Atomic Energy

Steve Blank had a great article today on how Silicon Valley changed the very culture of business, wherein engineers and scientists led the business. One of Steve’s main points is how, like in research labs there is no penalty for making mistakes, similarly in the market, these entrepreneurial firms used the same culture to experiment (in Steve’s language “pivot” while “searching for a customer”), until eventually finding sustainable business models.

Steve maintains that this is one of Silicon Valley’s biggest contributions to business, the trial and error, experimentation-oriented engineer/scientist running the business in the same way, not just the pure science research. Back in the early days, as he points out, there were no MBAs in the industry to “get in the way.”

I think Steve is right about the contributions this culture change made (and I am most intrigued by his allusion to something special happening this Friday), but I believe the reverse is true as well. I have an MBA, in addition to my engineering degree, and I value both. I consider both invaluable investments, and I consider myself an engineer at heart. But I am also aware that the MBA has shifted. MBAs nowadays, at least some of them (plug for my school Duke), have learned the value of entrepreneurship and innovation, trial and error, and the difference between expanding GE and starting Google from scratch (a classic case of searching for a model for a long time, double entendre intended).

Back in the 60s and 70s, MBAs would have been detrimental to the Valley’s entrepreneurship and squashed the culture. Nowadays, assuming you get the right people (which is as true for engineers as it is for MBAs), they truly can add value, but largely thinks to the influence the entrepreneurial world has had on the old world of business.

Steve Blank has a very funny story posted on his blog, about when he was raising a round of money for E.piphany from Infinity Capital. He wanted a $10MM valuation, they insisted it was too high and everyone would laugh at them. In the end, they came back with… $9.99MM. The rest of the story – dust, walls and pictures – is quite entertaining, but the interesting lesson is about the difference between $9.99MM and $10MM.

At first blush, there isn’t any real difference. $10,000 on a $10MM deal is 0.1%, less than either side’s legal fees likely were, and nothing significant. That is true for a classic economics, “rational” perspective. However, in life, in business, in financing, in sales, in marketing, the emotional often outweighs the rational. That is especially true here on several fronts:

• Getting something off of Steve, however small, had emotional meaning for the VC. Sometimes you need to give in a bit just to make someone feel like they have “gotten some love.”
• Whole numbers are a barrier. Remember when people wondered if the Dow would ever cross 10,000? Going on either side of $10MM has psychological impact.
• Some numbers have almost magical properties. For reasons unknown, the numbers 9 and 7 get deals done faster. This has been proven in study after study. It is not for naught that that candy was $1.99 and not $2.00.

A whole field of economics, called “behavioural economics,” has arisen to study these “irrational” behaviours. A professor at my MBA school of Duke, Dan Ariely, has written a very entertaining book on the subject, “Predictably Irrational,” which I recommend.

From a business perspective, it is important to recognize and understand these emotional/irrational drivers of behaviour. S/he who recognizes them and remains rational can use them to his/her advantage.

All technology companies have engineers, team leads and managers. Some have good QA, others have good product managers or even program managers. But not everyone has architects, and those who do are not necessarily strong. The question cash-contrained (and who isn’t) company executives ask is, “why do I need to spend a *lot* of money to hire a technologist who is not actually writing code?” The answer is often either not to hire an architect, or to take a weaker person and “promote” them to architect. In many ways, the latter solution is like the old “security by obscurity”. You were better off without it, because at least you knew you were insecure. This way, you think you are secure, but really you are not.

The purpose of an architect is to create, design and enforce a coherent philosophy on the product. To do so, they need to know every part of it – infrastructure, middleware and application; front-end and back-end; database and network. No, this is not my brilliant idea, but was first broadly publicized in Fred Brooks’ legendary “Mythical Man-Month.”

Recently, I had the opportunity to see first-hand what happens when you do not have a good architect.

The company deals in software on a semi-annual release cycle. They were a few short weeks before releasing their product. For reasons unknown, one coder decided that a core network communication component needed a new API. Granted, he was trying to rebalance multiple versions of this API that had been around. On the other hand:

• The multiple versions were only because there were several poor ones with no architectural integrity between them, until a newer version came along in an attempt to unify them all.
• The latest version really had only one benefit: a different architectural view. Not better, not worse, but different. But a single engineer wanted to change them all.
• This was a scant few weeks before release.
• It had not been reviewed by anyone else.

Needless to say, the change was made, the engineer *thought* he got all the references but of course missed some, and some part of the product was broken, necessitating last minute run arounds by many other staff to find, fix and test the issues.

Sure, the engineer acted like a cowboy: came up with an idea and ran with it, without considering the effect. To be fair, I like cowboys; startups could not exist without them, and sometimes they are the only ones who can get through a frozen situation or process. But in this case, as in many, the real problem was the lack of architect. There was no one person with all of the authority, the knowledge and the respect/recognition of the rest of the team to decide if this change suited the whole of the product, or, better yet, to have passed that knowledge down to begin with and thus have the engineer himself decide not to do the change before getting started.

The architect need not be solely dedicated. In smaller firms and organizations, it is often a role s/he shares with other duties. But the key role must exist, and everyone must know it.

The NY Times reported on Thu that when Mark Zuckerberg is ready to make an offer (or seduce someone, meant in the most positive way) to join Facebook, he takes them for a walk in the woods. Some actually find it strange – although given some of Mark’s reported early antics, nothing should be strange at Facebook, again, meant in a positive way. I believe that there are only two kinds of people in the world: those that think they are crazy and those that don’t know it yet; it is the latter who attack post offices or Wal-Marts (or airports).

I find Mark’s ideas correct and appealing. An office, even one as informal as Facebook’s, is still an office, and an interview, even one in Silicon Valley or Israel dress code jeans and T-shirt, is still an artificial environment for both parties. The best way to get to really know someone is either to work with them for a few months, something impossible to do beforehand unless you have a long past, or to get into a comfortable situation. Mark’s “walk in the woods” is exactly that. Each party gets to see the other as a little bit more of the human they will be when working together.

A long number of years ago, a wealthy individual wanted me to join him as CIO of his company. After a day of interviews with just about everyone, we were done, and I left his office. As I waited at the corner for the light to change, he showed up “by chance” and we took a walk together. How do we walk down the street? How do we handle slower walking people, mother with strollers, panhandlers, street corners, etc.? You can learn a lot from walking with someone three blocks down the big city.

More recently, as a consultant, I often find myself in the position of needing information from or about someone that they are reluctant or uncomfortable to divulge. Obviously, if they really do not want to share, I will find an alternative source, but more often than not, drinks in the evening at a hotel bar or the nearest Starbucks during the day, talking with a consultant who is not part of the formal organization, in casual clothing, really gets people to open up.

I read a great post earlier this week, whose thesis can be summed up as “your startup isn’t unique, and it doesn’t matter.” Adam Ludwin, of RRE Ventures, argued that the success of a startup is not determined by its unique technology or innovation, but rather by the mix of good timing (the market must be ready for it) and good people (solid execution).

This is probably the most important post I have seen, for entrepreneurs, in a long time. Entrepreneurs come from all backgrounds. Technologists usually believe they will succeed because they have something new; salespeople think they will succeed because they can sell better; marketers are convinced success is theirs because they can better manage and penetrate the market.

In the end, all of them are true, and one alone very rarely is. Sure, a very innovative product for which the market is screaming can succeed on the product’s merits alone for some time; similarly, slow incumbents that are underserving their markets can be undercut by a startup with existing products and technology but better customer service, pricing and segmentation. But overall, it is about executing on all of the elements.

The biggest danger I have seen is the belief in a “secret sauce,” usually technological, that will “guarantee” unique advantage to this startup. Whenever I hear that from an investor, I advise an entrepreneur to stay far away. Investors like that are far more likely to drive too much effort into R&D at the expense of customer service, sales and marketing, and panic at the first sign of a competitor. You may have their cash, but they have your shares and may even be on your board of directors.

The only secret sauce to success in startups is the same as in every other business: execution, with due respect (or not) to Docteur Guillotin, who invented that rather gruesome and often ineffective form of execution, the Guillotine. Get the right product, new or otherwise, in the right market, with the right mix of features (product), market, price and customer service. Execute execute execute.

I read an interesting article today about what Peter Thiel, one of the best-known early investors, asks any startup founder. He wants to know why employee number 20 will join your company. Employee number 1,000 is easy: company is stable (relatively speaking; ask Dick Fuld), money is relatively plentiful, lots of different career paths. Employee number 5 is also easy: lots of equity at a low valuation, which means huge upside if the company does well (which is the definition of risk). But employee number 20 joins when there is still equity, but not quite as much to make an enormous payday, but not enough stability to appeal to number 1,000 (or even 100). You need to be able to articulate compelling vision to the “late-early stage” employees. The equity is not big enough for the risk, but the current stability and upside aren’t there.

What Thiel calls “employee #20″, I call “feet on the ground.” In the years when I worked in corporate IT, I always made it my habit to visit a vendor before I bought their products or services, especially small ones, no matter where they were, no matter how large or small the purchase, even if the executive management offered – and did – come visit me. Besides meeting the COO, CFO, CMO, CTO and CEO, not to mention the VP R&D and Customer Service, I always wanted to walk the ground, “shmooze” with the customer service reps, sales staff and engineers, the grunts in the trenches. Often, I would discover a company with a phenomenal product or service, but engineers who, I knew, could not possibly have built what they are selling me. To put a fine point on it, it was way out of their league. Dig deeper, and I would discover top talent had lost faith and left. I would walk away from the deal. Sometimes, the reverse was true, and a lost deal would be salvaged.

The most important part to me, though, even in a large company, was to get a feel of the spirit of the company. If there was a positive energy, people were doing work, happy, and really felt part of something that I, as a customer, actually wanted to buy at something within reasonable range of their ask price, that was a company I would invest in.

One particular incident stands out in my memory. In 2001-2002, I was looking at buying a notification management system. Everyone (and I mean everyone) was using a simple configuration file driven system called TelAlert. But TelAlert had a lot of shortcomings, and since I headed up Enterprise Management, it was my decision to continue or replace. I found a small company called AlarmPoint (different name back then), based in Pleasanton, CA, a little Southeast of Oakland, that had a still maturing but much better product. I met with them, did trials, gave feedback, and they listened. Our investment was not *that* big, but I got onto a plane first thing in the morning, spent most of the day with everyone from their great CEO Troy McAlpin down to the first-line engineers, and came away convinced they were a good investment. In my terms, I got feet on the ground and found good paths; in Thiel’s lingo, I found out why employee #20 joined.