Organizational Concepts
for Entrepreneurial Technology Companies
-the cathedral or the bazaar?
Vinod Khosla
Kleiner Perkins Caufield & Byers
vkhosla@kpcb.com
There’s change and then there is change!
“…every strategic inflection point [is]
characterized by a ‘10X’ change …”
“There’s wind and
then there is a typhoon,
there are waves and
then there’s a tsunami”
- Andy Grove
New company value in Billions
Visible Signs: Wealth Creation
$100
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
95
96
97
98
First 10 years of PC
99
0
1
2
3
4
First few years on Internet
Visible Signs: Corporate Tech Spending
Continues to Rise
U.S.-based Information Technology Spending as a Share of Business Capital Equipment Spending - 1960 to CQ2:1997
50%
45%
Commercial Internet
40%
35%
30%
25%
PC Introduction
20%
15%
10%
Source: U.S.
Department of
Commerce.
5%
1960
1961
1963
1964
1966
1967
1969
1970
1972
1973
1975
1976
1978
1979
1981
1982
1984
1985
1987
1988
1990
1991
1993
1994
1996
1997
0%
Note: Information technology spending includes purchases of information processing and related
equipment (including office, computing, and accounting machinery), computers and peripheral
equipment, communication equipment, instruments, and photocopy and related equipment.
Visible Signs: Public Pure Play
Internet Winners - $ Billion Club
Market
Market
Value (4/98) Value (3/99)
Yahoo!
$6.3 B
$34.2 B
Amazon.com
2.2
20.8
eBay
n/a
18.8
@Home
2.2
14.9
Netscape
4.0
9.7
Excite
1.3
5.7
Priced as of 4/22/98, 3/17/99
Users (Millions)
Visible Signs: Social Change
Years to reach 50M users:
Radio
= 38
TV
= 13
Cable
= 10
Internet = 5
120
90
60
30
0
Radio
‘22
‘30
Cable
TV
‘38
Source: Morgan Stanley.
‘46
‘54
‘62
‘70
‘78
Internet
‘86
‘94 ‘02
Behind the Scenes: Changes Economics
of Reaching New Customers
Cost per Response/Click-Through
$ 7 0 .0 0
$ 6 0 .0 0
$ 6 0 .0 0
$ 5 0 .0 0
Cost
$ 4 0 .0 0
$ 3 0 .0 0
$ 3 0 .0 0
$ 2 0 .0 0
$ 2 0 .0 0
$ 1 0 .0 0
$ 2 .0 0
$ 1 .0 0
1%
2%
$ 0 .6 7
$ 1 5 .0 0
$ 0 .5 0
$ 1 2 .0 0
$ 6 .0 0
$ 0 .4 0
$ 0 .0 0
3%
4%
R e s p o n s e R a te
W e b A d v e r t is in g
5%
10%
D ir e c t M a il
Even with lower click-through / response rates, Net advertising costs
much less on a per-response basis!
Source: Direct Marketing Association, Morgan Stanley, KPCB analysis.
Behind the Scenes:
Changes the Cost of Serving Customers
T r a n sa c tio n C o sts (B a n k in g )
Cost / Transaction
$ 1 .2 0
$ 1 .0 0
• Net transactions cost
far less than through
traditional channels
$ 0 .8 0
$ 0 .6 0
• Investment for a
commercial bank to
reach 10M potential
customers
$ 0 .4 0
$ 0 .2 0
$ 0 .0 0
Source: Booz Allen Hamilton.
– Bricks-and-Mortar:
$900M
– The Net: $1M
Behind the Scenes: Revolutionizing the
way companies interact with customers
• New customer acquisition
– 80% of Dell’s small business Web customers never purchased from Dell
before
• New channels to the customer
– 70% of Internet users plan to make travel plans and purchases on the Web
• Increased availability to customers
– 40% of AOL’s merchant online sales took place between the hours of 10
P.M. and 10 A.M.
• Building an online customer base
– Amazon.com has 6.2M records – mailing addresses, e-mail addresses,
credit card numbers – of customers who have made purchases on their site
Source: Company reports.
Behind the Scenes:
Brand Building is Changing
• Amazon vs. Barnes & Noble
• Yahoo vs. Mickey Mouse
• SportsLine vs. ESPN
• e-Trade vs. Merrill Lynch
• C|Net vs. CNBC
• CD Now vs. Tower Records
Behind the Scenes:
Internal Operations are Changing
• Procurement: GE purchases $1B in
supplies over the Internet in 1997
Savings
$500-700M
(3 yrs.)
• Customer Service: Cisco reports customer $360M
(annually)
service productivity has improved 200300% from using the Internet
• Logistics: FedEx reports that PC and Web
6 Million calls
interfaces are used by 950K customers to
per year
track 12M packages annually
Source: Company reports.
Behind the Scenes:
Communications Networks are Changing
• Qwest changing the rules on backbone fiber capacity
• Level 3 investing $10B in an all IP network
• DWDM growth causing dramatic changes in available
capacity
• Voice over IP projects proliferate at Lucent, Nortel, Cisco
And at the macro level….
The New Economy
• Conventional wisdom: American dream
over. “I’m OK, but my kids...”
• 40% of GDP growth from tech
• Silicon Valley is symbol: <3% unemployed,
high wages, every segment moving up
• Silicon Valley is state of mind: it’s
everywhere, for everyone...
The New Economy
Old versus
New economy
a skill
managers
labor v. mgt
bus v. environ
security
monopolies
job preservation
wages
plant, equipment
life long learning
entrepreneurs
teams
encourage growth
risk taking
competition
job creation
ownership, options
intellectual property
The New Economy
Old versus
New economy
status quo
standardization
top-down
hierarchical
regulation
zero sum
sues
standing still
speed, change
custom, choice
distributed
networked
pub/private partners
win win
invests
moving ahead
What goals are we designing
the organizational form for?
The “Environment”
•
•
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•
•
•
•
Change as a “process”
A new Competitiveness -Adam Smith II
Technology : “driver” or “tool”
People
Whose Rules?
Static vs. Dynamic - Creation of new markets
Amplification of Events & Time Compression
A “winner take all” economy
Pace of Change
•
•
•
•
Diseconomies of scale
Diseconomies of process / hierarchy
Timeliness of information disbursement
The role of standards
Success Factors - Old & New
•
•
•
•
•
•
•
•
People vs. Organization
Process vs. Instinct
Questioning vs. Hierarchy
Leverage vs. Entrenchment
Managing Risk vs. Risk avoidance
Paranoia & Persistence vs. History
Role of Trial vs. Consistency
Best of breed Offerings
A detailed look at the factors….
Internal Factors
•
•
•
•
•
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•
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People: Building the “balanced” team
Culture
Technostructure & Infostructure
Engineering Methodology
Organized Chaos : Execution vs. innovation.
Pull vs. Push
About Customers & Marketing
Planning & process
People
•
•
•
•
•
Top 5% - “winner take all”
Instinct & Vision
Personality mixes
Role of the “Flakes”
Leading vs. managing
Culture
•
•
•
•
Setting the goals
Managed Conflict
Persistence & iteration
Tolerating mistakes & rewarding
failure
• Sense of urgency
• Paranoia
• Success & Complacency
Technostructure & Infostructure
•
•
•
•
•
Specialization and complexity of technology
Decision-making: top down or bottom up?
The role of the “fringe” employee.
Nuances as Pitfalls
Horizontal and vertical communication &
cooperation.
Engineering Methodology
•
•
•
•
Evolvability
Specialization
Experimentation
Change isolation
Organized Chaos: The Shepherd or the Sargent?
•
•
•
•
The Flakes vs. Engineering vs. Marketing
Experimentation
Execution
Budgets, Schedules, Tasks vs Project Stage
Push vs. Pull
•
•
•
•
Products
Brands
People
Leverage
Changing Roles: Marketing & Customers
•
•
•
•
•
•
•
Listening to the customer
Participants in Design / Experimentation
Meeting vs. Teaching Requirements
Discovering “Applications”
Growth Patterns: the “stairstep”
Perception & Reality; the Halo effect
Momentum
Planning & Process
•
•
•
•
Process vs. Instinct
Risk Balancing & Burn Balancing
Risk Balancing of Projects
Planning & Variability
Optimized for what?
“The early movers are the only companies that have the
potential to affect the structure of the industry and to
define how the game is played by others.”
-Andy Grove
Case Study: Open Source
Evolvable Systems: Cathedral-building
The traditional development model reflects the
“cathedral-building” model...
•
•
•
•
Follow a single approach and vision
Optimize for performance
Release only bug-free products
Products and technologies are developed in
isolation
• Examples: IBM System/360, MSFT Windows
platform, Intel Pentium, AT&T network
Evolvable Systems: the Bazaar model
The new development model is evolving to the
“bazaar” model...
• Optimize for evolvability
• Adopt new approaches and agendas regularly
(“plan to throw it away”)
• Delegate/buy/outsource everything you can
• Be open to the point of promiscuity
• Release early, and often
• Products and technologies have to exist in a dynamic
community
• Examples: Linux, Apache, Sendmail, Excite,
Microsoft (the company), QWEST/Williams networks
Weather Forecast
• Rate of change will accelerate - life will be
more complex, more busy...
• Innovation, opportunities &
entrepreneurship will thrive
• Fun & fortunes will be in abundance
• Adaptability, agility & momentum will be
the key to success!
“As long as we maintain the practices that
have us made us what we are today, there is
no limit to the longevity of this situation”
-F.E.Terman, Vice President, Stanford University
Comments?
vkhosla@kpcb.com
KPCB
• Who we are:
• a handful of professional technologists and operating
execs - not financiers
• portfolio of 340+ companies with $244B+ market
cap, $61B+ revenue, 162k+employees, 127 IPOS
• Forbes 500: Sun, Compaq, LSI Logic, Ascend, AOL,
@Home, Quantum, Linear Technology, Amazon,
Tandem, Lotus, Netscape, Intuit
KPCB
• What we look for:
•
•
•
•
People
Unfair advantages
Risk up front
Characteristics: sense of urgency, corporate
partners, home run swings
• Defensibility in critical mass, technology,
franchise, content, distribution
• Shared upside & simple structures
KPCB
• What we do:
•
•
•
•
Technology oriented, pioneering industries
IPO oriented big companies
Incubations, early stage, speedups
Co-ventures
KPCB
• What we bring:
• Company building experience
• Experience with pitfalls of new markets,
technology management...
• Credibility
• Relationships
• Repertoire of mistakes
• Knowledge of industry trends
The Internet: Does It Change Everything?
• First two way mass communication medium
• The phenomenon: fastest social change, largest legal
creation of wealth
• Adam Smith II - efficiency & economics revisited
• Role of information & infomediaries
• Changing economics: distribution, specialization,
narrowcasting
• Technology driving business strategy
• New Models: Excite, Amazon, Priceline, Ebay,
Preview, Home Grocer, Della&James...
The Internet: Does It Change Everything?
• Corporate culture & infrastructure: “real time”
• Fastest social change and largest legal creation
of wealth (Cisco, Dell)
• Tight feedback loops
• Ideal for experimentation (Vs. planning)
• Leverage
• People as the killer app
The Internet: Does It Change Everything?
• This is a winner-take-all economy ...
• Winners and losers diverge quickly
• Adaptability, agility, momentum, and
execution are the keys
• Examples: Amazon/Barnesandnoble.com,
AOL/Compuserve, @Home/Roadrunner,
MSFT/Apple/IBM/Lotus, Cisco/Bay
Key Principles
• Knowing what you don’t know
• Whose opinion ?
• Identify your liabilities & assets
Comments?
vkhosla@kpcb.com