organizational concepts for entrepreneurial technology ... · source: company reports. behind the...
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Vinod KhoslaKleiner Perkins Caufield & Byers
Organizational Conceptsfor Entrepreneurial Technology Companies
-the cathedral or the bazaar?
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“… every strategic inflection point [is]characterized by a ‘10X’ change … ”
“There’s wind andthen there is a typhoon,
there are waves andthen there’s a tsunami”
- Andy Grove
There’s change and then there is change!
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Visible Signs: Wealth Creation
$0
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95 96 97 98 99 0 1 2 3 4
New
com
pany
val
ue in
Bill
ions
First 10 years of PC First few years on Internet
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Source: U.S.Department ofCommerce.0%
5%
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50%19
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PC Introduction
Commercial Internet
U.S.-based Information Technology Spending as a Share of Business Capital Equipment Spending - 1960 to CQ2:1997
Visible Signs: Corporate Tech SpendingContinues to Rise
Note: Information technology spending includes purchases of information processing and relatedequipment (including office, computing, and accounting machinery), computers and peripheralequipment, communication equipment, instruments, and photocopy and related equipment.
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Visible Signs: Public Pure Play
Internet Winners - $ Billion Club
Priced as of 4/22/98, 3/17/99
Yahoo!Amazon.comAmazon.comeBayeBay@Home @Home NetscapeNetscapeExcite
$6.32.2n/a2.24.01.3
$34.220.818.814.9
9.75.7
MarketValue (3/99)
MarketValue (4/98)
B B
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Years to reach 50M users:
0
30
60
90
120
‘22 ‘30 ‘38 ‘46 ‘54 ‘62 ‘70 ‘78 ‘86 ‘94 ‘02
User
s (M
illio
ns)
Radio TV Cable Internet
Source: Morgan Stanley.
Visible Signs: Social Change
Radio = 38TV = 13Cable = 10Internet = 5
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Behind the Scenes: Changes Economics
of Reaching New CustomersBehind the Scenes: Changes Economics
of Reaching New Customers
$0.40$0.50$0.67$1.00$2.00
$60.00
$30.00
$20.00$15.00
$6.00$12.00
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
1% 2% 3% 4% 5% 10%Response Rate
Cost
Web Advertising Direct Mai l
Even with lower click-through / response rates, Net advertising costsmuch less on a per-response basis!
Source: Direct Marketing Association, Morgan Stanley, KPCB analysis.
Cost per Response/Click-Through
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Behind the Scenes:
Changes the Cost of Serving Customers
• Net transactions costfar less than throughtraditional channels
• Investment for acommercial bank toreach 10M potentialcustomers– Bricks-and-Mortar:
$900M– The Net: $1M
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
Transaction Costs (Banking)
Source: Booz Allen Hamilton.
Cost
/ Tr
ansa
ctio
n
Branch
TelephoneATM
PC BankingInternet
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Source: Company reports.
Behind the Scenes: Revolutionizing theway 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
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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
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Source: Company reports.
Behind the Scenes:Internal Operations are Changing
• Procurement: GE purchases $1B insupplies over the Internet in 1997
• Customer Service: Cisco reports customerservice productivity has improved 200-300% from using the Internet
• Logistics: FedEx reports that PC and Webinterfaces are used by 950K customers totrack 12M packages annually
Savings$500-700M (3 yrs.)$500-700M (3 yrs.)
$360M(annually)$360M(annually)
6 Million callsper year6 Million callsper year
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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 availablecapacity
• Voice over IP projects proliferate at Lucent, Nortel,Cisco
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And at the macro level… .
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The New Economy
• Conventional wisdom: American dreamover. “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’severywhere, for everyone...
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The New Economy
a skill life long learningmanagers entrepreneurslabor v. mgt teamsbus v. environ encourage growthsecurity risk takingmonopolies competitionjob preservation job creationwages ownership, optionsplant, equipment intellectual property
Old versus New economy
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status quo speed, changestandardization custom, choicetop-down distributedhierarchical networkedregulation pub/private partnerszero sum win winsues investsstanding still moving ahead
Old versus New economy
The New Economy
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What goals are we designingthe organizational form for?
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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
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Pace of Change
• Diseconomies of scale• Diseconomies of process / hierarchy• Timeliness of information disbursement• The role of standards
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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
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A detailed look at the factors… .
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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
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People
• Top 5% - “winner take all”• Instinct & Vision• Personality mixes• Role of the “Flakes”• Leading vs. managing
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Culture
• Setting the goals• Managed Conflict• Persistence & iteration• Tolerating mistakes & rewarding
failure• Sense of urgency• Paranoia• Success & Complacency
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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.
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Engineering Methodology
• Evolvability• Specialization• Experimentation• Change isolation
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Organized Chaos: The Shepherd or the Sargent?
• The Flakes vs. Engineering vs. Marketing• Experimentation• Execution• Budgets, Schedules, Tasks vs Project Stage
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Push vs. Pull
• Products• Brands• People• Leverage
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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
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Planning & Process
• Process vs. Instinct• Risk Balancing & Burn Balancing• Risk Balancing of Projects• Planning & Variability
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Optimized for what?
“The early movers are the only companies that have thepotential to affect the structure of the industry and to
define how the game is played by others.”-Andy Grove
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Case Study: Open Source
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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
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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
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Weather Forecast
• Rate of change will accelerate - life will bemore complex, more busy...
• Innovation, opportunities &entrepreneurship will thrive
• Fun & fortunes will be in abundance• Adaptability, agility & momentum will be
the key to success!
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“As long as we maintain the practices thathave us made us what we are today, there is
no limit to the longevity of this situation”
-F.E.Terman, Vice President, Stanford University