May 2022 - Play Nice, But Win by Michael Dell and James Kaplan

This month we dive into the history of Dell Computer Corporation, one of the biggest PC and server companies in the world! Michael Dell gives a first-hand perspective of all of Dell’s big successes and failures throughout the years and his intense battle with Carl Icahn, over the biggest management buyout in history.

Tech Themes

1. Be a Tinkerer. When he was in seventh grade, Michael Dell begged his parents to buy an Apple II computer (which costs ~$5,000 in today's dollars). Immediately after the computer arrived, he took the entire thing apart to see exactly how the system worked. After diving deep into each component, Dell started attending Apple user groups. During one, he met a young and tattered Steve Jobs. Dell began tutoring people on the Apple II's components and how they could get the most out of it. When IBM entered the market in 1980 with the 5150 computer, he did the same thing - took it apart, and examined the components. He realized that almost everything IBM made came from other companies (not IBM) and that the total value of its components was well below the IBM price tag. From this simple insight, he had a business. He started fixing up a couple of computers for local business people in Austin. Dell's machines cost less and delivered more performance. The company got so big (50k - 80k revenue per month) that during his freshman year at UT Austin, Dell decided to drop out, much to his parent's dismay. On May 3rd, 1984, Dell incorporated his company and never returned to school.

2. Lower Prices and Better Service - a Powerful Combination. Dell Computer Corporation was the original DTC business. Rather than selling in big box retail stores, Dell carried out orders via mail request. When the internet became prominent in the late 90s, Dell started taking orders online. After his insight that the cost of components was significantly lower than the selling price, he flew to the far east to meet his suppliers. He started placing big deals and getting better and better prices. This strategy is the classic low-end disruption pattern that we learned about in Clayton Christensen's, The Innovator's Dilemma – a lowered-priced competitor that offers better service, customizability starts to crush the competition. Christensen is important to note that the internet itself was a sustaining innovation to Dell, but very disruptive to the market as a whole: "Usually, the technology simply is an enabler of the disruptive business model. For example, is the Internet a disruptive technology? You can't say that. If you bring it to Dell, it's a sustaining technology to what Dell's business model was in 1996. It made their processes work better; it helped them meet Dell's customers' needs at lower cost. But when you bring the very same Internet to Compaq, it is very disruptive [to the company's then dealer-only sales model]. So how do we treat that? We praise [CEO Michael] Dell, and we fire Eckhard Pfeiffer [Compaq's former CEO]. In reality, those two managers are probably equally competent." If competitors lowered prices, Dell could find better components and continually lower prices. Dell's strategy led to many departures from the personal PC market – IBM left, HP acquired Compaq in a disastrous deal for HP, and many others never made it back.

3. Layoffs, Crises, and Opportunities. Dell IPO'd in 1988 and joined the Fortune 500 in 1991 as they hit $800m in sales for the year. So you would think the company would be humming when it hit $2B in sales in 1993, right? Wrong. Everything was breaking. When a company scales that quickly, it doesn't have time to create processes and systems. Personnel issues began to happen more frequently. As Dell recalls, the head of sales had a drinking problem, and the head of HR had a stripper girlfriend on the payroll. The company was late to market with notebooks, and it had to institute a recall on its notebooks which could catch fire in some instances. During that time, Dell hired Bain to do an internal report about how it should change its processes for its new scale – Kevin Rollins of the Bain team knew the business super well and thought incredibly strategically. After the Bain assignment, Rollins joined the company as Vice-chairman, ultimately becoming CEO for a brief period in 2004. One of his first recommendations was to cease its experiment selling through department stores and to stay DTC-focused. During the internet bubble, Dell faced another crisis – its stock had risen precipitously for many years, but once the bubble burst, in a matter of months, it fell from $50 to $17 a share. The company missed its earnings estimates for five quarters in a row and had to do two layoffs – one with 1,700 people and another with 4,000. During this time, an internal poll showed that 50% of Dell team members would leave if another company paid them the same rate. Dell realized that the values statement he had written in 1988 was no longer resonating and needed updating – he refreshed the value statement and focused the company on its role in the global IT economy. Dell understands that you should never waste a great crisis, and always find the opportunity for growth and improvement when things aren't going well.

Business Themes

1. Carl Icahn and Dell. No one in business represents a corporate nemesis quite like Carl Icahn. Icahn was born in Rockaway, NY, and earned his tuition money at Princeton playing poker against the rich kids. Icahn is an activist investor and popularized the field of activist investing with some big, bold battles against companies in the early 1980s. Icahn got his start in 1968 by purchasing a seat on the New York Stock Exchange. He completed his first major takeover attempt in 1978, and the rest was history. Icahn takes an intense stance against companies, typically around big mergers, acquisitions, or divestitures. He 1) buys up a lot of shares, like 5-10% of a company, 2) accuses the company and usually the management of incompetence or a lousy strategy 3) argues for some action - a sale of a division, a change in management, a special dividend 4) sues the company in a variety of ways around shareholder negligence 5) sends letters to shareholders and the company detailing his findings/claims 6) puts up a new slate of board members at the company 7) waits to profit or gets paid to go away (also called greenmail). Icahn used these exact tactics when he took on Michael Dell. Icahn issued several scathing letters about Dell, criticizing the company's poor performance, highlighting Michael Dell's obvious conflicts of interest as CEO, and demanding the special committee evaluate the deal fairly. Icahn normally makes money when he gets involved, and he is essentially a gnat that doesn't go away until he makes money one way or another. After the fight, Icahn still made a profit of 10s of millions, and his fight with Dell was just beginning.

2. Take Privates and Transformation. Michael Dell had thought a couple of times about taking the company private when he was approached by Egon Durban of Silver Lake Partners, a large tech private equity firm. Dell and Zender went on a walk in Hawaii and worked out what a transaction might be. The issue with Dell at that time was that the PC market was under siege. People thought tablets were the future, and their questions found confirmation in the PC market's declining volumes. Dell had spent $14B on an acquisition spree, acquiring a string of enterprise software companies, including Quest Software, SonicWall, Boomi, Secureworks, and more, as it redirected its strategy. But these companies had yet to kick into gear, and most of Dell's business was still PCs and servers. The stock price had fallen about 45% since Michael Dell had rejoined as CEO in 2007. Dell had thought about taking the company private a couple of other times, but now seemed like a great time - they needed to transform, and fast. Enacting a transformation in the public markets is tough because wall street focuses on quarter-to-quarter metrics over long-term vision. He first considered the idea in June 2012 when talking with the then largest shareholder Southeastern Asset Management. After letting the idea percolate, Dell held discussions with Silver Lake and KKR. Silver Lake and Dell submitted a bid at $12.70, then $12.90, then $13.25, then $13.60, then $13.65. On February 4th, 2013, the special committee accepted Silver Lake's offer. On March 5th, Carl Icahn entered the fray, saying he owned about $1b of shares. Icahn submitted a half proposal suggesting the company pay a one-time special dividend, he would acquire a substantial part of the stock and it would remain public, under different leadership. On July 18th, the special committee delayed a vote on the acquisition because it became clear that Dell couldn't get enough of the "majority of the minority" votes needed to close the acquisition. A few weeks later, Silver Lake and Dell raised their bid to $13.75 (the original asking price of the committee), and the committee agreed to remove the voting standard, allowing the SL/Dell combo to win the deal. After various lawsuits, Icahn gave up in September 2013, when it became clear he had no strategy to convince shareholders to his side. It was an absolute whirlwind of a deal process, and Dell escaped with his company.

3. Big Deals. After Dell went private, Michael Dell and Egon Durban started scouring the world for enticing tech acquisitions. They closed on a small $1.4B storage acquisition, which reaffirmed Michael Dell's interest in the storage market. After the deal, Dell reconsidered something that almost happened in 2008/09 – a merger with EMC. EMC was the premier enterprise storage company with a dominant market share. On top of that, EMC owned VMware, a software company that had successfully virtualized the x86 architecture so servers could run multiple operating systems simultaneously. Throughout 2008 and 2009, Dell and EMC had deeply considered a merger – to the point that its boards held joint discussions about integration plans and deal price. The boards scrapped the deal during the financial crisis, and in the ensuing years, EMC grew and grew. By 2014 it was a $59B public company and the largest company in Massachusetts. In mid-2014, Dell started to consider the idea. He pondered the strategic and competitive implications of the deal everywhere he went. Little did he know that he was already late to the party – it later came out that both HP and Cisco had looked at acquiring EMC in 2013. HP got down to the wire, with the deal being championed by Meg Whitman, as a way to move past the Autonomy debacle and board room in-fighting. HP had a handshake agreement to merge with EMC in a 1:1 deal, but at the last minute, HP re-traded and demanded a more advantageous split (i.e. HP would own 55% of the combined company) and EMC said no. When EMC then turned to Dell, Whitman slammed the deal. While the only remaining competitor of size was Dell, there was still a question of how they could finance the deal, especially as a private company. Dell's ultimate package was a pretty crazy mix of considerations: Dell issued a tracking stock related specifically to Dell's business, it then took out some $40b in loans against its newly acquired VMWare equity and the cash flow of Dell's underlying business, Michael Dell and Silver lake also put in an additional $5B of equity capital. After Silver Lake and Dell determined the financing structure, Dell faced a grueling interrogation session in front of the EMC board as final approval for the deal. The deal was announced on October 12th, 2015, and it closed a year later. By all measures, it appears the deal was a success – the company has undergone a complete transformation – shedding some acquired assets, spinning off VMWare, and going public again by acquiring its own tracking stock. Michael Dell took some huge risks - taking his company private and completing the biggest tech merger in history. It seems to have paid off handsomely.

Dig Deeper

• Michael Dell, Dell Technologies | Dell Technologies World 2022

• Steve Jobs hammers Michael Dell (1997)

• Michael Dell interview - 7/23/1991

• Background of the Merger - the full SEC timeline of the EMC-Dell Merger

• Carl Icahn's First Ever Interview | 1985

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"

July 2020 - Innovator's Dilemma by Clayton Christensen

This month we review the technology classic, the Innovator’s Dilemma, by Clayton Christensen. The book attempts to answer the age-old question: why do dominant companies eventually fail?

Tech Themes

1. The Actual Definition of Disruptive Technology. Disruption is a term that is frequently thrown around in Silicon Valley circles. Every startup thinks its technology is disruptive, meaning it changes how the customer currently performs a task or service. The actual definition, discussed in detail throughout the book, is relatively specific. Christensen re-emphasizes this distinction in a 2015 Harvard Business Review article: "Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents' mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants' offerings in volume, disruption has occurred." The book posits that there are generally two types of innovation: sustaining and disruptive. While disruptive innovation focuses on low-end or new, small market entry, sustaining innovation merely continues markets along their already determined axes. For example, in the book, Christensen discusses the disk drive industry, mapping out the jumps which pack more memory and power into each subsequent product release. There is a slew of sustaining jumps for each disruptive jump that improves product performance for existing customers but doesn't necessarily get non-customers to become customers. It is only when new use cases emerge, like rugged disk usage and PCs arrive, that disruption occurs. Understanding the specific definition can help companies and individuals better navigate muddled tech messaging; Uber, for example, is shown to be a sustaining technology because its market already existed, and the company didn't offer lower prices or a new business model. Understanding the intricacies of the definition can help incumbents spot disruptive competitors.

2. Value Networks. Value networks are an underappreciated and somewhat confusing topic covered in The Innovator's Dilemma's early chapters. A value network is defined as "The context within which a firm identifies and responds to customers' needs, solves problems, procures input, reacts to competitors, and strives for profit." A value network seems all-encompassing on the surface. In reality, a value network serves to simplify the lens through which an organization must make complex decisions every day. Shown as a nested product architecture, a value network attempts to show where a company interacts with other products. By distilling the product down to its most atomic components (literally computer hardware), we can see all of the considerations that impact a business. Once we have this holistic view, we can consider the decisions and tradeoffs that face an organization every day. The takeaway here is that organizations care about different levels of performance for different products. For example, when looking at cloud computing services at AWS, Azure, or GCP, we see Amazon EC2 instances, Azure VMs, and Google Cloud VMs with different operating systems, different purposes (general, compute, memory), and different sizes. General-purpose might be fine for basic enterprise applications, while gaming applications might need compute-optimized, and real-time big data analytics may need a memory-optimized VM. While it gets somewhat forgotten throughout the book, this point means that organizations focused on producing only compute-intensive machines may not be the best for memory-intensive, because the customers of the organization may not have a use for them. In the book's example, some customers (of bigger memory providers) looked at smaller memory applications and said there was no need. In reality, there was massive demand in the rugged, portable market for smaller memory disks. When approaching disruptive innovation, it's essential to recognize your organization's current value network so that you don't target new technologies at those who don't need it.

3. Product Commoditization. Christensen spends a lot of time describing the dynamics of the disk drive industry, where companies continually supplied increasingly smaller drives with better performance. Christensen's description of commoditization is very interesting: "A product becomes a commodity within a specific market segment when the repeated changes in the basis of competition, completely play themselves out, that is, when market needs on each attribute or dimension of performance have been fully satisfied by more than one available product." At this point, products begin competing primarily on price. In the disk drive industry, companies first competed on capacity, then on size, then on reliability, and finally on price. This price war is reminiscent of the current state of the Continuous Integration / Continuous Deployment (CI/CD) market, a subsegment of DevOps software. Companies in the space, including Github, CircleCI, Gitlab, and others are now competing primarily on price to win new business. Each of the cloud providers has similar technologies native to their public cloud offerings (AWS CodePipeline and CloudFormation, GitHub Actions, Google Cloud Build). They are giving it away for free because of their scale. The building block of CI/CD software is git, an open-source version control system founded by Linux founder Linus Torvalds. With all the providers leveraging a massive open-source project, there is little room for true differentiation. Christensen even says: "It may, in fact, be the case that the product offerings of competitors in a market continue to be differentiated from each other. But differentiation loses its meaning when the features and functionality have exceeded what the market demands." Only time will tell whether these companies can pivot into burgeoning highly differentiated technologies.

Business Themes

1. Resources-Processes-Value (RPV) Framework. The RPV framework is a powerful lens for understanding the challenges that large businesses face. Companies have resources (people, assets, technology, product designs, brands, information, cash, relationships with customers, etc.) that can be transformed into greater value products and services. The way organizations go about converting these resources is the organization's processes. These processes can be formal (documented sales strategies, for example) or informal (culture and habitual routines). Processes are the big reasons organizations struggle to deal with emerging technologies. Because culture and habit are ingrained in the organization, the same process used to launch a mature, slow-growing market may be applied to a fast-growing, dynamic sector. Christensen puts it best: "This means the very mechanisms through which organizations create value are intrinsically inimical to change." Lastly, companies have values, or "the standards by which employees make prioritization decisions." When there is a mismatch between the resources, processes, and values of an organization and the product or market that an organization is chasing, its rare the business can be successful in competing in the disruptive market. To see this misalignment in action, Christensen describes a meeting with a CEO who had identified the disruptive change happening in the disk-drive market and had gotten a product to market to meet the growing market. In response to a publication showing the fast growth of the market, the CEO lamented to Christensen: "I know that's what they think, but they're wrong. There isn't a market. We've had that drive in our catalog for 18 months. Everyone knows we've got it, but nobody wants it." The issue was not the product or market demand, but the organization's values. As Christensen continues, "But among the employees, there was nothing about an $80 million, low-end market that solved the growth and profit problems of a multi-billion dollar company – especially when capable competitors were doing all they could to steal away the customers providing those billions. And way at the other end of the company there was nothing about supplying prototype companies of 1.8-inch drives to an automaker that solved the problem of meeting the 1994 quotas of salespeople whose contacts and expertise were based so solidly in the computer industry." The CEO cared about the product, but his team did not. The RPV framework helps evaluate large companies and the challenges they face in launching new products.

2. How to manage through technological change. Christensen points out three primary ways of managing through disruptive technology change: 1. "Acquire a different organization whose processes and values are a close match with the new task." 2. "Try to change the processes and values of the current organization." 3. "Separate out an independent organization and develop within it the new processes and values that are required to solve the new problem." Acquisitions are a way to get out ahead of disruptive change. There are so many examples but two recent ones come to mind: Microsoft's acquisition of Github and Facebook's acquisition of Instagram. Microsoft paid a whopping $7.5B for Github in 2018 when the Github was rumored to be at roughly $200M in revenue (37.5x Revenue multiple!). Github was undoubtedly a mature business with a great product, but it didn't have a ton of enterprise adoption. Diane Greene at Google Cloud, tried to get Sundar Pichai to pay more, but he said no. Github has changed Azure's position within the market and continued its anti-Amazon strategy of pushing open-source technology. In contrast to the Github acquisition, Instagram was only 13 employees when it was acquired for $1B. Zuckerberg saw the threat the social network represented to Facebook, and today the acquisition is regularly touted as one of the best ever. Instagram was developing a social network solely based on photographs, right at the time every person suddenly had an excellent smartphone camera in their pocket. The acquisition occurred right when the market was ballooning, and Facebook capitalized on that growth. The second way of managing technological change is through changing cultural norms. This is rarely successful, because you are fighting against all of the processes and values deeply embedded in the organization. Indra Nooyi cited a desire to move faster on culture as one of her biggest regrets as a young executive: "I’d say I was a little too respectful of the heritage and culture [of PepsiCo]. You’ve got to make a break with the past. I was more patient than I should’ve been. When you know you have to make a change, at some point you have to say enough is enough. The people who have been in the company for 20-30 years pull you down. If I had to do it all over again, I might have hastened the pace of change even more." Lastly, Christensen prescribes creating an independent organization matched to the resources, processes, and values that the new market requires. Three great spin-out, spin-in examples with different flavors of this come to mind. First, Cisco developed a spin-ins practice whereby they would take members of their organization and start a new company that they would fund to develop a new process. The spin-ins worked for a time but caused major cultural issues. Second, as we've discussed, one of the key reasons AWS was born was that Chris Pinkham was in South Africa, thousands of miles away from Amazon Corporate in Seattle; this distance and that team's focus allowed it to come up with a major advance in computing. Lastly, Mastercard started Mastercard Labs a few years ago. CEO Ajay Banga told his team: "I need two commercial products in three years." He doesn't tell his CFO their budget, and he is the only person from his executive team that interacts with the business. This separation of resources, processes, and values allows those smaller organizations to be more nimble in finding emerging technology products and markets.

3. Discovering Emerging Markets.

   The resources-processes-values framework can also show us why established firms fail to address emerging markets. Established companies rely on formal budgeting and forecasting processes whereby resources are allocated based on market estimates and revenue forecasts. Christensen highlights several important factors for tackling emerging markets, including focusing on ideas, failure, and learning. Underpinning all of these ideas is the impossibility of predicting the scale and growth rate of disruptive technologies: "Experts' forecasts will always be wrong. It is simply impossible to predict with any useful degree of precision how disruptive products will be used or how large their markets will be." Because of this challenge, relying too heavily on these estimates to underpin financial projections can cause businesses to view initial market development as a failure or not worthy of the companies time. When HP launched a new 1.3-inch disk drive, which could be embedded in PDAs, the company mandated that its revenues had to scale up to $150M within three years, in line with market estimates. That market never materialized, and the initiative was abandoned as a failed investment. Christensen argues that because disruptive technologies are threats, planning has to come after action, and thus strategic and financial planning must be discovery-based rather than execution-based. Companies should focus on learning their customer's needs and the right business model to attack the problem, rather than plan to execute their initial vision. As he puts it: "Research has shown, in fact, that the vast majority of successful new business ventures, abandoned their original business strategies when they began implementing their initial plans and learned what would and would not work." One big fan of Christensen's work is Jeff Bezos, and its easy to see why with Amazon's focus on releasing new products in this discovery manner. The pace of product releases is simply staggering (~almost one per day). Bezos even talked about this exact issue in his 2016 shareholder letter: "The senior team at Amazon is determined to keep our decision-making velocity high. Speed matters in business – plus a high-velocity decision making environment is more fun too. We don't know all the answers, but here are some thoughts. First, never use a one-size-fits-all decision-making process. Many decisions are reversible, two-way doors. Those decisions can use a light-weight process. For those, so what if you're wrong? I wrote about this in more detail in last year's letter. Second, most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you're probably being slow." Amazon is one of the first large organizations to truly embrace this decision-making style, and clearly, the results speak for themselves.

Dig Deeper

• What Jeff Bezos Tells His Executives To Read

• Github Cuts Subscription Price by More Than Half

• Ajay Banga Opening Address at MasterCard Innovation Forum 2014

• Clayton Christensen Describing Disruptive Innovation

• Why Cisco’s Spin-Ins Never Caught On

April 2020 - Good To Great by Jim Collins

Collins’ book attempts to answer the question - Why do good companies continue to be good companies? His analysis across several different industries provides meaningful insights into strong management and strategic practices.

Tech Themes

1. Packard’s Law. We’ve discussed Packard’s law before when analyzing the troubling acquisition history of AOL-Time Warner and Yahoo. As a reminder, Packard’s law states: “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. [And] 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.” Given Good To Great is a management focused book, I wanted to explore an example of this law manifesting itself in a recent management dilemma. Look no further than ride-sharing giant, Uber. Uber’s culture and management problems have been highly publicized. Susan Fowler’s famous blog post kicked off a series of blows that would ultimately lead to a board dispute, the departure of its CEO, and a full-on criminal investigation. Uber’s problems as a company, however, can be traced to its insistence to be the only ride-sharing service throughout the world. Uber launched several incredibly unprofitable ventures, not only a price-war with its local competitor Lyft, but also a concerted effort to get into China, India, and other locations that ultimately proved incredibly unprofitable. Uber tried to be all things transportation to every location in the world, an over-indulgence that led to the Company raising a casual $20B prior to going public. Dara Khosrowshahi, Uber’s replacement for Travis Kalanick, has concertedly sold off several business lines and shuttered other unprofitable ventures to regain financial control of this formerly money burning “logistics” pit. This unwinding has clearly benefited the business, but also limited growth, prompting the stock to drop significantly from IPO price. Dara is no stranger to facing travel challenges, he architected the spin-out of Expedia with Barry Diller, right before 9/11. Only time will tell if he can refocus the Company as it looks to run profitably. Uber pushed too far in unprofitable locations, and ran head on into Packard’s law, now having to pay the price for its brash push into unprofitable markets.

2. Technology Accelerators. In Collins’ Good to Great framework (pictured below), technology accelerators act as a catalyst to momentum built up from disciplined people and disciplined thought. By adapting a “Pause, think, crawl, walk, run” approach to technology, meaning a slow and thoughtful transition to new technologies, companies can establish best practices for the long-term, instead of short term gains from technology faux-feature marketing. Technology faux-feature marketing, which is decoupled from actual technology has become increasingly popular in the past few years, whereby companies adopt a marketing position that is actually complete separate from their technological sophistication. Look no further than the blockchain / crypto faux-feature marketing around 2018, when Long Island iced-tea changed its name to Long Island Blockchain, which is reminiscent of companies adding “.com” to their name in the early 2000’s. Collins makes several important distinctions about technology accelerators: technology should only be a focus if it fits into a company’s hedgehog concept, technology accelerators cannot make up for poor people choices, and technology is never a primary root cause of either greatness or decline. The first two axioms make sense, just think of how many failed, custom software projects have begun and never finished; there is literally an entire wikipedia page dedicated to exactly that. The government has also reportedly been a famous dabbler in homegrown, highly customized technology. As Collins notes, technology accelerators cannot make up for bad people choices, an aspect of venture capital that is overlooked by so many. Enron is a great example of an interesting idea turned sour by terrible leadership. Beyond the accounting scandals that are discussed frequently, the culture was utterly toxic, with employees subjected to a “Performance Review Committee” whereby they were rated on a scale of 1-5 by their peers. Employees rated a 5 were fired, which meant roughly 15% of the workforce turned over every year. The New York Times reckoned Enron is still viewed as a trailblazer for the way it combined technology and energy services, but it clearly suffered from terrible leadership that even great technology couldn’t surmount. Collins’ most controversial point is arguably that technology cannot cause greatness or decline. Some would argue that technology is the primary cause of greatness for some companies like Amazon, Apple, Google, and Microsoft. The “it was just a better search engine” argument abounds discussions of early internet search engines. I think what Collins’ is getting at is that technology is malleable and can be built several different ways. Zoom and Cloudflare are great examples of this. As we’ve discussed, Zoom started over 100 years after the idea for video calling was first conceived, and several years after Cisco had purchased Webex, which begs the question, is technology the cause of greatness for Zoom? No! Zoom’s ultimate success the elegance of its simple video chat, something which had been locked up in corporate feature complexity for years. Cloudflare presents another great example. CDN businesses had existed for years when Cloudflare launched, and Cloudflare famously embedded security within the CDN, building on a trend which Akamai tried to address via M&A. Was technology the cause of greatness for Cloudflare? No! It’s way cheaper and easier to use than Akamai. Its cost structure enabled it to compete for customers that would be unprofitable to Akamai, a classic example of a sustaining technology innovation, Clayton Christensen’s Innovator’s Dilemma. This is not to say these are not technologically sophisticated companies, Zoom’s cloud ops team has kept an amazing service running 24/7 despite a massive increase in users, and Cloudflare’s Workers technology is probably the best bet to disrupt the traditional cloud providers today. But to place technology as the sole cause for greatness would be understating the companies achievements in several other areas.

3. Build up, Breakthrough Flywheel. Jeff Bezos loves this book. Its listed in the continued reading section of prior TBOTM, The Everything Store. The build up, breakthrough flywheel is the culmination of disciplined people, disciplined thought and disciplined action. Collins’ points out that several great companies frequently appear like overnight successes; all of a sudden, the Company has created something great. But that’s rarely the case. Amazon is a great example of this; it had several detractors in the early days, and was dismissed as simply an online bookseller. Little did the world know that Jeff Bezos had ideas to pursue every product line and slowly launched one after the other in a concerted fashion. In addition, what is a better technology accelerator than AWS! AWS resulted from an internal problem of scaling compute fast enough to meet growing consumer demand for their online products. The company’s tech helped it scale so well that they thought, “Hey! Other companies would probably like this!” Apple is another classic example of a build-up, breakthrough flywheel. The Company had a massive success with the iPod, it was 40% of revenues in 2007. But what did it do? It cannablized itself and pursued the iPhone, with several different teams within the company pursuing it individually. Not only that, it created a terrible first version of an Apple phone with the Rokr, realizing that design was massively important to the phone’s success. The phone’s technology is taken for granted today, but at the time the touch screen was simply magical!

Business Themes

1. Level 5 Leader. The first part and probably the most important part of the buildup, breakthrough, flywheel is disciplined people. One aspect of Good to Great that inspired Collins’ other book Built to Last, is the idea that leadership, people, and culture determine the long-term future of a business, even after current leadership has moved on from the business. To set an organization up for long-term success, executives need to display level five leadership, which is a mix of personal humility and professional will. Collins’ leans in on Lee Iacocca as an example of a poor leader, who focused more on personal celebrity and left Chrysler to fail, when he departed. Level 5 leadership has something that you don’t frequently see in technology business leaders, humility. The technology industry seems littered with far more Larry Ellison and Elon Musk’s than any other industry, or maybe its just that tech CEOs tend to shout the loudest from their pedestals. One CEO that has done a great job of representing level five leadership is Shantanu Narayen, who took the reigns of Adobe in December 2007, right on the cusp of the financial crisis. Narayen, who’s been described as more of a doer than a talker, has dramatically changed Adobe’s revenue model, moving the business from a single sale license software business focused on lower ACV numbers, to an enterprise focused SaaS business. This march has been slow and pragmatic but the business has done incredibly well, 10xing since he took over. Adobe CFO, Mark Garrett, summarized it best in a 2015 McKinsey interview: “We instituted open dialogue with employees—here’s what we’re going through, here’s what it might look like—and we encouraged debate. Not everyone stayed, but those who did were committed to the cloud model.”

2. Hedgehog Concept. The Hedgehog concept (in the picture wheel to the right) is the overlap of three questions: What are you passionate about?, What are you the best in the world at?, and What drives your economic engine? This overlap is the conclusion of Collins’ memo to Confront the Brutal Facts, something that Ben Horowitz emphasizes in March’s TBOTM. Once teams have dug into their business, they should come up with a simple way to center their focus. When companies reach outside their hedgehog concept, they get hurt. The first question, about organizational passion, manifests itself in mission and value statements. The best in the world question manifests itself through value network exercises, SWOT analyses and competitive analyses. The economic engine is typically shown as a single metric to define success in the organization. As an example, let’s walk through an example with a less well-known SaaS company: Avalara. Avalara is a provider of tax compliance software for SMBs and enterprises, allowing those businesses to outsource complex and changing tax rules to software that integrates with financial management systems to provide an accurate view of corporate taxes. Avalara’s hedgehog concept is right on their website: “We live and breathe tax compliance so you don't have to.” Its simple and effective. The also list a slightly different version in their 10-K, “Avalara’s motto is ‘Tax compliance done right.’” Avalara is the best at tax compliance software, and that is their passion; they “live and breath” tax compliance software. What drives Avalara’s economic engine? They list two metrics right at the top of their SEC filings, number of core customers and net revenue retention. Core customers are customers who have been billed more than $3,000 in the last twelve months. The growth in core customers allows Avalara to understand their base of revenue. Tax compliance software is likely low churn because filing taxes is such an onerous process, and most people don’t have the expertise to do it for their corporate taxes. They will however suffer from some tax seasonality and some customers may churn and come back after the tax period has ended for a given year. Total billings allows Avalara to account for this possibility. Avalara’s core customers have grown 32% in the last twelve months, meaning its revenue should be following a similar trajectory. Net retention allows the company to understand how customer purchasing behavior changes over time and at 113% net retention, Avalara’s overall base is buying more software from Avalara than is churning, which is a positive trend for the company. What is the company the best in the world at? Tax compliance software for SMBs. Avalara views their core customer as greater than $3,000 of trailing twelve months revenue, which means they are targeting small customers. The Company’s integrations also speak to this - Shopify, Magento, NetSuite, and Stripe are all focused on SMB and mid-market customers. Notice that neither SAP nor Oracle ERP is in that list of integrations, which are the financial management software providers that target large enterprises. This means Avalara has set up its product and cost structure to ensure long-term profitability in the SMB segment; the enterprise segment is on the horizon, but today they are focused on SMBs.

3. Culture of Discipline. Collins describes a culture of discipline as an ability of managers to have open and honest, often confrontational conversation. The culture of discipline has to fit within a culture of freedom, allowing individuals to feel responsible for their division of the business. This culture of discipline is one of the first things to break down when a CEO leaves. Collins points on this issue with Lee Iaccoca, the former CEO of Chrysler. Lee built an intense culture of corporate favoritism, which completely unraveled after he left the business. This is also the focus of Collins’ other book, Built to Last. Companies don’t die overnight, yet it seems that way when problems begin to abound company-wide. We’ve analyzed HP’s 20 year downfall and a similar story can be shown with IBM. In 1993, IBM elected Lou Gerstner as CEO of the company. Gerstner was an outsider to technology businesses, having previously led the highly controversial RJR Nabisco, after KKR completed its buyout in 1989. He has also been credited with enacting wholesale changes to the company’s culture during his tenure. Despite the stock price increasing significantly over Gerstner’s tenure, the business lost significant market share to Microsoft, Apple and Dell. Gerstner was also the first IBM CEO to make significant income, having personally been paid hundreds of millions over his tenure. Following Gerstner, IBM elected insider Sam Palmisano to lead the Company. Sam pushed IBM into several new business lines, acquired 25 software companies, and famously sold off IBM’s PC division, which turned out to be an excellent strategic decision as PC sales and margins declined over the following ten years. Interestingly, Sam’s goal was to “leave [IBM] better than when I got there.” Sam presided over a strong run up in the stock, but yet again, severely missed the broad strategic shift toward public cloud. In 2012, Ginni Rometty was elected as new CEO. Ginni had championed IBM’s large purchase of PwC’s technology consulting business, turning IBM more into a full service organization than a technology company. Palmisano has an interesting quote in an interview with a wharton business school professor where he discusses IBM’s strategy: “The thing I learned about Lou is that other than his phenomenal analytical capability, which is almost unmatched, Lou always had the ability to put the market or the client first. So the analysis always started from the outside in. You could say that goes back to connecting with the marketplace or the customer, but the point of it was to get the company and the analysis focused on outside in, not inside out. I think when you miss these shifts, you’re inside out. If you’re outside in, you don’t miss the shifts. They’re going to hit you. Now acting on them is a different characteristic. But you can’t miss the shift if you’re outside in. If you’re inside out, it’s easy to delude yourself. So he taught me the importance of always taking the view of outside in.” Palmisano’s period of leadership introduced a myriad of organizational changes, 110+ acquisitions, and a centralization of IBM processes globally. Ginni learned from Sam that acquisitions were key toward growth, but IBM was buying into markets they didn’t fully understand, and when Ginni layered on 25 new acquisitions in her first two years, the Company had to shift from an outside-in perspective to an inside-out perspective. The way IBM had historically handled the outside-in perspective, to recognize shifts and get ahead of them, was through acquisition. But when the acquisitions occured at such a rapid pace, and in new markets, the organization got bogged down in a process of digestion. Furthermore, the centralization of processes and acquired businesses is the exact opposite of what Clayton Christensen recommends when pursuing disruptive technology. This makes it obvious why IBM was so late to the cloud game. This was a mainframe and services company, that had acquired hundreds of software businesses they didn’t really understand. Instead of building on these software platforms, they wasted years trying to put them all together into a digestible package for their customers. IBM launched their public cloud offering in June 2014, a full seven years after Microsoft, Amazon, and Google launched their services, despite providing the underlying databases and computing power for all of their enterprise customers. Gerstner established the high-pay, glamorous CEO role at IBM, which Palmisano and Ginni stepped into, with corporate jets and great expense policies. The company favored increasing revenues and profits (as a result of acquisitions) over the recognition and focus on a strategic market shift, which led to a downfall in the stock price and a declining mindshare in enterprises. Collins’ understands the importance of long term cultural leadership. “Does Palmisano think he could have done anything differently to set IBM up for success once he left? Not really. What has happened since falls to a new coach, a new team, he says.”

Dig Deeper

• Level 5 Leadership from Darwin Smith at Kimberly Clark

• From Good to Great … to Below Average by Steven Levitt - Unpacking underperformance from some of the companies Collins’ studied

• The Challenges faced by new CEO Arvind Krishna

• Overview of Cloudflare Workers

• The Opposite of the Buildup, Breakthrough, Flywheel - the Doom Loop

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