Apparently sprinters reach their highest speed right out of the blocks, and spend the rest of the race slowing down. The winners slow down the least. It’s that way with most startups too. The earliest phase is usually the most productive. That’s when they have the really big ideas.
The striking thing about this phase is that it’s completely different from most people’s idea of what business is like. If you looked into people’s heads for images representing “business,” you’d get images of people dressed up in suits, groups sitting around conference tables looking serious, Powerpoint presentations, people producing thick reports for one another to read. Early stage startups are the exact opposite of this. And yet they’re probably the most productive part of the whole economy.
And yet conventional ideas of “professionalism” have such an iron grip on our minds that even startup founders are affected by them. In our startup, when outsiders came to visit we tried hard to seem “professional.”
What surprised me most was how unsure the founders seemed to be that they were actually onto something big. Some of these companies got started almost by accident. The world thinks of startup founders as having some kind of superhuman confidence, but a lot of them were uncertain at first about starting a company. What they weren’t uncertain about was making something good — or trying to fix something broken.
They all were determined to build things that worked. In fact, I’d say determination is the single most important quality in a startup founder. If the founders I spoke with were superhuman in any way, it was in their perseverance. That came up over and over in the interviews.
Perseverance is important because, in a startup, nothing goes according to plan. Founders live day to day with a sense of uncertainty, isolation, and sometimes lack of progress. Plus, startups, by their nature, are doing new things — and when you do new things, people often reject you.
People think startups grow out of some brilliant initial idea like a plant from a seed. But almost all the founders I interviewed changed their ideas as they developed them. PayPal started out writing encryption software, Excite started out as a database search company, and Flickr grew out of an online game.
Kind of the early Christians in the first century were all really hard at work waiting for the second coming. Still waiting. So it felt like the early Christians. “Any minute now, there’ll be millions of people begging for security on their handheld devices.” It just wasn’t happening.
We went to enterprises and told them we were going to do this and got some positive reception, but then the thing happened again where no one really wants the stuff. It’s really cool, it’s mathematically complex, it’s very secure, but no one really needed it.
Obviously it was really simple to mock it up — to sort of go, “Beep! Money is received.” But I was so disgusted with the idea. We have this security company; how could I possibly use a mock-up for something worth $4.5M? What if it crashes? What if it shows something? I’ll have to go and commit ritual suicide to avoid any sort of embarrassment. So instead of just getting the mock-up done and getting reasonable rest, my 2 coders and I coded nonstop for 5 days. I think some people slept; I know I didn’t sleep at all. It was just this insane marathon where we were like, “We have to get this thing working.” It actually wound up working perfectly. The beaming was at 10am; we were done at 9am.
And I was getting interviewed by the WSJ, all I remember was that he went off to the bathroom for a second, and they brought out my omelet. The next thing I remember, I woke up, and I was on the side of my own omelet, and there was no one at Buck’s. Everyone was gone. They just let me sleep.
Eventually we realized that these guys were begging to be our users. We had the moment of epiphany, and for the next 12 months just iterated like crazy on the website version of the product, which is today’s PayPal.
We prevented all the obvious fraud, and then, I think 6 months into it, we saw the first chargeback and were like, “Ah, one per week. OK.” Then it was like an avalanche of losses; 2000 was basically the year of fraud, where we were just losing more and more and more money every month. At one point we were losing over $10M per month in fraud. It was crazy.
You could see that we were losing money, but, given the growth of the system and the growth of the fraud, fraud was not that big of a problem. It was less than 1% — it was really low. But then, if you looked at the rate of growth of fraud, you could see that, if you don’t stop it, it would become 5%, 10% of the system, which would have been prohibitive.
I think a good way to describe PayPal is: a security company pretending to be a financial services company. What Paypal does is judge the risk of a transaction and then occasionally actually take the risk on.
The point is, the startups didn’t realize there was this risk. We didn’t really realize there was this risk component either when we started. But we were just lucky enough.
The default of how you do these things is very powerful, if you’ve been in the industry for a long time. So we were sort of beneficiaries of our naivete. We thought, “We don’t know how to do this; let’s just invent it.”
There was always something, every day. I could not sleep well for 4 years. If you are in charge of technology at a really fast-growing company that gets lots of publicity, there’s always something that worries you.
Peter and I like to reflect on the fact that we got lucky so many times. Pick any one episode in the company history, and we got lucky and lucky and lucky again.
I think it’s luck in the sense that we could have collapsed under this particular one, and we didn’t. Mostly we didn’t because we did something about it, and we corrected the problem or caught onto it early enough. But I think the fact that we caught the signs early enough in part is a luck thing because we could have missed it, or we could have been too tired or too bored.
Try to have a good cofounder. I think it’s all about people, and, if you are doing it completely alone, it’s really hard. It’s not impossible, in particular if you are a loner and introverted type, but it’s still really hard.
You are doing fine. Just keep at it. You’ll get it.
Both of us are really competitive and really — not mistrusting, but not willing to assume that the other guy knows what he’s talking about. When we met, we sort of hung out socially, and then one night we had this showdown where we sat around in this cafe for like 8 hours and traded puzzles to see who could solve puzzles faster — just this nonstop mental beating on each other.
It’s one of these things where, if you look back now, when everyone walked away with a ton of money, everyone loves everyone. We had this great time, etc.
Between the founding and the actual PayPal, it was just this tug-of-war where it was like, “We’re trying this, this week.” Every week you go to investors and say, “We’re doing this, exactly this. We’re really focused. We’re going to be huge.” The next week you’re like, “That was a lie.”
Two of my colleagues from Stanford had gone on to start Yahoo, and I thought, “Wow. This is just a list, a directory which tells you what is where. And somebody put $1M in them.” I mean, that was huge. So I thought, “This Internet thing is here to stay,” and I started playing around with it and came up with the idea to do a simple-to-install database at the back end.
Also, when you are hardware designers, you have tremendously more discipline in writing and describing software because in hardware you cannot get it wrong. Every turn of every chip costs you millions of dollars, so when hardware designers design any piece of software, they normally get it right. They use something called state machines to describe the functioning of the software. When you do that, you are very deterministic: if this is the input, then this will be the output.
Once you’ve got a lead in terms of a subscriber base, that is unassailable. It can’t be replicated easily. So I knew even if they started developing the product — I have no doubt in my mind that they could have developed it, so many engineers and smart people in Microsoft. But I knew we had that momentum behind us and that is very hard to replicate.
Make sure you write a business plan because it will crystalize your thoughts to communicate your ideas with somebody else. Make sure that once you have written your business plan, you have somebody read and critique it and ask you questions.
Because I could never build one, all I could do was design them on paper and try to get better and better and better. I was competing with myself. But that’s just the story of how my skill got so good. It’s because I could never build anything, I just competed with myself to come up with ideas that nobody else would come up with.
My skills weren’t that I knew how to design a floppy disk, I knew how to design a printer interface, I knew how to design a modern interface; it was that, when the time came and I had to get one done, I would design my own, fresh, without knowing how other people do it. That was another thing that made me very good. All the best things that I did at Apple came from (a) not having money, and (b) not having done it before, ever.
- What is the key to excellence for an engineer?
- You have to be very diligent. You have to check every little detail. You have to be so careful that you haven’t left something out. You have to think harder and deeper than you normally would. It’s hard with today’s large, huge programs.
It had all these kinds of things and not one bug ever found. Not one bug in the hardware, not one bug in the software. And you just can’t find a product like that nowadays. But, you see, I had it so intense in my head, and the reason for that was largely because it was part of me. Everything in there had to be so important to me. This computer was me. And everything had to be as perfect as could be made. And I had a lot going against me because I didn’t have a computer to compile my code, my software.
It would have taken an entire lifetime for any engineer with a soldering iron to try all those variations. So I said to him, “Now that games are software, it’s going to be a different world for games.”
You’d go to the store and they’d just have all this stuff that you could buy to enhance the Apple II. So one of our big keys to success was that we were very open. There’s a big world out there for other people to come and join us.
Always seek excellence: make your product better than the average person would.
If you can just whip something out and it’s done, maybe it’s time, once in a while, to think and think and think, “Can I make it better than it is, a little superior?” What it does is not necessarily make the product better in the end, but it brings you closer to the product and your own head understands it better. Your neurons have gone through the code you wrote, or the circuits you designed, have gone through it more times, and it’s just a little more solidly in your head, and once in a while you’ll wake up and say, “Oh my god, I just realized a bug that’s in there, something I hadn’t thought of.”
He was being courted by Apple, Microsoft, and all the big players of the day, and my pitch was “Look, those guys are always going to want you and it’s rare that you are going to be in the position in life where you have so little responsibility, except to yourself. So now’s the time to do it. Yeah, we don’t know anything. We’re dumb and we’re just coming out of college. But now’s the opportunity.”
We set off trying to research what was happening in R&D in search technology. We had no idea how we were going to make any money. But we started spending a lot of time in the math and science library, trying to figure out what had happened over the last 30 years in search.
We basically sat in the garage coding for about 18 months. In retrospect, it was really fun. But I remember a lot of worry. “Are we doing anything of value?” We were building the core engine, the indexing engine that would actually index the text, and the search libraries that would query that index.
They were very excited through the course of the demo until they got to the 1st question, which was “How do you make money?” Especially given that search had never made money for VCs before. Verity, PLS, Open Text — these had never been big and profitable businesses. We were saying, “We think advertising is interesting, and if not, we kind of hoped you would help us figure that out.” And the conversations usually went very poorly from there.
The hard part was, “How do we value Joe, who’s not technical. He does stuff, but I don’t know whether I could do his stuff better.” Basically it was, “I don’t know how to measure myself against Joe, and therefore how do I feel comfortable that he has more?”
But we ended up working through it. I don’t remember the specifics of the conversation. I remember it being very awkward and I remember it being quiet. People were unhappy. No screaming or anything like that, but awkward.
I think you needed something stronger than greed pulling people together at that moment when greed alone would have caused huge fractures in redistributing. In the end, I think it made a lot of sense to do because those conversations only get harder and harder to have.
It was never clear that we were on to something huge. You never know anything. The hardest part in a startup is that you wake up one morning, and you feel great about the day, and you think, “We’re kicking ass.” And then you wake up the next morning, and you think “We’re dead.” And literally nothing’s changed. You haven’t made some big deal, you haven’t sold something new. Maybe you wrote a few lines of code over the course of that last day. Maybe you had some conversations with people, but nothing’s really moved.
It’s completely irrational, but it’s exactly what you go through. The thing is, you never know. I am certainly sort of a paranoid competitor. I was always worried about who was going to kill us and what they were going to do. I’d feel like “We’re going out of business any day and anything could upset the applecart.” I really wanted it to get to a point where I’d say, “OK, I know we’re onto something huge.”
Even up to the time when Excite was several hundred people and we were the 4th largest website in the world, it didn’t feel real. It doesn’t feel like you’re really doing something huge. On some level it feels like you’re fooling people — like, are we really doing this?
Back in those days, it was legitimate to ask, “Why would I use a search engine more than a couple of times to find the sites that I like? Then I’ll bookmark those sites and never go back to a search engine again.”
By 1997 everybody was diversifying into portal strategies, because nobody knew how to make money from search. Search was viewed as the traffic director to other more profitable businesses, when in reality, search was the business. That wasn’t obvious at the time.
We were too young to realize that existing companies’ biggest problem is legacy. Period. They can’t focus on new businesses because they’ve got to manage their old ones. And so when we moved to web search, it was never clear to us that Verity, PLS, and Open Text wouldn’t actually go and do this. But they couldn’t because they were servicing all their existing businesses and could never invest enough in this kind of business.
The negotiator went back to Gates and said, “I think the number’s going to be $100M if we want to do this.” And Gates said, “How much would it cost us to do it ourselves?” So the guy went away and built a plan and said it would be about a year and $25M and 25 people or something like this. And the interesting thing is that they didn’t buy Excite for the $100M, and they didn’t invest and build it themselves. Instead they did nothing.
Vinod said we should bid $3M. I was like, “How do we bid $3M? We only have $1M in the bank.” And he said, “Well, if we win, I’m pretty sure we can raise it, but if we don’t win, I don’t know how we’re going to raise it.” And so I thought, “OK, this is really scary.”
Vinod told us this whole story about how he’d gone through a similar situation at Sun in losing a deal, and he just never gave up and won the deal back. He said, “We haven’t lost. Let’s meet with them. Let’s show up in their lobby unannounced.” We did all this stuff; we called them constantly; we just basically acted like the bidding wasn’t over. And made a total pain in the ass of ourselves. It would have been embarrassing if it weren’t so serious.
It’s so ironic. If you look at the way that a lot of huge companies get built. Microsoft built itself off IBM, unwittingly. Excite built itself unwittingly off Netscape. Google built itself unwittingly off Yahoo. I don’t think we would have gotten where we got without the Netscape deal and we certainly wouldn’t have gotten the Netscape deal without a really valuable lesson in persistence.
I see way too many people give up in the startup world. They just give up too easily. Recruiting is a classic example. I don’t even hear the first “no” that somebody says. When they say, “No, I’m not interested,” I think, “Now it’s a real challenge. Now’s when the tough part begins.” It’s hard to identify talent, but great people don’t look for jobs, great people are sold enjoys. And if they’re sold they’re going to say no at first. You have to win them over.
I love this stuff; the persistence part is the part that I like. It’s actually not fun when it’s happening, but you know it makes a difference because 99.9% of the people give up.
Some famous people said, “Success is 50% luck and 50% preparedness for that luck.” I think that’s a lot of it. It’s being ready to take advantage of opportunities when they arise.
When their first release shipped in October 1979, it ignited the PC software revolution. VisiCalc was the “killer app” for PCs: businesses bought Apple IIs just to use it.
The traditional way a lot of people think of spreadsheets is as rows and columns, and it really isn’t. It’s really a 2D layout of words and numbers. If you look at what we had in all our cases at HBS, at documents you have in business, you have tables of things, but they’re organized in a way that is appropriate to the data, and there’s a lot of other text, and the text is just as important as the numbers.
People who saw it, who needed it, got it. Sorry, no — some of the people who needed it got it. You have to be a person who is able to look at a general-purpose and be able to think, “How would I use that to solve my problem?” Most people are not that way. They look for a tool that is being used already for something close to their problem and then understand what it is. Many people who saw the spreadsheet with an example, if the example wasn’t in their field, they couldn’t make the leap. Because they’re not programmers in their mind.
When the people who you looked up to as the pros have switched to your stuff, that meant something.
Stay out of lawsuits if you can help it. It’s bad for both sides, especially small businesses. That’s lawyers’ business, to them, solving things through lawsuits. But it’s very, very expensive. It’s a sport of kings, and it uses up a lot of time. Unless you’re a very big business that can make it a very small part of what you do, it’s much better to find other ways to solve things. Frequently, individuals can do it better face to face. People who are the heads of companies understand that.
As they say on Wall Street, the bulls make money, the bears make money, but the pigs get slaughtered. In other words, don’t be greedy. Whether you think things are going up or things are going down, you can make money going both ways. But, if you are piggish, are greedy, that’s when you have problems; you’ll be irrational about that.
It is worth it sometimes, if you can do it, to reach for the stars. Microsoft didn’t reach for the stars. Microsoft was step by step by step to where they got, and it was profitable all the way to it. So that’s the traditional way of doing it. The Google, Netscape way, those things, sometimes it works, and sometimes — usually — it doesn’t. But sometimes it does, and the payoffs are incredible.
While I’m disorganized, he’s more disorganized, in certain things, so he depends on me for the drive to get things to completion. On the other hand, I depend on him for some of the reaching for the stars.
As people know, in the business — like Bill Gates is known for this, about being really tough in meetings, and arguing and stuff like that — that’s just a way of testing your own understanding of things. By arguing with others about it, that’s how you learn. And, if somebody can’t take the arguing with it, then maybe they don’t really believe in what they’re talking about and they don’t understand it well enough.
We’d argue and then we’d go out to lunch together, because it wasn’t based on animosity. We had enough problems with people outside.
When we got the building, we got a loan to pay for it. We had a bank we’d been working with for years at the time, and we told them we wanted to do a loan, but we wanted no personal guarantees. When you have personal guarantees, they’ll take your house. So, we wanted no personal guarantees. And the bank said, “Sure.” We came down to the last closing papers, and we looked at the papers, and what does it say? Personal guarantees! They said, “Oh well, that’s standard. We always do that.” We got another bank, and sure enough as they were about to close, in came the personal guarantees. It wasn’t until the third bank that we did it with no personal guarantees.
And it’s very personal. There are a lot of personal things. It’s running into people. And how did I know that I should talk to Mitch? Well, our insurance agent was also his business insurance agent, and he talked to Mitch. So I knew that Mitch knew what was happening with our business.
Even though it seems like it’s big business and impersonal, and “they” take care of it, it really isn’t. There is no “they.” It always comes down to an “I” of somebody, and in many cases, it’s a principal.
When VisiCalc came out, it set the world on its ear. It was far and away the most useful piece of software ever done for a personal computer. It was incredibly innovative. It started generating sales of Apple Its, and it was a cut above everything else.
The IBM PC came out with a version of VisiCalc, and with a version of MultiPlan, which was Microsoft’s spreadsheet, but neither of them took advantage of the full capabilities of the IBM PC. And I said, “This is really an opportunity here.”
I had no significant experience in buliding an organization in building a management team. And I intuitively did well when I was leading the whole team, but once we got past 25 people, you can’t do that. And so I made a series of classic mistakes of hiring. And not building a good middle management structure. And not recruiting a board that could help me build the company.
I did not set out to build a big company. I actually wanted to be a software designer. I saw having a company not exactly as being a necessary evil, but there wasn’t a good alternative. My experience had convinced me that being a program author and having somebody else publish it wouldn’t give me enough control over the process.
In the ’60s, when I came of age, business was not a cool thing. We were all counterculture people with long hair and sex, drugs, and rock ’n’ roll.
These types of companies tend to reflect the personalities and interests of their founders. Microsoft is very much cast in Bill Gates’s image; and Apple, Steve Jobs; Borland, Philippe Kahn.
The other thing to say is that because I lost control of the company — I felt overwhelmed by what I had created, did not know how to step up to it, put enough brakes on, hire the right people and be collaborative — I wound up jumping ship and leaving pretty early, in 1987. And my successor, a very poor choice on my part, did not share the same vision or values and he wound up disassembling most of what we put in place. So it was a bittersweet sort of thing. It was ultimately not sustained.
I became a minor league celebrity in Boston, being recognized in restaurants, and that was weird. And people started to act differently around me, because when people are seen as having power or they’re seen as having some special resources, people get weird because they project their fantasies onto the person or they start telling you what they think you want to hear.
It depends on what type of advice they want. You can’t tell people what they don’t want to hear because they won’t care and it’s just a waste of breath. And everyone comes in with some kind of agenda.
The most important thing for me is, I don’t want to work with someone who says, “Just help me make the business be more successful.” I want to work with entrepreneurs who are personally passionate, committed, and believe in what they’re doing. Not all entrepreneurs are like that. Some people may be just as happy selling canned tuna — “Just show me an opportunity where I can make money and I’m going to do that.” You think Mark Cuban really cared about what they were doing at Broadcast.com? This is not to criticize him as a businessman but I don’t think he had a fundamental passion about that business. There was an opportunity, he saw it, he built something, he sold, and he cashed out at the right time.
We got to the closing for the 2nd round and they had a very sharp lawyer on their side — our lawyer wasn’t so good — and all these things were happening at the last minute, all these onerous terms, and I got up and said, “I’m not going to do this. I don’t have to do this today. We don’t have to close here and I’m just not going to agree to this. I’m gone.” And they backed down completely on their onerous terms.
If the VCs were more transparent and disclosed stuff so that entrepreneurs could make a choice, that would be better. They wouldn’t have to change the terms, just disclose them and explain what they mean, and what’s likely to happen. But they don’t do that. They see it as a negotiation in which having information that the other side doesn’t have gives you an advantage. It gives an advantage in terms of that negotiation, but if you’re trying to form a genuine partnership where you have repeat encounters and you withhold critical information in the first and most important one, you’re undermining longterm collaboration.
Why should they trust you? What they’ve demonstrated is that you are going to act in your own self-interest at my expense if you know better than me about something and you don’t feel under any obligation to share that.
I’m an engineer by training and I tend to be one of these people who believes he can accomplish basically anything in software — it’s just a big toolbox. So if you know that you can accomplish anything you set your mind to, what’s worth accomplishing?
At any given time, you’ve got to have a technology roadmap in your mind and a market roadmap as to where things are headed — broadband is getting increasingly pervasive or wireless is getting increasingly pervasive, or something is going on — and trying to project out several years, because it will take you several years to build anything that’s worth building. So you don’t want to fill today’s needs, but try to capture some window that will happen in the future.
Certainly they don’t teach you in business school to go point to your competitors, but it sent the right message to the users, which was, “It’s all about you. We’re going to get the data you want. If it exists on the Web, we’re going to find it for you, even if we don’t make money off of it directly.” But it keeps people coming back because they know we have their best interest in mind. I think that was a big idea. It was an acknowledgment that you, as a single company, can’t be everything to everyone. We’re not a walled garden like AOL. We’re this connection point, and it’s our job to get you wher you want to go.
Before I start a company, I typically write a couple of founding documents. One of them is very outside-in: it’s a scenario-based document, describing the high-level challenge that I’m trying to address and the end user scenarios that we are trying to solve. This attempts to explain what we’re trying to accomplish to anyone who joins the company or we might need to get financing from.
Then I create a second, bottom-up document describing the different technologies that will have to be assembled to accomplish that vision.
In Groove’s case, there was a very risky piece of technology — a certain algorithm for synchronization that we didn’t even know if we could do. It took about 3-4 months before we were confident that we’d be able to actually build what we wanted to.
I think of the challenges I take on as 10-year challenges, not filling a quick market niche. There tends to be some time where I’m building up a level of technological advantage for when we get to market. With technology, there’s no such thing as a sustainable advantage, but you can get a good running start if you concentrate on doing something hard really well.
Some people cope with uncertainty by being really comfortable in their own little box. Some developers, for example, will divide the problem and divide the problem until they only have to work on this little piece of the database or this little piece of communications, and they just don’t worry about the stuff above that. They leave that to people like me to deal with, in terms of the risk and continuing to be on the right path.
But what held people together was the belief that you’re really going to change the world. I think that’s the nature of many startups. You believe that what you are doing is going to have a dramatic impact. You might not exactly know how, but you really have a belief. That keeps you going and going through many changes and a lot of uncertainty.
What surprised you the most?
How difficult the go-to-market challenges are. I suppose it shouldn’t have surprised me, but in both the cases of Notes and Groove, building a market in something that’s new can be as, if not more, challenging than building the technology. We were building some very complex technology, and I thought, since we were developing to what seemed to be a fairly straightforward customer value proposition, going to market would be a lot easier.
Companies take their shape based on the personality characteristics and human interaction characteristics of the founders. This is true in every company. Learn about the kind of culture that you want to create in your own company based on the positive and negative aspects that you witness in the people that are your leaders.
Learn to respect and appreciate other people’s skill sets, because you are going to need other people if you do start a company and you are a technologist. Understand that it’s a rare, rare case when a tech entrepreneur is the right one to lead a startup for a long period of time. You have to feel comfortable in your own skin in terms of what you’re good at and what other people are good at. Know when the shift to CTO is the right thing for the company.
In terms of the culture, there were some very strong positive things. People doing things for the right reason. Never say to people that you are doing it for the money. Don’t do it for the money.
Everyone knows that one reason you go to work and do what you do is the hope that ultimately you’ll be compensated. But you don’t have to say it, and it doesn’t have to come through. It should be about the mission. It should be about changing the world. It should be about how you can impact the lives of users, partners, and the employees themselves. It’s not just about this big payday. The more you focus on the things that matter when you are talking to people who want to believe in you, the more they will believe in you and the more it will be a sustainable entity.
For me, the idea that I could have a thought and I could type in a form and it would be on my website in a matter of seconds completely transformed the experience. It was one of those things that, by automating the process, completely morphed what it was I was doing. If I could have a thought and then put it on my site, then obviously I am going to potentially do that much more than it is a stream for communication of a whole different type.
We launched it and we had a dilemma on our hands right away of course, because we now had a product that people were using, but it wasn’t the “real” product.
We even looked at Blogger and, technically, it was trivial (at least until it came to scaling it). It wasn’t based on any new technology. But that made sense to me because it was not that the technology was new, it was that we had figured out this medium, at least one of the native forms of what the Web was good for. It was about freshness and about frequency, and it was about the democratization of media and giving power to everybody and the universal desire for personal expression and the attraction to a real, compelling personal voice.And hyperlinks.
Other companies at the time were going into enterprises, since companies had money. At the time it was like, “Consumers aren’t spending money. Go to companies — they’re the ones with money.” So many companies at the time took their consumer Internet thing and made it an enterprise Internet thing and then died anyway.
Having your site hacked is stressful enough, but here I was in Iowa trying to assess the damage over a dial-up connection and a tiny laptop. And I didn’t have a sysadmin or anyone else for me at the time. I ended up spending most of the day in a Kinko’s doing damage control. So much for enjoying the holidays.
One of the things that kills great things so often is compromise — letting people talk you out of what your gut is telling you. Not that I don’t value people’s input, but you have to have the strength to ignore it sometimes, too. If you feel really strongly, there might be something to that, and if you see something that other people don’t see, it could be because it’s that powerful and different. If everyone agrees, it’s probably because you’re not doing anything original.
I was also surprised by the success of something so simple. That’s a mantra for many people in the technology world — simplicity. But what we built wasn’t that amazing. It was the idea of putting a couple of things together and being able to establish a lead by doing something really, really simple. How far you can get on a simple idea is amazing. I have a tendency to add more and more — the ideas always get too big to implement before they can even get off the ground.
Yahoo began in 1994 as a collection of links to research papers maintained by Yang and Filo. They gradually added links to new types of information, and the site grew rapidly in popularity.
We hired a lot of friends and friends of friends. You always hear “Never go into business with friends.” But with the first 20 hires, everyone knew each other. Consequently there was a high level of trust.
Any time you talk to Microsoft, just the way they do business, they have the potential to do whatever the hell they want, so when you go to them their mindset is always, “We could partner with you, or we could do it ourselves.”
Everyone heard “Internet,” but then they went and signed up for AOL because it was the easiest way to get online. AOL’s walled garden was bigger than the Internet for a handful of months there.
The one thing we didn’t do that all our competitors were spending a lot of time doing was search. They were crawling the Web and doing full text search, and our strategy was, “Look, that’s a technology game. We’re not a technology company, we’re a media company. Since there are so many of them out there, we’re always going to be able to rent it.” That was the thought back then, and until Google came along that strategy was perfect. Because, as things played out, that’s exactly what happened.
Strategically, it was spot-on until Google showed up. Because we always thought it was going to be a leapfrogging game. No one is ever going to be able to get so far ahead that we’d ever be in strategic risk of kingmaking a full-text search engine, because you just can’t do that. Google ended up doing exactly that.
One, IPO windows don’t last forever. Markets get hot and then they don’t. If you go out, you can only go IPO while the market’s hot. Netscape lit that market afire for us. The other consideration was that we saw that one of the ways we were going to have to compete was to acquire companies. The best way to do that was to have a currency other than the cash in the bank — to have a stock to pay people for their companies. So, in order to get big fast, which we thought we needed to do, we had to have a public stock.
Stanford is very progressive in that. Yahoo is far from the first startup that originated there and will be far from the last one. It was new enough, and it wasn’t a specific technology; it was a brand. It wasn’t really an invention; it wasn’t a piece of technology. They were smart enough to know that anything they do to stifle it would kill it, so their best hope was to let it go and hope that Jerry and Dave gave money back later, which they did. They optimized their outcome, trust me.
Looking back, I don’t think I understood the time commitment or the emotional commitment it takes to get something off the ground. Despite how everything grew, it was a task just staying on the wave that was the Internet.
What were the most popular link categories at first?
The sex category was probably of everything on the Web. Not just Yahoo, but everything on the Web. Just like the VHS industry when it first got going.
He looks at me, and he’s just like, “This is C+ work.”
I hadn’t slept for a couple of days, and I felt like taking a swing at him. But he was absolutely right. “If we’re going to appear big, we’d better act big, and this is what we hand out? You can’t hand that out.” I remember that very clearly, and that was a really good lesson for me — “I know you’re tired, I know you’re working hard, but it’s not an excuse for putting out something that looks like a startup.”
Doing all that thinking up front: why am I getting in, when do I leave, if I leave then why am I doing it, what gets me up in the morning, what could happen that could make me stop getting up in the morning? I’ve seen a lot of people get so emotional because they start something on a whim; they are doing this thinking while they are doing business, and, when things don’t go well, you don’t act rationally, to say the least. There’s a lot to it; it can get really emotional because you get tired and there’s a lot of work and you’re invested in it. All those personally motivating things — think them through before you get things started.
We decided to launch it in NY, in the financial markets, because they were big users of systems and email. They were also affluent, so they could afford the service early on. They were big users of data and information, and they needed it in real time. To them, time was money in a big way. The BlackBerry system gave them that in spades.
Over the years, I’ve learned that the first idea you have is irrelevant. It’s just a catalyst for you to get started. Then you figure out what’s wrong with it and you go through phases of denial, panic, regret. And then you finally have a better idea and the second idea is always the important one.
We had this really funky power balance in our company where we had a really strong VP of sales and a really strong CFO and a really inexperienced CEO. And whenever there was a decision to be made, she couldn’t break the tie. And what do you do? Once Kim got replaced by John Olsen, he was completely different. John had run big companies and it was really easy for him to make decisions that were very hard for us to make.
I didn’t know anything about building these large systems before working at Google. So I’d look at how different parts of Google work and sort of say, “Does that apply to us? Can we reuse that technique?” — since there was already a successful model of how to do these things. That was part of the challenge, just figuring out when to copy other parts of Google and when to say, “Our problem is too different from theirs. We have to do something new.”
Q: You mentioned that Gmail was “controversial” internally. Can you expand?
A: I think, in general, people are uncomfortable with things that are different. Even now when I talk about adding new features to Gmail, if it isn’t just a small variation or rearranging what’s already there, people don’t like it. People have a narrow concept of what’s possible, and we’re limited more by our own ideas about what’s possible than what really is possible. So they just get uncomfortable, and they kind of tend to attack it for whatever reason.
I’ve always been a hobbyist, and it’s one of the reasons I kind of seamlessly go between software, hardware, networking, and material science. I don’t care — it’s whatever it takes to make the damn thing work. I don’t have much formal education in these things, but you learn. You build enough stuff; after a while, you see it. And if you reverse-engineer enough things, you learn what other people have done.
“This email is being sent to you on the modem that I designed at Columbia.” And he said, “We try to make the right judgment and we don’t always. I’m glad that I did not dissuade you from continuing on with its development.” I thought that was a very nice thing to say.
I remember we spoke to one semiconductor company that we got very far along the road with that made a processor. When it came down to literally days before we signed the investment document, they added in a section that said we would be obliged to use only them as the provider for all of our silicon. In other words, they set it up so that our backs were against the wall, and they were getting us locked in. We knew that, if we were locked into one provider for silicon, we would have no way to negotiate prices. That would drive up the cost of the unit, so we couldn’t do that. We even tried to explain to them that, “You guys are investing in a company. You don’t want that to happen.” But they felt very clever about this strategy and taking these wet-behind-the-years entrepreneurs.
So there was another 2 months wasted. We were watching the bank account dwindle.
We found that nobody was willing to make that first step. In fact, I think a lot of them were sort of like vultures waiting for us to fail, and then pick up the pieces — because they saw the value of what we were doing — for a bargain.
Q: Do you think there are major differences for a new startup in SV versus the East Coast?
A: Oh yeah, phenomenal differences. I can’t speak for every kind of startup, but for something involving technology — and even a lot of things involving content — it’s just so much easier to do it here. You have resources here and people who understand technology. There’s a high concentration of talent that you can draw on. You don’t have to relocate people to get them there.
Then there’s Sand Hill Road with all the VCs and other potential investors, who are all clustered together. You literally might do 2 or 3 presentations to different VCs all in the cluster of buildings on Sand Hill Road.
The other thing is that there’s kind of an attitude here that people should try things, and, if they fail, if they understand why they failed, they may actually be a better investment in the next round than somebody who quickly succeeded just by sheer luck.
I mean, they’re a very cautious company, and they proactively worry about any potential threats. I don’t know if they saw WebTV immediately as a threat, but they saw it as a potential threat.
I began to get to know the other top executives at Microsoft, they were talking about negotiating this and that funding, and cutting back products to the point where they no longer made sense. I said, “Look, can’t we all agree on what is the right objective for the whole company and then fund that? I don’t care if it’s in your group or my group or whatever, but we should do the right thing.” It didn’t work that way and, of course, any big company is like this. People have certain things they control. That’s why there’s politics in large companies.
Q: What has the potential to go most wrong in the first year when a startup is such a fragile organization?
A: The worst thing that can happen to a startup is if the founding team — or the people who are leading the thing — do not get along. And it’s deadly when they don’t get along in front of the troops. I’ve come to realize over the years that companies are just the people that make them up. We like to think of them as business enterprises and having this value and that value. But it mainly comes down to the people. And the attitude of the company distills from the top.
All you’ve got are problems — problems that need to be solved, obstacles that need to be overcome. You need to have an incredible strong bond and an incredibly synchronized view of the world amongst the key players if you are going to succeed.
Their original plan was to create a network server for homes. Realizing it would be hard to explain to consumers why they needed one, they narrowed the idea down to one component of the original play: the digital video recorder (DVR).
TiVo was ground-breaking in that it took all the information that existed on TV and gave the viewers the power to manipulate it. With TiVo, you could skip commercials, pause live TV, schedule the recording of every episode of a series — all the things one might expect to be able to do with data. But these new features sparked controversy in Hollywood. Networks worried about losing control over how people watched TV.
By skillfully navigating the border between what’s possible with technology and what television executives would tolerate, TiVo brought about a revolution in the way people watch TV.
People like Bill Gates were young kids then. A lot of the people who are now very famous were just young engineers that were trying to come up with a good idea. And they did. So the rest is history.
It fascinated us because, once you looked under the covers, you realized it was a very difficult technical problem. The fact that it had to be TV meant that it had to be completely reliable and bulletproof.
Is that going to be challenging enough for us to attract the brightest people? Because I don’t want to run a company that has a 2nd-rate engineering organization. I want to run a company that has a top-rate engineering organization. So I was worried about that.
It was interesting because the press who reviewed it… there were 2 kinds: the technology press, like Walt Mossberg, who hated it because it wasn’t techie enough for them; then there was the consumer press, who loved it because it was nice and simple.
After the statutory hugging and talking about their kids and their families and what they’ve been doing, it was not unusual for them to let us know how they felt about what we were doing and show su the door. “You’re evil. Don’t come back. You’re going to destroy us.”
Replay probably did us a fabulous favor when they stepped across the line. There’s a line in the sand that those media companies think about. You don’t know where it is, but if you step over it, they’re going to get you. Replay stepped over it by doing automatic commercial skipping. And they let you share programs over the Internet. That crossed the line. They got sued. They were the bad guy; therefore, we were the good guy.
At the time most of the hackers we knew used this program called X Windows, where you could be using a program that was running on some remote machine, but it would be drawing stuff on your screen. There was also this idea of an X terminal, or xterm for short, which was a computer that did nothing but run X Windows — all the brains were on the server. So the way we thought of web-based applications at first was using the browser as an xterm.
As I was lying there half asleep this idea of making the software run on the server popped into my head and it was so dramatic that it woke me up. I sat up in bed, like the letter L, thinking, “We have to go try this.”
If it seems strange to you that we were afraid of customers, imagine how the average sales guy would feel about modifying the software running on his laptop. The idea would seem terrifying.
I think the main thing was that it was easy. Practically all the software in the world is either broken or very difficult to use. So users dread software. They’ve been trained that whenever they try to install something, or even fill out a form online, it’s not going to work. I dread installing stuff, and I have a PhD in computer science.
We didn’t even process credit card transaction till about 2 years in. We would just forward the order to the merchant, and they’d process it like a phone order.
That was my 1st introduction to something that turns out to be a very important lesson for startups: it’s never a deal till the money’s in the bank. So many things can go wrong with deals, and they all do. Before we ultimately got bought by Yahoo, we probably had 9 or 10 different acquirers that we were talking to, and things always went wrong for one reason or another.
The most valuable sort of press is not articles about you, it’s when people mention you in passing as a matter of course. That’s what you really want — whenever anybody talks about e-commerce, for them to say, “companies including… and Viaweb.” Schwartz got us that within a couple months.
It was also kind of weird that when the deal closed, we all became Yahoo employees. It was like one of those dreams where you have to back to high school. Up till that point we’d been independent, and then suddenly we were employees, with bosses. And the weirdest thing was, we, or I at least, actually started to think of them as bosses. Now whatever I did was either submitting or rebelling, whereas before it had been just doing.
Never believe it’s a deal till the money’s in the bank. Even at the pint where you walk in that room to sign the final papers, there’s still a 10% chance the deal’s going to fall through. At the point where people say, “We want to buy you,” the chances of it falling through are like 80-90%. So you can’t let yourself believe. If someone wants to make you an offer, fine, but don’t change your plans based on that. Just keep going.
Millions of dollars, when the most money I’d ever had in my bank account was about $10K. There was a point where we started to seem like a real company and this made us just pathetically eager to sell the company. We must have seemed like such losers.
So I can understand now when founders want to sell out for a couple million. Investors say, “No, you should wait,” but it’s easy for them to say. A million dollars seems just overwhelmingly attractive when you have nothing. You don’t care if it’s a good deal or not.
I also kind of regret being a zombie for several years straight. I really had no life during Viaweb. I was not part of the ordinary world of humans. I was sitting glued to a computer all day long, or asleep.
Q: What advice can you give about raising money?
A: The advice I would give is to avoid it. I would say spend as little as you can, because every dollar of the investors’ money you get will be taken out of your ass — literally in the sense that it will take stock away from you, but also the process of raising money is so horrible compared to the other aspects of business. You can’t work your way out of it like you can with other problems. You’re at other people’s mercy.
People start startups to get rich, but what keeps them going day to day is the fear of failure. You’ve said, “OK, I’m starting this startup and I’m going to get all the users and be successful,” and once you’ve told everybody that’s what you’re doing, if you fail you’ll look like a fool.
As often happens with startups, del.icio.us began as something Schachter built for himself. He needed a way of organizing his collection of 20K bookmarks, and he hit on the idea of “tagging” them with brief text phrases to help him find links later.
I was always very careful to structure the code — each chunk of code wasn’t larger than the screen — such that I could come in and look at it, figuring out what I’m doing, do it, and be done for the day in 15 minutes. So if I could get one thing done a day, I was happy.
I tend to be careful about that. I think people ask for features — they want to do something, but they don’t say, “I want to do that something.” They translate it into some feature that typically they’ve seen somewhere else and ask for that instead. I want a feature that does this. “Why do you want to do that?” Then it turns out there’s some better way to do that. So, stuff that people ask for, I tend to try and dig to the root cause, before reducing to practice.
I knew that you have x messages and when you talk to the press, any question they ask is answered with one of the messages.
I have never had a great deal of trust for people who don’t execute on core ideas. I understand the value of needing someone to deal with that kind of stuff — someone’s got to do the VC pitch and there’s got to be a CFO, etc. But the guy who says, “I have a great idea and I’m looking for other people to implement it,” I’m wary of — frequently because I think the process of idea-making relies on executing and failing or succeeding at the ideas, so that you can actually become better at coming up with ideas. You don’t really know if it’s a good idea until you’ve executed it. You need to understand the cost of execution and so on.
Brad Feld does a nice blog talking about how the VC process works. He says they never call you back to say no — they don’t want to close the door in case they want to open it again, but they don’t want to actually give you a response. Very few VCs actually said, “Sorry, we’re not interested.”
It’s a combination of sudden freedom to run things as you please and crushing responsibility in which you know you have to do certain things in a certain way at a certain time. That eradicates all of that freedom. You become a robot on rails. You know what you have to do and you are working in a certain direction.
Maybe other people are different, but I think that every step was sort of the inevitable, inexorable progress due to the previous steps in the path. It’s not like I had no choice, but everything I did was the only choice because it was the only thing that made sense at the time. It’s not that long ago, but no regrets, that was the path to take. Everything that had to be done was done.
Reduce. Do as little as possible to get what you have to get done. Do less of it; get it done. If you’ve got 2 things that you want to put together, take away until they go together. Don’t add another thing. Because you can understand it better, you can analyze it more cleanly. The UI will be easier. Doing less is so important.
Then it became apparent that the anti-spam business is not a fun one to be in, because everybody hates you. You’re never perfect. You either don’t block enough spam or you block somebody’s favorite emails.
I guess my advice is: solve a problem that you have, first and foremost, and chances are, other people may have the same problem.
A lot of reporters used Bloglines. They like to talk about things they use, so we got really fortunate in that regard.
My philosophy on these types of companies — consumer-based Internet companies — is that you don’t need to worry about the business model initially. If you get users, then everything else follows. Basically any technology can be copied, any concept can be copied. In my opinion, what makes one of these companies valuable is the users. That can’t be copied.
Users are going to tell you what they want, and they’re your best feedback. It’s critical just to get something out quickly. Just to start shipping and then you can iterate. Because shipping is just this huge hurdle. I’ve been a part of companies that have had big problems shipping — they just can’t ship. It’s a psychological thing.
Once you start acting on those feature suggestions, the users see that you are actually listening to them and they become more loyal to your site. So it is not a disadvantage — it may even be an advantage — to ship without all your features initially, for that reason, because you get all of this going and you get out there sooner.
With ONElist, we were growing so quickly that it was like a no-brainer that we shouldn’t sell. And we didn’t really have much in the way of competition back then, so it was basically hang on for your life and see how long you can go. With Bloglines, we weren’t running nearly as fast as that. I was feeling there was competition coming. I do think we’re kind of in a bubble again to some degree.
I wanted to make sure that the acquisition was viewed as a success for Ask 1 year later — 5 years later, even. I’ve learned that your reputation is very important, as an entrepreneur, as a tech guy in the Valley, and it’s a good thing to worry about your reputation.
Especially with all the emails every night, with working a full-time job, with the incredible amount of stress.
We spoke about making it a nonprofit and that made some sense, given my ignorance then. Now I realize there’s a lot of legal constraints in nonprofits. They’re meant to prevent various forms of corruption. The thing is, like a lot of laws like that, people who are crooked always find ways around the laws, and so the constraints just make it more difficult for the honest people.
But with Flickr, it completely turned around because the momentum behind it was so strong that at one point, we were getting calls from 3-4 VCs a week. They were getting in touch with us — completely different from when we were going door to door and beating the bushes trying to raise money.
That was the ironic thing, because when you need money, nobody will return your calls. When you don’t need money they can’t stop calling you. They just can’t help themselves.
Back when photographs were really expensive, they were like these iconic photographs. For example, my grandparents — there’s a picture of them that was taken in a studio. It’s very posed and it is this special photographic event. As cameras became more and more distributed, you would take photographs at weddings, birthdays, or events. But then digital photography really changed that because photos are totally inexpensive. You can take hundreds of photos and only save 5.
And people are taking photographs of things that you would not normally take photographs of — maybe a funning thing that they see on their way to work. One completely new behavior that we saw was that people were taking photographs specifically to participate in a group on Flickr.
The blessing of Thinking Machines and the curse of Thinking Machines was that it had a lot of money. If you have a lot of money, then you can be detached from people that are going to pay you in the future.
Also I found that there are people that specialize in different parts of businesses. Some people just do startups over and over again. Or they are actually in the idea stage.
All the newspapers are pretty much online now. They control their own distribution. They have their own websites. It doesn’t all funnel in through an iTunes. The music guys, I’m not sure why they did this, but they sold their souls. Somebody else controls not only the distribution of their product, but they control the pricing. What do you have if somebody else controls the distribution and the pricing of your product?
I learned to try not to make too many leaps at once. Most people have a very difficult time imagining something they can’t see at least a demonstration of. If you can get a demonstration — or, worst case, a video — it communicates an idea better than hand-waving for hours.
We’re now in 2006, and it’s hard to believe how pathetic things are. We don’t even have books online yet. I don’t know why the world moves so slowly. Everybody says, “Oh, it’s moving so fast.” And it’s like, “No, I don’t think so. It’s been forever.”
Having your own company means that it’s much harder to blame somebody else. If you are working inside a big company, you can always blame management, marketing, engineering, or something. But, when you are running it, you can’t, because it’s all your responsibility.
“Now that I’m running Britannica, I have to be Mr. Sunshine everyday.” Because people are looking to you, not just for the ideas, but for the general attitude toward how to make the whole thing work. Carrying a company is a lot of weight. You have to make sure that you keep on the uptick — not just financially, but also make it so that it’s a fun environment and people want to work there.
There were other systems around, but one thing I tend to do is do something that is far enough out there that nobody in their right mind would possibly want to do it. In general, I usually take things from the “you gotta be crazy” period to the “of course.” And once it gets to “of course,” then there will be competitors, and I’m done.
It came to be called collaborative filtering. The way it worked was we collected user trails of “Where did they go?” You know, the Amazon recommendations, “people who bought this book, bought that book.” This was, “people who went to this web page, went to these web pages.”
“Pick a big enough project, something that’s really hard, something that over the years you can work on.” I’ve found that that has been a great guiding piece of wisdom. If you just set out to go and make a lot of money, then the problem is, what happens when you make a lot of money? You’re out of ideas.
There’s an idea that you can pull something off here. That sort of uplifting nature to SF and the Bay Area in general really lives on. This is a city of dreamers, and that’s what mades it just a wonderful place to live and to work.
PostScript made it possible to describe complex documents in a simple form.
My ego may get bruised if this doesn’t work, but I’ll always have a job. If you have a PhD in computer science, you’re not going to be looking for work very long.
You guys are nuts. Throw out your business plan. Your customers — or potential customers — are telling you what your business should be. The business plan was only used to get you the money. Why don’t you rewrite a business plan that is focused just on providing what your customers want?
We had deliberately not gone to IBM early because we knew that, if we didn’t have a couple of business deals in hand, they would be extremely difficult, if not impossible, to negotiate with.
At that time, Apple was marketing their computers and the LaserWriter around a marketing program called the Macintosh office, which was an attempt to take IBM head-on. And frankly, it was not going well. It was very hard to replace all those feet on the street in corporate America, “You’re never lost your job buying IBM,” — all the stuff you’ve heard.
Fortunately, there was a young marketing guy at Apple named John Scull, who was aware of what was going on (as were we) at Aldus up in Seattle, because PageMaker came out at the same time as the LaserWriter did. He came up with the idea of getting the 3 companies — Apple, Aldus, and Adobe — together to put together a marketing campaign called “desktop publishing.” That had a huge impact on Apple, Adobe, and Aldus, and on the publishing industry, and completely turned around the fortunes of the Macintosh and the LaserWriter.
It turns out my grandfather and father were both letterpress photo engravers, and so I knew what it was like to work with the etching baths and the copper plates and all of the emulsions and everything. It was very toxic work, very expensive and very labor intensive.
Desktop publishing became very popular. For an investment of a few thousand dollars you could, in effect, be your own printer and publisher. So it opened up a whole lot of new businesses.
We came up with the idea of using a pure mathematical description of the outline of the type and then worked on some sophisticated algorithms about how to decide which bits to turn on and which ones not to turn on to give the highest-quality rendering on the particular device. That was really the breakthrough technology that differentiated PostScript from anything that preceded it, including Interprets.
I am not a hunter, never have fired a gun, but I’m told that if you want to shoot a duck, you have to shoot where the duck is going to be, not where the duck is. I’d the same with introducing technology: if you’re only focused on the market today, by the time you introduce your solution to that problem, there’ll probably be several others already entrenched. It will be hard to dislodge them, and hard to convince people that what you have is so much better that they should make a change. Much better to figure out where the marketplace is going to be in a few years, focusing on providing a solution to that, and let the market forces catch up to you. That’s what we did with Photoshop.
So that reinforced a message that John and I had always preached inside the company about how to treat our customers. Listen to them very carefully. Understand what their requirements are and what their needs are. Not necessarily do what they asked us to do, but to have the vision to do more than they expected. We had worked religiously at that. We had indoctrinated in all of our employees that you treat a customer the way you’d like to be treated. That you are responsible for that customer’s success and, if you fail at your job, you may cause their business to fail.
So the other lesson is that you have to be willing to move on, even if you’ve got a real success. That was, in fact, the same problem that Xerox had. Because the 914, the original copier, was so successful, they couldn’t look at a business that didn’t have a “b” in the dollar amount. Unfortunately, new businesses start out small and grow. You have to be wiling to make some risky decisions and invest in them in the hopes that a few of them will succeed.
Q: We just take for granted what you guys created.
A: That’s what’s really cool. That’s when you know you’ve had an impact. The biggest thrill is frankly not the financial success, it’s the ability to have an impact. Because we’re both engineers at heart and that’s every engineer’s dream — to build something that millions of people will use.
People with no training in the graphic arts could now develop materials that got a message across and did it more dramatically.
The product lines that are bringing in the most revenue believe that they have a right to all the resources of the company. Part of good management, and part of the attitude of a startup, is to recognize that, while those businesses are incredibly successful today and you hope they’ll be successful for a long time, the law of averages and experience tells you that at some point they will peak and they will probably begin to decay. So you’ve got to be investing today in what your future’s going to be 5 or 10 years out.
Doing things like that to make people feel like they were part of a community helped build a rapport inside the company so that our turnover rate has been among the lowest in the Valley ever since we’ve been in business. Particularly with people who are the top performers, our turnover rate has been not only single digit, but typically 1-2%. And that’s because we’ve made it an interesting and rewarding place to work. So I get frustrated sometimes by people who have never run a business who are legislating things like stock option accounting and so on. They don’t have a clue of what it takes to run a business.
I think what does separate some entrepreneurs from other entrepreneurs is we’re not hand wringers. We don’t worry about the unknown. We don’t really worry about the risk points ahead. As you get older and you get more experience, you train yourself to think ahead about the risk points versus just to take the next hill. But non-risk-takers and non-entrepreneurs would really have big headaches about this. They would need some level of comfort and safety.
That’s something that we look for in entrepreneurs — that they have the courage to do the job. That they’ll have the ability to judge the business situation. They’ll have the ability to lead people. They’ll have the ability to interact with the marketplace and to really build confidence into strategy.
The funny thing is that most people were impressed by all the stuff Basecamp didn’t do. They were use dot these big, honking products that tried to do everything, where they just needed something simple.
We had this dilemma that either you had MS Project or you had email, and there’s a huge gap between them.
That whole constrained development model really focused our view on what we needed, and it forced us to make tough decisions about making less software all the time. And we keep getting feedback from customers that say, “I love this, it’s just so simple to use. It’s got just the features I need and not all the other stuff.” There wasn’t time for us to say, “Wouldn’t it be cool to do this and that?”
Because when you’re in a big corporate environment, you throw a lot of resources at projects. You just could never arrive at the type of product that Basecamp is when you don’t work under constraints like we did. It’s just too tempting to try to do it all, or at least do too much.
The funny thing is that another reason Basecamp is a success is because it’s not more focused. We started out wanting to make a tool for creative services businesses, like us. But we never actually wound up including things that were specific to creative services, like billing, time tracking, etc. So people use Basecamp for all kinds of projects, like managing wedding, home improvement projects, and student collaboration.
Q: Was there ever a time when you felt you couldn’t do all this?
A: Sometimes, but whenever we had those feelings we viewed them as clues that we were trying to do too much, so we’d think, “How could we make this feature require less engineering and programming?” And we got into a pretty good mode that, whenever we wanted to do something new, we would brainstorm some ideas and try to look for the idea that required the least amount of work.
If your product costs $1M to make, try rescoping that idea in your head so it fits in $100K and get it out earlier. Instead of having a 1-year product cycle, what could you do in 1 month?
Most computer programmers don’t listen to what the customer wants. They have their own ideas of what would be cool, so they spend a lot of time building stuff that the customer doesn’t want. They don’t have an investment in the user experience.
We tried to help each programmer develop an independent, professional reputation. We had this idea that programmers could be professionals, like doctors or lawyers, and, to that end, we wanted the programmers to be real engineers — to sit down face to face with the customer, find out what was needed, come up with some suggestions or changes based on the programmer’s experience with similar services, and then take a lot of responsibility for making it happen.
They came to us and it was a happy coincidence, because they were happy to pay for lots of software and infrastructure and tools and let us keep the rights to it all.
It was on my website for free, but having a hard copy in the stores gave it a bit more credibility and more readers.
Edward Tufte gave us this idea of having a one-day seminar that people would come to and learn. We would get 400 people to come to a free, one-day course, and then maybe 1 or 2 would become customers and maybe 10 of them would adopt the software.
Almost all of our marketing and sales was educational. We just thought, “We’ll teach people stuff, and some tiny fraction of those people will become our customers.” It seemed to work just as well as running ads, which were a hard sell and kind of empty and a waste of people’s time. In this case, nobody could ever say that we wasted their time.
So we would say, “You’re a very capable person, and you’re going to have a very easy time hiring people like yourself. We don’t know your business and we’d have a hard time hiring someone like you, but we have a very easy time hiring someone like me, who’s an MIT-trained computer science nerd. It’s cheaper for you to use us, because we have really great programmers, and great programmers are a lot cheaper than mediocre programmers. So even if you give us a profit margin, it’s still cheaper than doing it internally.”
You don’t have the alienation from the customer that Karl Marx talked about as being a bad thing about factory work versus craftsmanship — that you never find out if your work really connects with people because you’re in a factory and the customer is at the other end of a railroad line.
The programmers were in the corner doing what they were told. That’s one reason they were so easy to outsource. If a programmer really never talks to the customer, never thinks, just solves little puzzles, well, that’s a perfect candidate for something to offshore.
They would have to develop the skill of starting from the problem. They would invest some time in writing cup their results. I was very careful about trying to encourage these people to have an independent professional reputation, so there’s code that had their name on it and that they took responsibility for, documentation that explained what problem they were trying to solve, what alternatives they considered, what the strengths and limitations of this particular implementation that they were releasing were, maybe a white paper on what lessons they learned from a project. I tried to get the programmers to write, which they didn’t want to do.
People don’t like to write. It’s hard. The people who were really good software engineers were usually great writers; they had tremendous ability to organize their thoughts and communicate. The people who were sort of average-quality programmers and had trouble thinking about the larger picture were the ones who couldn’t write.
“Why would they want to come work at my company where everything is constrained?” It’s not as simple as hanging out a shingle and saying, “Here’s our small company; we have $15M a year in revenue and we’re profitable; now we need a manager.” The people you are likely to attract, by definition, are people who couldn’t get a job at GE.
We were having trouble because the handful of good people who wanted to work at startups were all dazzled by the names of the VCs. They’d say, “If you don’t have backing from Kleiner Perkins, we don’t want to work for you.”
They were very candid with us and said, “Look, we’re not going to take you public.”
We said, “Why? We’ve got more revenue than any company you’ve taken public in the last 6 months.”
They said, “We get paid a percentage of the deal. The more deals we do, the more money we get paid. If we want to take you public, we’d have to waste a lot of time doing due diligence. We would have to look at your accounting and talk to your customers. We would have to convince ourselves that you were a good company.”
“So what? You have to do that with any company.”
“No, with all the other companies, we just look at the names of the VCs who’ve backed them, and if it’s a big name, we just take the company public without doing any research. We just take them public and take our fee. So in the time it would take to take you public, we could do 5-6 of these VC-backed companies. Sorry, we’re not interested.”
Basically, with their CEO that they brought in, they had a 3-to-2 board majority no matter what. And they said, “We’re going to run this company. We’re going to make all the decisions, and you’re just going to be a figurehead.”
There’s really nothing holy left in America: religion’s not holy, the family isn’t holy, marriage isn’t holy, but the only thing that’s really left that is holy to Americans is ownership. And that’s what the courts are there for.
Joel on Software was one of the first examples of a now common (though rarely achievable) strategy for software startups: create a popular blog to get attention.
The consulting market is the derivative of every other market. When a company is growing, they will hire a few consultants to help them grow a little bit more rapidly. When they’re shrinking, they’ll instantly fire all consultants. If the market is even going down by 0.002% instead of growing then the first people to go will be the consultants.
The market disappeared in November of 2000. I’m using specific dates because it really disappeared in that month, but nobody knew that it had disappeared until April. All the businesses’ perception was that the amount of time it takes to sign up a new client was going up by about 1 day per day.
These were all marginally good marketing ideas. Unfortunately we spent a lot of time chasing them. The one thing we learned over 5 years is that nothing works better than just improving your product. Every minute, every developer hour we spent on any of these crazy things — although they had some marginal return on the work that we put into them — was nothing compared to just making a better version of the product and releasing it.
In the early days, we would ask people on our site, “How’d you hear about Fog Creek?” when they purchased things, and 100% of the people would write, “Joel on Software.”
I remember thinking that, no matter what we knew that the competitors were doing, the information was completely useless to us. It never really changed what we were doing. If it’s like, “The competitors are going to do feature x,” well, if that’s such a good feature to do, why aren’t we hearing about it from our customers?
At the time, there were almost — I hesitate to say this, but — no software companies that really knew the basics of how to develop software in the way that Microsoft did. They accomplished what they did because they figured out a ton of things about how to make software, repeatedly and reliably, that people want to buy, that nobody else had figured out. And they were doing things like bug tracking — like having a bug-tracking database — that seem completely obvious, and, when you looked around, 80% of commercial software companies did not do bug tracking. Or 80% of commercial software companies did not write specifications. Or 99% of commercial software companies did not do usability testing.
I think what makes a good hack is the observation that you can do without something that everybody else thinks you need. To me, the most elegant hack is when somebody says, “These 2K lines of code end up doing the same thing as those 2 lines of code would do. I know it seems complicated, but arithmetically it’s really the same.” When someone cuts through a lot of crap and says, “You know, it doesn’t really matter.”
But it’s also a programmer who gets into flow — sort of what Paul Graham describes as an animal.
To them, it’s just kind of engineering step by step; it’s never the magic of creation.
To me, building a software company is creating the factory that was going to be equipped for, when I have an idea or when somebody has an idea, we can throw it into the factory and get the working code at the back.
We would define “best” as not searching for prices, but really finding the unbiased information.
What we ended up with was a much smaller database as measured by the number of documents that we’d indexed, but extremely, extremely relevant.
When we started TripAdvisor, the notion was TripAdvisor was actually just going to be our demo site, because we never planned to appeal directly to end users. We were going to be selling this rich database to travel portals, online travel sites. They would be querying our database to find the best information and surfacing it to the user.
Click-through rates at the time were 0.25-0.5%. Here we were sitting at 10% because links were so relevant to the topic at hand.
In hindsight, we clearly made the right decision. But at the time it wasn’t obvious, so we kept negotiating with them. My tip for someone in a similar situation — a company looks like it might be going out of business — this might be the only way to get enough capital to survive, on terms that really aren’t very acceptable: keep pushing at it. Don’t say yes too quickly, don’t say no too quickly, to see whether any other options come along, or to see whether the deal gets so bad that it actually becomes an easier decision to just say no and you can go about your plans. We had a few sleepless nights back then.
Look at me 20 years ago, and at best I was a smart engineer. I didn’t know much about business, knew nothing about selling, and unless you have somebody who has an interest in talking with whoever you’re selling your product or service to, your product isn’t going to turn out to be what the customer wants.
At the earlier stages of the company, when you’re actually out trying to get some customers, do whatever the hell the customer wants. If they’re going to pay you, the customer is right. Because you need that initial money. Make that customer into the person that sings your praises the loudest, and really uses your product or service.
Then I look at each group and say, “Hey, I’m hoping every one of you — in addition to all the successful ideas you’ll come up with — aren’t afraid to come up with some resounding failures.” You just want the failure to cost you a couple of weeks, a month or two — it depends on the industry — a small, fixed cost. It’s the old adage: if we’re not failing at something on a regular basis, we’re just not trying hard enough.
Certainly one of the keys to our success was being fanatical on the hiring side of things. I was almost going to answer, “Well, I would have liked to have hired more top-notch folks throughout the company earlier.” Because I’m still in that position now — I’m still struggling to fill positions with the types of people that we want to hire. It’s not something that we do very efficiently here. It takes us a long time to fill a req.
The difference in almost any position between someone who does a good job and someone who does a great job might be 20% or more in salary, but its’ 100-200% more in throughput.
Man, you’ve got a bunch of sharp people here.
I think entrepreneurs want to make money. It’s not that they do it for the money, but they want to make money. Because money is the measuring stick; it’s how they know if they’ve won or not. And I think a lot of what drives entrepreneurs is the kind of legacy they are going to leave. They want to make a mark in the world and feel like their life mattered. Entrepreneurs are the kind of people who love ideas and want to build things, and add value to the world.
Part of that is to quench their ego’s thirst and say, “I matter.”
And nothing ever goes according to plan. You can’t dwell on the fact that your plan didn’t work. You have to hustle, you can’t just have a plan and cakewalk it. You just have to know what direction you’re going in and run around like a rat in a maze trying to get out.
There’s no such thing as easy entrepreneurship. It’s going to be painful, it’s going to be emotionally unstable, you’re going to feel insecure. If you’re not already bipolar, you will feel like you are.
People in that community talked about the test for about 2 weeks. I watched this and thought, “I’ve never seen anyone talk about a movie for this long. That’s powerful media. Why? Are we our own favorite subjects?”
At the venture firm, I saw how most online media companies were getting killed by acquisition costs, and I realized that to build a successful company, you have to have very low — if not zero — expenses for acquiring users. So I thought that these tests could be a very promising area to start a digital media company through.
I was really paranoid because I thought this idea was incredibly obvious. I seemed like this was the best thing to do online — it would be incredibly viral and it would be deep because you’d get so much data on people. And people would answer honestly, because the test was about them and they’d want accurate results. It was just obvious to me that you could build a huge media company on the back of this thing. So I was relatively paranoid about that and only talked to people that I trusted.
But what I got back was, “I don’t understand what the heck you’re talking about.”
Because they are trying to understand their world and predict the future — that’s the main function of the cerebrum, to fin the patterns and predict what is going to happen next — and insofar as they realize that the future to them is somewhat gray, or even black, it’s scary. So then they go and have another conversation and everyone says, “Broadcast.com, oh that’s so cool.” Everyone nods and smiles and that’s the type of pack animal collective creating reality. And when you go against that, it’s painful.
We had the anxiety test; the parenting, relationship, and communication tests. And no one came.
I remembered that advertising agencies say if you want people to remember an ad, include babes and puppies. So I thought, “Let’s do a test for what kind of breed of dog are you.” So they came up with a 15-question test that wasn’t scientific at all. We put it online, and 8 days later we had 1M people trying to enter our site. Our server was going down every 10 minutes.
Q: What would you tell someone who was considering starting a startup?
A: That it is incredibly painful and it will take over your life. If you care about it and if you have any chance of succeeding, you will stop being present for the softer things in life like your family, friends, or dating life. And when you are there with them, you’re not really there with them; you’re thinking about this thing because you’re creating it, and it takes that amount of passion to make it work.
The only thing that bothers me is that Microsoft seems completely driven by competition. We tried to be driven entirely by users. There was a need, so we tried to cater to it.
We’re also overly paranoid because the first thing we did when we started the company was talk to a bunch of entrepreneurs who told us, “Don’t tell anyone what you are doing. VCs are sharks.” Meanwhile, you hear from the VC, “You’re too paranoid.” So it’s hard to find the right balance and be human, because you don’t know who’s genuine and who’s not.
If it wasn’t for Barak, I don’t know where we would be now. We knew what we knew, which was the product. But there were all these little things that you just have no clue about. It was incredibly overwhelming. But if you think about it too much, then you don’t do it. You almost have to not know what you’re getting into to actually do it.
There was no turning point per se. It was a complete evolution and there was a new opportunity and a new challenge every day. As you mow down one obstacle, there’s always another one waiting. We’d be fighting 6 or 7 fires at any given point in time on any given day, and you’re fighting all these fires at the same time you’re trying to construct the blueprint of the house.
But that’s the nature of the entrepreneur and that’s the nature of a young business. We’d be hard-pressed to find a company in the history of business that has laid out a blueprint and been able to follow that blueprint chapter and verse throughout its life. It just doesn’t happen. It’s a changing environment out there.
We developed a business plan, but I’d be lying to say that we referred to it every day. We spent a lot of time on the plan trying to identify what business we were in and where we’d go, but so much of our life was reactionary.
I think the life of an entrepreneur is a life of setbacks, challenges, disappointments, and failures. It’s not how you celebrate success, it’s how you overcome the adversity and the hardship that determines how the business succeeds.
In a growth business — which is where you always want to be as an entrepreneur, because it’s a lot more fun than the alternative — things are breaking every day. The accounting system that I used in ’95 was useless in ’98. The systems and the computers that I used weren’t powerful enough 12 months later. The facilities that we would lease weren’t big enough. The data center wasn’t powerful enough to manage the computers we needed. Everything would crumble, and you needed to be one step ahead of that all the time. It’s important that you do it with perseverance. You do it with a sense of determination and doggedness that says, “I can overcome.”
One of the things that I think is dogma within VC is that you don’t want to manage what they call the “living dead.” Typically 1 out of 10 companies is a really big hit; roughly 3 go belly up pretty quickly, and you get rid of them. The ofter 5-6 are what they call the “living dead.” They grow nicely, organically, but don’t generate spectacular returns, and they take management time and energy.
The lesson I learned at Alliant in dealing with VCs was that they’re quite impatient with a difficult situation. They have to be. They have no choice.
So it came down to making a decision. What were we going to do with the company and how were we going to transition it? I was in disagreement. I was saying, “Let’s take the slower, more methodical approach over time, and we can work it out.” The other approach was, “No. Let’s change the architecture of the computer, move into the newer technologies quickly, etc.” You can argue either one.
One of our takeaways from that was that you can almost always take a negative situation and turn it to your advantage if you work hard at it. We took something that was a very negative potential situation and made some real friends. Anytime we had a client situation that blew up — and those happen in the business, things go wrong — we would always say, “How do we take this and turn this into a big opportunity, where the client comes back even more loyal than they were before?”
The moderator asked, “If you could describe in one word the key to success for your company, what would that word be?” Very few answered in one word. Some of them said integrity, or communications, and things like that. The last person to talk was Michael Dell, and he said one simple word: persistence.
I can relate to that. Things never work out right the first time. You’ve always got to do it 2 or 3 times to get it right. And things always go wrong. So persistence is the key to success.