thing that had been bugging me since I woke up…I mourned my lost life. I was still human in the ways that mattered.” Emotion and technology are often thought of as opposite ends of the spectrum, but they are more intertwined then people imagine.

Business Themes

1. Government and AI Future. Another business theme explored in the book is the power and influence of corporations. In the story, Bob's actions and the emergence of AI have a significant impact on the economy, politics, and society. This theme raises questions about the ethics of corporate power and the need for regulation to ensure that technology is used in ways that benefit society as a whole. For example, Bob is controlled by a religious government entity called FAITH, the Free American Independent Theocratic Hegemony, which is led by Christian Fundamentalists. While Taylor’s expression of a future whereby Christian Fundamentalists control the government is a commentary on an increasingly co-mingled church and state environment in the US, it also begs the question about control over AI. In China, the government has a front row seat and access to all potential AI innovations. In the US, a lot of these innovations are controlled by corporations, who will obviously work with the government but who do not necessarily need to sell to the government. At the same time, it would be difficult to envision how the American government would repossess or control all AI developments of underlying corporations. There is still a lot to be figured out between industries and government’s when it comes to AI innovation.

2. Space business. The book also explores the intersection of technology and business, specifically in the context of space exploration and colonization. Amazon's Kuiper and SpaceX's Starlink are two examples of companies that are driving innovation in this field. These satellite constellations have the potential to revolutionize industries such as agriculture, mining, and energy, by enabling real-time data analytics and remote control of machinery. The book touches on this theme with Bob's use of satellite constellations for communication and coordination in his efforts to explore and colonize new worlds. For example, the book explores the potential consequences of corporate control over space resources, highlighting the importance of ethical guidelines to ensure the equitable distribution of resources. Bob, who is a FAITH probe, fights China, the Australian Federation, and the Brazilian Empire over control of vast new space worlds. In the real world, people are beginning to question the value of these new constellation space businesses. A recent publication at Bernstein research noted: “Project Kuiper appears even more extreme as an investment area with $10B+ already committed. Perhaps there’s a lesson here from Google shutting Loon and stagnant Fiber and Fi businesses, that capital intensive low-margin utilities aren’t worth the effort regardless of how ‘cool’ the technology may be.” The durability of a real, sustainable business model has always been a question for Space focused businesses. As we learned from Carlota Perez’s Technology Revolutions and Financial Capital, the early establishers of infrastructure can either reap windfalls (railroads, steel) or face severe competition (telecom) which drives returns negative. I am skeptical that Kuiper or Starlink have a large enough market to create substantially large businesses that cover the cost of the capital expenditure involved in launching and maintaining the satellites. That being said, I think both organizations will probably learn a lot about space in the process, so should it ever become economically feasible, they would be ready to pounce (if they still exist).

3. 3D Printing and The Food Question. Bob uses 3D printing technology to replicate himself into new versions with longer and larger appendages. “The area was a beehive of activity. Five version two HEAVEN vessels were under construction. One of which was a trade up from me. The new designs included a bigger reactor and drive, a rail gun, storage and launch facilities for busters, replicant systems with twice the capacity of version one, more room for storing roamers and mining drones, and more cargo capacity in general. The manufacturing systems cranked out parts as fast as the roamers could feed in the raw ore.” Bob creates many many roamers, which he uses in all sorts of ways, as drones, analyzers, and crafters. The plurality of use cases has always been the pitch for 3D computing, however, the businesses involved such as Desktop Metal or 3D Systems have struggeld to really hit mass consumer adoption. Today, it is still too hard for the average non AGI person to build things with a 3D printer, and most jobs are left to seasoned professionals. As the newly created Bob replicant’s peruse the universe for new worlds, original Bob sticks behind to help determine the fate of people on earth. One of the big challenges facing Bob is finding enough food for the world’s population while it is in transit to a new world. This situation is reminiscent of Wall-E, where the entire population of earth leaves after a nuclear attack. Food insecurity, or lacking access to quality food, is a global question, with estimates of over 345 million people facing high levels of food insecurity in 2023. In the US, about 10% of the population or 13.8 million households had low or very low food security. The question is complicated by the cost of sustainable farming, the role that farming and food play in greenhouse gas emissions, and how to use land with a growing population. Bob ulitmately decides to build a farm on a spaceship, which is reminiscent of the vertical farming craze that came through Ag-Tech around 2016-17. Three vertical farming businesses: Aerofarms, Kalera, and NL have gone bankrupt this week, after failing to find a financial sustainable business model. Its still early days in the world of alternative foods and new farming techniques, but we need to figure them out before the world population hits 10B in 2050.

   Dig Deeper

• OpenAI CEO: When will AGI arrive? | Sam Altman and Lex Fridman

• Starlink 2 months later ... in a 2min review ✌️

• We are Legion (We are Bob) | Dennis E. Taylor | Talks at Google

• What Is 3D Printing and How Does It Work? | Mashable Explains

• What is Sustainable Agriculture? Episode 1: A Whole-Farm Approach to Sustainability

July 2022 - Deep Work: Rules for Focused Success in a Distracted World

This month we learn about the explore popular productivity book Deep Work, by Cal Newport, a professor of theoretical computer science at Georgetown.

Tech Themes

1. Deep vs. Shallow. Just like Lady Gaga and Bradley Cooper, we, too, are trying to avoid the shallow. Newport starts his book with an overview of Deep Work compared to Shallow Work. Deep Work is focused, undistracted efforts at achieving the peak of your abilities. On the other hand, Shallow Work includes small, logistical tasks that the brain does not need to be entirely active to solve. Newport argues that more time should be spent in Deep mode. It leads to greater productivity and offers a way for individuals to differentiate themselves with the quality of work they do. In Newport's mind, the distracted Tiktok-obsessed world we currently inhabit is only getting more Shallow, so embracing Deep Work is the only way to survive. Shallow Work tends to involve lots of context switching from Task A to Task B. When this context-switching is repeated incessantly throughout the day, our ability to focus on anything diminishes, and we can end up in a permanent state of shallowness.

2. Deep Styles. Newport believes there are four core styles of Deep Work: Monastic, Bi-modal, Rhythmic, and Journalistic. The Monastic philosophy of Deep Work tries to completely eliminate all distractions. An example of Monastic Deep Work is famed computer science professor and Turing award winner Donald Knuth. Knuth does not have an email address. As he explains: "I have been a happy man ever since January 1, 1990, when I no longer had an email address. I'd used email since about 1975, and it seems to me that 15 years of email is plenty for one lifetime. Email is a wonderful thing for people whose role in life is to be on top of things. But not for me; my role is to be on the bottom of things. What I do takes long hours of studying and uninterruptible concentration. I try to learn certain areas of computer science exhaustively; then I try to digest that knowledge into a form that is accessible to people who don't have time for such study. On the other hand, I need to communicate with thousands of people all over the world as I write my books. I also want to be responsive to the people who read those books and have questions or comments. My goal is to do this communication efficiently, in batch mode --- like, one day every six months." Clearly, the monastic state tries to maximize deep work by shutting everything else out. The Bi-Modal philosophy asks the studier to program stretches of life wholly dedicated to Deep Work. Newport uses famous Penn psychology professor Adam Grant, as an example. Grant batches all of his teaching in the fall and all of his research in the spring. This schedule allows him to flip between modes into excellent-teacher Adam and excellent-researcher Adam. In these states, he's entirely dedicated to being the best at each subdomain, providing simplicity, clarity, and purpose to his routines and focus. Rhythmic philosophy entails finding certain times of day to work in stretches of Deep Work. This approach is the most accessible style of Deep Work for people who don't control their schedules. Newport recommends you plan out a week's worth of Deep Work in regular chunks to establish a routine for getting your mind ready to "Go Deep." The last Deep Work mode, the Journalistic philosophy, may be the most challenging style but can have incredibly intense effects. Newport gives Walter Issacson as an example here: "It was always amazing … he could retreat up to the bedroom for a while, when the rest of us were chilling on the patio or whatever, to work on his book … he'd go up for twenty minutes or an hour, we'd hear the typewriter pounding, then he'd come down as relaxed as the rest of us … the work never seemed to faze him, he just happily went up to work when he had the spare time." Find a philosophy that works for your current work structure!

3. Busyness != Productivity. In today's corporate world, many people equate busyness with productivity. Have I been sending and receiving emails all day? Have I been in meetings? Have I completed five zoom calls? These all feel vaguely productive, or maybe they don't. But either way, they take up large portions of our day. One only has to look at the hilarious new trend of young employees at mega-tech companies posting about their busy days doing what amounts to 3 hours of work while being spoiled by ridiculous offices and employee perks. Maybe this is why Facebook and Google have recently publicly told employees that their organizations are not very productive. Zuckerberg went as far as to say: "Realistically, there are probably a bunch of people at the company who shouldn't be here." Sundar Pichai created a "Simplicity Sprint "week to identify ways to make Google's 174,000 employees more productive. The world may be in for a more focused, intensely productive time with an imminent recession looming. Maybe that is why so many great companies are borne out of times of trouble?

Business Themes

1. Think Weeks and Unconcious Processing. Bill Gates is famous for taking two weeks a year completely off to set new directives for his life and professional work. We covered this in our June 2021 book regarding information overload in investing. Newport definitely likes the idea of Think Weeks - encouraging people to find separate locations from home or work to build creative momentum for the week. Individuals can also take some grand action, like traveling to a remote place or paying a significant sum for specialized accommodation to signal the importance of the work they are about to attempt. Newport also dives into the idea of unconscious processing or a work shutdown. Newport argues that downtime aids insights, helps recharge the energy needed to work deeply, and pushes us to focus only on necessary things (i.e. that nighttime email responses are usually not super important).

2. Four Disciplines of Execution (4DX). To help people in their Deep Work journies, Newport introduces us to the Four Disciplines of Execution (4DX), a framework created by the FranklinCovey company for helping companies work better. FranklinCovey is the business associated with Stephen Covey, and his highly successful 7 habits of Successful People and First Things First. His son Sean Covey, wrote and popularized 4DX. The four disciplines espoused by the framework are: (1) Focus on the Wildly Important, (2) Act on Lead Measures, (3) Keep a Compelling Scoreboard, and (4) Create a Cadence of Accountability. Clearly, the first discipline focuses on identifying the significant goals we want to achieve. The second discipline is a bit more nuanced and prompts us to think more about the inputs to success rather than the success itself. As an example, a company might have a revenue target for the year, but that target could be broken down into simple actions by the sales team to reach out to customers, understand use cases, and position the company's product to help. Discipline 2 argues that we should focus on these leading indicators of success rather than revenue achievement itself. The third discipline is about creating consistency and identifying success. Jerry Seinfeld offers a great example of this practice: "He [Jerry Seinfeld] told me to get a big wall calendar that has a whole year on one page and hang it on a prominent wall. The next step was to get a big red magic marker. He said for each day that I do my task of writing, I get to put a big red X over that day. 'After a few days you'll have a chain. Just keep at it and the chain will grow longer every day. You'll like seeing that chain, especially when you get a few weeks under your belt. Your only job next is to not break the chain.' 'Don't break the chain,' he said again for emphasis." This advice likely explains the phenomenon of maintaining Snapchat streaks at all costs. The fourth discipline is about establishing accountability for achieving the goals set out during the previous week. FranklinCovey insists that you hold yourself accountable each week. Hopefully, all that's needed is a 15-minute scheduled window to see your progress. The 4DX method is straightforward, clear, and helpful for executing any goal.

3. Amp it Up. In the spirit of next month's TBOTM, let's talk about amping up the intensity of our Deep Work. Newport discusses the early and incredible success of Teddy Roosevelt in what seemed like everything he tried. As one blogger notes: "While at Harvard, TR developed an intense study or "deep work" attitude. He would schedule every minute of his day including every activity, meal breaks, and classes. Any "spare time" was slated for study - study that did not include daydreams, sips of tea or any sign of indecision. He focused, without breaks, an intense frenzy of concentrated energy." As BusinessInsider notes, the way to incorporate this into our lives is by: "Newport says one way to incorporate rewarding deep work into your life is 'to inject the occasional dash of Rooseveltian intensity into your own workday.' This entails selecting a high-priority task, estimating how much time it would normally take you, and then creating a deadline well below the typical allotted time." Newport, a theoretical computer scientist, has a formula for how to describe this strategy: Quality Work (QW) = time Spent x Intensity. Quality work therefore does not always need to be achieved through laboring hours but can instead be supplemented with blistering intensity and focus. How do you achieve this superior intensity? There is no theory for becoming a more intense worker, but Newport believes that work intensity is a muscle that can be honed over time with more and more efforts of intense, Deep Work.

Dig Deeper

• Cal Newport Explains Deep Work

• Walter Isaacson | Full Address and Q&A | Oxford Union Web Series

• Donald Knuth - My advice to young people (93/97)

• The surprising habits of original thinkers | Adam Grant

• Jerry Seinfeld — A Comedy Legend’s Systems, Routines, and Methods for Success | The Tim Ferriss Show

June 2022 - Whistleblower: My Journey to Silicon Valley and Fight For Justice at Uber by Susan Fowler

This month we learn about the crazy culture at Uber and how it perpetrated repeated discrimination against groups of people, until someone did something about it. Then Susan Fowler - a software engineer at Uber, put pen to paper on a seminal blog post that upended Uber and the world.

Tech Themes

1. Software Engineering Diversity. Diversity has been a challenge for technology companies, despite overwhelming rhetoric about its importance. A 2022 report by Celential.ai highlighted that only 21% of software engineers are women. More concerning, is that this percentage has been falling in recent years, with zippia estimating that the percentage of female software engineers was closer to ~31% in 2011. Susan Fowler experienced this sad statistic multiple times - when she joined Plaid, a fintech startup with 13 employees, there were only two women. After switching to the networking startup, Pubnub, Fowler found herself the only woman on the engineering team, which was made worse by her boss who was “openly, unabashedly sexist.” So Fowler was very excited when her interviewer at Uber noted: “Twenty-five percent of our engineers are women.” But that joy was short-lived. Just one year after receiving her team assignment (Site reliability engineering), her team had gone from 25% women to just 6% due to repeated harassment by team managers. Sadly, sexual harassment seems like the norm in the tech industry with 78% of female founders saying they’ve been sexually harassed or know someone else who has. The tech industry has a lot to improve to make companies more diverse with less harassment.

2. Abuse, Burnout, and Fatigue. Software engineering can be a grind. Day in, and day out, you are typing at your computer, sometimes rarely interacting with other people. Fowler quickly figured out that Uber’s managers had a common approach to get people motivated, negative personal attacks and abuse. As Fowler noted relatively early on in her Uber journey: “I dreaded going into work, knowing that I’d be yelled at in meetings, that I’d be told I wasn’t ‘doing my job,’ that I wasn’t ‘working hard enough,’ even though I was doing everything that my managers asked of me. I wasn’t the only one who felt this way. When I told my friends in the other site reliability engineering teams what was going on, they said they had the same problems with their managers and teams, too. Almost every single one of them had started seeing a therapist for anxiety and depression related to the culture of work at uber; the engineers who had been at uber the longest all seemed to have suicidal thoughts.” Fowler was determined to escape this constant anxiety, so she applied to switch teams, only to have the transfer blocked by her manager. Her manager went so far as to imply that women couldn’t be good site reliability engineers, claiming “ Some people have things about them that are performance problems. These aren’t things about their work or the kind of work they do, but who they are.” Insane! Abuse, depression, anxiety, and burnout are sadly norms in the tech world, with 60% of tech workers reporting burnout in a team Blind survey. Tech cultures can feed on themselves with increasing hours leading to small productivity gains that lead to promotions and an ever-intensifying culture. Some gave developers have worked 24 hours straight testing games. The software engineering world needs better managers that understand how to help engineers avoid burnout.

3. Site Reliability Engineering. Fowler worked as a Site Reliability Engineer at Uber, which is a relatively new engineering role that was popularized by Google. According to Red Hat, “SRE teams use software as a tool to manage systems, solve problems, and automate operations tasks.” Site Reliability Engineering generally manages production infrastructure and ensure that companies can meet their Service Level Agreements for service uptime. When Fowler joined Uber, she noticed that the company lacked standardization across its SRE practices. Fowler noted: “Over a thousand independent microservices, spread out across countless engineering teams, all had to work together for the Uber app to function correctly; these microservices didn’t always work together the way they needed to, and the lack of standardization was large to blame. Whenever these systems failed because they didn’t meet the basic standards of building reliable software, it meant that riders were abandoned, drivers weren’t paid, and destinations were lost mid-trip.” Fowler tackled this problem by compiling a list of architecture standards that worked for each team, and then devised a system to certify that microservices were “production-ready.” Her work helped improve the standards for software at Uber and increased their micro-service uptime.

Business Themes

1. Stoicism and Doing What's Right. Susan Fowler was an outsider to Silicon Valley. She grew up in poverty in a rural suburb of Phoenix. Her parents were faithful believers in Christianity, and her Dad worked as a pastor while her mother stayed at home and homeschooled her children. However, when Fowler got to high school, her Mom re-entered the workforce as a teacher, and her Dad decided to pursue a degree in education. Despite trying desperately to enter the public school system, Fowler was rebuffed and told that she wasn't competent enough to enroll in an Arizona high school. As a result, she got a job working as a nanny and studied textbooks at night with the hope of schooling herself. During this intensely lonely period of her life, she rediscovered some of her favorite books, including the Greek philosophers known as the stoics. Fowler recalls the pivotal moment of her life: "As I sat there among the books that I had been reading for the last few years, thinking about the stories that they told of great people and the great things they had done, it suddenly occurred to me: these were stories about people who had done things in their lives, not had things done to them, who had made things happen in their lives, not had things happen to them." This revelation prompted a seething desire to get a formal education and gain personal autonomy. She accomplished this by attending Arizona State, then the University of Pennsylvania, and ultimately graduating with a degree in physics. The stoic mindset was pivotal in her decision to ultimately publish the blog post that made her famous. The Stoics teach that you must do was is morally right. Fowler recalls: "I didn't know what to do. I felt, deep in my heart that writing my story and sharing it with the world was the right thing to do but the possible consequences were so awful that I couldn't believe it was something I was actually morally obligated to do...And then it hit me: I had no way of possibly knowing what the consequences of my actions would be. I had no idea what would actually happen if I wrote the blog." Fowler's philosophical growth laid the foundation for her to speak out when she saw truly abhorrent behavior, and the world is undeniably better for it.

2. Early Culture Importance. As ride-hailing platforms exploded world-wide, Uber was a business in open defiance of the law. "Travis Kalanick and his team were operating in cities across the world without permission, unashamedly breaking and disregarding laws and regulations – all in the name of 'hustle' and 'disruption.'" The HBO series about Uber called Superpumped, an Uber cultural value, depicts this intense hustle-or-die culture. Beyond the abuse, the sexual harassment, and the HR violations, Uber filled its management ranks with corporate ladder climbers clamoring for closer positions to "TK." Fowler recalled: "Nothing was off-limits in these petty power games: projects were sabotaged, rumors were spread, employees were used as pawns." Interestingly enough, Uber had all the makings of what would be considered good diversity and inclusion practices – unconscious bias training, anti-harassment, and anti-discrimination training, employee surveys, support groups, women on the board, and women in management positions. But the company was rotten from the inside out because of its operations. "The issue wasn't that Uber needed to be more diverse and inclusive; the issue was that Uber had a culture that ignored and violated civil and employment laws." Uber had 14 cultural values, which is too many for any company. Culture is established early in companies and can be the complete unwinding of a company if not very carefully managed as the company grows.

3. Human Resources. Nothing exemplifies Uber's broken culture more than Fowler's disturbing first day on her SRE team. As she sat down to work finishing up onboarding tasks, her new manager Jake started to slack her incessantly about his open relationship and approach to sexual relationships. Because of Susan's past dealing with the completely unjust due process at Penn, she immediately screenshotted the messages and promptly reported Jake to HR. However, after a brief meeting in a different building, she was told that this was Jake's first offense and that the company wouldn't be taking any action against him. Later, Fowler would uncover that numerous people had complained specifically about Jake and Uber had lobbied the same excuse. This inexplicable communication was just the beginning of HR nightmares at Uber – some of which violated employment law. So what were the issues with Uber's HR department? First, Uber's HR department was woefully small, with one source suggesting it was close to 10 people to manage 11,000 employees. In addition, the Head of HR reported to Ryan Graves, a co-founder and its then Head of operations, rather than CEO Travis Kalanick. This misalignment in reporting structure meant that Renee Atwood, then Head of HR, had to report challenging HR situations to Graves, whom some claimed wasn't equipped to handle the growing complexity of these situations appropriately. To handle the mounting controversies surrounding Uber after Fowler's blog post, the board hired Eric Holder, a former US Attorney General to investigate Fowler's claims. The final report is mostly internal, but the recommendations of Holder's firm Covington are public. When all was said and done, Uber fired Travis Kalanick, and replaced him with Dara Khosrowshahi, a former Expedia CEO and Allen and Co. Managing Director.

Dig Deeper

• The Power of a Story with Susan Fowler | SXSW 2019

• Uber's CEO one year in: The one thing I wish I had fixed sooner

• What is Site Reliability Engineering (SRE)?

• Culture Transformation at Uber | Anouk Geertsma (HR Director EMEA)

• Anita Hill: Five years after the ‘Uber Blog’ helped launch #MeToo, businesses still must do more to fight sexual harassment

• Uber’s Changes Following Scandals

January 2022 - Seven Powers by Hamilton Helmer

This month we dove into a classic technology strategy book. The book covers seven major Powers a company can have that offer both a benefit and a barrier to competition. Helmer covers the majority of the book through the lens of different case studies including his favorite company, Netflix.

Tech Themes

1. Power. After years as a consultant at BCG and decades investing in the public market, Helmer distilled all successful business strategies to seven individual Powers. A Power offers a company a re-inforcing benefit while also providing a barrier to potential competition. This is the epitome of an enduring business model in Helmer's mind. Power describes a company's strength relative to a specific competitor, and Powers focus on a single business unit rather than throughout a business. This makes sense: Apple may have a scale economies Power from its iPhone install base relative to Samsung, but it may not have Power in its AppleTV originals segment relative to Netflix. The seven types of Powers are: Scale Economies, Network Economies, Counter-Positioning, Switching Costs, Branding, Cornered Resources, and Process Power.

2. Invention. While Powers are somewhat easy to spot (scale economies of Google's search algorithm), creating them is anything but easy. So what underlies every one of the seven Powers? Invention. Helmer pulls invention through the lens of industry Dynamics - external competitive conditions and the forward march of technology create opportunities to pursue new business models, processes, brands, and products. Companies must leverage their resources to craft Powers through trial and error, rather than an upfront conscious decision to pursue something by design. I view this almost as an extension of Clayton Christensen's Resource-Processes-Values (RPV) framework we discussed in July 2020. Companies can find a route to Power through these resources and the crafting process. For Netflix, the route was streaming, but the actual Power came from a strong push into exclusive and original content. The streaming business opened up Netflix's subscriber base, and the content decision provided the ability to amortize great content across its growing subscriber base.

3. Power Progressions. Powers become available at different points in business progression. This makes sense - what drives a company forward in an unpenetrated market is different from what keeps it going during steady-state - Snowflake's competitive dynamics are different than Nestle's. Helmer defines three stages to a company: Origination, Takeoff, and Stability. These stages mirror the dynamics of S-Curves, which we discussed in our July 2021 book. During the Origination stage, companies can benefit from Cornered Resources and Counter-Positioning. Helmer uses the Pixar management team as an example of Cornered Resources during the Origination phase of 3D animated movies. The company had Steve Jobs (product visionary), John Lasseter (story-teller creative), and Ed Catmull (operations and technology leader). During the early days of the industry, these were the only people that knew how to operate a digital film studio. Another Cornered Resource example might be a company finding a new oil well. Before the company starts drilling, it is the only one that can own that asset. An example of Origination Counter-Positioning might be TSMC when they first launched. At that time, it was standard industry perception that semiconductor companies had to be integrated design manufacturers (IDM) - they had to do everything in-house. TSMC was launched as solely a fabrication facility that companies could use to gain extra manufacturing capacity or try out new designs. This gave them great Counter-Positioning relative to the IDM's and they were dismissed as a non-threat. The Takeoff period offers Network Economies, Scale Economies, and Switching Cost Powers. This phase is the growth phase of businesses. Snowflake currently benefits from Switching Cost dynamics - once you use Snowflake, it's unlikely you'll want to use other data warehouse providers because that process involves data replication and additional costs. Scale economies can be seen in businesses that amortize high costs over their user base, like Amazon. Amazon invests in distribution centers at a significant scale, which improves customer experience, which helps them get more customers - the flywheel repeats, allowing Amazon to continually invest in more distribution centers, further building its scale. Network economies show in social media businesses like Bytedance/TikTok. Users make content that attracts more users; incremental users join the platform because there is so much content to "gain" by joining the platform. Like scale economies, it's almost impossible to go build a competitor because a new company would have to recruit all users from the other platform, which would cost tons of money. The Stability phase offers Branding and Process Power. Branding is hard to generate, but the advantage grows with time. Consider luxury goods providers like LVMH; the older, the more exclusive the brand, the more it's desired, and every day it gets older and becomes more desired. A business can create Process Power by refining and improving operations to such a high degree that it becomes difficult to replicate. Classic examples of Process Power are TSMC's innovative 3-5nm processes today and Toyota's Production System. Toyota has even allowed competitors to tour its factory, but no competitor has replicated its operational efficiency.

Business Themes

1. Sneak Attack. I've always been surprised by businesses that seemingly "come out of nowhere." In Helmer's eyes, this stems from Counter-Positioning. He tells the story of Vanguard, which was started by Jack Bogle in 1976. "You could charitably describe the reception as enthusiastic: only $11M trickled in from investors. Soon after the launch, [Noble Laureate Paul] Samuelson himself lauded the effort in his column for Newsweek, but with little result: the fund had only reached $17M by mid-1977. Vanguard's operating model depended on others for distribution, and brokers, in particular, were put off by a product that predicated on the notion that they provided no value in helping their clients choose which active funds to select." But Vanguard had something that active managers didn't: low fees and consistency. Vanguard's funds performed like the indices and cost much less than active funds. No longer were individuals underperforming the market and paying advisors to pick actively managed funds. Furthermore, Vanguard continually invested all profits back into its funds, so it looked like it wasn't making money while it grew its assets under management. It's so hard to spot these sneak attacks while they are happening. But one that might be happening right now is Cloudflare relative to AWS. Cloudflare launched its low-cost R2 service (a play on Amazon's famous S3 storage technology). Cloudflare is offering a cheaper product at a much lower cost and is leveraging its large installed base with its CDN product to get people in the door. It's unclear whether this will offer Power over AWS because it's confusing what the barrier might be other than some relating to switching costs. However, there will likely be reluctance on AWS's part to cut prices because of its scale and public company growth targets.

2. A New Valuation Formula. Helmer offers a very unique take on the traditional DCF valuation approach. Investors have long suggested the value of any business was equal to the present value of its future discounted cash flows. In contrast to the traditional approach of summing up a firm's cash flows and discounting it, Helmer takes a look at all of the cash flows subject to the industry in which firms compete. In this formula (shown above), M0 represents the current market size, g the discounted market growth factor, s the long-term market share of the company, and m the long-term differential margin (net profit margin over that needed to cover the cost of capital). More simply, a company is worth it's Market Scale (Mo x g) x its Power (s x m). This implies that a company is worth the portion of the industry's profits it collects over time. This formula helps consider Power progression relative to industry dynamics and company stage. In the Origination stage, an industry's profits may be small but growing very quickly. If we think that a competitor in the industry can achieve an actual Power, it will likely gain a large portion of the long-term market. Thus, watching market share dynamics unfold can tell us about the potential for a route to Power and the ability for a company to achieve a superior value to its near-term cash flows.

3. Collateral Damage. If companies are aware of these Powers and how other companies can achieve them, how can companies not take proactive action to avoid being on the losing end of a Power struggle? Helmer lays out what he calls Collateral Damage, or the unwillingness of a competitor to find the right path to navigating the damage caused by a competitor's Power. His point is actually very nuanced - it's not the incumbent's unwillingness to invest in the same type of solution as the competitor (although that happens). The incumbent's business gets trashed as collateral damage by the new entrant. The incumbent can respond to the challenger by investing in the new innovation. But where counter-positioning really takes hold is if the incumbent recognizes the attractiveness of the business model/innovation but is stymied from investing. Why would a business leader choose not to invest in something attractive? In the case of Vanguard competitor Fidelity, any move into passive funds could cause steep cannibalization of their revenue. So in response, a CEO might decide to just keep their existing business and "milk" all of its cash flow. In addition, how could Fidelity invest in a business that completely undermined their actively managed mutual fund business? Often CEOs will have a negative bias toward the competing business model despite the positive NPV of an investment in the new business. Just think how long it took SAP to start selling Cloud subscriptions compared to its on-premise license/maintenance model. Lastly, a CEO might not invest in the promising new business model if they are worried about job security. This is the classic example of the principal-agent problem we discussed in June. Would you invest in a new, unproven business model if you faced a declining stock price and calls for your resignation? In addition, annual CEO compensation is frequently tagged to stock price performance and growth targets. The easiest way to achieve near-term stock price appreciation and growth targets is staying with what has worked in the past (and M&A!). Its the path of least resistance! Counter-positioning and collateral damage are nuanced and difficult to spot, but the complex emotions and issues become obvious over time.

Dig Deeper

• The 7 Powers with Hamilton Helmer & Jeff Lawson (CEO of Twilio)

• Hamilton Helmer Discusses 7Powers with Acquired Podcast

• Vanguard Founder Jack Bogle's '90s Interview Shows His Investing Philosophy

• Bernard Arnault, Chairman and CEO of LVMH | The Brave Ones

• S-curves in Innovation

December 2021 - Trillion Dollar Coach: The Leadership Playbook of Silicon Valley's Bill Campbell by Eric Schmidt, Jonathan Rosenberg, and Alan Eagle

This month we read a book about famous CEO and executive coach, Bill Campbell. Bill had an unusual background for a silicon valley legend: he was a losing college football coach at Columbia. Despite a late start to his technology career, Bill’s timeless leadership principles and focus on people are helpful for any leader at any size company.

Tech Themes

1. Product First. After a short time at Kodak, Bill realized the criticality of supporting product and engineering. As a football coach, he was not intimately familiar with the intricacies of photographic film. Still, Campbell understood that the engineers ultimately determined the company's fate. After a few months at Kodak, Bill did something that no one else ever thought of - he went into the engineering lab and started talking to the engineers. He told them that Fuji was hot on Kodak's heels and that the company should try to make a new type of film that might thwart some competitive pressure. The engineers were excited to hear feedback on their products and learn more about other aspects of the business. After a few months of gestation, the engineering team produced a new type of film: "This was not how things worked at Kodak. Marketing guys didn't go talk to engineers, especially the engineers in the research lab. But Bill didn't know that, or if he did, he didn't particularly care. So he went over to the building that housed the labs, introduced himself around, and challenged them to come up with something better than Fuji's latest. That challenge helped start the ball rolling on the film that eventually launched as Kodacolor 200, a major product for Kodak and a film that was empirically better than Fuji's. Score one for the marketing guy and his team!" Campbell understood that product was the heart of any technology company, and he sought to empower product leaders whenever he had a chance.

2. Silicon Valley Moments. Sometimes you look back at a person's career and wonder how they managed to be at the center of several critical points in tech history. Bill was a magnet to big moments. After six unsuccessful years as coach of Columbia's football team, Bill joined an ad agency and eventually made his way to the marketing department at Kodak. At the time, Kodak was a blockbuster success and lauded as one of the top companies in the world. However, the writing was on the wall, film was getting cheaper and cheaper, and digital was on the rise. After a few years, Bill was recruited to Apple by John Sculley. Bill joined in 1983 as VP of Marketing, just two years before Steve Jobs would famously leave the company. Bill was incessant that management try to keep Jobs. Steve would not forget his loyalty, and upon his return, Jobs named Campbell a director of Apple in 1997. Bill became CEO of Claris, an Apple software division that functioned as a separate company. In 1990, when Apple signaled it would not spin Claris off into a separate company, Bill left with the rest of management. After a stint at Intuit, Bill became a CEO coach to several Silicon Valley luminaries, including Eric Schmidt, Steve Jobs, Shellye Archambeau, Brad Smith, John Donahoe, Sheryl Sandberg, Jeff Bezos, and more. Bill helped recruit Sandberg and current CFO Ruth Porat to Google. Bill was a serial networker who stood at the center of silicon valley.

3. Failure and Success. Following his departure from Claris/Apple, Bill founded Go Corporation, one of the first mobile computers. The company raised a ton of venture capital for the time ($75m) before an eventual fire-sale to AT&T. The idea of a mobile computer was compelling, but the company faced stiff competition from Microsoft and Apple's Newton. Beyond competition, the original handheld devices lacked very basic features (easy internet, storage, network and email capabilities) that would be eventually be included in Apple's iPhone. Sales across the industry were a disappointment, and AT&T eventually shut down the acquired Go Corp. After the failure of Go. Corporation, Bill was unsure what to do. John Doerr, the famous leader of Kleiner Perkins, introduced Bill to Intuit founder Scott Cook. Cook was considering retirement and looking for a replacement. Bill met with Cook, but Cook remained unimpressed. It was only after a second meeting where Bill shared his philosophy on management and his focus on people that Cook considered Campbell for the job. Bill joined Intuit as CEO and went on to lead the company until 1998, after which he became Chairman of the board, a position he held until 2016. Within a year of Campbell joining, Microsoft agreed to purchase the company for $1.5b. However, the Justice Department raised flags about the acquisition, and Microsoft called off the deal in 1995. Campbell continued to lead the company to almost $600M of revenue. When he retired from the board in 2016, the company was worth $30B.

Business Themes

1. Your People Make You a Leader. Campbell believed that people were the most crucial ingredient in any successful business. Leadership, therefore, was of utmost importance to Bill. Campbell lived by a maxim passed by former colleague Donna Dubinsky: "If you're a great manager, your people will make you a leader. They acclaim that, not you." In an exchange with a struggling leader, Bill added to this wisdom: "You have demanded respect, rather than having it accrue to you. You need to project humility, a selflessness, that projects that you care about the company and about people." The humility Campbell speaks about is what John Collins called Level 5 leadership (covered in our April 2020 book, Good to Great). Research has shown that humble leaders can lead to higher performing teams, better flexibility, and better collaboration.

2. Teams Need Coaches. Campbell loved to build community. Every year he would plan a trip to the super bowl, where he would find a bar and set down roots. He'd get to know the employees, and after a few days, he was a regular at the bar. He understood how important it was to build teams and establish a community that engendered trust and psychological safety. Every team needs a good coach, and Campbell understood how to motivate individuals, give authentic feedback, and handle interpersonal conflicts. "Bill Campbell was a coach of teams. He built them, shaped them, put the right players in the right positions (and removed the wrong players from the wrong positions), cheered them on, and kicked them in their collective butt when they were underperforming. He knew, as he often said, that 'you can't get anything done without a team.'" After a former colleague left to set up a new private equity firm, Bill checked out the website and called him up to tell him it sucked. As part of this feedback style, Bill always prioritized feedback in the moment: "An important component of providing candid feedback is not to wait. 'A coach coaches in the moment,' Scott Cook says. 'It's more real and more authentic, but so many leaders shy away from that.' Many managers wait until performance reviews to provide feedback, which is often too little, too late."

3. Get the Little Things Right. Campbell understood that every interaction was a chance to connect, help, and coach. As a result, he thought deeply about maximizing the value out of every meeting: "Bill took great care in preparing for one-on-one meetings. Remember, he believed the most important thing a manager does is to help people be more effective and to grow and develop, and the 1:1 is the best opportunity to accomplish that." Meetings with Campbell frequently started with family and life discussions and would move back and forth between business and the meaning of life - deep sessions that made people think, reconsider what they were doing and come back energized for more. He also was not shy about addressing issues and problems: "There was one situation we had a few years ago where two different product leaders were arguing about which team should manage a particular group of products. For a while, this was treated as a technical discussion, where data and logic would eventually determine which way to go. But that didn't happen, the problem festered, and tensions rose. Who was in control? This is when Bill got involved. There had to be a difficult meeting where one exec would win and the other would lose. Bill made the meeting happen; he spotted a fundamental tension that was not getting resolved and forced the issue. He didn't have a clear opinion on how to resolve the matter, on which team the product belonged, he simply knew we had to decide one way or another, now. It was one of the most heated meetings we've had, but it had to happen." Bill extended this practice to email where he perfected concise and effective team communication. On top of 1:1's, meetings, and emails, Campbell stayed on top of messages: ""Later, when he was coach to people all over the valley, he spent evenings returning the calls of people who had left messages throughout the day. When you left Bill a voice mail, you always got a call back." Bill was a master of communication and a coach to everyone he met.

Dig Deeper

• Intuit founder Scott Cook on Bill Campbell

• A Conversation between Brad Smith (Intuit CEO) and Bill Campbell

• A Bill Campbell Reading List

• Silicon Valley mourns its ‘coach,’ former Intuit CEO Bill Campbell

• CHM Live | Trillion Dollar Coach: The Leadership Playbook of Silicon Valley’s Bill Campbell

June 2021 - Letters to the Nomad Partnership 2001-2013 (Nick Sleep's and Qais Zakaria's Investor Letters)

This month we review a unique source of information - mysterious fund manager Nick Sleep’s investment letters. Sleep had an extremely successful run and identified several very interesting companies and characteristics of those companies which made for great investments. He was early to uncover Amazon, Costco, and others - riding their stocks into the stratosphere over the last 20 years. These letters cover the internet bubble, the 08/09 crisis, and all types of interesting businesses across the world.

The full letters can be found here

Tech Themes

1. Scale Benefits Shared. Nick Sleep’s favored business model is what he calls Scale Benefits Shared. The idea is straight forward and appears across industries. Geico, Amazon, and Costco all have this business model. Its simple - companies start with low prices and spend only on the most important things. Over time as the company scales (more insured drivers, more online orders, more stores) they pass on the benefits of scale to the customer with even further lower prices. The consumer then buys more with the low-cost provider. This has a devastating effect on competition - it forces companies to exit the industry because the one sharing the scale benefits has to become hyper-efficient to continue to make the business model work. “In the case of Costco scale efficiency gains are passed back to the consumer in order to drive further revenue growth. That way customers at one of the first Costco stores (outside Seattle) benefit from the firm’s expansion (into say Ohio) as they also gain from the decline in supplier prices. This keeps the old stores growing too. The point is that having shared the cost savings, the customer reciprocates, with the result that revenues per foot of retailing space at Costco exceed that at the next highest rival (WalMart’s Sam’s Club) by about fifty percent.” Jeff Bezos was also very focused on this, his 2006 annual letter highlighted as much: “Our judgment is that relentlessly returning efficiency improvements and scale economies to customers in the form of lower prices creates a virtuous cycle that leads over the long-term to a much larger dollar amount of free cash flow, and thereby to a much more valuable Amazon.com. We have made similar judgments around Free Super Saver Shipping and Amazon Prime, both of which are expensive in the short term and – we believe – important and valuable in the long term.” So what companies today are returning scale efficiencies with customers? One recent example is Snowflake - which is a super expensive solution but is at least posturing correctly in favor of this model - the recent earnings call highlighted that they had figured out a better way to store data, resulting in a storage price decrease for customers. Fivetran’s recent cloud data warehouse comparison showed Snowflake was both cheaper and faster than competitors Redshift and Bigquery - a good spot to be in! Another example of this might be Cloudflare - they are lower cost than any other CDN in the market and have millions of free customers. Improvements made to the core security+CDN engine, threat graph, and POP locations result in better performance for all of their free users, which leads to more free users, more threats, vulnerabilities, and location/network demands - a very virtuous cycle!

2. The Miracle of Compound Growth & Its Obviousness. While appreciated in some circles, compounding is revered by Warren Buffett and Nick Sleep - it’s a miracle worth celebrating every day. Sleep takes this idea one step further, after discussing how the average hold period of stocks has fallen significantly over the past few decades: “The fund management industry has it that owning shares for a long time is futile as the future is unknowable and what is known is discounted. We respectfully disagree. Indeed, the evidence may suggest that investors rarely appropriately value truly great companies.” This is quite a natural phenomenon as well - when Google IPO’d in 2004 for a whopping $23bn, were investors really valuing the company appropriately? Were Visa ($18Bn valuation, largest US IPO in history) and Mastercard ($5.3Bn valuation) being valued appropriately? Even big companies like Apple in 2016 valued at $600Bn were arguably not valued appropriately. Hindsight is obvious, but the durability of compounding in great businesses is truly a myth to behold. That’s why Sleep and Zakaria wound down the partnership in 2014, opting to return LP money and only own Berkshire, Costco, and Amazon for the next decade (so far that’s been a great decision!). While frequently cited as a key investing principle, compounding in technology, experiences, art, and life are rarely discussed, maybe because they are too obvious. Examples of compounding (re-investing interest/dividends and waiting) abound: Moore’s Law, Picasso’s art training, Satya Nadella’s experience running Bing and Azure before becoming CEO, and Beatles playing clubs for years before breaking on the scene. Compounding is a universal law that applies to so much!

3. Information Overload. Sleep makes a very important but subtle point toward the end of his letters about the importance of reflective thinking:

   BBC Interviewer: “David Attenborough, you visited the North and South Poles, you witnessed all of life in-between from the canopies of the tropical rainforest to giant earthworms in Australia, it must be true, must it not, and it is a quite staggering thought, that you have seen more of the world than anybody else who has ever lived?”

   David Attenborough: “Well…I suppose so…but then on the other hand it is fairly salutary to remember that perhaps the greatest naturalist that ever lived and had more effect on our thinking than anybody, Charles Darwin, only spent four years travelling and the rest of the time thinking.”

   Sleep: “Oh! David Attenborough’s modesty is delightful but notice also, if you will, the model of behaviour he observed in Charles Darwin: study intensely, go away, and really think.”

   There is no doubt that the information age has ushered in a new normal for daily data flow and news. New information is constant and people have the ability to be up to date on everything, all the time. While there are benefits to an always-on world, the pace of information flow can be overwhelming and cause companies and individuals to lose sight of important strategic decisions. Bill Gates famously took a “think week” each year where he would lock himself in a cabin with no internet connection and scan over hundreds of investment proposals from Microsoft employees. A Harvard study showed that reflection can even improve job performance. Sometimes the constant data flow can be a distraction from what might be a very obvious decision given a set of circumstances. Remember to take some time to think!

Business Themes

1. Psychological Mistakes. Sleep touches on several different psychological problems and challenges within investing and business, including the role of Social Proof in decision making. Social proof occurs when individuals look to others to determine how to behave in a given situation. A classic example of Social Proof comes from an experiment done by Psychologist, Stanley Milgram, in which he had groups of people stare up at the sky on a crowded street corner in New York City. When five people were standing and looking up (as opposed to a single person), many more people also stopped to look up, driven by the group behavior. This principle shows up all the time in business and is a major proponent in financial bubbles. People see others making successful investments at high valuations and that drives them to do the same. It can also drive product and strategic decisions - companies launching dot-com names in the 90’s to drive their stock price up, companies launching corporate venture arms in rising markets, companies today deciding they need a down-market “product-led growth” engine. As famed investor Stan Druckenmiller notes, its hard to sit idly by while others (who may be less informed) crush certain types of investments: “I bought $6 billion worth of tech stocks, and in six weeks I had lost $3 billion in that one play. You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basketcase and I couldn’t help myself. So maybe I learned not to do it again, but I already knew that.”

2. Incentives, Psychology, and Ownership Mindset. Incentives are incredibly powerful in business and its surprisingly difficult to get people to do the right thing. Sleep spends a lot of time on incentives and the so-called Principal-Agent Conflict. Often times the Principal (Owner, Boss, Purchaser, etc.) may employ an Agent (Employee, Contractor, Service) to accomplish something. However the goals and priorities of the principal may not align with that agent. As an example, when your car breaks down and you need to go to a local mechanic to fix it, you (the principal) want to find someone to fix the car as well and as cheaply as possible. However, the agent (the mechanic) may be incentivized to create the biggest bill possible to drive business for their garage. Here we see the potential for misaligned incentives. After 5 years of really strong investment results, Sleep and Zakaria noticed a misaligned incentive of their own: “Which brings me to the subject of the existing performance fee. Eagle-eyed investors will not have failed but notice the near 200 basis point difference between gross and net performance this year, reflecting the performance fee earned. We are in this position because performance for all investors is in excess of 6% per annum compounded. But given historic performance, that may be the case for a very long time. Indeed, we are so far ahead of the hurdle that if the Partnership now earned pass-book rates of return, say 5% per annum, we would continue to “earn” 20% performance fees (1% of assets) for thirty years, that is, until the hurdle caught up with actual results. During those thirty years, which would see me through to retirement, we would have added no value over the money market rates you can earn yourself, but we would still have been paid a “performance fee”. We are only in this position because we have done so well, and one could argue that contractually we have earned the right by dint of performance, but just look at the conflicts!” They could have invested in treasury bonds and collected a performance fee for years to come but they knew that was unfair to limited partners. So the duo created a resetting fee structure, that allowed LPs to claw back performance fees if Nomad did not exceed the 6% hurdle rate for a given year. This kept the pair focused on driving continued strong results through the life of the partnership.

3. Discovery & Pace. Nick Sleep and Qais Zakaria looked for interesting companies in interesting situations. Their pace is simply astounding: “When Zak and I trawled through the detritus of the stock market these last eighteen months (around a thousand annual reports read and three hundred companies interviewed)…” Sleep and Zakaria put up numbers: 55 annual reports per month (~2 per day), 17 companies interviewed per month (meeting every other day)! That is so much reading. Its partially unsurprising that after a while they started to be able to find things in the annual reports that piqued their interest. Not only did they find retrospectively obvious gems like Amazon and Costco, they also looked all around the world for mispricings and interesting opportunities. One of their successful international investments took place in Zimbabwe, where they noticed significant mispricing involving the Harare Stock Exchange, which opened in 1896 but only started allowing foreign investment in 1993. While Nomad certainly made its name on the Scaled efficiencies shared investment model, Zimbabwe offered Sleep and Zakaria to prioritize their second model: “We have little more than a handful of distinct investment models, which overlap to some extent, and Zimcem is a good example of a second model namely, ‘deep discount to replacement cost with latent pricing power.’” Zimcem was the country’s second-largest cement producer, which traded at a massive discount to replacement cost due to terrible business conditions (inflation growing faster than the price of cement). Not only did Sleep find a weird, mispriced asset, he also employed a unique way of acquiring shares to further increase his margin of safety. “The official exchange rate at the time of writing is Z$9,100 to the U$1. The unofficial, street rate is around Z$17,000 to the U$1. In other words, the Central Bank values its own currency at over twice the price set by the public with the effect that money entering the country via the Central Bank buys approximately half as much as at the street rate. Fortunately, there is an alternative to the Central Bank for foreign investors, which is to purchase Old Mutual shares in Johannesburg, re-register the same shares in Harare and then sell the shares in Harare. This we have done.“ By doing this, Nomad was able to purchase shares at a discounted exchange rate (they would also face the exchange rate on sale, so not entirely increasing the margin of safety). The weird and off the beaten path investments and companies can offer rich rewards to those who are patient. This was the approach Warren Buffett employed early on in his career, until he started focusing on “wonderful businesses” at Charlie Munger’s recommendation.

Dig Deeper

• Overview of Several Scale Economies Shared Businesses

• Investor Masterclass Learnings from Nick Sleep

• Warren Buffett & Berkshire’s Compounding

• Jim Sinegal (Costco Founder / CEO) - Provost Lecture Series Spring 2017

• Robert Cialdini - Mastering the Seven Principles of Influence and Persuasion

May 2021 - Crossing the Chasm by Geoffrey Moore

This month we take a look at a classic high-tech growth marketing book. Originally published in 1991, Crossing the Chasm became a beloved book within the tech industry although its glory seems to have faded over the years. While the book is often overly prescriptive in its suggestions, it provides several useful frameworks to address growth challenges primarily early on in a company’s history.

Tech Themes

1. Technology Adoption Life Cycle. The core framework of the book discusses the evolution of new technology adoption. It was an interesting micro-view of the broader phenomena described in Carlota Perez’s Technological Revolutions. In Moore’s Chasm-crossing world, there are five personas that dominate adoption: innovators, early adopters, early majority, late majority, and laggards. Innovators are technologists, happy to accept more challenging user experiences to push the boundaries of their capabilities and knowledge. Early adopters are intuitive buyers that enjoy trying new technologies but want a slightly better experience. The early majority are “wait and see” folks that want others to battle test the technology before trying it out, but don’t typically wait too long before buying. The late majority want significant reference material and usage before buying a product. Laggards simply don’t want anything to do with new technology. It is interesting to think of this adoption pattern in concert with big technology migrations of the past twenty years including: mainframes to on-premise servers to cloud computing, home phones to cell phones to iphone/android, radio to CDs to downloadable music to Spotify, and cash to check to credit/debit to mobile payments. Each of these massive migration patterns feels very aligned with this adoption model. Everyone knows someone ready to apply the latest tech, and someone who doesn’t want anything to do with it (Warren Buffett!).

2. Crossing the Chasm. If we accept the above as a general way products are adopted by society (obviously its much more of a mish/mash in reality), we can posit that the most important step is from the early adopters to the early majority - the spot where the bell curve (shown below) really opens up. This is what Geoffrey Moore calls Crossing the Chasm. This idea is highly reminiscent of Clay Christensen’s “not good enough” disruption pattern and Gartner’s technology hype cycle. The examples Moore uses (in 1991) are also striking: Neural networking software and desktop video conferencing. Moore lamented: “With each of these exciting, functional technologies it has been possible to establish a working system and to get innovators to adopt it. But it has not as yet been possible to carry that success over to the early adopters.” Both of these technologies have clearly crossed into the mainstream with Google’s TensorFlow machine learning library and video conferencing tools like Zoom that make it super easy to speak with anyone over video instantly. So what was the great unlock for these technologies, that made these commercially viable and successfully adopted products? Well since 1990 there have been major changes in several important underlying technologies - computer storage and data processing capabilities are almost limitless with cloud computing, network bandwidth has grown exponentially and costs have dropped, and software has greatly improved the ability to make great user experiences for customers. This is a version of not-good-enough technologies that have benefited substantially from changes in underlying inputs. The systems you could deploy in 1990 just could not have been comparable to what you can deploy today. The real question is - are there different types of adoption curves for differently technologies and do they really follow a normal distribution as Moore shows here?

3. Making Markets & Product Alternatives. Moore positions the book as if you were a marketing executive at a high-tech company and offers several exercises to help you identify a target market, customer, and use case. Chapter six, “Define the Battle” covers the best way to position a product within a target market. For early markets, competition comes from non-consumption, and the company has to offer a “Whole Product” that enables the user to actually derive benefit from the product. Thus, Moore recommends targeting innovators and early adopters who are technologist visionaries able to see the benefit of the product. This also mirrors Clayton Christensen’s commoditization de-commoditization framework, where new market products must offer all of the core components to a system combined into one solution; over time the axis of commoditization shifts toward the underlying components as companies differentiate by using faster and better sub-components. Positioning in these market scenarios should be focused on the contrast between your product and legacy ways of performing the task (use our software instead of pen and paper as an example). In mainstream markets, companies should position their products within the established buying criteria developed by pragmatist buyers. A market alternative serves as the incumbent, well-known provider and a product alternative is a near upstart competitor that you are clearly beating. What’s odd here is that you are constantly referring to your competitors as alternatives to your product, which seems counter-intuitive but obviously, enterprise buyers have alternatives they are considering and you need to make the case that your solution is the best. Choosing a market alternative lets you procure a budget previously used for a similar solution, and the product alternative can help differentiate your technology relative to other upstarts. Moore’s simple positioning formula has helped hundreds of companies establish their go-to-market message: “For (target customers—beachhead segment only) • Who are dissatisfied with (the current market alternative) • Our product is a (new product category) • That provides (key problem-solving capability). • Unlike (the product alternative), • We have assembled (key whole product features for your specific application).”

Business Themes

1. What happened to these examples? Moore offers a number of examples of Crossing the Chasm, but what actually happened to these companies after this book was written? Clarify Software was bought in October 1999 by Nortel for $2.1B (a 16x revenue multiple) and then divested by Nortel to Amdocs in October 2001 for $200M - an epic disaster of capital allocation. Documentum was acquired by EMC in 2003 for $1.7B in stock and was later sold to OpenText in 2017 for $1.6B. 3Com Palm Pilot was a mess of acquisitions/divestitures. Palm was acquired by U.S Robotics which was acquired by 3COM in 1997 and then subsequently spun out in a 2000 IPO which saw a 94% drop. Palm stopped making PDA devices in 2008 and in 2010, HP acquired Palm for $1.2B in cash. Smartcard maker Gemplus merged with competitor Axalto in an 1.8Bn euro deal in 2005, creating Gemalto, which was later acquired by Thales in 2019 for $8.4Bn. So my three questions are: Did these companies really cross the chasm or were they just readily available success stories of their time? Do you need to be the company that leads the chasm crossing or can someone else do it to your benefit? What is the next step in the chasm journey after its crossed and why did so many of these companies fail after a time?

2. Whole Products. Moore leans into an idea called the Whole Product Concept which was popularized by Theodore Levitt’s 1983 book The Marketing Imagination and Bill Davidow’s (of early VC Mohr Davidow) 1986 book Marketing High Technology. Moore explains the idea: “The concept is very straightforward: There is a gap between the marketing promise made to the customer—the compelling value proposition—and the ability of the shipped product to fulfill that promise. For that gap to be overcome, the product must be augmented by a variety of services and ancillary products to become the whole product.” There are four different perceptions of the product: “1. Generic product: This is what is shipped in the box and what is covered by the purchasing contract. 2.Expected product: This is the product that the consumer thought she was buying when she bought the generic product. It is the minimum configuration of products and services necessary to have any chance of achieving the buying objective. For example, people who are buying personal computers for the first time expect to get a monitor with their purchase-how else could you use the computer?—but in fact, in most cases, it is not part of the generic product. 3.Augmented product: This is the product fleshed out to provide the maximum chance of achieving the buying objective. In the case of a personal computer, this would include a variety of products, such as software, a hard disk drive, and a printer, as well as a variety of services, such as a customer hotline, advanced training, and readily accessible service centers. 4. Potential product: This represents the product’s room for growth as more and more ancillary products come on the market and as customer-specific enhancements to the system are made. These are the product features that have maybe expected or additional to drive adoption.” Moore makes a subtle point that after a while, investments in the generic/out-of-the-box product functionality drive less and less purchase behavior, in tandem with broader market adoption. Customers want to be wooed by the latest technology and as products become similar, customers care less about what’s in the product today, and more about what’s coming. Moore emphasizes Whole Product Planning where you can see how you get to those additional features into the product over time - but Moore was also operating in an era when product decisions and development processes were on two-year+ timelines and not in the DevOps era of today, where product updates are pushed daily in some cases. In the bottoms-up/DevOps era, its become clear that finding your niche users, driving strong adoption from them, and integrating feature ideas from them as soon as possible can yield a big success.

3. Distribution Channels. Moore focuses on each of the potential ways a company can distribute its solutions: Direct Sales, two-tier retail, one-tier retail, internet retail, two-tier value-added reselling, national roll-ups, original equipment manufacturers (OEMs), and system integrators. As Moore puts it, “The number-one corporate objective, when crossing the chasm, is to secure a channel into the mainstream market with which the pragmatist customer will be comfortable.” These distribution types are clearly relics of technology distribution in the early 1990s. Great direct sales have produced some of the best and biggest technology companies of yesterday including IBM, Oracle, CA Technologies, SAP, and HP. What’s so fascinating about this framework is that you just need one channel to reach the pragmatist customer and in the last 10 years, that channel has become the internet for many technology products. Moore even recognizes that direct sales had produced poor customer alignment: “First, wherever vendors have been able to achieve lock-in with customers through proprietary technology, there has been the temptation to exploit the relationship through unfairly expensive maintenance agreements [Oracle did this big time] topped by charging for some new releases as if they were new products. This was one of the main forces behind the open systems rebellion that undermined so many vendors’ account control—which, in turn, decrease predictability of revenues, putting the system further in jeopardy.” So what is the strategy used by popular open-source bottoms up go-to-market motions at companies like Github, Hashicorp, Redis, Confluent and others? Its straightforward - the internet and simple APIs (normally on Github) provide the fastest channel to reach the developer end market while they are coding. When you look at Open Source scaling, it can take years and years to Cross the Chasm because most of these early open source adopters are technology innovators, however, eventually, solutions permeate into massive enterprises and make the jump. With these new go-to-market motions coming on board, driven by the internet, we’ve seen large companies grow from primarily inbound marketing tactics and less direct outbound sales. The companies named above as well as Shopify, Twilio, Monday.com and others have done a great job growing to a massive scale on the backs of their products (product-led growth) instead of a salesforce. What’s important to realize is that distribution is an abstract term and no single motion or strategy is right for every company. The next distribution channel will surprise everyone!

Dig Deeper

• How the sales team behind Monday is changing the way workplaces collaborate

• An Overview of the Technology Adoption Lifecycle

• A Brief History of the Cloud at NDC Conference

• Frank Slootman (Snowflake) and Geoffrey Moore Discuss Disruptive Innovations and the Future of Tech

• Growth, Sales, and a New Era of B2B by Martin Casado (GP at Andreessen Horowitz)

• Strata 2014: Geoffrey Moore, "Crossing the Chasm: What's New, What's Not"

April 2021 - Innovator's Solution by Clayton Christensen and Michael Raynor

This month we take another look at disruptive innovation in the counter piece to Clayton Christensen’s Innovator’s Dilemma, our July 2020 book. The book crystallizes the types of disruptive innovation and provides frameworks for how incumbents can introduce or combat these innovations. The book was a pleasure to read and will serve as a great reference for the future.

Tech Themes

1. Integration and Outsourcing. Today, technology companies rely on a variety of software tools and open source components to build their products. When you stitch all of these components together, you get the full product architecture. A great example is seen here with Gitlab, an SMB DevOps provider. They have Postgres for a relational database, Redis for caching, NGINX for request routing, Sentry for monitoring and error tracking and so on. Each of these subsystems interacts with each other to form the powerful Gitlab project. These interaction points are called interfaces. The key product development question for companies is: “Which things do I build internally and which do I outsource?” A simple answer offered by many MBA students is “Outsource everything that is not part of your core competence.” As Clayton Christensen points out, “The problem with core-competence/not-your-core-competence categorization is that what might seem to be a non-core activity today might become an absolutely critical competence to have mastered in a proprietary way in the future, and vice versa.” A great example that we’ve discussed before is IBM’s decision to go with Microsoft DOS for its Operating System and Intel for its Microprocessor. At the time, IBM thought it was making a strategic decision to outsource things that were not within its core competence but they inadvertently gave almost all of the industry profits from personal computing to Intel and Microsoft. Other competitors copied their modular approach and the whole industry slugged it out on price. The question of whether to outsource really depends on what might be important in the future. But that is difficult to predict, so the question of integration vs. outsourcing really comes down to the state of the product and market itself: is this product “not good enough” yet? If the answer is yes, then a proprietary, integrated architecture is likely needed just to make the actual product work for customers. Over time, as competitors enter the market and the fully integrated platform becomes more commoditized, the individual subsystems become increasingly important competitive drivers. So the decision to outsource or build internally must be made on the status of product and the market its attacking.

2. Commoditization within Stacks. The above point leads to the unbelievable idea of how companies fall into the commoditization trap. This happens from overshooting, where companies create products that are too good (which I find counter-intuitive, who thought that doing your job really well would cause customers to leave!). Christensen describes this through the lens of a salesperson “‘Why can’t they see that our product is better than the competition? They’re treating it like a commodity!’ This is evidence of overshooting…there is a performance surplus. Customers are happy to accept improved products, but unwilling to pay a premium price to get them.” At this time, the things demanded by customers flip - they are willing to pay premium prices for innovations along a new trajectory of performance, most likely speed, convenience, and customization. “The pressure of competing along this new trajectory of improvement forces a gradual evolution in product architectures, away from the interdependent, proprietary architectures that had the advantage in the not-good-enough era toward modular designs in the era of performance surplus. In a modular world, you can prosper by outsourcing or by supplying just one element.” This process of integration, to modularization and back, is super fascinating. As an example of modularization, let’s take the streaming company Confluent, the makers of the open-source software project Apache Kafka. Confluent offers a real-time communications service that allows companies to stream data (as events) rather than batching large data transfers. Their product is often a sub-system underpinning real-time applications, like providing data to traders at Citigroup. Clearly, the basis of competition in trading has pivoted over the years as more and more banking companies offer the service. Companies are prioritizing a new axis, speed, to differentiate amongst competing services, and when speed is the basis of competition, you use Confluent and Kafka to beat out the competition. Now let’s fast forward five years and assume all banks use Kafka and Confluent for their traders, the modular sub-system is thus commoditized. What happens? I’d posit that the axis would shift again, maybe towards convenience, or customization where traders want specific info displayed maybe on a mobile phone or tablet. The fundamental idea is that “Disruption and commoditization can be seen as two sides of the same coin. That’s because the process of commoditization initiates a reciprocal process of de-commoditization [somewhere else in the stack].”

3. The Disruptive Becomes the Disruptor. Disruption is a relative term. As we’ve discussed previously, disruption is often mischaracterized as startups enter markets and challenge incumbents. Disruption is really a focused and contextual concept whereby products that are “not good enough” by market standards enter a market with a simpler, more convenient, or less expensive product. These products and markets are often dismissed by incumbents or even ceded by market leaders as those leaders continue to move up-market to chase even bigger customers. Its fascinating to watch the disruptive become the disrupted. A great example would be department stores - initially, Macy’s offered a massive selection that couldn’t be found in any single store and customers loved it. They did this by turning inventory three times per year with 40% gross margins for a 120% return on capital invested in inventory. In the 1960s, Walmart and Kmart attacked the full-service department stores by offering a similar selection at much cheaper prices. They did this by setting up a value system whereby they could make 23% gross margins but turn inventories 5 times per year, enabling them to earn the industry golden 120% return on capital invested in inventory. Full-service department stores decided not to compete against these lower gross margin products and shifted more space to beauty and cosmetics that offered even higher gross margins (55%) than the 40% they were used to. This meant they could increase their return on capital invested in inventory and their profits while avoiding a competitive threat. This process continued with discount stores eventually pushing Macy’s out of most categories until Macy’s had nowhere to go. All of a sudden the initially disruptive department stores had become disrupted. We see this in technology markets as well. I’m not 100% this qualifies but think about Salesforce and Oracle. Marc Benioff had spent a number of years at Oracle and left to start Salesforce, which pioneered selling subscription, cloud software, on a per-seat revenue model. This meant a much cheaper option compared to traditional Oracle/Siebel CRM software. Salesforce was initially adopted by smaller customers that didn’t need the feature-rich platform offered by Oracle. Oracle dismissed Salesforce as competition even as Oracle CEO Larry Ellison seeded Salesforce and sat on Salesforce’s board. Today, Salesforce is a $200B company and briefly passed Oracle in market cap a few months ago. But now, Salesforce has raised its prices and mostly targets large enterprise buyers to hit its ambitious growth initiatives. Down-market competitors like Hubspot have come into the market with cheaper solutions and more fully integrated marketing tools to help smaller businesses that aren’t ready for a fully-featured Salesforce platform. Disruption is always contextual and it never stops.

Business Themes

1. Low-end-Market vs. New-Market Disruption. There are two types of established methods for disruption: Low-end-market (Down-market) and New-market. Low-end-market disruption seeks to establish performance that is “not good enough” along traditional lines, and targets overserved customers in the low-end of the mainstream market. It typically utilizes a new operating or financial approach with structurally different margins than up-market competitors. Amazon.com is a quintessential low-end market disruptor compared to traditional bookstores, offering prices so low they angered book publishers while offering unmatched convenience to customers allowing them to purchase books online. In contrast, Robinhood is a great example of a new-market disruption. Traditional discount brokerages like Charles Schwab and Fidelity had been around for a while (themselves disruptors of full-service models like Morgan Stanley Wealth Management). But Robinhood targeted a group of people that weren’t consuming in the market, namely teens and millennials, and they did it in an easy-to-use app with a much better user interface compared to Schwab and Fidelity. Robinhood also pioneered new pricing with zero-fee trading and made revenue via a new financial approach, payment for order flow (PFOF). Robinhood makes money by being a data provider to market makers - basically, large hedge funds, like Citadel, pay Robinhood for data on their transactions to help optimize customers buying and selling prices. When approaching big markets its important to ask: Is this targeted at a non-consumer today or am I competing at a structurally lower margin with a new financial model and a “not quite good enough” product? This determines whether you are providing a low-end market disruption or a new-market disruption.

2. Jobs To Be Done. The jobs to be done framework was one of the most important frameworks that Clayton Christensen ever introduced. Marketers typically use advertising platforms like Facebook and Google to target specific demographics with their ads. These segments are narrowly defined: “Males over 55, living in New York City, with household income above $100,000.” The issue with this categorization method is that while these are attributes that may be correlated with a product purchase, customers do not look up exactly how marketers expect them to behave and purchase the products expected by their attributes. There may be a correlation but simply targeting certain demographics does not yield a great result. The marketers need to understand why the customer is adopting the product. This is where the Jobs to Be Done framework comes in. As Christensen describes it, “Customers - people and companies - have ‘jobs’ that arise regularly and need to get done. When customers become aware of a job that they need to get done in their lives, they look around for a product or service that they can ‘hire’ to get the job done. Their thought processes originate with an awareness of needing to get something done, and then they set out to hire something or someone to do the job as effectively, conveniently, and inexpensively as possible.” Christensen zeroes in on the contextual adoption of products; it is the circumstance and not the demographics that matter most. Christensen describes ways for people to view competition and feature development through the Jobs to Be Done lens using Blackberry as an example (later disrupted by the iPhone). While the immature smartphone market was seeing feature competition from Microsoft, Motorola, and Nokia, Blackberry and its parent company RIM came out with a simple to use device that allowed for short productivity bursts when the time was available. This meant they leaned into features that competed not with other smartphone providers (like better cellular reception), but rather things that allowed for these easy “productive” sessions like email, wall street journal updates, and simple games. The Blackberry was later disrupted by the iPhone which offered more interesting applications in an easier to use package. Interestingly, the first iPhone shipped without an app store (but as a proprietary, interdependent product) and was viewed as not good enough for work purposes, allowing the Blackberry to co-exist. Management even dismissed the iPhone as a competitor initially. It wasn’t long until the iPhone caught up and eventually surpassed the Blackberry as the world’s leading mobile phone.

3. Brand Strategies. Companies may choose to address customers in a number of different circumstances and address a number of Jobs to Be Done. It’s important that the Company establishes specific ways of communicating the circumstance to the customer. Branding is powerful, something that Warren Buffett, Terry Smith, and Clayton Christensen have all recognized as durable growth providers. As Christensen puts it: “Brands are, at the beginning, hollow words into which marketers stuff meaning. if a brand’s meaning is positioned on a job to be done, then when the job arises in a customer’s life, he or she will remember the brand and hire the product. Customers pay significant premiums for brands that do a job well.” So what can a large corporate company do when faced with a disruptive challenger to its branding turf? It’s simple - add a word to their leading brand, targeted at the circumstance in which a customer might find themself. Think about Marriott, one of the leading hotel chains. They offer a number of hotel brands: Courtyard by Marriott for business travel, Residence Inn by Marriott for a home away from home, the Ritz Carlton for high-end luxurious stays, Marriott Vacation Club for resort destination hotels. Each brand is targeted at a different Job to Be Done and customers intuitively understand what the brands stand for based on experience or advertising. A great technology example is Amazon Web Services (AWS), the cloud computing division of Amazon.com. Amazon invented the cloud, and rather than launch with the Amazon.com brand, which might have confused their normal e-commerce customers, they created a completely new brand targeted at a different set of buyers and problems, that maintained the quality and recognition that Amazon had become known for. Another great retail example is the SNKRs app released by Nike. Nike understands that some customers are sneakerheads, and want to know the latest about all Nike shoe drops, so Nike created a distinct, branded app called SNKRS, that gives news and updates on the latest, trendiest sneakers. These buyers might not be interested in logging into the Nike app and may become angry after sifting through all of the different types of apparel offered by Nike, just to find new shoes. The SNKRS app offers a new set of consumers and an easy way to find what they are looking for (convenience), which benefits Nike’s core business. Branding is powerful, and understanding the Job to Be Done helps focus the right brand for the right job.

Dig Deeper

• Clayton Christensen’s Overview on Disruptive Innovation

• Jobs to Be Done: 4 Real-World Examples

• A Peek Inside Marriott’s Marketing Strategy & Why It Works So Well

• The Rise and Fall of Blackberry

• Payment for Order Flow Overview

• How Commoditization Happens

December 2020 - Do Androids Dream of Electric Sheep? (Blade Runner) by Phillip K. Dick

This month we read the classic sci-fi novel, Do Androids Dream of Electric Sheep? The book follows Rick Deckard, a bounty hunter searching out android robots who are pretending to be human beings. Along the journey, the reader is asked to consider: what does it mean to be alive? Philip K. Dick was a crazy sci-fi writer, producing many books and stories that became famous like The Man in the High Castle, Minority Report, and Total Recall. Although his writing career was prolific, Dick was a troubled individual. He was a heavy drug user, he married five times, he experienced drug-induced “paranormal activities” and he was physically abusive to at least two of his wives. While

Tech Themes

The common, modern depiction of a Turing Test

1. Are you an android? In 1950, British computer scientist Alan Turing conceived of the Turing Test, a hypothetical test to determine whether a machine can display intelligent behavior. Turing asked the question, “Can machines think?” and attempted to define a test whereby a human might be tricked into believing a machine was human. The test design is fairly complex but involves a human asking written questions to a machine in another room. If the machine can convince the interrogator that it’s human, then machines can “think.” This Turing test is mirrored in the Voigt-Kampff test used throughout the book. It’s unclear if the test works, and Rick Deckard almost misdiagnoses Rachel in the book's early parts. At the end of the book, the test is turned on its head, with Rick impersonating John Isidore (another human), trying to convince machines (in another room) to let him in. This role-reversal and the questioning of who is an android happens throughout the novel - at times, Rick, Phil Resh, and Harry Bryant might all be androids. These questions are the centerpiece of sci-fi lore. They are also explored in a similar style in the famous movie Ghost in The Shell, where people have now have some organs and limbs replaced by electric parts. When a cyber-attacker named the Puppet Master takes over the machine network of technological parts, it’s unclear who is human, who is an android, and who is possessed by the Puppet Master. In the video game world, this idea has also recently been explored in Detroit: Become Human. In the game, which is set up in choose-your-own-adventure style, players can play as humans or androids and choose whether they stay in character or break out of their controlled, android state. The idea of an interrogator or bounty hunter snooping out rogue machines has been explored across books, film, and video games. As technology has become more prevalent in our lives, the cultural mediums may have changed, but the classic philosophical question - what does it mean to be alive? - remains.

2. Predicting the future. The Blade Runner movie is famously set in Los Angeles, 2019, while the book is set in 1992 in San Francisco. The book itself was written in 1968, and the movie Blade Runner debuted 14 years later in 1982. In 2019, Blade Runner experienced a comic resurgence as its dark, bleak futuristic society of flying cars, fully intelligent artificial beings, and international space travel never happened. Today, predictions of computing and artificial intelligence abound. In his original Imitation Game paper, Alan Turing made one of the most famous AI predictions: “I believe that in about fifty years’ time it will be possible to programme computers, with a storage capacity of about 10^9, to make them play the imitation game so well that an average interrogator will not have more than 70 percent, chance of making the right identification after five minutes of questioning.” It’s tough to know if this prediction came true (other than the 10^9 part because that is only 1 GB), with some places claiming to have built algorithms that beat the Turing Test. Interestingly, one common theme emerges about these computing predictions - both experts and non-experts typically predict about 15-25 years out. In the Innovators, Walter Issacson posited that this was enough time to allow people to engage in imaginative thinking. Roy Amara, co-founder of the Institute for the Future, probably put it best: “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.” How long run is the long run, though? As John Maynard Keynes proclaimed: “In the long run we are all dead. Economists set themselves too easy, too useless a task if, in tempestuous seasons, they can only tell us that when the storm is long past the ocean is flat again.” It is seriously hard to estimate the combination of changing technologies and infrastructures, which unlock completely new and cost-effective ways of building things. Will we have self-driving cars in 20 years? Will we have Artificial General Intelligence? Will we have quantum computing? I have no idea.

3. Technology and nature. One theme repeatedly explored throughout the novel is this balance or tension between technology and nature. World War Terminus has caused a layer of radioactive dust to fall over the world, killing animal life and changing the environment. Mechanical animals are the norm, and Rick dreams about procuring a real horse, ostrich, or goat one day. He regularly checks his Sidney’s Animal & Fowl Catalogue like a stockbroker checking the latest price change. A real animal is significantly more expensive than a mechanical version, despite it being nearly impossible to figure out whether an animal is real or fake. This mirror’s the book's whole premise - a real human is more important and valuable than an Android despite increasingly small differences between Androids and humans. Rick realizes this at the end of the book: “The spider Mercer gave the chickenhead, Isidore; it probably was artificial, too. But it doesn't matter. The electric things have their lives, too. Paltry as those lives are." Technology and nature have a tradeoff in today’s world as well. Cloud computing is certainly energy-intensive, but according to the companies that run those clouds (like Google Cloud or Microsoft Azure), it is significantly less intensive than having companies run their own data centers. Beyond the environmental impact, the behavior of nature is something to consider when operating a data center. A few years ago, Facebook data centers went down when a Snake chewed through a switchboard and took down all services. In 2014, a shark bit through an underwater Google fiber cable, and in 2012 a squirrel took down a Yahoo data center. Animals, technology, and nature are constantly interacting, sometimes in unexpected ways.

Business Themes

1. Status seeking and the growth of e-commerce. In the battle to achieve status, real animals are a highly sought after status symbol. Early on in the book, Rick engages in a jealous conversation over his neighbor’s real horse: “‘Ever thought of selling your horse?’ Rick asked. He wished to god he had a horse, in fact any animal.” After revealing that his sheep was electric, Rick’s neighbor kindly remarks that he won’t tell the other people in the apartment complex, suggesting that if people knew Rick had an electric sheep (rather than a real one), they would look down on him. While this interaction seems weird, it parallels so many interactions people have today. Vance Packard offered a description of “status seekers” in 1959: “People who are continually straining to surround themselves with visible evidence of the superior rank they are claiming.” As general consumption and wealth rose after World-War II in the US, luxury goods became more attainable for more classes. Globalization of supply chains also increased this trend. When commerce moved online, new shopping styles and behaviors emerged. E-commerce purchases can frequently replace feelings and there is even a psychological disorder caused by excessive purchasing: Buying-shopping disorder (BSD) is characterized by extreme preoccupations with and craving for buying/shopping and by irresistible and identity-seeking urges to possess consumer goods. Patients with BSD buy more consumer goods than they can afford, and those are neither needed nor frequently used. The excessive purchasing is primarily used to regulate emotions, e.g. to get pleasure, relief from negative feelings, or coping with self-discrepancy.” Dick may be signaling that humans seek status and importance compared to their reference groups, regardless of setting or what indicates that status to others, whether it be an expensive handbag or a goat.

2. Buy goat now, pay-later. 2020 saw the emergence of buy-now, pay-later (BNPL) vendors like Affirm, Klarna, and Afterpay. These companies typically offer zero-interest loans to consumers and get paid a 5% merchant fee for increasing purchases at e-commerce stores. The stores (like Peloton for example) increase sales and the consumers benefit from not having to pay a significant upfront payment. The other way these companies make money is by charging interest payments on specific types of purchases (likely where the merchant doesn’t want to give away a fee). These interest rates can be really, really high - averaging around 10-30% depending on the purchase. This is not a new concept and the idea of payday loans at predatorily high-interest rates has been around for over 30 years. Luckily, the purchases that these BNPL providers are financing tend to not be really high-value products, but it’s still concerning that some people are buying things without understanding the true value they will have to pay in interest. When Rick purchases a real goat, after killing three androids, he finances it, paying $3,000 upfront and entering into a three-year payment contract. Rick’s wife Iran is outraged at the cost of the goat: "‘What are the monthly payments on the goat?’ She held out her hand; reflexively he got out the contract which he had signed, passed it to her. ‘That much,’ she said in a thin voice. ‘The interest; good god — the interest alone. And you did this because you were depressed. Not as a surprise for me, as you originally said.” With BNPL providers now securitizing these consumer loans and selling them off to banks, I wonder if we will see any new regulation come to bear for the benefit of consumers. If people are not careful, they could be locked into long contracts with significant interest over time.

3. Two case studies in electric animals. Electric animals have actually been invented and while they may not be the equivalent of Goddard from Jimmy Neutron yet, they are pretty funny and interesting case studies. Sony released the AIBO dog in 1999 after many years of research. The original robot dog cost $2,100 (~$3,500 in today’s dollars) and sold about 65,000 units. The programmable software allowed the dogs to be used in a variety of situations including an AI soccer world cup. The initial popularity of the dogs waned, and price wars with new rivals caused sales to decline. In 2006, the AIBO dog was discontinued. In 2018, it made a resurgence and is now a barking flexible model that you can pet, play games with, and feed. Another tale of odd mechanic animals is Boston Dynamics. The company that spun out of MIT in 1992 produced massive quadruped animals including one called BigDog, that was capable of balancing, walking up-hill, and carrying significant amounts of equipment. The Company had trouble selling products though and was acquired by Google in 2013 for an undisclosed sum. This came at a time when Google was pushing heavily into robotics with Google Glass and what would become Waymo - they literally titled this Project Replicant (the name used for Android in the Blade Runner film). After some more years of underperformance, Google sold Boston Dynamics to Softbank in 2017. After years of development, the company finally released a product to consumers for a whopping $75,000. The dog is still pretty creepy and comes without a real face, unlike the Aibo. In 2020, it was announced that Hyundai had acquired an 80% stake in the business at a $1.1B valuation. We are still years away from having electric animals that mimic real-life animals and that may be a good thing.

Dig Deeper

• Blade Runner: How Its Problems Made It a Better Movie

• Does Buy Now, Pay Later Threaten Credit Card Issuers?

• Predicting a Future Where the Future Is Routinely Predicted

• An Overview of the latest Affirm Consumer Loan Securitization

• Snakes in a Facebook Data Center

November 2020 - Tape Sucks: Inside Data Domain, A Silicon Valley Growth Story by Frank Slootman

This month we read a short, under-discussed book by current Snowflake and former ServiceNow and Data Domain CEO, Frank Slootman. The book is just like Frank - direct and unafraid. Frank has had success several times in the startup world and the story of Data Domain provides a great case study of entrepreneurship. Data Domain was a data deduplication company, offering a 20:1 reduction of data backed up to tape casettes by using new disk drive technology.

Tech Themes

Data Domain’s 2008 10-K prior to being acquired

1. First time CEO at a Company with No Revenue. Frank is an immigrant to the US, coming from the Netherlands shortly after graduating from the University of Rotterdam. After being rejected by IBM 10+ times, he joined Burroughs corporation, an early mainframe provider which subsequently merged with its direct competitor Sperry for $4.8B in 1986. Frank then spent some time at Compuware and moved back to the Netherlands to help it integrate the acquisition of Uniface, an early customizable report building software. After spending time there, he went to Borland software in 1997, working his way up the product management ranks but all the while being angered by time spent lobbying internally, rather than building. Frank joined Data Domain in the Spring of 2003 - when it had no customers, no revenue, and was burning cash. The initial team and VC’s were impressive - Kai Li, a computer science professor on sabbatical from Princeton, Ben Zhu, an EIR at USVP, and Brian Biles, a product leader with experience at VA Linux and Sun Microsystems. The company was financed by top-tier VC’s New Enterprise Associates and Greylock Partners, with Aneel Bhusri (Founder and current CEO of Workday) serving as initial CEO and then board chairman. This was a stacked team and Slootman knew it: “I’d bring down the average IQ of the company by joining, which felt right to me.” The Company had been around for 18 months and already burned through a significant amount of money when Frank joined. He knew he needed to raise money relatively soon after joining and put the Company’s chances bluntly: “Would this idea really come together and captivate customers? Nobody knew. We, the people on the ground floor, were perhaps, the most surprised by the extraordinary success we enjoyed.”

2. Playing to his Strengths: Capital Efficiency. One of the big takeaways from the Innovators by Walter Issacson was that individuals or teams at the nexus of disciplines - primarily where the sciences meet the humanities, often achieved breakthrough success. The classic case study for this is Apple - Steve Jobs had an intense love of art, music, and design and Steve Wozniak was an amazing technologist. Frank has cultivated a cross-discipline strength at the intersection of Sales and Technology. This might be driven by Slootman’s background is in economics. The book has several references to economic terms, which clearly have had an impact on Frank’s thinking. Data Domain espoused capital efficiency: “We traveled alone, made few many-legged sales calls, and booked cheap flights and hotels: everybody tried to save a dime for the company.” The results showed - the business went from $800K of revenue in 2004 to $275 million by 2008, generating $75M in cash flow from operations. Frank’s capital efficiency was interesting and broke from traditional thinking - most people think to raise a round and build something. Frank took a different approach: “When you are not yet generating revenue, conservation of resource is the dominant theme.” Over time, “when your sales activity is solidly paying for itself,” the spending should shift from conservative to aggressive (like Snowflake is doing this now). The concept of sales efficiency is somewhat talked about, but given the recent fundraising environment, is often dismissed. Sales efficiency can be thought of as: “How much revenue do I generate for every $1 spent in sales and marketing?” Looking at the P&L below, we see Data Domain was highly efficient in its sales and marketing activity - the company increased revenue $150M in 2008, despite spending $115M in sales and marketing (a ratio of 1.3x). Contrast this with a company like Slack which spent $403M to acquire $230M of new revenue (a ratio of 0.6x). It gets harder to acquire customers at scale, so this efficiency is supposed to come down over time but best in class is hopefully above 1x. Frank clearly understands when to step on the gas with investing, as both ServiceNow and Snowflake have remained fairly efficient (from a sales perspective at least) while growing to a significant scale.

3. Technology for Technology’s Sake. “Many technologies are conceived without a clear, precise notion of the intended use.” Slootman hits on a key point and one that the tech industry has struggled to grasp throughout its history. So many products and companies are established around budding technology with no use case. We’ve discussed Magic Leap’s fundraising money-pit (still might find its way), and Iridium Communications, the massive satellite telephone that required people to carry a suitcase around to use it. Gartner, the leading IT research publication (which is heavily influenced by marketing spend from companies) established the Technology Hype Cycle, complete with the “Peak of inflated expectations,” and the “Trough of Disillusionment” for categorizing technologies that fail to live up to their promise. There have been several waves that have come and gone: AR/VR, Blockchain, and most recently, Serverless. Its not so much that these technologies were wrong or not useful, its rather that they were initially described as a panacea to several or all known technology hindrances and few technologies ever live up to that hype. Its common that new innovations spur tons of development but also lots of failure, and this is Slootman’s caution to entrepreneurs. Data Domain was attacking a problem that existed already (tape storage) and the company provided what Clayton Christensen would call a sustaining innovation (something that Slootman points out). Whenever things go into “winter state”, like the internet after the dot-com bubble, or the recent Crpyto Winter which is unthawing as I write; it is time to pay attention and understand the relevance of the innovation.

Business Themes

1. Importance of Owning Sales. Slootman spends a considerable amount of this small book discussing sales tactics and decision making, particularly with respect to direct sales and OEM relationships. OEM deals are partnerships with other companies whereby one company will re-sell the software, hardware, or service of another company. Crowdstrike is a popular product with many OEM relationships. The Company drives a significant amount of its sales through its partner model, who re-sell on behalf of Crowdstrike. OEM partnerships with big companies present many challenges: “First of all, you get divorced from your customer because the OEM is now between you and them, making customer intimacy challenging. Plus, as the OEM becomes a large part of your business, for all intents and purposes they basically own you without paying for the privilege…Never forget that nobody wants to sell your product more than you do.” The challenges don’t end there. Slootman points out that EMC discarded their previous OEM vendor in the data deduplication space, right after acquiring Data Domain. On top of that, the typical reseller relationship happens at a 10-20% margin, degrading gross margins and hurting ability to invest. It is somewhat similar to the challenges open-source companies like MongoDB and Elastic have run into with their core software being…free. Amazon can just OEM their offering and cut them out as a partner, something they do frequently. Partner models can be sustainable, but the give and take from the big company is a tough balance to strike. Investors like organic adoption, especially recently with the rise of freemium SaaS models percolating in startups. Slootman’s point is that at some point in enterprise focused businesses, the Company must own direct sales (and relationships) with its customers to drive real efficiency. After the low cost to acquire freemium adopters buy the product, the executive team must pivot to traditional top down enterprise sales to drive a successful and enduring relationship with the customer.

2. In the Thick of Things. Slootman has some very concise advice for CEOs: be a fighter, show some humanity, and check your ego at the door. “Running a startup reduces you to your most elementary instincts, and survival is on your mind most of the time…The CEO is the ‘Chief Combatant,’ warrior number one.” Slootman views the role of CEO as a fighter, ready to be the first to jump into the action, at all times. And this can be incredibly productive for business as well. Tony Xu, the founder and CEO of Doordash, takes time out every month to do delivery for his own company, in order to remain close to the customer and the problems of the company. Jeff Bezos famously still responds and views emails from customers at jeff@amazon.com. Being CEO also requires a willingness to put yourself out there and show your true personality. As Slootman puts it: “People can instantly finger a phony. Let them know who you really are, warts and all.” As CEO you are tasked with managing so many people and being involved in all aspects of the business, it is easy to become rigid and unemotional in everyday interactions. Harvard Business School professor and former leader at Uber distills it down to a simple phrase: “Begin With Trust.” All CEO’s have some amount of ego, driving them to want to be at the top of their organization. Slootman encourages CEO’s to be introspective, and try to recognize blind spots, so ego doesn’t drive day-to-day interactions with employees. One way to do that is simple: use the pronoun “we” when discussing the company you are leading. Though Slootman doesn’t explicitly call it out - all of these suggestions (fighting, showing empathy, getting rid of ego) are meant to build trust with employees.

3. R-E-C-I-P-E for a Great Culture. The last fifth of the book is all focused on building culture at companies. It is the only topic Slootman stays on for more than a few chapters, so you know its important! RECIPE was an acronym created by the employees at Data Domain to describe the company’s values: Respect, Excellence, Customer, Integrity, Performance, Execution. Its interesting how simple and focused these values are. Technology has pushed its cultural delusion’s of grandeur to an extreme in recent years. The WeWork S-1 hilariously started with: “We are a community company committed to maximum global impact. Our mission is to elevate the world’s consciousness.” But none of Data Domain’s values were about changing the world to be a better place - they were about doing excellent, honest work for customers. Slootman is lasered focused on culture, and specifically views culture as an asset - calling it: “The only enduring, sustainable form of differentiation. These days, we don’t have a monopoly for very long on talent, technology, capital, or any other asset; the one thing that is unique to us is how we choose to come together as a group of people, day in and day out. How many organizations are there that make more than a halfhearted attempt at this?” Technology companies have taken different routes in establishing culture: Google and Facebook have tried to create culture by showering employees with unbelievable benefits, Netflix has focused on pure execution and transparency, and Microsoft has re-vamped its culture by adopting a Growth Mindset (has it really though?). Google originally promoted “Don’t be evil,” as part of its Code of Conduct but dropped the motto in 2018. Employees want to work for mission-driven organizations, but not all companies are really changing the world with their products, and Frank did not try to sugarcoat Data Domain’s data-duplication technology as a way to “elevate the world’s consciousness.” He created a culture driven by performance and execution - providing a useful product to businesses that needed it. The culture was so revered that post-acquisition, EMC instituted Data Domain’s performance management system. Data Domain employees were looked at strangely by longtime EMC executives, who had spent years in a big and stale company. Culture is a hard thing to replicate and a hard thing to change as we saw with the Innovator’s Dilemma. Might as well use it to help the company succeed!

Dig Deeper

• How Data Domain Evolved in the Cloud World

• Former Data Domain CEO Frank Slootman Gets His Old Band Back Together at ServiceNow

• The Contentious Take-over Battle for Data Domain: Netapp vs. EMC

• 2009 Interview with Frank Slootman After the Acquisition of Data Domain

October 2020 - Working in Public: The Making and Maintenance of Open Source Software by Nadia Eghbal

This month we covered Nadia Eghbal’s instant classic about open-source software. Open-source software has been around since the late seventies but only recently it has gained significant public and business attention.

Tech Themes

The four types of open source communities described in Working in Public

1. Misunderstood Communities. Open source is frequently viewed as an overwhelmingly positive force for good - taking software and making it free for everyone to use. Many think of open source as community-driven, where everyone participates and contributes to making the software better. The theory is that so many eyeballs and contributors to the software improves security, improves reliability, and increases distribution. In reality, open-source communities take the shape of the “90-9-1” rule and act more like social media than you could think. According to Wikipedia, the "90–9–1” rule states that for websites where users can both create and edit content, 1% of people create content, 9% edit or modify that content, and 90% view the content without contributing. To show how this applies to open source communities, Eghbal cites a study by North Carolina State Researchers: “One study found that in more than 85% of open source projects the research examined on Github, less than 5% of developers were responsible for 95% of code and social interactions.” These creators, contributors, and maintainers are developer influencers: “Each of these developers commands a large audience of people who follow them personally; they have the attention of thousands of developers.” Unlike Instagram and Twitch influencers, who often actively try to build their audiences, open-source developer influencers sometimes find the attention off-putting - they simply published something to help others and suddenly found themselves with actual influence. The challenging truth of open source is that core contributors and maintainers give significant amounts of their time and attention to their communities - often spending hours at a time responding to pull requests (requests for changes / new features) on Github. Evan Czaplicki’s insightful talk entitled “The Hard Parts of Open Source,” speaks to this challenging dynamic. Evan created the open-source project, Elm, a functional programming language that compiles Javascript, because he wanted to make functional programming more accessible to developers. As one of its core maintainers, he has repeatedly been hit with requests of “Why don’t you just…” from non-contributing developers angrily asking why a feature wasn’t included in the latest release. As fastlane creator, Felix Krause put it, “The bigger your project becomes, the harder it is to keep the innovation you had in the beginning of your project. Suddenly you have to consider hundreds of different use cases…Once you pass a few thousand active users, you’ll notice that helping your users takes more time than actually working on your project. People submit all kinds of issues, most of them aren’t actually issues, but feature requests or questions.” When you use open-source software, remember who is contributing and maintaining it - and the days and years poured into the project for the sole goal of increasing its utility for the masses.

2. Git it? Git was created by Linus Torvalds in 2005. We talked about Torvalds last month, who also created the most famous open-source operating system, Linux. Git was born in response to a skirmish with Larry McAvoy, the head of proprietary tool BitKeeper, over the potential misuse of his product. Torvalds went on vacation for a week and hammered out the most dominant version control system today - git. Version control systems allow developers to work simultaneously on projects, committing any changes to a centralized branch of code. It also allows for any changes to be rolled back to earlier versions which can be enormously helpful if a bug is found in the main branch. Git ushered in a new wave of version control, but the open-source version was somewhat difficult to use for the untrained developer. Enter Github and GitLab - two companies built around the idea of making the git version control system easier for developers to use. Github came first, in 2007, offering a platform to host and share projects. The Github platform was free, but not open source - developers couldn’t build onto their hosting platform - only use it. GitLab started in 2014 to offer an alternative, fully-open sourced platform that allowed individuals to self-host a Github-like tracking program, providing improved security and control. Because of Github’s first mover advantage, however, it has become the dominant platform upon which developers build: “Github is still by far the dominant market player: while it’s hard to find public numbers on GitLab’s adoption, its website claims more than 100,000 organizations use its product, whereas GitHub claims more than 2.9 million organizations.” Developers find GitHub incredibly easy to use, creating an enormous wave of open source projects and code-sharing. The company added 10 million new users in 2019 alone - bringing the total to over 40 million worldwide. This growth prompted Microsoft to buy GitHub in 2018 for $7.5B. We are in the early stages of this development explosion, and it will be interesting to see how increased code accessibility changes the world over the next ten years.

3. Developing and Maintaining an Ecosystem Forever. Open source communities are unique and complex - with different user and contributor dynamics. Eghbal tries to segment the different types of open source communities into four buckets - federations, clubs, stadiums, and toys - characterized below in the two by two matrix - based on contributor growth and user growth. Federations are the pinnacle of open source software development - many contributors and many users, creating a vibrant ecosystem of innovative development. Clubs represent more niche and focused communities, including vertical-specific tools like astronomy package, Astropy. Stadiums are highly centralized but large communities - this typically means only a few contributors but a significant user base. It is up to these core contributors to lead the ecosystem as opposed to decentralized federations that have so many contributors they can go in all directions. Lastly, there are toys, which have low user growth and low contributor growth but may actually be very useful projects. Interestingly, projects can shift in and out of these community types as they become more or less relevant. For example, developers from Yahoo open-sourced their Hadoop project based on Google’s File System and Map Reduce papers. The initial project slowly became huge, moving from a stadium to a federation, and formed subprojects around it, like Apache Spark. What’s interesting, is that projects mature and change, and code can remain in production for a number of years after the project’s day in the spotlight is gone. According to Eghbal, “Some of the oldest code ever written is still running in production today. Fortran, which was first developed in 1957 at IBM, is still widely used in aerospace, weather forecasting, and other computational industries.” These ecosystems can exist forever, but the costs of these ecosystems (creation, distribution, and maintenance) are often hidden, especially the maintenance aspect. The cost of creation and distribution has dropped significantly in the past ten years - with many of the world’s developers all working in the same ecosystem on GitHub - but it has also increased the total cost of maintenance, and that maintenance cost can be significant. Bootstrap co-creator Jacob Thornton likens maintenance costs to caring for an old dog: “I’ve created endlessly more and more projects that have now turned [from puppies] into dogs. Almost every project I release will get 2,000, 3,000 watchers, which is enough to have this guilt, which is essentially like ‘I need to maintain this, I need to take care of this dog.” Communities change from toys to clubs to stadiums to federations but they may also change back as new tools are developed. Old projects still need to be maintained and that code and maintenance comes down to committed developers.

Business Themes

1. Revenue Model Matching. One of the earliest code-hosting platforms was SourceForge, a company founded in 1999. The Company pioneered the idea of code-hosting - letting developers publish their code for easy download. It became famous for letting open-source developers use the platform free of charge. SourceForge was created by VA Software, an internet bubble darling that saw its stock price decimated when the bubble finally burst. The challenge with scaling SourceForge was a revenue model mismatch - VA Software made money with paid advertising, which allowed it to offer its tools to developers for free, but meant its revenue model was highly variable. When the company went public, it was still a small and unproven business, posting $17M in revenue and $31M in costs. The revenue model mismatch is starting to rear its head again, with traditional software as a service (SaaS) recurring subscription models catching some heat. Many cloud service and API companies are pricing by usage rather than a fixed, high margin subscription fee. This is the classic electric utility model - you only pay for what you use. Snowflake CEO Frank Slootman (who formerly ran SaaS pioneer ServiceNow) commented: “I also did not like SaaS that much as a business model, felt it not equitable for customers.” Snowflake instead charges based on credits which pay for usage. The issue with usage-based billing has traditionally been price transparency, which can be obfuscated with customer credit systems and incalculable pricing, like Amazon Web Services. This revenue model mismatch was just one problem for SourceForge. As git became the dominant version control system, SourceForge was reluctant to support it - opting for its traditional tools instead. Pricing norms change, and new technology comes out every day, it’s imperative that businesses have a strong grasp of the value they provide to their customers and align their revenue model with customers, so a fair trade-off is created.

2. Open Core Model. There has been enormous growth in open source businesses in the past few years, which typically operate on an open core model. The open core model means the Company offers a free, normally feature limited, version of its software and also a proprietary, enterprise version with additional features. Developers might adopt the free version but hit usage limits or feature constraints, causing them to purchase the paid version. The open-source “core” is often just that - freely available for anyone to download and modify; the core's actual source code is normally published on GitHub, and developers can fork the project or do whatever they wish with that open core. The commercial product is normally closed source and not available for modification, providing the business a product. Joseph Jacks, who runs Open Source Software (OSS) Capital, an investment firm focused on open source, displays four types of open core business model (pictured above). The business models differ based on how much of the software is open source. Github, interestingly, employs the “thick” model of being mostly proprietary, with only 10% of its software truly open-sourced. Its funny that the site that hosts and facilitates the most open source development is proprietary. Jacks nails the most important question in the open core model: “How much stays open vs. How much stays closed?” The consequences can be dire to a business - open source too much and all of a sudden other companies can quickly recreate your tool. Many DevOps tools have experienced the perils of open source, with some companies losing control of the project it was supposed to facilitate. On the flip side, keeping more of the software closed source goes against the open-source ethos, which can be viewed as organizations selling out. The continuous delivery pipeline project Jenkins has struggled to satiate its growing user base, leading to the CEO of the Jenkins company, CloudBees, posting the blog post entitled, “Shifting Gears”: “But at the same time, the incremental, autonomous nature of our community made us demonstrably unable to solve certain kinds of problems. And after 10+ years, these unsolved problems are getting more pronounced, and they are taking a toll — segments of users correctly feel that the community doesn’t get them, because we have shown an inability to address some of their greatest difficulties in using Jenkins. And I know some of those problems, such as service instability, matter to all of us.” Striking this balance is incredibly tough, especially in a world of competing projects and finite development time and money in a commercial setting. Furthermore, large companies like AWS are taking open core tools like Elastic and MongoDB and recreating them in proprietary fashions (Elasticsearch Service and DocumentDB) prompting company CEO’s to appropriately lash out. Commercializing open source software is a never-ending battle against proprietary players and yourself.

3. Compensation for Open Source. Eghabl characterizes two types of funders of open-source - institutions (companies, governments, universities) and individuals (usually developers who are direct users). Companies like to fund improved code quality, influence, and access to core projects. The largest groups of contributors to open source projects are mainly corporations like Microsoft, Google, Red Hat, IBM, and Intel. These corporations are big enough and profitable enough to hire individuals and allow them to strike a comfortable balance between time spent on commercial software and time spent on open source. This also functions as a marketing expense for the big corporations; big companies like having influencer developers on payroll to get the company’s name out into the ecosystem. Evan You, who authored Vue.js, a javascript framework described company backed open-source projects: “The thing about company-backed open-source projects is that in a lot of cases… they want to make it sort of an open standard for a certain industry, or sometimes they simply open-source it to serve as some sort of publicity improvement to help with recruiting… If this project no longer serves that purpose, then most companies will probably just cut it, or (in other terms) just give it to the community and let the community drive it.” In contrast to company-funded projects, developer-funded projects are often donation based. With the rise of online tools for encouraging payments like Stripe and Patreon, more and more funding is being directed to individual open source developers. Unfortunately though, it is still hard for many open source developers to pursue open source on individual contributions, especially if they work on multiple projects at the same time. Open source developer Sindre Sorhus explains: “It’s a lot harder to attract company sponsors when you maintain a lot of projects of varying sizes instead of just one large popular project like Babel, even if many of those projects are the backbone of the Node.js ecosystem.” Whether working in a company or as an individual developer, building and maintaining open source software takes significant time and effort and rarely leads to significant monetary compensation.

Dig Deeper

• List of Commercial Open Source Software Businesses by OSS Capital

• How to Build an Open Source Business by Peter Levine (General Partner at Andreessen Horowitz)

• The Mind Behind Linux (a talk by Linus Torvalds)

• What is open source - a blog post by Red Hat

• Why Open Source is Hard by PHP Developer Jose Diaz Gonzalez

• The Complicated Economy of Open Source

March 2020 - The Hard Thing About Hard Things by Ben Horowitz

Ben Horowitz, GP of the famous investment fund Andreessen Horowitz, addresses the not-so-pleasant aspects of being a founder/CEO during a crisis. This book provides an excellent framework for anyone going through the struggles of scaling a business and dealing with growing pains.

Tech Themes

1. The importance of Netscape. Now that its been relegated to history by the rise of AOL and internet explorer, its hard to believe that Netscape was ever the best web browser. Founded by Marc Andreessen, who had founded the first web browser, Mosaic (as a teenager!), Netscape would go on to achieve amazing success only to blow up in the face of competition and changes to internet infrastructure. Netscape was an incredible technology company, and as Brian McCullough shows in last month’s TBOTM, Netscape was the posterchild for the internet bubble. But for all the fanfare around Netscape’s seminal IPO, little is discussed about its massive and longstanding technological contributions. In 1995, early engineer Brendan Eich created Javascript, which still stands as the dominant front end language for the web. In the same year, the Company developed Secure Socket Layer (SSL), the most dominant basic internet security protocol (and reason for HTTPS). On top of those two fundamental technologies, Netscape also developed the internet cookie, in 1994! Netscape is normally discussed as the amazing company that ushered many of the first internet users onto the web, but its rarely lauded for its longstanding technological contributions. Ben Horowitz, author of the Hard Thing About Hard Things was an early employee and head of the server business unit for Netscape when it went public.

2. Executing a pivot. Famous pivots have become part of startup lore whether it be in product (Glitch (video game) —> Slack (chat)), business model (Netflix DVD rental —> Streaming), or some combo of both (Snowdevil (selling snowboards online) —> Shopify (ecommerce tech)). The pivot has been hailed as necessary tool in every entrepreneur’s toolbox. Though many are sensationalized, the pivot Ben Horowitz underwent at LoudCloud / Opsware is an underrated one. LoudCloud was a provider of web hosting services and managed services for enterprises. The Company raised a boatload ($346M) of money prior to going public in March 2001, after the internet bubble had already burst. The Company was losing a lot of money and Ben knew that the business was on its last legs. After executing a 400 person layoff, he sold the managed services part of the business to EDS, a large IT provider, for $63.5M. LoudCloud had a software tool called Opsware that it used to manage all of the complexities of the web hosting business, scaling infrastructure with demand and managing compliance in data centers. After the sale was executed, the company’s stock fell to $0.35 per share, even trading below cash, which meant the markets viewed the Company as already bankrupt. The acquisition did something very important for Ben and the Opsware team, it bought them time - the Company had enough cash on hand to execute until Q4 2001 when it had to be cash flow positive. To balance out these cash issues, Opsware purchased Tangram, Rendition Networks, and Creekpath, which were all software vendors that helped manage the software of data centers. This had two effects - slowing the burn (these were profitable companies), and building a substantial product offering for data center providers. Opsware started making sales and the stock price began to tick up, peaking the attention of strategic acquirers. Ultimately it came down to BMC Software and HP. BMC offered $13.25 per share, the Opsware board said $14, BMC countered with $13.50 and HP came in with a $14.25 offer, a 38% premium to the stock price and a total valuation of $1.6B, which the board could not refuse. The Company changed business model (services —> software), made acquisitions and successfully exited, amidst a terrible environment for tech companies post-internet bubble.

3. The Demise of the Great HP. Hewlett-Packard was one of the first garage-borne, silicon valley technology companies. The company was founded in Palo Alto by Bill Hewlett and Dave Packard in 1939 as a provider of test and measurement instruments. Over the next 40 years, the company moved into producing some of the best printers, scanners, calculators, logic analyzers, and computers in the world. In the 90s, HP continued to grow its product lines in the computing space, and executed a spinout of its manufacturing / non-computing device business in 1999. 1999 marks the tragic beginning of the end for HP. The first massive mistake was the acquisition of Compaq, a flailing competitor in the personal computer market, who had acquired DEC (a losing microprocessor company), a few years earlier. The acquisition was heavily debated, with Walter Hewlett, son of the founder and board director at the time, engaging in a proxy battle with then current CEO, Carly Firorina. The new HP went on to lose half of its market value and incur heavy job losses that were highly publicized. This started a string of terrible acquisitions including EDS, 3COM, Palm Inc., and Autonomy for a combined $28.8B. The Company spun into two divisions - HP Inc. and HP Enterprise in 2015 and each had their own spinouts and mergers from there (Micro Focus and DXC Technology). Today, HP Inc. sells computers and printers, and HPE sells storage, networking and server technology. What can be made of this sad tale? HP suffered from a few things. First, poor long term direction - in hindsight their acquisitions look especially terrible as a repeat series of massive bets on technology that was already being phased out due to market pressures. Second, HP had horrible corporate governance during the late 90s and 2000s - board in-fighting over acquisitions, repeat CEO fiirings over cultural issues, chairman-CEO’s with no checks, and an inability to see the outright fraud in their Autonomy acquisition. Lastly, the Company saw acquisitions and divestitures as band-aids - new CEO entrants Carly Fiorina (from AT&T), Mark Hurd (from NCR), Leo Apotheker (from SAP), and Meg Whitman (from eBay) were focused on making an impact at HP which meant big acquisitions and strategic shifts. Almost none of these panned out, and the repeated ideal shifts took a toll on the organization as the best talent moved elswehere. Its sad to see what has happened at a once-great company.

Business Themes

1. Ill, not sick: going public at the end of the internet bubble. Going public is supposed to be the culmination of a long entrepreneurial journey for early company employees, but according to Ben Horowitz’s experience, going public during the internet bubble pop was terrible. Loudcloud had tried to raise money privately but struggled given the terrible conditions for raising money at the beginning of 2001. Its not included in the book but the reason the Company failed to raise money was its obscene valuation and loss. The Company was valued at $1.15B in its prior funding round and could only report $6M in Net Revenue on a $107M loss. The Company sought to go public at $10 per share ($700M valuation), but after an intense and brutal roadshow that left Horowitz physically sick, they settled for $6.00 per share, a massive write-down from the previous round. The fact that the banks were even able to find investors to take on this significant risk at this point in the business cycle was a marvel. Timing can be crucial in an IPO as we saw during the internet bubble; internet “businesses” could rise 4-5x on their first trading day because of the massive and silly web landgrab in the late 90s. On the flip side, going public when investors don’t want what you’re selling is almost a death sentence. Although they both have critical business and market issues, WeWork and Casper are clear examples of the importance of timing. WeWork and Casper were late arrivals on the unicorn IPO train. Let me be clear - both have huge issues (WeWork - fundamental business model, Casper - competition/differentiation) but I could imagine these types of companies going public during a favorable time period with a relatively strong IPO. Both companies had massive losses, and investors were especially wary of losses after the failed IPOs of Lyft and Uber, which were arguably the most famous unicorns to go public at the time. Its not to say that WeWork and Casper wouldn’t have had trouble in the public markets, but during the internet bubble these companies could’ve received massive valuations and raised tons of cash instead of seeking bailouts from Softbank and reticent public market investors.

2. Peactime / Wartime CEO. The genesis of this book was a 2011 blog post written by Horowitz detailing Peacetime and Wartime CEO behavior. As the book and blog post describe, “Peacetime in business means those times when a company has a large advantage vs. the competition in its core market, and its market is growing. In times of peace, the company can focus on expanding the market and reinforcing the company’s strengths.” On the other hand, to describe Wartime, Horowitz uses the example of a previous TBOTM, Only the Paranoid Survive, by Andy Grove. In the early 1980’s, Grove realized his business was under serious threat as competition increased in Intel’s core business, computer memory. Grove shifted the entire organization whole-heartedly into chip manufacturing and saved the company. Horowitz outlines several opposing behaviors of Peacetime and Wartime CEOs: “Peacetime CEO knows that proper protocol leads to winning. Wartime CEO violates protocol in order to win; Peacetime CEO spends time defining the culture. Wartime CEO lets the war define the culture; Peacetime CEO strives for broad based buy in. Wartime CEO neither indulges consensus-building nor tolerates disagreements.” Horowitz concludes that executives can be a peacetime and wartime CEO after mastering each of the respective skill sets and knowing when to shift from peacetime to wartime and back. The theory is interesting to consider; at its best, it provides an excellent framework for managing times of stress (like right now with the Coronavirus). At its worst, it encourages poor CEO behavior and cut throat culture. While I do think its a helpful theory, I think its helpful to think of situations that may be an exception, as a way of testing the theory. For example, lets consider Google, as Horowitz does in his original article. He calls out that Google was likely entering in a period of wartime in 2011 and as a result transitioned CEOs away from peacetime Eric Schmidt to Google founder and wartime CEO, Larry Page. Looking back however, was it really clear that Google was entering wartime? The business continued to focus on what it was clearly best at, online search advertising, and rarely faced any competition. The Company was late to invest in cloud technology and many have criticized Google for pushing billions of dollars into incredibly unprofitable ventures because they are Larry and Sergey’s pet projects. In addition, its clear that control had been an issue for Larry all along - in 2011, it came out that Eric Schmidt’s ouster as CEO was due to a disagreement with Larry and Sergey over continuing to operate in China. On top of that, its argued that Larry and Sergey, who have controlling votes in Google, stayed on too long and hindered Sundar Pichai’s ability to effectively operate the now restructured Alphabet holding company. In short, was Google in a wartime from 2011-2019? I would argue no, it operated in its core market with virtually no competition and today most Google’s revenues come from its ad products. I think the peacetime / wartime designation is rarely so black and white, which is why it is so hard to recognize what period a Company may be in today.

3. Firing people. The unfortunate reality of business is that not every hire works out, and that eventually people will be fired. The Hard Thing About Hard Things is all about making difficult decisions. It lays out a framework for thinking about and executing layoffs, which is something that’s rarely discussed in the startup ecosystem until it happens. Companies mess up layoffs all the time, just look at Bird who recently laid off staff via an impersonal Zoom call. Horowitz lays out a roughly six step process for enacting layoffs and gives the hard truths about executing the 400 person layoff at LoudCloud. Two of these steps stand out because they have been frequently violated at startups: Don’t Delay and Train Your Managers. Often times, the decision to fire someone can be a months long process, continually drawn out and interrupted by different excuses. Horowitz encourages CEOs to move thoughtfully and quickly to stem leaks of potential layoffs and to not let poor performers continue to hurt the organization. The book discusses the Law of Crappy People - any level of any organization will eventually converge to the worst person on that level; benchmarked against the crappiest person at the next level. Once a CEO has made her mind up about the decision to fire someone, she should go for it. As part of executing layoffs, CEOs should train their managers, and the managers should execute the layoffs. This gives employees the opportunity to seek direct feedback about what went well and what went poorly. This aspect of the book is incredibly important for all levels of entrepreneurs and provides a great starting place for CEOs.

Dig Deeper

• Most drastic company pivots that worked out

• Initial thoughts on the Opsware - HP Deal from 2007

• A thorough history of HP’s ventures, spin-offs and acquisitions

• Ben’s original blog post detailing the pivot from service provider to tech company

• The First (1995-01) and Second Browser War (2004 - 2017)

February 2020 - How the Internet Happened: From Netscape to the iPhone by Brian McCullough

Brian McCullough, host of the Internet History Podcast, does an excellent job of showing how the individuals adopted the internet and made it central to their lives. He follows not only the success stories but also the flame outs which provide an accurate history of a time of rapid technological change.

Tech Themes

1. Form to Factor: Design in Mobile Devices. Apple has a long history with mobile computing, but a few hiccups in the early days are rarely addressed. These hiccups also telegraph something interesting about the technology industry as a whole - design and ease of use often trump features. In the early 90’s Apple created the Figaro, a tablet computer that weighed eight pounds and allowed for navigation through a stylus. The issue was it cost $8,000 to produce and was 3/4 of an inch thick, making it difficult to carry. In 1993, the Company launched the Newton MessagePad, which cost $699 and included a calendar, address book, to-do list and note pad. However, the form was incorrect again; the MessagePad was 7.24 in. x 4.5 in. and clunky. With this failure, Apple turned its attention away from mobile, allowing other players like RIM and Blackberry to gain leading market share. Blackberry pioneered the idea of a full keyboard on a small device and Marc Benioff, CEO of salesforce.com, even called it, “the heroin of mobile computing. I am serious. I had to stop.” IBM also tried its hand in mobile in 1992, creating the Simon Personal Communicator, which had the ability to send and receive calls, do email and fax, and sync with work files via an adapter. The issue was the design - 8 in. by 2.5 in. by 1.5 in. thick. It was a modern smartphone, but it was too big, clunky, and difficult to use. It wasn’t until the iPhone and then Android that someone really nailed the full smart phone experience. The lessons from this case study offer a unique insight into the future of VR. The company able to offer the correct form factor, at a reasonable price can gain market share quickly. Others who try to pioneer too much at a time (cough, magic leap), will struggle.

2. How to know you’re onto something. Facebook didn’t know. On November 30, 2004, Facebook surpassed one million users after being live for only ten months. This incredible growth was truly remarkable, but Mark Zuckerberg still didn’t know facebook was a special company. Sean Parker, the founder of Napster, had been mentoring Zuckerberg the prior summer: “What was so bizarre about the way Facebook was unfolding at that point, is that Mark just didn’t totally believe in it and wanted to go and do all these other things.” Zuckerberg even showed up to a meeting at Sequoia Capital still dressed in his pajamas with a powerpoint entitled: “The Top Ten Reasons You Should Not Invest.” While this was partially a joke because Sequoia has spurned investing in Parker’s latest company, it represented how immature the whole facebook operation was, in the face of rapid growth. Facebook went on to release key features like groups, photos, and friending, but most importantly, they developed their revenue model: advertising. The quick user growth and increasing ad revenue growth got the attention of big corporations - Viacom offered $2B in cash and stock, and Yahoo offered $1B all cash. By this time, Zuckerberg realized what he had, and famously spurned several offers from Yahoo, even after users reacted negatively to the most important feature that facebook would ever release, the News Feed. In today’s world, we often see entrepreneur’s overhyping their companies, which is why Silicon Valley was in-love with dropout founders for a time, their naivite and creativity could be harnessed to create something huge in a short amount of time.

3. Channel Partnerships: Why apple was reluctant to launch a phone. Channel partnerships often go un-discussed at startups, but they can be incredibly useful in growing distribution. Some industries, such as the Endpoint Detection and Response (EDR) market thrives on channel partnership arrangements. Companies like Crowdstrike engage partners (mostly IT services firms) to sell on their behalf, lowering Crowdstrike’s customer acquisition and sales spend. This can lead to attractive unit economics, but on the flip side, partners must get paid and educated on the selling motion which takes time and money. Other channel relationships are just overly complex. In the mid 2000’s, mobile computing was a complicated industry, and companies hated dealing with old, legacy carriers and simple clunky handset providers. Apple tried the approach of working with a handset provider, Motorola, but they produced the terrible ROKR which barely worked. The ROKR was built to run on the struggling Cingular (would become AT&T) network, who was eager to do a deal with Apple in hopes of boosting usage on their network. After the failure of the ROKR, Cingular executives begged Jobs to build a phone for the network. Normally, the carriers had specifications for how phones were built for their networks, but Jobs ironed out a contract which exchanged network exclusivity for complete design control, thus Apple entered into mobile phones. The most important computing device of the 2000’s and 2010’s was built on a channel relationship.

Business Themes

1. AOL-Time Warner: the merger destined to fail. To fully understand the AOL-Time Warner merger, you must first understand what AOL was, what it was becoming, and why it was operating on borrowed time. AOL started as an ISP, charging customers $9.95 for five hours of dial-up internet access, with each additional hour costing $2.95. McCullough describes AOL: “AOL has often been described as training wheels for the Internet. For millions of Americans, their aol.com address was their first experience with email, and thus their first introduction to the myriad ways that networked computing could change their lives.” AOL grew through one of the first viral marketing campaigns ever; AOL put CDs into newspapers which allowed users to download AOL software and get online. The Company went public in March of 1992 and by 1996 the Company had 2.1 million subscribers, however subscribers were starting to flee to cheaper internet access. It turned out that building an ISP was relatively cheap, and the high margin cash flow business that AOL had built was suddenly threatened by a number of competitors. AOL persisted with its viral marketing strategy, and luckily many americans still had not tried the internet yet and defaulted to AOL as being the most popular. AOL continued to add subscribers and its stock price started to balloon; in 1998 alone the stock went up 593%. AOL was also inking ridiculous, heavily VC funded deals with new internet startups. Newly public Drkoop, which raised $85M in an IPO, signed a four year $89M deal to be AOL’s default provider of health content. Barnes and Noble paid $40M to be AOL’s bookselling partner. Tel-save, a long distance phone provider signed a deal worth $100M. As the internet bubble continued to grow, AOL’s CEO, Steve Case realized that many of these new startups would be unable to fufill their contractual obligations. Early web traffic reporting systems could easily be gamed, and companies frequently had no business model other than attract a certain demographic of traffic. By 1999, AOL had a market cap of $149.8B and was added to the S&P 500 index; it was bigger than both Disney and IBM. At this time, the world was shifting away from dial-up internet to modern broadband connections provided by cable companies. One AOL executive lamented: “We all knew we were living on borrowed time and had to buy something of substance by using that huge currency [AOL’s stock].” Time Warner was a massive media company, with movie studios, TV channels, magazines and online properties. On Jan 10, 2000, AOL merged with Time Warner in one of the biggest mergers in history. AOL owned 56% of the combined company. Four days later, the Dow peaked and began a downturn which would decimate hundreds of internet businesses built on foggy fundamentals. Acquisitions happen for a number of reasons, but imminent death is not normally considered by analysts or pundits. When you see acquisitions, read the press release and understand why (at least from a marketing perspective), the two companies made a deal. Was the price just astronomical (i.e. Instagram) or was their something very strategic (i.e. Microsoft-Github)? When you read the press release years later, it should indicate whether the combination actually was proved out by the market.

2. Acquisitions in the internet bubble: why acquisitions are really just guessing. AOL-Time Warner shows the interesting conundrum in acquisitions. HP founder David Packard coined this idea somewhat in Packard’s law: “No company can consistently grow revenues faster than its ability to get enough of the right people to implement that growth and still become a great company. If a company consistently grows revenue faster than its ability to get enough of the right people to implement that growth, it will not simply stagnate; it will fall.” Author of Good to Great, Jim Collins, clarified this idea: “Great companies are more likely to die of ingestion of too much opportunity, than starvation from too little.” Acquisitions can be a significant cause of this outpacing of growth. Look no further than Yahoo, who acquired twelve companies between September 1997 and June 1999 including Mark Cuban’s Broadcast.com for $5.7B (Kara Swisher at WSJ in 1999), GeoCities for $3.6B, and Y Combinator founder Paul Graham’s Viaweb for $48M. They spent billions in stock and cash to acquire these companies! Its only fitting that two internet darlings would eventually end up in the hands of big-telecom Verizon, who would acquire AOL for $4.4B in 2015, and Yahoo for $4.5B in 2017, only to write down the combined value by $4.6B in 2018. In 2013, Yahoo would acquire Tumblr for $1.1B, only to sell it off this past year for $3M. Acquisitions can really be overwhelming for companies, and frequently they don’t work out as planned. In essence, acquisitions are guesses about future value to customers and rarely are they as clean and smart as technology executives make them seem. Some large organizations have gotten good at acquisitions - Google, Microsoft, Cisco, and Salesforce have all made meaningful acquisitions (Android, Github, AppDynamics, ExactTarget, respectively).

3. Google and Excite: the acquisition that never happened. McCullough has an incredible quote nestled into the start of chapter six: “Pioneers of new technologies are rarely the ones who survive long enough to dominate their categories; often it is the copycat or follow-on names that are still with us to this day: Google, not AltaVista, in search; Facebook, not Friendster, in social networks.” Amazon obviously bucked this trend (he mentions that), but in search he is absolutely right! In 1996, several internet search companies went public including Excite, Lycos, Infoseek, and Yahoo. As the internet bubble grew bigger, Yahoo was the darling of the day, and by 1998, it had amassed a $100B market cap. There were tons of companies in the market including the players mentioned above and AltaVista, AskJeeves, MSN, and others. The world did not need another search engine. However, in 1998, Google founders Larry Page and Sergey Brin found a better way to do search (the PageRank algorithm) and published their famous paper: “The Anatomy of a Large-Scale Hypertextual Web Search Engine.” They then went out to these massive search engines and tried to license their technology, but no one was interested. Imagine passing on Goolge’s search engine technology. In an over-ingestion of too much opportunity, all of the search engines were trying to be like AOL and become a portal to the internet, providing various services from their homepages. From an interview in 1998, “More than a "portal" (the term analysts employ to describe Yahoo! and its rivals, which are most users' gateway to the rest of the Internet), Yahoo! is looking increasingly like an online service--like America Online (AOL) or even CompuServe before the Web.” Small companies trying to do too much (cough, uber self-driving cars, cough). Excite showed the most interest in Google’s technology and Page offered it to the Company for $1.6M in cash and stock but Excite countered at $750,000. Excite had honest interest in the technology and a deal was still on the table until it became clear that Larry wanted Excite to rip out its search technology and use Google’s instead. Unfortunately that was too big of a risk for the mature Excite company. The two companies parted ways and Google eventually became the dominant player in the industry. Google’s focus was clear from the get-go, build a great search engine. Only when it was big enough did it plunge into acquisitions and development of adjacent technologies.

Dig Deeper

• Raymond Smith, former CEO of Bell Atlantic, describing the technology behind the internet in 1994

• Bill Gates’ famous memo: THE INTERNET TIDAL WAVE (May 26, 1995)

• The rise and fall of Netscape and Mosaic in one chart

• List of all the companies made famous and infamous in the dot-com bubble

• Pets.com S-1 (filing for IPO) showin a $62M net loss on $6M in revenue

• Detail on Microsoft’s antitrust lawsuit

November 2019 - Brotopia: Breaking Up the Boys' Club of Silicon Valley by Emily Chang

This book details a number of factors that have discouraged women’s participation and promotion in the tech industry. Emily Chang gives a brief history of the circumstances that have pushed women away from the industry and then covers its current issues - weaving in great insights and actionable takeaways along the way.

Tech Themes

1. The Antisocial Programmer. As the necessity for technological talent began to rise in the early 1960s, many existing companies were unsure how to hire the right people. To address this shortfall in know-how, companies used standard aptitude tests, like IBM’s Programmer Aptitude Test, to examine whether a candidate was capable of applying the right problem solving skills on the job. Beyond these standard aptitude tests, companies leveraged personality exams. In 1966, a large software company called System Development Corporation hired William Cannon and Dallis Perry to build a personality test that could shed light on the right personalities needed on the job. To build this personality test, Cannon and Perry profiled 1,378 programmers on a range of personality traits. Of those 1,378 profiled, only 186 were women. After compiling their findings, the final report stated: “[Programmers] dislike activities involving close personal interaction; they are generally more interested in things than people.” Furthermore, Cannon and Perry’s 82-page paper made no reference to women at all, referring to the surveyed group as men, for the entire paper. A combination of aptitude tests and Cannon-Perry’s personality test became the industry standard for recruiting, and soon companies were mistakenly focused on stereotypical antisocial programmers. Antisocial personality disorder is three times more common in men than women. Given how early the tech industry was, compared to what it is now, this decision to hire a majority of anti-social men has propagated throughout the industry, with senior leaders continually reinforcing incorrect hiring standards.

2. Women in Computer Science. According to the book, “there was an overall peak in bachelor’s degrees awarded in computer science in the mid-1980s, and a peak in the percentage of women receiving those degrees at nearly 40 percent. And then there was a steep decline in both.” It was at this time in the mid-1980s that computer science departments began to turn away anyone who was not a pre-qualified, academic top performer. There was too much demand with a constrained supply of qualified teachers, so only the best kids were allowed into top programs. This caused students to view computer science as hyper-competitive and unwelcoming to individuals without significant experience. Today, women earn only 18% of computer science degrees – a statistic that shocks many in the industry. Researchers at NPR found that intro CS courses play a key role in this problem – with many teachers still assuming students have prior familiarity with coding. Furthermore, women are socialized in a number of ways to achieve perfection, so when brand new code is not working well, women are more likely to feel discouraged. It is imperative to encourage women to try computer science if they have interest, to combat these negative trends.

3. PayPal and Perpetuating Cycles. After the dot-com bubble burst in the early 2000s, several newly minted millionaires did the natural thing after selling a company for millions of dollars, became a venture capitalists. One of the major success stories of the era was PayPal. Among those newly minted millionaires were the PayPal mafia: Peter Thiel, Keith Rabois, Elon Musk, Max Levchin, David Sacks, and Reid Hoffman. Thiel and Rabois have a history of suggesting a meritocratic process of hiring where only the most qualified academic candidate should land the job, not taking into account diversity of any form. Furthermore, in his book Zero to One (which we’ve discussed before), Thiel proposes startups should hire only “nerds of the same type.” The mafia began investing in several new companies, seeding friends who were likely to perpetuate the cycle of recruiting friends and hiring based on status alone. Rabois, who is currently a venture capitalist has remarked: “Once you have alignment, then I think you can have a wide swath of people, views and perspectives.” These ideas seem more like justification for hiring large groups of white males who were friends of PayPal executives than a truly “meritocratic” process, which is not the best way of building a successful, diverse organization. Roger McNamee, founder of technology private equity firm, Silver Lake, suggests: “They didn’t just perpetuate it; they turned it into a fine art. They legitimized it… The guys were born into the right part of the gene pool, they wind up at the right company, at the right moment in time, they all leave together and [go on] to work together. I give them full credit for it but calling it a meritocracy is laughable.”

Business Themes

1. The Women at Early Google. A lot of people know the story of Sergey Brin meeting co-founder Larry Page. But few are aware of when Sergey and Larry met Susan Wojcicki, who is now CEO of YouTube. Sergey and Larry were looking for office space, and through a mutual friend, were introduced to Susan Wojcicki, who worked in marketing at Intel at the time. Though she didn’t jump on board immediately, Susan eventually came around and was instrumental in launching two of Google’s most important products: AdWords and AdSense. Wojcicki would soon be working closely with a newly recruited, Marissa Mayer, who after graduating from Stanford with a degree in Symbolic Systems, joined Google to help build AdWords and design Google’s front-end. Wojcicki and Mayer would soon be joined by Sheryl Sandberg, who came to Google in 2001 as Vice President of Online Sales and Operations. Another now-famous early female employee was Kim Scott, author of Radical Candor, who joined the company in 2004. All of these early, powerful female leaders, with the continued urging of Larry and Sergey (who wanted to achieve a 50/50 ratio of male to female employees) helped build a strong culture of female leadership. But as the Company scaled it lost sight of its gender diversity goals – “In 2017, women accounted for 31% of employees overall, 25% of leadership roles and 20% of technical roles.” Google claims it lost touch as it scaled, when the need for hiring outpaced the ability to find qualified and diverse candidates – but that sounds like an easy cop out.

2. Startups and Party Culture. Atari and Trilogy Software pioneered the idea of a work-hard, play-hard startup cultures. Nolan Bushnell of Atari would throw wild parties and have employees (including Steve Jobs) work late into the night, building for the company. Trilogy, a provider of sales and marketing software, extended this idea even further. It started with hiring, where, according to a former engineer, Trilogy’s ethos was: “We’re elite talent. It’s potential and talent, not experience, that has merit.” The Company regularly used complicated brain-teasers in interviews and attracted swaths of anti-social engineers with young and attractive talent recruiters. Joe Liemandt, the CEO of Trilogy, also moved the company to Austin, Texas; executives likened the tactic to marooning members of a cult. Co-founder Christy Jones remarked: “I didn’t go on vacation. We called holidays competitive advantage days because no one else was working. It was a chance to get ahead.” The Company had a strong drinking and partying culture and bares striking cult-like resemblance to WeWork, except it had a sustainable business model. Other technology companies have mixed constant alcohol and long hours, which has led to numerous assault charges at well-known startups including Uber, Zenefits, WeWork and others. Startup and party culture does not need to be so intertwined.

3. Hiring Practices to Encourage Diverse Backgrounds. Stewart Butterfield, the founder of Flickr (sold to Yahoo for $20 million in 2005), has focused on diverse hiring efforts at his new company Slack. According to Brotopia, “In 2017, Slack reported that 43.5% of its employees were women, including 48% of managers and almost 30% of technical employees – far better numbers than any tech company in Silicon Valley.” Butterfield, who grew up on a commune in Canada, recognizes his privilege, and discusses its not insanely difficult to create a diverse environment: “As an already successful, white, male, straight – go down the list – I’m not going to have the relevant experience to determine what makes this a good workplace, so some of that is just being open but really just making it an explicit focus.” Slack’s diverse recruiting team was given explicit instructions to source candidates from underrepresented backgrounds and schools for every new role in the organization. More companies should follow Slack’s lead and adopt explicit gender and diversity goals.

Dig Deeper

• Susan Fowler’s blog post describing terrible conditions at Uber

• Overview of gender and diversity statistics of major technology companies

• The Sex and Drug fueled parties of Silicon Valley VCs

• A recap of the Google Walkout over sexual harassment allegations

• The Tech Industry’s diversity is not improving

September 2019 - Ready Player One by Ernest Cline

Ernest Cline’s magical world of virtual reality is explores a potential new medium of communication through an excellent heroic tale.

Tech Themes

1. Wide-ranging applicability and use cases of Virtual Reality. Although the novel was written in 2011, Ernest Cline does an incredible job of detailing the complex and numerous use cases of VR throughout the novel. Cline’s 18 year old main character Wade Watts attends school via VR, where you can have a limitless number of students all learn from the same teacher. Beyond that, different worlds and galaxies are easily conjured up with different themes, time periods and technology taking learning and experience to another level: Wade spends time playing old video games in an effort to unlock certain clues about James Halliday, Wade re-enacts all of Matthew Broderick’s part in the movie War Games in an effort to unlock one of the keys, Aech and Wade frequently hang out in the Basement, a re-created 1980’s recreational room with vintage magazines and game consoles. All of these distinct use cases – education, gaming, social networking, and entertainment – are the promise of Virtual Reality. There is a long way to go before that promise is met.

2. The intersection of the online/offline world. As James Halliday writes in Anorak’s Almanac: “Going outside is highly overrated.” Ready Player One does a great job of exploring the conflation of the online and offline worlds. The book weaves together experiences from this intersection into critical moments of the book including Wade’s escape from the Stacks and his imprisonment by IOI. While there is a tangible feeling that online is the much preferred experience for all the reasons discussed above, it’s the offline in-person events that truly shape the heroic ending of the book. This serves as a reminder that the OASIS is very much a virtual reality and explores the need for in-person human connection. Ironically, this is something Halliday sorely missed out on as shown through his unrequited love for Ogden Morrow’s (co-creator of the OASIS) wife, Kira. As big companies move into our homes through Google Homepods, Amazon Echos, Facebook Portals, the human connection element needs to be maintained.

3. The ability to disguise your identity online. “In the OASIS, you could become whomever and whatever you wanted to be, without ever revealing your true identity, because your anonymity was guaranteed.” This quote about the OASIS is largely true of today’s Internet. Through private browsing, Virtual Private Networks, avoiding Google and ad-tagging websites, people are able to stay anonymous online already. But what the OASIS does in addition, is allow you to modify not only your back-story, but also how you appear to others, something that is very important in VR. While there is no question that Wade, Art3mis and Aech are able to avoid insecurities by masking their identities, eventually those insecurities are revealed, albeit with little consequence. Given the myriad of leaks and breaches in the last few years (Yahoo, Facebook, DoorDash, etc.), as the VR ecosystem continues to grow, increasing amounts of privacy will be needed to maintain anonymity.

Business themes

1. What is the dominant revenue model in VR? The evil villains at Innovative Online Industries (IOI) and their army of sixers have tried several hostile takeover attempts to acquire Halliday’s Gregarious Simulations Systems in order to convert it to a paid user model. IOI is the world’s largest internet service provider and just like other three letter named tech behemoths (cough, IBM, cough), fits the classic evil corporation vibe. Dismissing the potential business and technology conflicts (the world’s largest ISP is probably critical in delivering the OASIS throughout the world), its interesting to theorize what the dominant revenue model of VR may be. Facebook recently launched its VR world to complement its Oculus devices and there have been varied attempts to launch similar software worlds like Rec Room. The big discovery Google made early on was that advertising would be the business model of the web. Facebook copied this as it created social networking and as devices transitioned from desktop to mobile, and image to video, advertising continued to be the dominant mode of content monetization. Is there any reason to think VR will be any different? Potentially. The current dominant model for video gaming is subscriber based, freemium (paying for enhanced abilities, character changes, etc.) or single purchase. While there is no reason these ideas can’t be combined with advertising, the idea of a multi-world VR landscape may reduce some of the targeted ROI you receive from very specific ad-targeting on Instagram and Google today. In a limitless world, advertising to specific people will be difficult. Beyond that, porting the mish-mash of complex technologies used in today’s advertising landscape would add even more challenge.

2. The BIG, evil tech corporation. IOI is the quintessential evil technology company. As the world’s largest ISP, IOI could be a reference to Comcast, which is the United States’ largest ISP and often referenced as one of the most hated companies. Comcast, like other ISPs is always facing the challenge of serving millions of subscribers but unlike other companies, they are monopolistic in certain areas where they are the only viable provider for internet, allowing them to raise prices and treat customers poorly. The big, evil technology corporation cliché has been around for a long time and today’s largest tech companies have all spent sometime being that cliché. This dynamic can arise for many reasons. At Amazon, it’s the continued alienation of open source communities, the anti-competitive behavior around its search algorithm and the smothering of small vendors on its marketplace. Facebook and Google have both faced privacy concerns. Google has been sued for manipulating search on mobile devices. Microsoft was sued for anti-trust issues over browsers. As startups begin to dominate their core businesses, unless they continue innovating, they begin acting defensively to maintain their leading position. Facebook feature copied Snapchat stories almost immediately after they came out. IBM had a book written on them in the 1980s claiming they were anticompetitive. There is a reason corporate communications (WeWork lol) are so important and maintaining the image of a positive change for good. Every major technology company has spent time as the evil one, some have just spent more time than others.

3. Difficulty in creating VR applications. Ready Player One stoked a lot interest in the promise of VR, but the actual implementation is incredibly difficult with the hardware and software we have available as tools today. Moore’s law is slowing and some computer scientists have suggested specific chips to address the demands of newer technologies like Artificial Intelligence, Virtual Reality and Deep Learning. After Facebook acquired Oculus in 2014 for $2.4B, funding continued to flow into VR startups. Magic Leap, the highly secretive and most heavily funded VR startup has raised $2.3B on its own, and after years of development finally released its hardware for over $2,000 per device and its unclear if it makes a profit on any sales yet. More recently, several VR companies have gone bankrupt and laid off employees as product development didn’t reach application or end users before the funding ran out. While the software and hardware continues to improve, a lot still needs to be figured out before VR becomes mainstream.

Dig Deeper

• VR Garden in Montreal

• Oculus co-founder Palmer Lucky’s review of Magic Leap

• Augmented Reality and Virtual Reality in Healthcare

• Deep dive into the secretive Magic Leap

• The real world easter egg hunt from Ready Player One

August 2019 - How Google Works by Eric Schmidt and Jonathan Rosenberg

While at times it reads as a piece of Google propaganda, this book offers insight into the management techniques that Larry, Sergey and Eric employed to grow the Company to massive scale. Its hard to read this book and expect that all of these practices were actually implemented – it reads like a “How to build a utopia work culture” - but some of the principles are interesting, and more importantly it gives us insight into what Google values in their products and operations.

Tech Themes

1. Smart Creatives. Perhaps the most important emphasis in the book is placed on the recruiting and hiring of what Eric Schmidt and Jonathan Rosenberg have termed: Smart Creatives – “people who combine technical & business knowledge, creativity and always-learning attitude.” While these seem like the desired platitudes of every silicon valley employee, it gives a window into what Google finds important in its employees. For example, unlike Amazon, which has both business product managers and technical product managers, Google prefers its PMs to be both business focused and highly technical. Smart Creatives are mentioned hundreds of times in the book and continually underpin the success of new product launches. The book almost harps on it too much, to the point where it feels like Eric Schmidt was trying to convince all Googlers that they were truly unique.

2. Meetings, Q&A, Data and Information Management. Google is one of the many Silicon Valley companies that hosts company wide all-hands Q&A sessions on Friday where anyone can ask a question of Google’s leadership. Information transparency is critically important to Google, and they try to allow data to be accessible throughout the organization at all times. This trickles into other aspects of Google’s management philosophy including meetings and information management. At Google, meetings have a single owner, and while laptops largely remain closed, it’s the owner’s job to present the relevant data and derive the correct insights for the team. To that end, Google makes its information transparently available for all to access – this process is designed to avoid information asymmetry at management levels. One key issue faced by poor management teams is only receiving the best information at the top – this is countered by Amazon through incredibly blunt and aggressive communication; Google, on the other hand, maintains its intense focus on data and results to direct product strategy, so much so that it even studies its own teams productivity using internal data. Google’s laser focus on data makes sense given its main advertising products harvest the world’s internet user data for their benefit, so understanding how to leverage data is always a priority at Google.

3. 80/20 Time. As part of Google’s product innovation strategy, employees can spend 20% of their work time on creative projects separate from their current role. While the idea sounds like an awesome to keep employees interested and motivated, in practice, its much more structured. Ideas have to be approved by managers and they are only allowed if they can directly impact Google’s business. Some great innovations were spawned out of this policy including Gmail and Google Maps but Google employees have joked that it should be called “120%” time rather than 80%.

Business Themes

1. Google’s Cloud Strategy. “You should spend 80% of your time on 80% of your revenue.” This quote speaks volumes when it comes to Google’s business strategy. Google clearly is the leader in Search and search advertising. Not only is it the default search engine preferred by most users, it also owns the browser market that directs searches to Google, and the most used operating system. It has certainly created a dominant position in the market and even done illegal things to maintain that advantage. Google also maintains and mines your data, and as Stratechery has pointed out, they are not hiding it anywhere. But what happens when the next wave of computing comes, and you are so focused on your core business that you end up light years behind competition from Amazon (Web Services) and Microsoft (Azure)? That’s where Google finds itself today, and recent outages and issues haven’t helped. So what is Google’s “Cloud Strategy?” The answer is lower priced, open source alternatives. Google famously developed and open sourced, Kubernetes, the container orchestration platform, which has become an increasingly important technology as developers opt for light weight alternatives to traditional virtual machines. They have followed this open sourcing with a, “We are going to open source everything” mentality that is also being employed, a bit more defensively at Microsoft. Google seeks to be an open source layer, either through Kubernetes (which runs in Azure and AWS) or through other open source platforms (Anthos) and just touch some of your company’s low churn cloud spend. Their issue is scale and support. With their knowledge of data centers and parallel computing, cloud capabilities seemed like an obvious place where Google could win, but they fumbled on building a great product because they were so focused on protecting their core business. They are in a catch up position and new CEO of Google Cloud, Thomas Kurian (formerly at Oracle), isn’t afraid to make acquisitions to build out missing product capabilities, which is why it bought Looker earlier this year. It makes sense why a company as focused as Google is on data, would want a cloud focused data analysis tool. Now they are betting on M&A and a highly open-sourced multi-public cloud future as the only way they can win.

2. “Objective” Key Results. As mentioned previously, the way Google combats potential information asymmetries by empowering individuals throughout the organization with data. This extends to famous venture capitalist (who invested in both Google and Amazon) John Doerr’s favorite data to examine – OKRs – Objective key results. Each Googler has a specific set of OKRs that they are responsible for maintaining on a quarterly basis. Every person’s OKRs are readily available for anyone to see throughout the Company i.e. full transparency. OKRs are public, measurable, and ambitious. This keeps engineers focused and accountable, as long as the OKRs are set correctly and actually measure outcomes. These fit so perfectly with Google’s focus on mining and monitoring data at all times: their products and their employees need to be data driven at all times.

Dig Deeper

• Recent reports highlight numerous cultural issues at Google, that are not addressed in the book

• Google Cloud was plagued by internal clashes and missed acquisitions

• PayPal mafia veteran, Keith Rabois, won’t fund Google PM’s as founders

• List of Google’s biggest product failures over time

• Stadia: Google’s game streaming service

June 2019 - Zero to One by Peter Thiel

Peter Thiel’s contrarian startup classic, Zero to One, is a great book for understanding and building startups.

Tech Themes

1. Zero to One. As Thiel explains in the opening pages, Zero to One is the concept of creating companies that bring new technology into the world: “The single word for vertical, 0 to 1 progress is technology.” This is in contrast to startups that simply copy existing ideas or other products and tackle problems 1 to n. In Thiel’s view, the great equalizer that allows you to create such an idea is proprietary technology. This can come in many forms: Google’s search algorithms, Amazon’s massive book catalog, Apple’s improved design of the iPad or PayPal’s faster integrated Ebay payments. But generally, to capture significant value from a market; the winning technology has to be 10x better than competition. To this end, Thiel says, “Don’t disrupt.... If your company can be summed up by its opposition to already existing firms, it can’t be completely new and it’s probably not going to become a monopoly.” The true way to become a massively successful company is to build something completely new that is 10x better than the way its currently being done. This 10x better product has to be conceived over the long term, with the idea that the final incremental feature added to the product gives it that 10x lift and takes it to monopoly status.

2. Beliefs and Contrarianism. Thiel begins the book with a thought-provoking question: “What important truth do very few people agree with you on?” To Thiel, however you answer this question indicates your courage to challenge conventional wisdom and thus your potential ability to take a novel technology from 0 to 1. Extending this idea, Thiel defines the word startup as, “the largest group of people you can convince of a plan to build a different future.” This sort of Silicon Valley contrarianism is exactly the mindset of Internet bubble entrepreneurs. Thiel continues on this thinking, with another question: “Can you control your future?” and to that question he answers with an emphatic, “Yes.” People are taught to believe that “right place, right time” or “luck” is the greatest contributor to individual success. And as discussed in Good to Great, while many CEOs and prominent executives make this claim, they often don’t believe it and use it much more as a marketing mechanism. Thiel firmly believes in the idea of self-determination, and why shouldn’t he? He’s a white male, Rhodes Scholar and Stanford Law School graduate who has now made billions of dollars. In his mind, you either believe something novel and create that future or you waste your time tackling the problems that exist today. This also conveniently mirrors Thiel’s investing focus and he even calls this out in a chapter detailing venture returns. Venture takes informed speculative bets on which technology will ultimately win out in a market – the best bets are the ones that differ so greatly from the established norm because the likelihood of landing in the monopoly position (though still small) is much greater than a Company that is recreating existing products.

3. Looking for Secrets and Building Startups. The answers to the Thiel question posed above are secrets: knowable but undiscovered truths that exist in the world today. He then poses: “Why has so much of our society come to believe that there are no hard secrets left?” He provides a four part answer:

• Incrementalism – the idea that you only have to hit a minimum threshold for pre-determined success and that over-achieving is frequently met with the same reward as basic achievement

• Risk Aversion – People are more scared than ever about being wrong about a secret they believe

• Complacency – people are fine collecting rents on things that were already established before they were involved

• Flatness – the idea that as globalization continues, the world is viewed as one hyper competitive market for all products

Sticking on his contrarian path, Thiel emphasizes: “The best place to look for secrets is where no else is looking…What are people not allowed to talk about? What is forbidden or taboo?” This question is especially interesting in the context of the latest round of startups going public. A lot of people have argued that the newest wave of startups are tackling problems that are of lower value to society, like food delivery – focused on pleasing an increasingly on-demand, dopamine driven world. Why is that? Have we reached a local maximum in technology for a given period? While you may not completely believe Ray Kurzweil’s Law of Accelerating Returns, the pace of technological evolution has probably not hit a maximum. It could be argued that we have enjoyed a great run with mobile as a dominant computing platform (PCs before that, Mainframes before that, etc.) and that the next wave of startups tackling “important" problems could spring out of such a development.

Business Themes

1. Monopoly profits. Thiel plainly states the overarching goal of business that is normally obfuscated by cult-like Silicon Valley startups: monopoly profits. This touches on a point that has been bouncing its way through the news media (Elizabeth Warren, Stratechery, Spotify/Apple) in recent months with Elizabeth Warren calling for a breakup of Apple, Facebook and Amazon, Spotify claiming the App Store is a monopoly, and others discussing whether these companies are even monopolies. He claims monopolies deserve their bad press and regulation, “only in a world where nothing changes.” Monopolies in a static environment act like rent collectors: “If you corner the market for something, you can jack up the price; others will have no choice but to buy from you.” This is true of many heavy regulated industries today like Utilities. It’s often the case consumers only have one or two providers to choose from at max, so governments regulate the amount utilities can increase prices each year. Thiel then explains what he calls creative monopolists, companies that “give customers more choice by adding entirely new categories of abundance to the world. Creative monopolies aren’t just good for the rest of society: they’re powerful engines for making it better.” Thiel cites a few interesting examples of “monopoly” disruption: Apple iOS outcompeting Microsoft operating systems, IBM hardware being overtaken by Microsoft software, and AT&T’s monopoly prior to being broken up. It should be noted that two of these examples actually did require government regulation – Microsoft was sued in 2001 and AT&T was forced to break up its monopoly. What’s even more interesting, is the prospect of the T-Mobile/Sprint merger being blocked because while the consolidation of the telecom industry could mean increased prices, both T-Mobile and Sprint have struggled to compete with guess who, AT&T and Verizon (who started as a merger with former AT&T company, Bell Atlantic). Whether monopolies are good or bad for society, whether its possible to call tech companies with several different business lines monopolies remains to be seen – but one things for sure – being a monopoly, tech monopoly, or creative monopoly is a great thing for your business.

2. Prioritizing Near Term Growth at the Risk of Long Term Success. Thiel begins his chapter on Last Mover Advantage with an interesting discussion on how investors view LinkedIn’s valuation (since acquired by Microsoft but at the time was publicly traded). At the time, LinkedIn had $1B in revenue and $21M in net income, but was trading at a value of $24B (i.e. 24x LTM Revenue and 1100x+ Net Income). Why was this valued so highly? Thiel provides an interesting answer: “The overwhelming importance of future profits is counterintuitive even in Silicon Valley. For a company to be valuable it must grow and endure, but many entrepreneurs focus on short-term growth. They have an excuse: growth is easy to measure, but durability isn’t.” Thiel then continues with two great examples of short-term focus: “Rapid short-term growth at Zynga and Groupon distracted managers and investors from long-term challenges.” Zynga became famous with Farmville, but struggled to find the next big hit and Groupon posted incredibly fast growth, but couldn’t get sustained repeat customers. This focus on short-term growth is incredibly interesting given the swarm of unicorns going public this year. Both Lyft and Uber grew incredibly quickly, but as the public markets have showed, the ride-sharing business model may not be durable with each company losing billions a year. Thiel continues: “If you focus on near term growth above all else, you miss the most important question you should be asking: will this business still be around a decade from now?” To become a durable tech monopoly, Thiel cites the following important characteristics: proprietary technology, network effects, economies of scale, and branding. It’s interesting to look at these characteristics in the context of a somewhat monopoly disruptor, Zoom Video Communications. CEO Eric Yuan, who was head of engineering at Cisco’s competing WebEx product, built the Company’s proprietary tech stack with all the prior knowledge of WebEx’s issues in mind. Zoom’s software is based on a freemium model, when one user wants to video chat with another, they simply send the invite regardless of whether they have the service already – this isn’t exactly a google-esque network effect but it does increase distribution and usage. Zoom’s technology is efficiently scalable as shown by the fact that its profitable despite incredibly fast growth. Lastly, Zoom’s marketing and branding are excellent and are repeatedly lauded within the press. The question is, are these characteristics really monopoly defining? Or are they simply just good business characteristics? We will have to wait and see how Zoom fairs over the next 10 years to find out.

3. Asymmetric Risk & VC Returns. Thiel started venture capital firm, Founders Fund in 2005 with Ken Howery (who helped start PayPal with Thiel). Thiel notes an interesting phenomena about VC returns that several entrepreneurs don’t truly understand: “Facebook the best investment in our 2005 fund, returned more than all the others combined. Palantir, the second best investment is set to return more than the sum of every investment aside from Facebook…The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.” Venture capital investing, especially at the earliest stages like Seed and Series A (where Founder’s Fund invests) is a game of maximizing the chance of one or two big successes. In the past five to ten years, there has been a significant increase in venture capital investing, and with that a focus among many firms to be founder friendly. As discussed before, these founder friendly cultures have led to super-voting shares (like Snap, FB and others) and unprecedented VC rounds. Even with these changes, there is still a friction at most VC-backed companies: the supposedly value added VC board member doesn’t believe that Company XYZ will be the next Facebook or Palantir, and because of that chooses to spend as little time with them as possible. This has fueled the somewhat anti-VC movement that several entrepreneurs have adopted because as with Elon Musk at PayPal and Zip2, being abandoned by your earliest investors can be devastating.

Dig Deeper

• Facebook Chris Hughes co-founder calls for the breakup of Facebook

• Thiel wrote the first check into Facebook at a $5M valuation

• An overview of the PayPal Mafia

• A new book on scaling quickly by PayPal Mafia member Reid Hoffman