May 13, 2008, post by Randall Howard
In today’s knowledge-based economy, much discussion centres around the importance of clustering. For example, in financial services, cities like New York, London and Toronto have all benefited at the expense of smaller rivals (eg. Philadelphia, Paris and Montreal or Vancouver). Likewise, as entrepreneurial technology startups have spread around the world, the Silicon Valley remains a magnet and model for that magic blend of people, ideas and capital aspiring to create the next Microsoft or Google. Furthermore, in spite of the world-flattening ascendency of information technology over the last decade, in some ways, the forces of such clustering seems to have increased.
Being domiciled in Canada, and having built transatlantic technology companies over the years, led me to ponder Chris Anderson’s recent endorsement of distributed workface in which he “builds companies that are distributed because that’s where the best people are.”
So, what’s the stronger force: clustering or distributed teams? First, let’s dig a bit into history so we can follow this trend.
The 1980’s: Selling Software in a Pre-web World
In the late 1980’s, an otherwise bright, young MBA student advised MKS to conquer local markets (ie. Waterloo Region) before going national and only then to export markets. While this may have made sense in traditional industries, we had the good sense to ignore this faulty gem of wisdom. Instead, reckoning that a dollar spent marketing in the US would reach about 10 times the audience as one dollar spent in Canada, we rejected this advice and focused from day one on selling our first product (MKS Toolkit) into the US market. To provide some context to modern readers, in these pre-web times software companies put ads in the back of magazines with dealers with geeky names like Programmer’s Shop and Programmer’s Paradise, with a several month cycle from ad spend to results. It’s easy to forget that, in those days, software companies had a “manufacturing” group which duplicated diskettes and shrink-wrapped them in boxes with physical manuals. Our main tactic to overcome geography was to use a North America-wide toll free 800 number to mask our country of origin, at least for first customer contact.
In my case, it helped that I had my first software startup experience in the US while building Coherent. This gave me direct operating experience in the Silicon Valley from the beginning. While importing that model of company development back to Waterloo probably wasn’t a 100% fit, it did serve to shape our biases in company structure to a very large degree.
The 1990’s: The Israeli Model
As the 1990’s unfolded, better IT systems, lower cost telephony and the emergence of the internet, web (and its precursors such as AOL), created an environment that was ideal for what I call the “Israeli Model” of technology company formation. In this model, R&D and “back office” functions resided in Israel, while much of the sales, marketing and business development (ie. the storefront of the company) was in the US - typically in the Silicon Valley. Companies like Aladdin, Checkpoint Software and Mercury Interactive all are good examples from the 1990’s.
Why did this model make sense? Israel is a small country with a tiny home market, having a population of just over 7 million. At the same time, it is a rich country (22nd in GDP per capita) with extremely high educational standards and a military establishment that was pushing the boundaries of research into many IT-related disciplines. Thus, Israel was an ideal cluster of brainpower and ideas to create new technology startups. However, the market was elsewhere. Between Tel Aviv and San Francisco there is an inconvenient, and inescapable, 10 hour timezone difference and up to 20 hours of flying time. To help overcome this a bi-modal company structure evolved, often with half of the staff (the back end) in Israel and the other half (the front end) in the USA. It’s a time tested model that has proven remarkably resilient.
As a result, despite its apparent disadvantageous geographic location, today Israel is second only to America in the number of NASDAQ-listed companies, and the Economist says that “the country attracts twice the number of venture-capital (VC) investments as the whole of Europe”.
It may seem odd, given how close Canada is to the US, to suggest that the same model made sense for Canadian companies as well. However, especially in the 1990’s, these key business drivers were essential to MKS or any other Canadian technology company with global aspirations:
- corporate image: many Americans like to buy local, so having a strong (front end) presence in the US will definitely improve both the sales, and even investment and valuation, prospects of the company.
- senior talent: sales and marketing executives with expertise in the software industry were effectively nonexistent in Canada. MKS source both its VP Sales and VP Marketing from the US. It was a great choice that allowed us to access top talent from major competitors. Furthermore, these executives provided mentorship, by acting as role models for the Canadian-based employees.
This was a virtuous circle, in which better US image helped to increase company value, attract ever better talent and ultimately should provide long term exit options.
Why not split the R&D organization as well? Notwithstanding our adoption of the Israeli Model, MKS resisted moving to multiple development locations until the very late 1990’s. Ironically, being a company that sells software to manage multi-site development, the state of the art in telecommunications and software adoption was still too primitive in those days and face to face communications continued to be critical. However, as the internet and bandwidth continued to develop and once MKS embarked on a series of acquisitions across the US, we did invest heavily in the new, IP-based room conferencing systems to knit geographically dispersed teams. It remains clear that until very recently, a single location for development has been preferable, particularly in the formative, early stages of product innovation.
Best Practices Today
Today, we live in a business world that routinely accepts offshoring, virtualized management, distributed teams, etc. Tools like Basecamp, Enterprise Wikis, iotum’s rich conferencing, and even instant messaging for real time back channel, all make distributed innovation sessions (aka meetings) much more practical. What is most interesting is the fact that video plays only a very small part in all of this.
After years of evolving startup playbooks, we may be finding the right balance between the more traditional “Israeli Model” and the fully decentralized team as espoused by Chris Anderson. At Coreworx (Software Innovation), we moved the company to Waterloo largely to gain synergies, at a critical early stage, in what was then a 20 person team. So, there are clearly some benefits that remain from people interacting face to face and always will be. The most creative and innovative processes may well work best only when conducted in person. Further more, with the rise of mobile nomadism, less and less work seems to be conducted in the traditional office setting.
That being said, each year we seem to be able to achieve more by ignoring geography and building around the best talent. Conversely, I have a feeling that the convivial, chalkboard-centric environment at Waterloo’s Perimeter Institute may well be crucial to the breakthroughs in fundamental physics that institution will undoubtedly generate. What is your take on the necessity of clustering talent?
Sphere: Related Content
May 06, 2008, post by Randall Howard
I finally found some time to record thoughts on a great conference - last Thursday’s Tech Leadership Conference (TLC) by Communitech.
CEO ROUNDTABLE:
Verdexus once again gathered a few tech CEOs from Waterloo and Toronto, the night before at Charbries, to have an informal and open-ended discussion of key issues in financing, growing, valuing and finding exits for technology startups.
As in past years, we assembled an accomplished group who have built primarily software-based businesses during the last decade and are now executing newer models, whether SaaS or the more esoteric Venture 2.0 Playbook necessary for “so-called” Web 2.0 and Mobile businesses. In an earlier blog, I covered a past TLC speaker and Verdexus advisor Grover RIghter’s Venture 2.0 Playbook.
Numerous war stories about increased complexities of dealing with founders, VCs, groups of angel investors, not to mention simply making enterprise sales highlighted common success factors of perseverence to overcome obstacles, failure and experimentation before ultimate success and just plain good luck around timing. The drying up of VC money and other funding challenges remain a constant theme.
Experience in building great businesses over the last ten years has a lot to teach us today. However, the 2008 market also demands significantly different startup building techniques. To explore that, we spent time dissecting the Web 2.0 phenomenon. Some key questions we analyzed were:
- Q: in building companies for less (e.g. under $10 million, or even $5 million, from start to exit), is this building a complete company? Or, is an exit to a much larger acquirer the only way such nimbly funded companies can be grown to full scale? A: yes and no, we had some quite different opinions on this, so perhaps the jury is still out.
- Q: likewise, are these companies inherently built around smaller applications, that aren’t as technologically deep as earlier startups, or is there a genuine breakthrough in company cost structures? A: yes there are real breakthroughs in outsourcing, virtualization, hardware and network costs, virtualizing management, etc. Furthermore, while some Venture 2.0 companies are big plays, many are ultimately just a piece of the whole product and will ultimately find their true “home” only when acquired.
- Q: in an age of “free”, what are the long term monetization strategies that will build companies of real value? A: see discussion around TLC and Chris Anderson, below.
In addition, we spoke about:
- the right time and stage to start going outside for money, and hence the tradeoffs between purely organic growth and the accelerated growth rates external finance allows.
- how to get and maintain, and perhaps legally incent, alignment between investors and management.
- the difficulties a “closed” mobile environment, particularly in Canada and the US, presents to startups and whether purely web-based applications (a la iPhone) represent the optimal rollout strategy. The emergence of 3G will only enhance this strategy (3G is expected to be 20% of handsets by 2010, but that number would be skewed to non-North American markets).
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Apr 02, 2008, post by Randall Howard
It seems that several people missed the “Comments” link where Grover posted his materials for the Venture 2.0 Playbook. Therefore, I’m reposting his comments with the link here below. Also, although we’ve had some great dialogue offline about this extremely important topic, I’d like to see some here.
Thanks to Randall for his kind words. It really was a great event hosted by MaRS. I would like to thank Peter Evans and MaRS’ CEO Dr. Ilse Treurnich for holding the event and letting so many entrepreneurs get a change to hear from the heavy hitters at IDC and the in-person speakers in Toronto.
I have posted my slides at the following URL:
http://www.imobileinternet.com/pub/mars/MaRS-Grover-Righter.zip
When you download the ZIP file, there is a folder with two content files. One is the PDF with the session presentation and another is the spreadsheet with the pro-forma numbers used in the session examples. (Hint to startup types, you need to put your OWN numbers in the spreadsheet 
If there is interest in a follow-on session, we can have a special Iotum hosted Sqwak just for this topic and we can dig deeper into topics of interest. Let me know.
- Grover
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Mar 28, 2008, post by Randall Howard
Today, I will expand on an offhand comment I made last week about founderitis being one of the biggest barriers to engagement with the Grover Playbook and, incidentally, probably the number one showstopper for investment we encounter at Verdexus.
As a serial entreprenur, (ex-)founder and investor in technology startups, I have seen more than my share of experiences showing how fraught founder interactions can be. My friend J Paul Haynes, who is a serial executive (and founder), showed me an interesting article from the February 2008 issue of Harvard Business Review on this topic entitled “The Founder’s Dilemma”. In this article, Noam Wasserman analyzed 212 startups and observed some intriguing patterns. What is great about this article is that it provides a cold, analytic economic framework to assess the “founder’s dilemma” which is the “… choice between making money and controlling the business.” The Faustian bargain to give up equity and control in order to attract institutional (venture) capital that will grow the business faster is a hard one for many founders to accept. And yet, the leverage of external capital and talent typically goes hand in hand with technology startups.
Wasserman goes on to show that founders, who want to retain control, often choose (or are forced to accept) slower growth and less chance of making money in a “home run” exit. Conversely, the study almost paints a picture of the inevitability of founders being pushed out by investors. For most founders, it makes grim reading, while most VCs would simply nod knowingly at the picture of founder limitations. After all, many of those terms in the much vaunted VC term sheets (now often term books!) evolved precisely as defensive artillery trained on errant founders. The article’s implication that the half life of the CEO tenure founders is short, will make difficult reading for most founders.
Perhaps it is difficult for founders to excel at both and so they “… end up being neither rich nor king”, but I would hope to see less of a zero sum game and more scope for personal growth. Personally, I find most founders I encounter to be smart and compelling individuals. Of course, I’ve also seen many of the counterproductive traits and habits that the VCs pejoratively label “founderitis”. On balance, I’m mostly on the side of founders in this classic standoff between the “black hats” (VCs) and “white hats” (founders). Having said that, I’ve also founders pull some appalling stupid and counterproductive moves in my time.
Since most founders are super smart and highly motivated individuals, with better mentoring, role models and better expectation setting by all parties, I would like to believe that more founders could better integrate the “rich” and “king” parts. In other words, I would hope to see more founders figure out how to increase their management and team playing skills, while also building value in their businesses.
As I mentioned, I think founders are, as a whole, a creative, exciting and group worth celebrating. Therefore, to balance Wasserman’s HBR research, I’d encourage everyone to read the remarkable 2007 book Founders at Work by Jessica Livingston. In it, she endeavoured to analyze founders by interviewing 32 founders from the 1980’s and onward, from hardware, to software, to Web 2.0 she has deduced some interesting patterns of founders:
- Tenacity: many technical founders had a burning passion that defied logic or “expert” advice until, of course, the idea caught on big time.
- Listening to the market: PayPal told their early eBay customers to “go away” so they could focus on mobile payments, before they realized that their real business was serving those annoying PayPal transactions.
- Distrust: a single event, early in the history of Apple, poisoned relations between Steve Wozniak and Steve Jobs and was perhaps never recoverable.
- VC Ego: Hotmail founder Sabeer Bhatia recounts how Tim Draper tried to claim to have invented Bhatia’s innovative viral marketing links embedded in every Hotmail message.
While it is easy to imagine the “blindspots” and self promotion inherent in interviews with founders, the sheer number of founders that Ms. Livingston interviewed helps to mitigate this concern over a wide range of time and types of technology businesses. And, for those who think the MBAs and marketers rule the world, it is refreshing to see the Silicon Valley model of very strong technical founders celebrated.
So, here’s to those remarkable individuals, the entrepreneurs founders who have the courage and tenacity to start business. For all their shortcomings and big egos, we do need to celebrate their important role in venture creation.
