Vinod Khosla
Kleiner Perkins Caufield & Byers
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
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95 96 97 98 99 0 1 2 3 4
New
com
pany
val
ue in
Bill
ions
First 10 years of PC First few years on Internet
Source: U.S. Department of Commerce. 0%
5%
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50%19
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PC Introduction
Commercial Internet
U.S.-based Information Technology Spending as a Share of Business Capital Equipment Spending - 1960 to CQ2:1997
Visible Signs: Corporate Tech SpendingContinues to Rise
Note: Information technology spending includes purchases of information processing and 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
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$20.00
$30.00
$40.00
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$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
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$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
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