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

Vinod Khosla

Kleiner Perkins Caufield & Byers

vkhosla@kpcb.com

Organizational Concepts for Entrepreneurial Technology Companies

-the cathedral or the bazaar?

“…every strategic inflection point [is] characterized by a ‘10X’ change …”

“There’s wind and then there is a typhoon,

there are waves and then there’s a tsunami”

- Andy Grove

There’s change and then there is change!

Visible Signs: Wealth Creation

$0

$10

$20

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$100

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

Source: U.S. Department of Commerce. 0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

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 related equipment (including office, computing, and accounting machinery), computers and peripheral equipment, communication equipment, instruments, and photocopy and related equipment.

Visible Signs: Public Pure Play

Internet Winners - $ Billion Club

Priced as of 4/22/98, 3/17/99

Yahoo!

Amazon.comAmazon.com

eBayeBay

@Home @Home

NetscapeNetscapeExcite

$6.32.2n/a2.24.01.3

$34.220.818.814.9

9.75.7

Market Value (3/99)

MarketValue (4/98)

B B

Years to reach 50M users:

0

30

60

90

120

‘22 ‘30 ‘38 ‘46 ‘54 ‘62 ‘70 ‘78 ‘86 ‘94 ‘02

Use

rs (M

illio

ns)

Radio TVCable Internet

Source: Morgan Stanley.

Visible Signs: Social Change

Radio = 38TV = 13Cable = 10Internet = 5

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

Cos

t

Web Advertising Direct Mail

Even with lower click-through / response rates, Net advertising costs much less on a per-response basis!

Source: Direct Marketing Association, Morgan Stanley, KPCB analysis.

Cost per Response/Click-Through

Behind the Scenes:

Changes the Cost of Serving Customers

• Net transactions cost far less than through traditional channels

• Investment for a commercial bank to reach 10M potential customers– Bricks-and-Mortar:

$900M

– The Net: $1M

$0.00

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$0.80

$1.00

$1.20

Transaction Costs (Banking)

Source: Booz Allen Hamilton.

Cost

/ Tr

ansa

ctio

n

Branch

TelephoneATM

PC BankingInternet

Source: Company reports.

Behind the Scenes: Revolutionizing the

way companies interact with customers

• New customer acquisition

– 80% of Dell’s small business Web customers never purchased from Dell before

• New channels to the customer

– 70% of Internet users plan to make travel plans and purchases on the Web

• Increased availability to customers

– 40% of AOL’s merchant online sales took place between the hours of 10 P.M. and 10 A.M.

• Building an online customer base

– Amazon.com has 6.2M records – mailing addresses, e-mail addresses, credit card numbers – of customers who have made purchases on their site

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

Source: Company reports.

Behind the Scenes:Internal Operations are Changing

• Procurement: GE purchases $1B in supplies over the Internet in 1997

• Customer Service: Cisco reports customer service productivity has improved 200-300% from using the Internet

• Logistics: FedEx reports that PC and Web interfaces are used by 950K customers to track 12M packages annually

Savings$500-700M (3 yrs.)$500-700M (3 yrs.)

$360M(annually)$360M(annually)

6 Million calls per year6 Million calls per year

Behind the Scenes:

Communications Networks are Changing

• Qwest changing the rules on backbone fiber capacity

• Level 3 investing $10B in an all IP network

• DWDM growth causing dramatic changes in available capacity

• Voice over IP projects proliferate at Lucent, Nortel, Cisco

And at the macro level….

The New Economy

• Conventional wisdom: American dream over. “I’m OK, but my kids...”

• 40% of GDP growth from tech

• Silicon Valley is symbol: <3% unemployed, high wages, every segment moving up

• Silicon Valley is state of mind: it’s everywhere, for everyone...

The New Economy

a skill life long learning

managers entrepreneurs

labor v. mgt teams

bus v. environ encourage growth

security risk taking

monopolies competition

job preservation job creation

wages ownership, options

plant, equipment intellectual property

Old versus New economy

status quo speed, change

standardization custom, choice

top-down distributed

hierarchical networked

regulation pub/private partners

zero sum win win

sues invests

standing still moving ahead

Old versus New economy

The New Economy

What goals are we designing the organizational form for?

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

Pace of Change

• Diseconomies of scale

• Diseconomies of process / hierarchy

• Timeliness of information disbursement

• The role of standards

Success Factors - Old & New

• People vs. Organization• Process vs. Instinct• Questioning vs. Hierarchy• Leverage vs. Entrenchment• Managing Risk vs. Risk avoidance• Paranoia & Persistence vs. History• Role of Trial vs. Consistency• Best of breed Offerings

A detailed look at the factors….

Internal Factors

• People: Building the “balanced” team

• Culture

• Technostructure & Infostructure

• Engineering Methodology

• Organized Chaos : Execution vs. innovation.

• Pull vs. Push

• About Customers & Marketing

• Planning & process

People

• Top 5% - “winner take all”

• Instinct & Vision

• Personality mixes

• Role of the “Flakes”

• Leading vs. managing

Culture

• Setting the goals

• Managed Conflict

• Persistence & iteration

• Tolerating mistakes & rewarding failure

• Sense of urgency

• Paranoia

• Success & Complacency

Technostructure & Infostructure

• Specialization and complexity of technology

• Decision-making: top down or bottom up?

• The role of the “fringe” employee.

• Nuances as Pitfalls

• Horizontal and vertical communication & cooperation.

Engineering Methodology

• Evolvability

• Specialization

• Experimentation

• Change isolation

Organized Chaos: The Shepherd or the Sargent?

• The Flakes vs. Engineering vs. Marketing

• Experimentation

• Execution

• Budgets, Schedules, Tasks vs Project Stage

Push vs. Pull

• Products

• Brands

• People

• Leverage

Changing Roles: Marketing & Customers

• Listening to the customer

• Participants in Design / Experimentation

• Meeting vs. Teaching Requirements

• Discovering “Applications”

• Growth Patterns: the “stairstep”

• Perception & Reality; the Halo effect

• Momentum

Planning & Process

• Process vs. Instinct

• Risk Balancing & Burn Balancing

• Risk Balancing of Projects

• Planning & Variability

Optimized for what?

“The early movers are the only companies that have the potential to affect the structure of the industry and to

define how the game is played by others.”-Andy Grove

Case Study: Open Source

Evolvable Systems: Cathedral-building

The traditional development model reflects the “cathedral-building” model...

• Follow a single approach and vision • Optimize for performance• Release only bug-free products• Products and technologies are developed in

isolation• Examples: IBM System/360, MSFT Windows

platform, Intel Pentium, AT&T network

Evolvable Systems: the Bazaar model

The new development model is evolving to the “bazaar” model...

• Optimize for evolvability

• Adopt new approaches and agendas regularly (“plan to throw it away”)

• Delegate/buy/outsource everything you can

• Be open to the point of promiscuity

• Release early, and often

• Products and technologies have to exist in a dynamic community

• Examples: Linux, Apache, Sendmail, Excite, Microsoft (the company), QWEST/Williams networks

Weather Forecast

• Rate of change will accelerate - life will be more complex, more busy...

• Innovation, opportunities & entrepreneurship will thrive

• Fun & fortunes will be in abundance

• Adaptability, agility & momentum will be the key to success!

“As long as we maintain the practices that have us made us what we are today, there is no limit to the longevity of this situation”

-F.E.Terman, Vice President, Stanford University

Comments?vkhosla@kpcb.com

KPCB

• Who we are:• a handful of professional technologists and operating

execs - not financiers• portfolio of 340+ companies with $244B+ market

cap, $61B+ revenue, 162k+employees, 127 IPOS• Forbes 500: Sun, Compaq, LSI Logic, Ascend, AOL,

@Home, Quantum, Linear Technology, Amazon, Tandem, Lotus, Netscape, Intuit

KPCB

• What we look for:• People• Unfair advantages• Risk up front• Characteristics: sense of urgency, corporate

partners, home run swings• Defensibility in critical mass, technology,

franchise, content, distribution• Shared upside & simple structures

KPCB

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

KPCB

• What we bring:• Company building experience• Experience with pitfalls of new markets,

technology management...• Credibility• Relationships• Repertoire of mistakes• Knowledge of industry trends

The Internet: Does It Change Everything?

• First two way mass communication medium• The phenomenon: fastest social change, largest legal

creation of wealth• Adam Smith II - efficiency & economics revisited• Role of information & infomediaries• Changing economics: distribution, specialization,

narrowcasting• Technology driving business strategy• New Models: Excite, Amazon, Priceline, Ebay,

Preview, Home Grocer, Della&James...

• Corporate culture & infrastructure: “real time”

• Fastest social change and largest legal creation of wealth (Cisco, Dell)

• Tight feedback loops

• Ideal for experimentation (Vs. planning)

• Leverage

• People as the killer app

The Internet: Does It Change Everything?

• This is a winner-take-all economy ...

• Winners and losers diverge quickly

• Adaptability, agility, momentum, and execution are the keys

• Examples: Amazon/Barnesandnoble.com, AOL/Compuserve, @Home/Roadrunner, MSFT/Apple/IBM/Lotus, Cisco/Bay

The Internet: Does It Change Everything?

Key Principles

• Knowing what you don’t know

• Whose opinion ?

• Identify your liabilities & assets

Comments?vkhosla@kpcb.com