Don't Forget the People

I was having lunch the other day with my friend and fellow UCLA business school alum, Manuel. I'm working with him on his latest venture, iPling. He summarized a key learning from his career as a serial entrepreneur: don't forget the people. Without the right people with the right skills focused on the right problems, you can't succeed. That's even more true in a startup environment, where teams are small and lack the redundancy of a larger company. Part of the volatile nature of an early-stage startup is that any failure can become a critical failure. Good team chemistry is vital.

In a startup you're often working with the smartest and most driven people, all of whom are used to setting their own agenda and proceeding according to their own best judgment. It can be tough getting everyone pointed in the same direction and motivating them to put the customary ego on the back burner for the sake of the team, even when the future of the entire organization--and the welfare of each of its individual members--is at stake. It's almost like a real-world game of Prisoner's Dilemma.

But the people equation is important in large organizations as well. In that context I'm reminded of my days at Yahoo. When I arrived in early 2002, the company was relatively small (about 2,000 employees--today, I hear, it's around 14,000) and focused in terms of rigorously screening potential hires for similar professional and educational backgrounds, work ethic, business values, and so forth. But within a couple of years Yahoo acquired some companies that weren't such a tight fit, and little effort was made to align the old and new cultures. Viewing the situation from the inside it seemed to me and some others that starting at about this time, increasing amounts of energy were diverted into attempts at negotiating culture imbalances--for example, different visions for product development, management, and marketing procedures and different sales strategies--at the expense of executing on revenue projects. Leadership didn't identify, understand, nurture, and enforce success vectors and best practices. In the end this "people problem" was one of the reasons Yahoo lost its market-leading position.

I haven't worked at Google, but I hear from people who do (fellow Yahoo alums, as it turns out) that the situation there is different. As large as Google has grown, the company still maintains tight control of the applicant screening process to be sure anyone allowed through the gate complements the existing corporate values that have proven so successful. The higher the position level the more rigorous the examination, I'm told. And it's hard to argue with Google's success. They understand that having not just the "best" people, but the right ones for their organization, goals, and strategy, is a critical element in business performance.

Manuel hasn't built the "next Google"--at least not yet--but his vision is on target. There are lots of things to deal with in a startup: money, product, positioning, marketing, business strategy, and more. But as Manuel points out, don't forget the people. They're the ones who make it all happen.

And a Side Order of Strategy

As I discuss business opportunities with a spectrum of hopeful young companies it’s striking how some have a clear sense of their market niche and seem to have a decent chance of success, while others don’t measure up to the fundamentals of Business Strategy 101. It’s true, everyone can think of a company or two that “made it” without ticking off every item on the strategy checklist, but why handicap yourself—and especially, why invest time and money—with a venture that doesn’t conform to time-tested guidelines for achieving rapid growth, high margins, and market dominance?

In my observation, the intuition to build a company on a strong strategic foundation isn’t highly correlated with the management team’s years of experience or even their past success. It just seems like some folks get it. Time will tell, but I’m betting that these businesses are more successful in the long run.

Let’s review a few of the basics:

· A defensible business. If you begin to succeed, human nature ensures that others will notice, envy, and copy you. How do you defend again competition? Perhaps with patent-protected intellectual property, special expertise of your staff, or a unique business structure. Without defensibility you’re left having to outspend the competition, who have the advantage of being able to learn from your mistakes.

· Product attributes that match those of target customers. One company I talked to claimed to have a very “innovative” product. Unfortunately the innovation was to offer a complicated, expensive product to a notoriously unsophisticated, cost-sensitive customer base. Sometimes when something has never been done before, there’s a good reason. The need truly to understand customer needs and capabilities can’t be overstated.

· Market expertise. On several occasions, I’ve encountered entrepreneurs with a legitimate, modest success in a niche field who decide they want to roll the dice against a larger bet. Thinking big is a great characteristic—but past results don’t guarantee future performance. If you have a new idea, especially a riskier one in a more competitive arena, make sure you bring deep knowledge to the table, not just a win sometime in the past with a completely different customer and product set.

· Understanding of the online medium. The online environment is fundamentally different from conventional offline businesses and needs to be understood on its own terms, which include the vital role of technology, the value of scale where variable costs are negligible, the unique business insights offered by the tremendous amount of data generated by audience/customer interaction with your site, and a formidable embrace of personal empowerment. If the internet is the primary platform for your business, align your strategy and products to as many of these differentiating attributes as possible.

· Innovation. Along similar lines, the internet is driving revolutionary, not evolutionary, change. To score a win in this extraordinarily competitive space, you need to lead your own revolution. Don’t just make it a bit easier for people to do something they do already—empower them to do something that previously seemed impossible: search through a large proportion of human knowledge in a fraction of a second; sell your products in Brazil without a middleman; publish a book for less than the cost of a book in a bookstore or publish your ideas online to the entire world for free; capture the exact thought process customers went through prior to purchasing your product. Not long ago these concepts were science fiction; now they’re commonplace. Expectations are high for innovation by online companies. To differentiate your business and rise above the chatter get visionary and move the bar forward by leagues, not inches.

Playing VC…with Human Capital

This seems to be one of those periods in Silicon Valley with a lot of startup activity. Leaps ahead in technology have converged with a round of new insights into consumer utility, yielding visions for potential products, companies, and wealth generation—all seeking infusions of talent and funding.

These PowerPoint dreams are the stuff of venture capitalists: business models, market size, revenue growth, needs not met, problems not yet framed. All are attractively packaged and temptingly displayed, aiming to entice VCs to open their wallets. What an interesting job these VCs have, scanning a constant parade of creative new business ideas in search of the next YouTube or Facebook. Too bad for the rest of us, who have to wait for these companies to become household names before we hear about them. As to those that don’t, they never show up on our radar. And without access to VCs’ millions there’s no way we can get in on the ground floor of opportunity.

But wait, there’s another option. You can play VC with human capital, that is, your ability to add value in the workplace. Through either consulting or employment status you can participate directly in businesses you reckon to hold bright prospects. At times like these when so many young companies are looking for help, it’s not that hard. And hey, we’ve all heard the story of the Google masseuse who became a millionaire.

To be sure, just like venture capital, the human capital strategy is full of risk. You may be working for equity only, or for deferred compensation pending certain levels of funding. There’s a very real possibility you won’t take away anything except some interesting anecdotes and a new line on your resume. But if you’re the dice-rolling type, we all know that somewhere out there, currently almost indiscernible from tomorrow’s flameouts, is the nugget of the next billion dollar idea. Can you spot the wheat amidst the chaff?

It’s a lot easier to market your human capital if you’re in Silicon Valley, where demand is high. Opportunities tend to show up on popular job sites here such as Craigslist or LinkedIn. Of course tech talent is always in demand, but startups also need help with marketing, sales, biz dev, HR—most of the usual corporate functions. If you have an appetite for risk give it a try. At worst you’ll gain significant new business experience, and at best—well, we all know one of those promising startups will hit the jackpot.

Keep an Eye on These Trends

I’ve been talking to a number of companies recently, and have gotten an interesting overview of some trends that are attracting interest and investment in the online media space. The hottest business ideas often involve cross-pollination of buzzwords. But in the end it’s all about execution. Time will tell which of these concepts fall by the wayside and which are truly great innovations. Without violating any NDAs, I’ll share a few notes:

• So far we’ve barely scratched the surface of the potential of community—the power of the colossal global online audience to create and distribute content, share experiences, provide advice and information, connect and network, and otherwise engage in activities that can be corralled into an environment that’s monetized with ads. The blindingly simple insight that the stuff of online media is collaborative, distributed, and democratic—not hierarchical and funneled into a unified voice—will be a rich mine of innovation for some time to come. First, you can’t ignore the tremendous economic advantage of the community model. A fixed platform investment scales with uptake. You don’t have to pay for additional content in order to drive additional traffic. Second, the audience manifests its interests, values, and priorities directly, through the content it creates, rather than indirectly through the content it consumes. This behavior has the potential to make them even more valuable to advertisers. And third, an audience that’s actively creating content is demonstrably more passionate and engaged than one that’s merely consuming content passively. That translates into all kinds of benefits, including more time on the site, more content created, more viral publicity, and the opportunity to gain deeper insight into the audience’s character. The takeaway: Facebook isn’t the end game of community by a long shot. Stay tuned for this strategy’s second wind and beyond. Emerging companies are looking across the spectrum of human interactions to identify opportunities to leverage the power of community to enhance the experience and improve outcomes.
  
  
• While no one has yet come up with the killer app of mobile, aside from phones and SMS, with so many smart people sinking their teeth into this opportunity a breakthrough can’t be too far away. With a tantalizing huge user base, the mobile platform is ripe for one or more big ideas to emerge suddenly and really catch on fast. The trick will be to intersect some of mobile’s unique properties—for example, portability, location, or voice—with other popular activities that are normally constrained in these areas. Device innovations will also be a factor. The iPhone and upcoming Google mobile platform are pointing the way toward a future with far richer capabilities. Expect some big, “how did we live without this?” mobile solutions to appear on the horizon in the 2008-2009 timeframe. But strictly speaking, these innovations may or may not be under the media (ad-supported) umbrella. Mobile advertising itself is in its infancy (think back to the little blinking boxes that constituted most online advertising 10 years ago). My advice here: don’t get tangled up in a long-term cellphone contract: change is coming.
  
  
• Speaking of online advertising, most of what’s available today still has a strong legacy in traditional media. Think back to how TV advertising in the 1950s mainly involved dramatizing what were formerly radio ads. It took another 20 years or so for TV ads to move into their own. Online advertising today is similar to those old ads, but it won’t evolve nearly so slowly. Awareness-oriented advertising is going to move in the direction of engagement and interactivity. Conversion-oriented ads will increasingly resemble lead gen. Transparency and data will be the keys required to unlock advertising spend. All sorts of companies, from agencies to online media properties to third parties, are working on pieces of the new generation of advertising. A dozen years from now we’ll look back and marvel that advertisers were willing to pay so much for the murky value propositions that surround the advertising business today. Advertising innovations have lagged behind the general pace of online media advances. Now they’re poised to start catching up.
  
  
• Finally, something that had almost dropped off my radar, but a few companies have brought it up, and that’s local information. The web does a great job of globalizing its audience, but paradoxically, the hyperlocal has remained a challenge. There are lots of products out there, but they all have room for improvement. The internet hasn’t been able to drive a stake in the heart of the venerable Yellow Pages; in fact, many local directory products haven’t changed much in the last 10 years, and often still license a Yellow Pages database for content. While most Silicon Valley innovators are focused on tough technical challenges, some entrepreneurs are revisiting more fundamental content challenges. The local advertising market is worth billions and is one of the few media areas where online hasn’t made a big dent. That could change.