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Organizational Concepts for Entrepreneurial Technology Companies -the cathedral or the bazaar?

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!.

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Organizational Concepts for Entrepreneurial Technology Companies -the cathedral or the bazaar?

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  1. Organizational Concepts for Entrepreneurial Technology Companies-the cathedral or the bazaar? Vinod Khosla Kleiner Perkins Caufield & Byers vkhosla@kpcb.com

  2. 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

  3. Visible Signs:Wealth Creation New company value in Billions First 10 years of PC First few years on Internet

  4. 50% 45% Commercial Internet 40% 35% 30% PC Introduction 25% 20% 15% 10% Source: U.S. Department of Commerce. 5% 0% 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 Visible Signs: Corporate Tech SpendingContinues to Rise U.S.-based Information Technology Spending as a Share of Business Capital Equipment Spending - 1960 to CQ2:1997 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.

  5. Visible Signs: Public Pure Play Internet Winners - $ Billion Club Market Value (3/99) Market Value (4/98) Yahoo! Amazon.com eBay @Home Netscape Excite $6.3 2.2 n/a 2.2 4.0 1.3 B $34.2 20.8 18.8 14.9 9.7 5.7 B Priced as of 4/22/98, 3/17/99

  6. Radio = 38 TV = 13 Cable = 10 120 Internet = 5 90 Users (Millions) 60 Cable Radio Internet 30 TV 0 ‘22 ‘30 ‘38 ‘46 ‘54 ‘62 ‘70 ‘78 ‘86 ‘94 ‘02 Visible Signs: Social Change Years to reach 50M users: Source: Morgan Stanley.

  7. Behind the Scenes: Changes Economicsof Reaching New Customers Cost per Response/Click-Through 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.

  8. Cost / Transaction ATM Branch Internet Telephone PC Banking Source: Booz Allen Hamilton. Behind the Scenes: Changes the Cost of Serving Customers • Net transactions cost far less than through traditional channels • Investment for a commercial bank to reach 10M potential customers • Bricks-and-Mortar: $900M • The Net: $1M

  9. 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.

  10. 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

  11. Savings $500-700M (3 yrs.) $360M (annually) 6 Million calls per year Behind the Scenes:Internal Operations are Changing • Procurement: GE purchases $1B in supplies over the Internet in 1997 • Customer Service: Cisco reports customer service productivity has improved 200-300% from using the Internet • Logistics: FedEx reports that PC and Web interfaces are used by 950K customers to track 12M packages annually Source: Company reports.

  12. 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

  13. And at the macro level….

  14. 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...

  15. The New Economy OldversusNeweconomy a skill life long learning managers entrepreneurs labor v. mgt teams bus v. environ encourage growth security risk taking monopolies competition job preservation job creation wages ownership, options plant, equipment intellectual property

  16. The New Economy OldversusNeweconomy status quo speed, change standardization custom, choice top-down distributed hierarchical networked regulation pub/private partners zero sum win win sues invests standing still moving ahead

  17. What goals are we designing the organizational form for?

  18. The “Environment” • 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

  19. Pace of Change • Diseconomies of scale • Diseconomies of process / hierarchy • Timeliness of information disbursement • The role of standards

  20. 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

  21. A detailed look at the factors….

  22. Internal Factors • People: Building the “balanced” team • Culture • Technostructure & Infostructure • Engineering Methodology • Organized Chaos : Execution vs. innovation. • Pull vs. Push • About Customers & Marketing • Planning & process

  23. People • Top 5% - “winner take all” • Instinct & Vision • Personality mixes • Role of the “Flakes” • Leading vs. managing

  24. Culture • Setting the goals • Managed Conflict • Persistence & iteration • Tolerating mistakes & rewarding failure • Sense of urgency • Paranoia • Success & Complacency

  25. 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.

  26. Engineering Methodology • Evolvability • Specialization • Experimentation • Change isolation

  27. Organized Chaos: The Shepherd or the Sargent? • The Flakes vs. Engineering vs. Marketing • Experimentation • Execution • Budgets, Schedules, Tasks vs Project Stage

  28. Push vs. Pull • Products • Brands • People • Leverage

  29. 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

  30. Planning & Process • Process vs. Instinct • Risk Balancing & Burn Balancing • Risk Balancing of Projects • Planning & Variability

  31. 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

  32. Case Study: Open Source

  33. 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

  34. 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

  35. 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!

  36. “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

  37. Comments?vkhosla@kpcb.com

  38. 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

  39. 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

  40. KPCB • What we do: • Technology oriented, pioneering industries • IPO oriented big companies • Incubations, early stage, speedups • Co-ventures

  41. KPCB • What we bring: • Company building experience • Experience with pitfalls of new markets, technology management... • Credibility • Relationships • Repertoire of mistakes • Knowledge of industry trends

  42. 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...

  43. 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

  44. 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

  45. Key Principles • Knowing what you don’t know • Whose opinion ? • Identify your liabilities & assets

  46. Comments?vkhosla@kpcb.com

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