April 2023 - Creativity Inc: Overcoming the Unseen Forces That Stand in the Way of True Inspriation by Ed Catmull and Amy Wallace

We continue our exploration of Disney’s history with this fascinating book on managing creativity by one of the best to ever do it, Ed Catmull!

Tech Themes

An Unlikely Start. When Pixar began, it did not set out to produce feature length films for children. In fact, it wasn’t even a movie studio. Pixar began as the computer division of George Lucas’s Industrial Light and Magic special effects studio. Following the success of Star Wars, Lucas sought to improve on his amazing special effects, by employing more digital computers. In 1979,Lucas hired Ed Catmull to lead the division, and begin building custom computers for special effects. As Catmull puts it; “Alvy’s team set out to design a highly specialized standalone computer that had the resolution and processing power to scan film, combine special effects images with, live action footage, and then record the final result back onto film. It took us roughly four years, but our engineers built just such a device, which we named Pixar Image Computer.” The name comes from a Pixer (a fake word) and Radar. In 1983, Catmull met a promising Disney Animator named John Lassester, who had just been fired by Disney after pitching his movie idea, Brave Little Toaster. Shortly after he joined Lucasfilm, the Pixar team set a goal to produce an animated short movie at the 1984 SIGGRAPH animation conference. Wally B. debuted and blew people away. Up until then, graphics was done by technology people, and almost never included storytellers and animators. As Walter Issacson pointed out in our January 2020 book, teams with diverse backgrounds, complementary styles, and visionary and operating capacity execute the best.
Exceptional Talent. Although Lasseter was a perfect fit at Pixar, gloom was on the horizon. In 1983, George Lucas divorced his then wife Marcia, which created financial challenges at Lucasfilm. He decided to sell Pixar, and courted buyers including Phillips, which wanted to use Pixar’s rendering capabilities for CT scans and MRIs, and General Motors which wanted to use its technology for modeling objects. Neither party wanted the team, and they definitely didn’t want to make animated feature films. Steve Jobs also took a look at the business, but couldn’t pull the trigger because of the immense pressure he was under at Apple (which ultimately led to his ousting). It wasn’t until almost 18 months later, and after founding NeXT, that Jobs was ready, and on January 3rd 1986, Jobs acquired Pixar for $5M. Pixar went about trying to sell their high-tech computer for $122,000 a piece, but couldn’t find many buyers (only 300 were sold). They continued making short videos and were even nominated for an Academy Award in 1987 for Luxo, Jr, a short film about a lamp. But the Company was losing tons of money, and by 1987, Jobs had sunk $54m into the company with little to show for it. The Company decided to pivot from selling computers, to making animated commercials for brands, but it didn’t produce enough cash flow to cover costs. Between 1987 and 1991, Jobs tried to sell Pixar three times: “When Microsoft offered $90 million for us he walked away. Steve wanted $120 million, and felt their offer was not just insulting but proof they weren’t worth of us. The same thing happened with Alias, the industrial and automotive design software company, and with Silicon Graphics…His reasoning was this: if Microsoft was willing to go to $90 million, then we mmust be worth hanging on to.” Jobs realized that Pixar had exceptional talent, and that it needed more time to achieve its vision. The combination of Lasseter, Catmull, and Jobs was truly unstoppable. These small acquisitions are reticent of IAC’s acquisition of College Humor, which came with a small video company called Vimeo. Sometimes these small acquisitions that are filled with creative talent can produce unbelievable results.
Unstable Ground. Its incredibly daunting to create something from nothing, whether its a company or a film. You feel unsure of yourself and your ideas, not knowing the right approach, wondering if your time is being used wisely. Managing in this environment requires: Frank talk, spirited debate, laughter, and love. To accomplish this list of positive tactics, Pixar created the Braintrust, a group of writers, directors, and creatives that could give early feedback to new films. The braintrust is made up of “People with a deep understanding of storytelling and, usually, people who have been through the process [of making a movie] themselves. The other important difference is the Braintrust has no authority, Directors do not have to listen to the feedback. The Braintrust has empathy for the Director. It knows: “[Mistakes] are an inevitable consequence of doing something new (and, as such, should be seen as valuable; without them, we’d have no originality.” As an example of this unstable ground, Catmull recalls the development of Monsters, Inc. Originally, Pete Docter (now CEO of Pixar), developed an idea that “revolved around a thirty-year-old man who was coping with cast of frightening characters that only he could see. His mom gives him a book with some drawings in it that he did when he was a kid. He doesn’t think anything of it, and he puts it on the shelf, and that night, monsters show up. And nobody else can see them. They follow him to his job, and on his dates, and it turns out these monsters are all the fears the he never dealt with as a kid.” Over a period of five years, Monsters Inc changed multiple times, but the ethos of “Monsters are real, and they scare kids for a living,” never changed. When approaching a creative project, things meander and wander, where they start is not normally where they end. Catmull believes: “Originality is fragile. Rather than trying to prevent all errors, we should assume, as is almost always the case, that our people’s intentions are good and that they want to solve problems. Give them responsibility, let the mistakes happen, and let people fix them.” New ideas are hard enough, you need to nurture and support them, whichever direction they go, to get to a high quality finished product.

Business Themes

Balance and Feeding the “Beast”. After Pixar was acquired by Disney, Catmull began hearing the phrase, “You’ve got to feed the Beast.” He was referring to “any large group that needs to be fed an uninterrupted diet of new material and resources in order to function. Following the success of the Lion King in 1994, The bureaucracy of Disney grew to the point that the process of making, marketing, and distributing films engulfed the creative process, leading to pressure for quick and fast success. You “feed the Beast, to occupy its time and attention, putting its talents to use. [But] success only creates more pressure to hurry up and succeed again. Which is why at too many companies, the schedule (that is, the need for product) drives the output, not the strength of the ideas at the front end.” In order to manage this all-consuming Beast, organizations must seek balance. You have to manage the goals of all parties involved, while giving time and energy to the best most creative ideas in the company. “The key is to view conflict as essential. A good manager must always be on the look for areas in which balance has been lost.” Its not as easy as it sounds to achieve balance, but experience is a helpful guide. It takes a constant focus and a subtle understanding of an organization’s psychology.
Pixar-Disney: A Love Hate Relationship. In January 2006, Disney acquired Pixar for $7.4B, a fairy-tale ending. But it wasn’t an easy beginning. After the incredible success of Toy Story, Pixar negotiated a five picture deal with Disney to handle its distribution, whereby Pixar would get an equal cut as Disney. Pixar delivered incredible films for Disney including: A Bug’s Life, Toy Story 2, Monsters Inc, and Finding Nemo. But all was not well in the partnership. Following a series of public slights at eachother, Steve Jobs and Michael Eisner essentially put the kaibosh on negotiations, both feeling they were the more important partner in any deal. With Cars and the Incredibles already in development, Disney and Pixar called off their partnership in 2004. This decision was the beginning of the end for Disney CEO, Michael Eisner, who resigned in the fall of 2005. Following his departure, Iger was named CEO, and set about repairing the broken relationship with Steve Jobs and Pixar. We have discussed the deal in length, but one of the subtle features was that Ed Catmull and John Lasseter would become head of Disney Animation, on top of Pixar. Disney animation was struggling. In the eyes of Circle 7 Studio Head Andrew Millstein, “Our filmmakers had lost their voices. It wasn’t that they had no desire to express themselves, but there was an imbalance of forces in the organization - not just within it, but between it and the rest of the corporation - that diminished the vailidity of teh creative voice. The balance was gone.” Wildly, the Pixar team notes that there were three sets of notes for a film: one from the development department, one from the head of the stuiod, and a third from Michael Eisner himself. This feedback was often conflicting and more “you must” then “you should think about.” When Catmull realized the challenge, they created a braintrust purposefully for Disney Animation, called the Story Trust. The first two meetings (for Meet the Robinsons, and American Dog - later Bolt) were unimpressive, and lacked the dynamism of true brain turst meetings. The Directors admitted they were afraid to give negative feedback to colleagues so publicly. Over time though the meetings took on more intensity, and a few years after the merger, Disney Animation produced its first successful movie in a while, Tangled. This was quickly followed by Wreck-it Ralph, and Frozen, and Disney Animation was back on track.
Notes Day. After many years of leading Pixar, Catmull realized that Pixar had become much larger, and: “More and more people had begun to feel that it was either not safe or not welcome to offer differing ideas.” The feeling of complacency was also manifesting in three real business problems. Production costs were rising, external economic forces were hitting the business, and a core tenant of the culture (good ideas can come from anywhere) was under attack. To remedy this onslaught of challenges, Pixar created Notes Day. The company created a digital electronic suggestion box where people could submit discussion topics that would help Pixar run more efficiently, with more innovation. They wittled down 4,000 suggesstions to 120 core topics. A handful of employees volunteered to be facilitators and were coached on how to keep meetings on track. The day started with an all-hands where John Lasseter admitted some personal shortcomings - he had been splitting time between Pixar and Disney and people didn’t like it and he frequently carried emotion from one meeting into the next, which confused employees and made employees more emotional. Then participants went to departmental meeting about efficiency, then broke into blocks of 90 minute sessions. At the end of each session - employees could fill out red forms for proposals, blue forms for brainstorms, yellow forms for best practices. The forms asked various questions about benefits to Pixar, how they could become a reality, why the idea was worth pursuing, and who should own the proposal. Notes Day was a cathartic day for employees, who shared feelings and emotions with eachother across functions and working groups. Catmull believes that Notes Day succeeded because there was a clear and focused goal (efficiency/candor), it was championed by senior management, and it was led from within, by individuals who volunteered to run sessions. The whole day mirrored the Kaizen process that was popularized by the Japanese auto-makers after W.E. Deming brought the practices to Japan. Although it was originally a World War II approach under the Training Within Industry job method, Kaizen was key to the Just-in-time manufacturing process used at Toyota. Feedback is critical to business success. Notes Day and Kaizen are great examples of the benefit of focused small improvements driven by passionate employees with great ideas.
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January 2023 - Ride of a Lifetime by Bob Iger

This month we look at the recent history of Disney and its famous leader, Bob Iger.

Tech Themes

Creative Trust. Bob began his career at ABC Television, eventually working his way into ABC Sports and their newly acquired Entertainment and Sports Programming Network (ESPN). Their Bob came under the toutalege of Roone Arledge, a famous broadcast executive known for his commitment to storytelling, and his lack of compassion for sub-par work. Bob saw first hand how Roone would get close to the start of production, only to make several last minute tweaks to the overall program, sometimes throwing out all of the work that had been done to offer the audience a better program. Bob understood this creative process was messy and inefficient, but crucial to producing high quality programming. After ABC was acquired by Capital Cities, Tom Murphy and Dan Burke promoted Iger into a new role as head of ABC entertainment. Upon being handed a stack of 40 scripts on his first day, Bob wondered what he was even supposed to be looking for in a script. “I started to realize over time, though, that I’d internalized a lot by watching Roone tell stories all those years.” In his first season as president, Iger decided to go ahead with an off-putting, creepy drama directed by David Lynch called Twin Peaks. At one point, Murphy was so concerned about airing the show, that he told Bob, “You can’t air this. If we put it on television, it will kill our company’s reputation.” Iger pushed back, enthralled that the creative community love the risk the network was taking. A 1990 New York Times article spells out the risky show’s language: “The offending usage was in a Wall Street Journal story about Robert Iger, a bold television producer: ''Even if 'Twin Peaks' caves in, it has already won ABC new cache in Hollywood as the hands-off network, eager for ideas that are daring and different.'' Iger learned early, it pays to take big and bold risks, especially with the creative community.
Bob Iger and Steve Jobs. One of the first things Bob Iger did when he became CEO of Disney was call Steve Jobs. Disney’s prior CEO, Michael Eisner, had spent years arguing a battle for who had the better legal position in the Disney-Pixar distribution relationship. Pixar had succeeded everyone’s wildest dreams with films like Toy Story, A Bug’s Life, and Finding Nemo, but Disney wanted full control of Pixar’s characters and the rights to film sequels. Iger describeds the kerfuffle: “Steve’s animosity toward Disney was too deep-rooted. The rift that had opened between Steve and Michael [Eisner] was a clash between two strong-willed people whose companies’ fortunes were going in different directions. When Disney Animation began to slip even further, Steve became more haughty with Michael because he flet we needed him more, and Michael hated that Steve had the upper hand.” Iger, ever the flatterer discussed with Jobs how he loved his iPod and wanted to put Disney shows on future generations of the device. Steve responded by showing Iger the new iPhone prototype they were developing. They agreed on a deal and Iger strode on stage at the iPod video launch in 2005. In his first board meeting as official CEO, Iger proposed buying Pixar. The company was half owned by Steve Jobs, who had bought it from his friend and Star Wars creator George Lucas for a measly $5 million (plus several $20-30m equity checks). After receiving approval from the board to look at an acquisition, Iger called Jobs from his car phone: “I’ve been thinking about our respective futures, What do you think about the idea of Disney buying Pixar?” Jobs responded - “You know, that’s not the craziest idea in the world.” A few weeks later, the two sat in the Apple boardroom sketching a simple pros and cons list on the whiteboard. For all of the math and financial analysis that goes into an acquisition, its hilariously to envision Steve and Bob doing what anyone would do to analyze an acquisition. “Two hours later, the pros were meager and the cons were abundant, even if a few of them, in my estimation were quite petty…’A few solid pros are more powerful than dozens of cons,’ Steve said." The agreement was negotiated an in 2006, Disney acquired Pixar for a $7.4B equity value. Right before the merger was announced, Steve took Bob for a walk around Apple’s campus, and told him that his cancer had returned. “He told me the cancer was now in his liver and he talked about the odds of beating it. He was going to do whatever it took to be at his son Reed’s high school graduation, he said. When he told me that was four years away, I felt devestated. It was impossible to be having these two conversations - about Steve facing his impending death and about the deal we were supposed to be closing in minutes - at the same time.” The deal ultimately closed and Jobs became Disney’s largest shareholder and a board member at the company, during which Disney’s stock performed very well.
BamTECH. When Iger became CEO, he launched a three part plan to return Disney to the top of media and creativity. The plan was clear: “1) We needed to devote most of our time and capital to the creation of high quality branded content. 2) We needed to embrace technology to the fullest extent, first by using it to enable the creation of higher quality products, and then to reach more consumers in amore modern, more relevant ways. 3) We needed to become a truly global company.” If Pixar, Marvel, and Lucasfilm were an answer to part one, BAMTech was the answer to part two. Baseball Advanced Media Technologies was a company founded by Major League Baseball in 2000 to build out a digital radio streaming service for overseas listeners to the MLB playoffs. MLB Advanced Media was funded by a $1 million investment by each of its 30 teams for four consecutive years. Following a successful launch, BAMTech decided to try streaming live video of baseball games and launched MLB.tv, which soon became a major leader in streaming. Other leagues began to pay attention and soon the NHL had signed up BAMTech as its streaming partner, taking a 10% stake in the company. Soon ESPN, HBO, and the PGA Tour all signed on too. Disney used BAMTech as a back-end partner for the launch of its WatchESPN platform in 2010. So it was a natural extension for Iger, fresh off the massive success of the Pixar, Marvel, and Lucasfilm acquisitions, to try to buy the company. In 2015, BAMTech was officially spun out of the MLB, and in August 2016, Walt Disney acquired 33% of the company in August 2016 for $1B, valuing the streaming platform at $3B. In 2017, it upped its stake to 75% for another $1.58B, then in August 2021 it acquired the NHL’s 10% interest. Finally, it bought the remaining 15% interest from the MLB for $828m in October 2022. Amazing companies can come from anywhere. Based on some simple rough math, the MLB earned a 23% IRR on initial $120m investment from 2000 to 2022, a 28x return.

Business Themes

The Guide of Experience. Its clear that Bob Iger was molded into an incredible businessman through a series of experiences that almost no one could predict would create to such a compelling leader. Because Iger began in the TV industry at ABC, he began the habit of waking up absurdly early, a trait shared by many successful leaders. “To this day, I wake nearly every morning at four-fifteen, though now I do it for selfish reasons: to have time to think and read and exercise before the demands of the day take over.” After moving over to sports, Bob learned the importance of high quality from Roone Arledge, but he also developed one of his greatest traits, finding compromise among competing interests. “In 1979, the World Table Tennis Championships were being held in Pyongyang, North Korea. Roone called me into his office one day and said, ‘This is going to be interesting. Let’s cover it on Wide World of Sports.’ I thought he was joking. He surely knew it would be impossible to secure the rights to an event in North Korea. He wasn’t joking. I then embarked on a worldwide pursuit to secure the rights. After a few months of intense negotiations, we were on the eve of closing the deal when I received a call from someone on the Asian desk in the U.S. State Department. ‘Everything you are doing with them is illegal,’ he said. ‘You’re in violation of strict U.S. Sanctions against doing any business with North Korea…’ I eventually arrived at a workoaround that involved securing the rights not through the host country but through the World Table Tennis Federation. The North Korean government, though we were no longer paying them, still agreed to let us in, and we became the first U.S. media team to enter North Korea in decades - a historic moment in sports broadcasting.” When ABC was purchased by Capital Cities, Bob began his relationship with Dan Burke and Tom Murphy. Warren Buffett famously praised the pair: “Tom Murphy and [his long-time business partner] Dan Burke were probably the greatest two-person combination in management that the world has ever seen or maybe ever will see.” Iger learned tons about business, acquisitions, budgeting, and decentralized management from Tom and Dan. They also gave Iger numerous opportunities to prove himself and take risks, like the Twin Peaks launch. Later, when Cap Cities was acquired by Disney, Iger gained a front-row seat to Michael Eisner’s leadership style. Eisner was once regarded as one of the best CEOs in the world, but languished as the stress of managing a massive company caused him to become increasingly defensive and depressed. Despite sharing a complicated relationship, Iger learned a lot about managing Disney from Eisner, including what he didn’t want to do once he got the role. In hindsight, its no surprise that Iger became the leader he became, even though it wasn’t clear as it was unfolding.
A tale of M&A. Although Disney sticks in people’s minds as a family friendly media company, its sprawling empire has grown to include ABC, ESPN, Marvel, the Simpsons, Star Wars, Pixar, Marvel, Hotstar, National Geographic, Hulu, 20th Century Studios, X-Men, Deadpool, Fx, Disney World, Disney Cruise Line, and Disney+. This empire was constructed through many M&A deals. The first major M&A deal was the 1995 $19B Disney, Capital Cities merger, which was the second largest corporate takeover (to KKR’s RJR Nabisco LBO) ever. Warren Buffett became one of the largest shareholders of Disney, which he sold over the next few years, only to massively miss out on the growth of ESPN and eventually the content domination that Iger began. The deal took a while to digest, and vastly expanded Disney’s operations. Eisner’s legendarily poor hire of talent agent Michael Ovitz compounded pressures, and Eisner relied even more heavily on Disney’s Strategic Planning group to make corporate decisions. From 1995 to 2005, Disney’s stock increased only 25%, and Eisner was forced out in a brutal, public proxy battle. Once Iger took over, he collapsed the Strat Planning department under rising star Kevin Mayer, and began the series of acquisitions that marked his tenure. After Pixar, Iger turned to Marvel, which was stumbling along as a comic book and toy producer to a shrinking population of interested buyers. Despite its relatively small size, Marvel had a fascinating corporate history. In the late 80’s, Ron Perelman, billionaire businessman, bought Marvel for a mere $82m. However, after the comic book boom faded, Marvel fell into bankruptcy, and Icahn stepped in to buy Marvel’s distressed debt eventually becoming chairman of the board through a protracted legal process. At the last second, Ike Perlmutter and Avi Arad, managers of the largest susidiary of Marvel, Toy Biz, proposed a better offer to the bankruptcy court, and eventually wrestled control away from both Perelman and Icahn. By the time Disney came knocking in 2008, Marvel was beginning to produce its own films, after several successful Spider-Man and X-men films. While a lot of Disney executives believed Marvel was too edgy for Disney, Iger took a longer term view and bought the company for $4B, which has clearly paid off. Alongside the acquisition of Marvel, Disney invested about $100m for a 30% stake in a new streaming service created by NBC and News Corp called Hulu. Next, Iger turned to Lucasfilm, the maker of Star Wars. George Lucas was very reluctant to sell to Disney, and it took four and half years of convincing: “We went over and over the same ground - George saying he couldn’t just hand over his legacy, me saying we couldn’t buy it and not control it - and twice walked away from the table and called the deal off. (We walked the first time and George walked the second).” Eventually, Disney acquired Lucasfilm for $4.05B, another great content acquisition that has worked out well. While Iger is credited with these amazing acquisitions, his latest and biggest acquisition has raised the most questions for Disney. In 2017, Disney announced it would buy 20th Century Fox for $52B in stock, and the assumption of $13.7B of Fox’s net debt. However, the deal faced a long regulatory approval process, during which the US Justice Department ruled in favor of AT&T buying Time Warner. With what seemed like a favorable M&A environment, Comcast entered the fray, proposing an all cash bid at $35 a share or $64B. Disney upped its offer to $38 a share, half in cash and half in stock. Fox accepted Disney’s new bid (of $71B), and Disney closed the deal in March of 2019. While the deal did bring X-men, Deadpool, Fantastic Four, the Simpsons, Family Guy, it added $19B of debt to its balance sheet. In addition, Disney spent time selling Fox’s Sky ownership to Comcast, and the regional sports networks owned by Fox. These divestitures were necessary for the regulatory approval of the deal and netted Disney $24B ($15B from Sky and $9.6B from the sports networks). Covid through Disney for a loop, and its higher leverage from the Fox deal, caused the elimination of its dividend, and an obvious massive reduction to its parks business. Time will tell if the Fox Deal yields the same great results that Pixar, Marvel, and Lucasfilm produced - I wonder if this wasn’t too big for the integration risk entailed.
Walt Proxy. Disney has a rich history in not only animated characters but business characters as well. The company has repeatedly been subject to proxy battles. Iger’s first proxy battle began slowly then grew into a massive public boardroom debate. In 2002, Roy E. Disney and Stanley Gold, expressed their disappointment in Michael Eisner’s choices as CEO of Disney, sending a letter to the board demanding his removal. Eisner retailiated, “turning to the company’s governance guidlines regarding board member tenure, which stipulated that board members had to retire at age seventy-two. Rather than telling Roy himself, though, Michael had the chairman of the board’s nominating committee inform him that he would not be allowed to stand for reeelection and would be retired as of the next shareholders meeting in March 2004.” Roy began a public campaign called “Save Disney” where he called for Michael’s retirement and for him to rejoin the board. At the same time, Comcast launched a hostile bid for Disney. While Comcast would eventually find its content companion in NBC/Universal years later, this bid added heat to the situation. Comcast was unable to complete its bid, but the shareholder vote still turned out poorly for Eisner, with 43% of shareholders withholding support for him as CEO. He was promptly stripped of his chairman title, and in the fall of 2004, announced his resignation at the end of his contract in 2006. Fast forward to 2023, and Disney is back in the proxy battle world, this time facing up against Nelson Peltz, the famous activist investor. Under scrutiny are Disney’s acquisition of Fox, its exorbitant streaming losses, the cancellation of its dividend, the massive debt load it carries, and its large Netflix-competing content spend. The board recently announced that Iger would come back as CEO, despite clearly saying his time was over in the book. Iger’s successor, Bob Chapek, had a terrible run as Disney CEO, including shutting down the company, a public row with the State of Florida and Scarlett Johansson, and a centralization process that took control away from the creatives. I guess the Ride of a Lifetime is not over.
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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

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.
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.
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

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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.
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.
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.

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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

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.
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.
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

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.
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.
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.

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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

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.
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.
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

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.
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."
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.

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August 2021 - Hit Refresh by Satya Nadella, with Greg Shaw and Jill Tracie Nichols

This month we look at how Satya Nadella reignited Microsoft’s fire and attacked new spaces with a growth mindset. The book is loaded with excellent management philosophy and complex Microsoft history.

Tech Themes

Bing: The Other Search Engine. After starting at Microsoft as an engineer and rising through the ranks to lead Microsoft Dynamics (its CRM product), Nadella was handpicked to lead the re-launch of a brand new search engine, Microsoft Bing. Bing was one of Microsoft’s first “born-in-the-cloud” businesses and Nadella quickly recognized four core areas of focus: distributed systems, consumer product design, understanding the economics, of two-sided marketplaces, and AI. Microsoft had a troubled history with search engines and wanted to go big quickly, submitting an offer to buy Yahoo for $45B in February of 2008. Microsoft was rebuffed and thus Nadella found himself launching Search Checkpoint #1 in September of 2008 ahead of a June 2009 Bing launch. What are the odds that Microsoft’s future CEO would have early cloud, distributed systems, and advanced AI leadership experience? It was an almost prescient combination!
Red Dog to Azure. Microsoft started working on the cloud two years after Amazon launched AWS. In 2008, veteran software architects Ray Ozzie and Dave Cutler created a secret team inside Microsoft known as Red Dog, which was focused on building a cloud infrastructure product. Red Dog was stationed under Microsoft’s Servers and Tools business unit (STB), with products such as Windows Server and Microsoft’s powerful RDBMS, SQL Server. In 2010, Microsoft CEO Steve Ballmer asked Nadella to lead the STB business unit and set the vision for their then single-digit millions cloud infrastructure business. It was a precarious situation: “The server and tools business was at the peak of its commercial success and yet it was missing the future. The organizing was deeply divided over the importance of the cloud business. There was constant tension between diverging forces.” How did Nadella resolve this tension? It was simple - he made choices and rallied his team around those decisions. He focused the team on hybrid cloud, data, and ML capabilities where Microsoft could take advantage of its on-premise, large enterprise heritage while providing an on-ramp for customers eager to make the shift to the cloud. Microsoft has since surged to an estimated 20% worldwide market share making it one of the biggest and fastest-growing products in the world!
Re-Mixed Reality. Microsoft’s gaming portfolio is impressive: Xbox, Mojang (aka Minecraft), Zenimax Media (Maker of Fallout, Wolfenstein, and DOOM). Microsoft also owns the Hololens, a virtual reality headset that competes with Facebook’s Oculus. Many believe the future computing generations will take place in virtual reality, augmented, or mixed reality. Nadella doesn’t mince words - he believes that the future will not be in virtual reality (as Facebook is betting) but rather in mixed reality, a combination of augmented reality (AR) and virtual reality, where the user experiences an augmented experience but still maintains some semblance of the outside world. Nadella lays out the benefits: “HoloLens provides access to mixed reality in which the users can navigate both their current location - interact with people in the same room - and a remote environment while also manipulating holograms and other digital objects.” Virtual reality blocks out the outside world, but that can be an overwhelming experience and impractical particularly for enterprise users of AR/VR/MR technologies. One of the big users of the HoloLens is the US Army, which recently signed a rumored $22B deal with Microsoft. It is still early days, but the future needs a new medium of computing and it might just be mixed reality!

Business Themes

Leading with Empathy. Satya Nadella’s life changed with the birth of his son. “The arrival of our son, Zain, in August 1996 had been a watershed moment in Anu’s and my life together. His suffering from asphyxia in utero had changed our lives in ways we had not anticipated. We came to understand life as something that cannot always be solved in the manner we want. Instead, we had to learn to cope. When Zain came home from the intensive care unit, Anu internalized this understanding immediately. There were multiple therapies to be administered to him every day, not to mention quite a few surgeries he needed that called for strenuous follow-up care after nerve-racking ICU stays…My son’s condition requires that I draw daily upon the very same passion for ideas and empathy that I learned from my parents.” Nadella reiterates the importance of empathy throughout the book, and rightly so, empathy is viewed as the most important leadership skill, according to recent research. How does one increase empathy? It’s actually quite simple - talk to people! Satya understands this: “It is impossible to be an empathetic leader sitting in an office behind a computer screen all day. An empathetic leader needs to be out in the world, meeting people where they live, and seeing how the technology we create affects their daily activities.” Leadership requires empathy - hopefully, we see more of it from big technology soon!
Frenemies. One of the first things that Satya Nadella did after taking over the CEO role from Steve Ballmer in 2014 was reach out to Tim Cook. Apple and Microsoft had always had a love-hate relationship. In 1997, Microsoft saved Apple shortly after Steve Jobs returned by investing $150M in the company so that Apple could stave off potential bankruptcy. However, in 2014, Nadella called on Apple: “I decided we needed to get Office everywhere, including iOS and Android…I wanted unambiguously to declare, both internally and externally, that the strategy would be to center our innovation agenda around users’ needs and not simply their device.” Microsoft had tried to become a phone company with Windows Mobile in 2000, tried again with Windows Phone in 2010, and tried even harder at Windows Phone in 2013 with a $7.2B acquisition of Nokia’s mobile phone unit. Although Nadella voted ‘No’ on the deal before becoming CEO, he was forced to manage the company through a total write-off of the acquisition and the elimination of eighteen thousand jobs. So how could Nadella catch up to the mobile wave? “For me, partnerships - particularly with competitors - have to be about strengthening a company’s core businesses, which ultimately centers on creating additional value for the customer…We have to face reality. When we have a great product like Bing, Office, or Cortana but someone else has created a strong market position with their service or device, we can’t just sit on the sidelines. We have to find smart ways to partners so that our products can become available on each other's popular platforms.” Nobody knows platforms like Microsoft; Bill Gates wrote the definition of a platform: “A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it.” Nadella got over his predecessor’s worry and hatred of the competition to bring Microsoft’s software to other platforms to strengthen both of their leadership positions.
Regulation and Technology. Nadella devotes an entire chapter to the idea of trust in the digital age. Using three case studies - North Korea’s attack on Sony’s servers, Edward Snowden’s leaked documents (that were held on Microsoft’s servers), and the FBI’s lawsuit against Apple to unlock an iPhone that might contain criminal information - Nadella calls for increased(!) regulation, particularly around digital technology. Satya uses a simple equation for trust: “Empathy + Shared values + Safety and Reliability = Trust over time.” Don’t you love it when a company that the government sued over anti-trust practices calls on the government to develop better laws! You’d love it even more if you saw how they used the same tactics to launch Microsoft Teams! Regulation in technology has been a hot topic recently, and Nadella is right to call on the government to create new laws for our digital world: “We do not believe that courts should seek to resolve issues of twenty-first-century technology relying on law that was written in the era of the adding machine.” He goes further to suggest potential remedies, including an efficient system for government access to corporate data, stronger privacy protections, globalized digital evidence sharing, and transparency of corporate and government data. I imagine the trend will be toward more regulation, especially with the passage of recent data laws like GDPR or CCPA, but I’m not sure we will see any real sweeping changes.

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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

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.”
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.
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

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.
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.
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!

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June 2020 - Bad Blood by John Carreyrou

This month we review John Carreyrou’s chilling story of the epic meltdown of a company, Theranos. We explore bad decision making, the limits of technology and the importance of strong corporate governance. The saddest thing and the reason Bad Blood hits so hard is that Theranos was a startup that seemed to have everything: a breakthrough blood analyzer, tons of funding, excellent board representation, and a smart, visionary female CEO. But underneath, it was a twisted cult of distrust with an evil leader.

Tech Themes

The limits of technology. Sometimes technology sounds too good to be true. Theranos’ Edison and miniLab blood analyzers were supposed to tell you everything you could ever want to know about your blood. But they didn’t work and never had a shot to work. Stanford professor Phyllis Gardener even told Elizabeth Holmes (Theranos’ founder/CEO) early-on that an early patch-like design of the product would never work: “[Holmes] just kind of blinked and nodded and left. It was just a 19-year-old talking who’d taken one course in microfluidics, and she thought she was gonna make something of it.” It was debunked by almost every scientist as wild fantasy even prior to its commercial use and subsequent fall from grace. There is something so human about wanting to believe there are no limits to technology. In today’s day of fake technology marketing, it’s easy for messaging to slowly take over a company if left unchecked. Think about Snap’s famous declaration, “Snap Inc. is a camera company.” or Dropbox’s S-1 mission statement: “Unleash the world’s creative energy by designing a more enlightened way of working.” These statements ignore what these businesses fundamentally do - advertising and storage. Sometimes there are massive leaps forward, like the transistor, networked computing, and the internet, but even these took many many years to push to fruition. When humans hear a compelling pitch, it is natural to want to remove those limits of technology because the result is so astounding, but we have to remain skeptical or risk another Theranos.
The reality distortion field. Elizabeth Holmes was obsessed with Steve Jobs. Mired in this deep fixation, she also managed to subscribe to one of Jobs’ interesting habits: the reality-distortion field. While we’ve discussed the reality distortion field before in relation to Jobs, Holmes seemed to take it to a new level. Jobs would demand something incredible be done and a lot of times his amazing team could come up with the solution. Holmes also believed this but failed to consider two things: fundamental biology and her team. Biology, at its core, is just not as flexible as the hardware and software that Apple was building. Jobs demanded an excellent product, Holmes demanded a biological impossibility. Beyond searching to enable a biological impossibility, which to be frank, can pop up after years of research (see CRISPR), Holmes operated the Theranos cult as a dictator, ruthlessly seeking out dissenters and punishing or firing them. While Jobs challenged his team repeatedly while being a huge asshole, the team, for the most part, stayed in tact (Phil Schiller, Tony Fadell, Jony Ive, Scott Forstall, and Eddy Cue). There were certainly those who got fired or left, but Holmes active rooting out of non-believers severely limited the chances of success at the company. The additional levels of secrecy were even extreme for a stealth technology startup. Startup founders need to drink the kool-aid sometimes, it comes with being visionary, but getting so drunk on power and image can only lead to personal and business demise as was the case with Theranos.
When startups turn bad. Tons of startups fail, but only a few turn truly malicious. Theranos was one of those few. The company tested people’s blood and gave individuals fake, untested medical results, including indicators of cancer diagnoses! Even when reviewing other major business failures and frauds - Jeff Skilling at Enron and Bernie Madoff’s Ponzi Scheme - nothing compares to Theranos. While it could be argued that Enron and Madoff’s schemes did more and broader financial hurt to society, at least they were never physically endangering individuals. The only comparisons that may be warranted are Boeing and the Fyre Festival. The brainchild of famous clown, Billy McFarland, the Fyrefest certainly endangered people by marooning them on an island with little food. Furthermore, Boeing’s incredibly incoherent internal review process which knowingly led to the production of a faulty airline software system, also endangered people - including two flights that crashed because of its system. Did Elizabeth Holmes set out to build a dangerous device, knowingly defraud investors, and endanger the public? Probably not. It was one decision after another. It was firing CFO Henry Mosley who called out fake projections; it was hiring Boies Schiller to pressure former employees; it was enlisting Sunny Balwani to “run” the company. It was what Clayton Christensen calls marginal thinking - the idea that the incremental bad decision or the incremental costs of doing something frequently outweigh the full costs of doing something. The incremental cost of firing the CFO who wouldn’t make fake numbers was simply easier than facing the difficult reality that the product sucked, and they had pushed through too much investor money to start again. When things turn bad, at startups or other businesses, a trail of marginal decision making can normally be found.

Business Themes

The Pressure to Succeed. Stress seems to be a part of business, but the pressure can sometimes get too big to handle. Public companies, in particular, face growth targets from wall street analysts and investors. One earnings miss or even a more modest beat than expected can completely derail a stock (See pluralsight and alteryx graphs to the right). Public company CEOs and CFOs can be fired or have compensation withheld for poor stock performance. So when a young hot biotechnology startup wanted to launch a partnership with Walgreens, Dr. J and the Walgreens team were more than ready to fast track the potential partnership. Despite not being allowed to use the bathroom, see the lab or see a partial demo of the product, Walgreens pushed through a deal so that longtime competitor, CVS, wouldn’t get the deal. As then head of the Theranos/Walgreens pilot said, "We can’t not pursue this. We can’t risk a scenario where CVS has a deal with them in six months and it ends up being real.” When the partnership was announced, even the press release sounded oddly formulaic: “Theranos’ proprietary laboratory infrastructure minimizes human error through extensive automation to produce high quality results.” There was no demo. There was no product. There was only pressure at Walgreens to beat CVS and pressure at Theranos to make something from a fake device.
The Importance of Corporate Governance. Corporate Governance has historically rarely been discussed outside of academic settings but has come into sharper focus over the past few years. Some have recently tried to bring some of the prominent corporate governance issues such as member compensation and option grants for executives to the forefront. Warren Buffet even commented on boards in his 2019 annual shareholder letter: “Director compensation has now soared to a level that inevitably makes pay a subconscious factor affecting the behavior of many non-wealthy members. Think, for a moment, of the director earning $250,000-300,000 for board meetings consuming a pleasant couple of days six or so times a year. And job security now? It’s fabulous. Board members may get politely ignored, but they seldom get fired. Instead, generous age limits – usually 70 or higher – act as the standard method for the genteel ejection of directors.” Boards are meant to help guide the company through strategic challenges, ensure the business is focused on the right things, and evaluate the CEO. Theranos’ Board of Directors was a laughable hodgepodge of old white men: George P. Shultz (former U.S. Secretary of State), William Perry (former U.S. Secretary of Defense), Henry Kissinger (former U.S. Secretary of State), Sam Nunn (former U.S. Senator), Bill Frist (former U.S. Senator and heart-transplant surgeon), Gary Roughead (Admiral, USN, retired), James Mattis (General, USMC), Richard Kovacevich (former Wells Fargo Chairman and CEO), and Riley Bechtel. The average age of the directors in 2012 was ~72 years old and few of these men could offer real strategic guidance in pursuing novel biotechnology. On top of that, as Carreyrou points out, “In December 2013, [Holmes] forced through a resolution that assigned one hundred votes to every share she owned, giving her 99.7% of the voting rights.” George Shultz even said later in a deposition, “We never took any votes at Theranos. It was pointless. Elizabeth was going to decide whatever she decided.” The episode brings more clarity to those CEOs and companies who hide behind their Board of Directors, who promise governance for investors, but rarely deliver on anything beyond pandering to the CEO’s whims. In another ludicrous comparison, Apple and Steve Jobs specifically have also been accused of shoddy corporate governance. In 2007, Apple famously backdated Jobs options, allowing him to make an instant profit, and did not even bother to report that it had issued the options. The best companies are not immune, and investors and employees should be aware of the qualifications and monetary interests of a company’s board members.
Search and Destroy. Only the Paranoid Survive, right? Wrong. There is such thing as too much paranoia. When you combine that paranoia with a manipulative persona, you get Elizabeth Holmes. It’s hard to believe that any startup or founder would need the level of security and secrecy that dominated the culture at Theranos. The list of weird security and legal gray areas include: personal security for Holmes, laboratory developed tests (instead of FDA approved tests), copious and vigorously enforced NDAs, siloed teams with no communication, and false representation in the media. Organizations are often secret and many startups operate in stealth to not give away details to competitors. Some larger companies launch new divisions in separate locations from their office, like Amazon a9. The Company hired private investigators (through its powerful law firm Boies Schiller) to threaten and track former employees including Erika Chung and Tyler Schulz. Tyler Schulz, grandson of board member George Schulz, was one of the key informants to author John Carreyrou. After he accused Elizabeth and Sunny of lying and potentially harming patients, he resigned and tried to convince his grandfather that it was all a sham. His grandfather agreed to speak with him one-on-one and at the end of the conversation surprised Tyler with two attorneys from Boies Schiller who almost forced Tyler to sign a confidentiality agreement. Tyler refused, which eventually led to the publication of Carreyrou’s first article. As early board member Avie Tevanian put it, “I had seen so many things that were bad go on. I would never expect anyone would behave the way that she behaved as a CEO. And believe me, I worked for Steve Jobs. I saw some crazy things. But Elizabeth took it to a new level.” Again, sadly, while Theranos may be the pinnacle of secrecy, paranoia and threatening behavior, eBay recently fired six employees for threatening online reviewers. On top of sending live spiders to the reviewers’ household, eBay team members would knock on their doors day or night, to scare the reviewers. How could these employees think this was ok? How could Elizabeth partake in this threatening and manipulative behavior? As Organizational Behavior professor Roderick Kramer reminds us: “‘Reality’ is not a fixed entity but rather a tissue of facts, impressions, and interpretations that can be manipulated and perverted by clever and devious businesses and governments.” Theranos’ fake Edison tests are reminiscent of Enron’s fake trading floor, where 70 low level employees once pretended to be busy to impress wall street analysts. Paranoia and secrecy are powerful weapons when left unchecked, and clearly Theranos' wielded those weapons to the fullest extent.

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May 2020 - Hitchhiker's Guide to the Galaxy by Douglas Adams

We want to recognize the craziness of the world today and the saddening police brutality and systemic racism that continues to occur in the US. This month we opted for a fiction book that may provide a minor break from that current, depressing reality. We want to acknowledge that our reality is messed up, and as a book club we are committed to reading more books about diversity in tech and more books written by a diverse set of authors.

Tech Themes

The Computer knows the answer. There is an overwhelming feeling in society today, that the computer should be able to tell us the answer. Predictive models are everywhere, from personalized AI workflows to sports gambling. Society has become accustomed to the idea that computers will solve problems for us. Interestingly, the novel portrays technology in the opposite light. Marvin, the robot on Zaphod Beeblebrox’s ship is so knowledgeable that even the most complex task seems meaninglessly easy. As a result, Marvin is constantly depressed. Deep Thought, the most powerful computer in history, takes seven million years to come up with an answer to the question of what life is all about. The simplistic forty-two answer, prompts the crowd to ask what the question was to which the answer is forty-two. The computer suggests that earth will provide that question. These examples somewhat reverse the expectations of technology to the reader. We normally think of technology as providing the answer, simplifying our lives and dehumanizing us. At the end of the story it is not Marvin’s heroism that saves the crew from being killed by the Blagulon Kappa cops who are after the Heart of Gold, it is his depression. When Marvin seizes control of the cops computer and explains his life-view, they commit suicide. In these instances, the role of technology is reversed - it is emotion and human nature that can help save the world and provide the answers to the universe.
Not so obvious, Space Travel and Towels. “A towel, it says, is about the most massively useful thing an interstellar hitchhiker can have.” Something so simple as a towel - which seems relatively unimportant in everyday life - is an absolute necessity for space travel and hitchhiking through the galaxy. Frequently throughout technological history, the simple and unimportant things are overlooked in favor of tackling more complex problems and solutions. The largest data breach in history occurred when Equifax overlooked an expired certificate. During early development of the ENIAC, one of the first computing machines, software was looked at as unimportant and was relegated to early female programmers. Little did these sexist hardware programmers realize that software would become the most important aspect of computing. When the first iPhone released, Microsoft CEO Steve Ballmer laughed at the the device, saying it was too expensive and unable to cater to business customers because it didn’t have a keyboard. The incredibly sad, failed launch of space shuttle Challenger was due to cold temperatures causing rubber joint rings to become too stiff for appropriate sealing. Sometimes the value of a technology or a towel is not inherently obvious.
The Guide, the Whole Earth Catalog and the Internet. “The reason why it was published in the form of a micro sub meson electronic component is that if it were printed in normal book form, an interstellar hitchhiker would require several inconveniently large buildings to carry it around in.” The Hitchhiker’s Guide to The Galaxy is a massive electronic guide to help hitchhikers move throughout space. This interestingly mirrors the current state of the internet, which didn’t exist when Douglas Adams wrote Hitchhiker’s Guide to the Galaxy in the early 70s. Prior to the internet, this type of alternative information could be found in the Whole Earth Catalog, a famous magazine that Steve Jobs once called “Google in paperback form, thirty-five years before Google came along.” The Whole Earth Catalog was created by Stewart Brand, a famous writer and technologist, who actually participated with Douglas Englebart in the Mother of All Demos, which featured the introduction of the mouse and video conferencing. Brand wanted a way to publish material that wouldn’t be found in traditional textbooks, including product reviews of the latest technology. When the internet was starting to launch, Brand created The WELL (Whole Earth ‘Lectronic Link) to continue to provide interesting alternative articles and essays. The WELL is credited with being one of the first internet forums, which was originally accessed via dial-up bulletin board system. The internet today very much mirrors the Hitchhiker’s guide to the galaxy: its content is enormous, it isn’t necessarily factual (the Guide is not completely factual either, but based on experience), and its content spans all possible information needed to survive. On top of that, the packaging is described as suspiciously similar to modern smartphones: “He also had a device which looked rather like a largish electronic calculator. This had about a hundred tiny flat press buttons and a screen about four inches square on which any one of a million ‘pages’ could be summoned at a moment's notice.” The internet and mobile computing have come a long way in 50 years; it will be great to watch what happens in the next 50!

Business Themes

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The Business of Space: SpaceX / Virgin Galactic. Elon Musk and Chamath Palihapitiya are outspoken, visionary billionaires. Elon has an incredible track record of under-delivering but still exceeding most people’s wildest expectations. Chamath was an early employee at Facebook and is now a part owner of the Golden State Warriors. He is CEO of a VC-firm turned “technological holding company” and the creator of three public SPACs, one of which now represents Virgin Galactic. A SPAC or Specialty Purpose Acquisition Company is a blank-check company with no commercial operations. A SPAC is normally led by experts in a specific space like software or real estate and these executives raise money to acquire a company. The money raised in an IPO sits in an interest bearing account until the blank-check company has found a company to acquire. If no deal is completed after two years, the SPAC will give money back to their investors. Chamath purchased 49% of Richard Branson's Virgin Galactic space company in 2019. Space is impossibly big and its natural to think that someone who can develop the technology to unlock that vastness to humans would also unlock a fortune. As the Guide puts it: “‘Space,’ it says, ‘is big. Really big. You just won’t believe how vastly, hugely, mindbogglingly big it is. I mean, you may think it’s a long way down the road to the chemist’s, but that’s just peanuts to space.’” But the business of space is in its earliest days. SpaceX relies almost completely on government contracted work which means the company needs an incredible amount of funding to survive because of the capital investment and the uncertain, non-recurring nature of these space contracts. Interestingly, the development of early commercial air travel, in the 1920’s, also had a similar funding issue, and it was up to the Guggenheim family, rich from mining profits, to set up a fund to exclusively contribute to the development of Western Air Express, the world’s first commercial airliner. Virgin Galactic is taking a piece out of Tesla’s playbook by selling future space rides ahead of any commercial launch. Public markets investors including reddit’s wallstreetbets community is piling into Virgin Galactic at the literal moonshot risk of it becoming the space company (Income statement above). Space has always been a billionaire passion, the question remains - can it be a business?
Moore’s Law and Murphy’s Law. Murphy’s law states: “Anything that can go wrong, will go wrong.” Hitchhiker’s Guide to the Galaxy explores this notion repeatedly as Arthur continually finds himself in unbelievably bad circumstances; his house is demolished, his planet is destroyed, he is captured by Vogons, and sure-death missles approach the ship as the crew descends on Magarathea. Arthur continues to survive these dangers with the help of the improbability drive, which the book states is a “a wonderful new method of crossing interstellar distances in a few seconds; without all that tedious mucking about in hyperspace. As the Improbability Drive reaches infinite improbability, it passes through every conceivable point in every conceivable universe almost simultaneously. In other words, you're never sure where you'll end up or even what species you'll be when you get there. It's therefore important to dress accordingly.” In comparison to Murphy’s law, Moore’s Law is the idea that computing power doubles every 18 months. A 2006 Economist article explained Moore’s Law as the opposite of Murphy’s Law: “But his law seems safe for at least another decade—or two to three chip generations—which is as far as he has ever dared to look into the future. As things are made at scales approaching individual atoms, he says, there will surely be limitations. Then again, the law has often met obstacles that appeared insurmountable, before soon surmounting them. In that sense, Mr Moore says, he now sees his law as more beautiful than he had realised. “Moore's Law is a violation of Murphy's Law. Everything gets better and better.” While Moore’s Law has surely reached its current limitations, the question remains where do chips go from here? Some have posited that chips will push towards function specific hardware or purpose built for specific computing tasks like NVIDIA’s graphics cards. The space is large and complex - with companies like Apple licensing ARM technology to build their famous A13 chip while other companies have focused on specific parts of the value chain like TSMC. A big question that still remains is how cloud companies will scale hardware to meet continuing demand from customers. Arthur Dent, like Elon Musk, continues to benefit from infinite improbability - maybe quantum computing is the only way to know if Elon will succeed and what happens next in chip design.
Mentorship. Slartibarfast is a wise, old, planet creator who is plopped into the story to provide Arthur with answers to so many incredible questions. Slartibartfast explains the creation of earth and the interaction with Deep Thought. The interactions between Arthur and Slartibartfast are somewhat akin to traditional business mentorship - when you have none of the answers or you have preconceived ideas of how everything came to be, a mentor can quickly dispel your ideas and provide deep answers. Mentorship has been popular in Silicon Valley, with Bill Campbell mentoring Steve Jobs and several others. Bill was also instrumental in several decisions Ben Horowitz contemplated as he took Opsware through its spinout and sale of its managed services division. Mentors help change perspective and provide guidance.

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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

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.
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.
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

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.
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).
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.

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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

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.
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.
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

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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.
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.
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.

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May 2019 - The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone

This book is a great deep dive on the history of Amazon and how it became the global powerhouse that it is today.

Tech Themes

The Birth of AWS. We’ve looked at the software transition from on premise, license maintenance software to SaaS hosted in the cloud, but let’s dive deep into how the cloud came to be. The first ideas of AWS go back to 2002 when Bezos met with O’Reilly Media, a book publisher who in order to compete with Amazon, had created a way to scrape the latest book rankings off Amazon’s website. O’Reilly suggested creating a set of tools to let developers access Amazon’s rankings, and in 2003 Amazon launched Amazon Web Services (AWS) to create commerce API’s for third parties. Around this time, Amazon had centralized its IT computing resources in a separate building with hardware professionals operating and maintaining the infrastructure for the entire company. While parts of the infrastructure had improved, Amazon was struggling internally to provision and scale its computing resources. In 2004, Chris Pinkham, head of the infrastructure division, relocated to South Africa to open up Amazon’s first office in Cape Town. His first order of business was to figure out the best way to provision resources internally to allow developers to work on all types of applications on Amazon’s servers. Chris elected to use Xen, a computer that sits on top of infrastructure and acts as a controller to allow multiple projects access the same hardware. This led to the development of Elastic Compute Cloud (EC2). During this time, another group within Amazon was working on solving the problem of storing the millions of gigabytes of data Amazon had created. This team was led by Alan Atlas, who could not escape Bezos’ laser focus: “It would always start out fun and happy, with Jeff’s laugh rebounding against the walls. Then something would happen and the meeting would go south and you would fear for your life. I literally thought I’d get fired after everyone one of those meetings.” In March 2006, Amazon launched the Simple Storage Service (S3), and then a few months later launched EC2. Solving internal problems can lead to incredibly successful companies; Slack, for example, originally started as a game development company but couldn’t get the product off the ground and eventually pivoted into the messaging giant that it is today: “Tiny Speck, the company behind Glitch, will continue. We have developed some unique messaging technology with applications outside of the gaming world and a smaller core team will be working to develop new products.”
A9. In the early 2000s, Google arrived on the scene and began to sit in between Amazon and potential sales. Around this time, Amazon’s core business was struggling and a New York Times article even called for Bezos to resign. Google was siphoning off Amazon’s engineers and Bezos knew he had to take big strategic bets in order to ward off Google’s advances. To do that, he hired Udi Manber, a former Yahoo executive with a PhD in computer science who had written the authoritative textbook on Algorithms. In 2003, Udi set up shop in Palo Alto in a new Amazon subsidiary called A9 (shorthand for Algorithms). The new subsidiary’s sole goal was to create a web search engine that could rival Google’s. While A9.com never completely took off, the new development center did improve Amazon’s website search and created Clickriver, the beginning of Amazon’s advertising business, which minted $10B in revenue last year. Udi eventually became VP of Engineering for all of Google’s search products and then its Youtube Division. A9 still exists to tackle Amazon’s biggest supply chain math problems.
Innovation, Lab126 and the Kindle. In 2004, Bezos called Steve Kessel into his office and moved him from his current role as head of Amazon’s successful online books business, to run Amazon Digital, a small and not yet successful part of Amazon. This would become a repeating pattern in Kessel’s career who now finds himself head of all of Amazon’s physical locations, including its Whole Foods subsidiary. Bezos gave Kessel an incredibly abstract goal, “Your job is to kill your own business. I want you to proceed as if your goal is to put everyone selling physical books out of a job.” Bezos wanted Kessel to create a digital reading device. Kessel spent the next few months meeting with executives at Apple and Palm (make of then famous Palm Pilots) to understand the current challenges in creating such a device. Kessel eventually settled into an empty room at A9 and launched Lab126 (1 stands for a, 26 for z – an ode to Bezos’s goal to sell every book A-Z), a new subsidiary of Amazon. After a long development process and several supply chain issues, the Company launched the Kindle in 2007.
Business Themes
Something to prove: Jeff Bezos’s Childhood. What do Jeff Bezos, Steve Jobs, Elon Musk and Larry Ellison (founder of Oracle) all have in common? They all had somewhat troubled upbringings. Jobs and Ellison were famously put up for adoption at young ages. Musk’s parents divorced and Elon endured several years of an embattled relationship with his father. Jeff Bezos was born Jeffrey Preston Jorgenson, on January 12, 1964. Ted Jorgenson, Bezos’s biological father, married his mother, Jackie Gise after Gise became pregnant at age sixteen. The couple had a troubled relationship and Ted was immature and an inattentive father. The couple divorced in 1965. Jacklyn eventually met Miguel Bezos, a Cuban immigrant college student, while she was working the late shift at the Bank of New Mexico’s accounting department. Miguel and Jacklyn were married in 1968 and Jeffrey Jorgenson became Jeffrey Bezos. Several books have theorized the maniacal drive of these entrepreneurs relates back to ultimately prove self-worth after being rejected by loved ones at a young age.
Anti-Competitive Amazon & the Story of Quidsi. Amazon has an internal group dubbed Competitive Intelligence, that’s sole job is to research the products and services of competitors and present results to Jeff Bezos so he can strategically address any places where they may be losing to the competition. In the late 2000s, Competitive Intelligence began tracking a company known as Quidsi, famous for its site Diapers.com, which provided discount baby products that could be purchased on a recurring subscription basis. Quidsi had grown quickly because it had customized its distribution system for baby products. In 2009, competitive intelligence reached out to Quidsi founder, Marc Lore (founder of Jet.com and currently the head of Walmart e-commerce) saying it was looking to invest in the category. After rebuffing the offer, Quidsi soon noticed that Amazon was pricing its baby products 30% cheaper in every category; the company even tried dropping prices lower only to see Amazon pages reset to even lower prices. After a few months, Quidsi knew they couldn’t remain in a price battle for long and launched a sale of the company. Walmart agreed in principle to acquire the business for $900M but upon further diligence reduced its bid, which prompted Lore to call Amazon. Lore and his executive team went to meet with Amazon, and during the meeting, Amazon launched Amazon Mom, which gave 30% discounts on all baby products and allowed participants to purchase products on a recurring basis. At one point, Amazon’s prices dipped so low it was on track to lose $100M in three months in the diapers category alone. Amazon submitted a $540M bid for Quidsi and subsequently entered into an exclusivity period with the Company. As the end to exclusivity grew nearer, Walmart submitted a new bid at $600M, but the Amazon team threatened full on price war if Quidsi went with Walmart, so on November 8, 2010, Quidsi was acquired by Amazon for $540M. One month after the acquisition, Amazon stopped the Amazon Mom program and raised all of its prices back to normal levels. The Federal Trade Commission reviewed the deal for four months (longer than usual), but ultimately allowed the acquisition because it did not create a monopoly in the sale of baby products. Quidsi was ultimately shut down by Amazon in 2017, because it was unable to operate it profitably.
The demanding Jeff Bezos and six page memos. At Amazon, nobody uses powerpoint presentations. Instead, employees write out six page narratives in prose. Bezos believes this helps create clear and concise thinking that gets lost in flashy powerpoint slides. Whenever someone wants to launch new initiative or project, they have to submit a six page memo framed as if a customer might be hearing it for the first time. Each meeting begins with the group reading the document and the discussion begins from there. At times, especially around the release of AWS, these documents grew increasingly complex in length and size given the products being described did not already exist. Bezos often responds intensely to these memos, with bad responses including: “Are you just lazy or incompetent?” and “If I hear that idea again, I’m gonna have to kill myself” and “This document was clearly written by the B team. Can someone get me the A team document? I don’t want to waste my time with the B team document.” Its no wonder Amazon is such a terrible place to work.