People say I’m crippled, but that’s a lie
They’re just mad ‘cause I’m so fly
Being handicapped is a state of mind
I’m not disabled I’m just blind
—The Blind MC, "Blind and Def"
People often ask me why I feature Hip Hop so much in my blog posts. In the past, I have given short and incomplete answers, but here is the full story. It probably belongs in The Hard Thing About Hard Things, but I did not know how to tell it without Rap Genius.
In 1986, I was 20 years old and attending Columbia University in the City of New York. I received a phone call from my mother on the shared dorm room phone:
Elissa Horowitz: “Ben, I don’t know how to tell you this, so I am just going to say it. Seth has been shot.”
Me: “What? How? Is he alive? How could that happen?”
Elissa: “He’s been shot in the face. He’s alive, but the doctors say he will never see again.”
I dropped the phone. Seth Clark and his family—Joel, Adam, Dana, Joel, and Penny—were my family too. We lived two houses away from each other. We ate dinner with each other almost every night. We saw each other every day. I went on their family vacations. He was my brother and he was 13 and he was blind for life.
I tried to imagine what he was feeling and I couldn’t. Seth was smart and athletic. He stood over 6 feet tall at 13 and every high school football coach in the area wanted him on their team, but there would be no football. The more that I thought about it, it seemed like there would be no anything. What could a blind person do? Who would his friends be? Where would all his dreams go?
When I would call home, things sounded worse and worse. “He has pellets from the shotgun blast in his brain. He is having seizures. He is totally depressed. He hasn’t spoken a word to anyone in 3 months.” I felt completely helpless. We were losing Seth. I felt like a part of me was slowly dying.
Meanwhile, I was in New York City in 1986 and there was an explosion of a new kind of music called Hip Hop. It was unlike any other kind of music because the rappers were celebrating having nothing while aspiring to have everything. The songs were about growing up in the housing projects, surviving in the streets, and how great it was and how great they would become. At the time, Rock n’ Roll was about rejecting the world, but Hip Hop was about embracing it with all of its flaws. In an era of super groups and over production, rap groups didn’t even need instruments. It was mind-blowing and I was captivated.
For people in New York, the music came primarily from two radio stations: WBLS and 98.7 KISS. The important DJs were Cool DJ Red Alert and Chuck Chillout who not only played the songs, but also significantly enhanced them through amazing scratching and sampling. As I listened to Red Alert one evening, I thought, “This is so inspiring that nobody could listen and be depressed.” I immediately grabbed a cassette tape and inserted it into my boom box. I recorded that show and every Red Alert show from that point forward. I would then mail the cassette tapes to Seth every week.
After a few months of mailing the tapes, I called home and got a different response. “All Seth wants to do is listen to Cool DJ Red Alert. Can you send more tapes?” Then the next call: “Ben, Seth isn’t talking, but he wants to talk to you about Chuck Chillout and how he remixed something from this guy LL Cool J called, 'Rock the Bells'.” Seth was coming back. Hip Hop was bringing him back.
Don’t need no help dictionary or thesaurus
My dog Dino, he’s a brontosaurus
—The Blind MC, "Bedrock"
As summer approached, I became overwhelmed with the thought that I had to continue what I started. There would be no summer internships with computer companies or summer classes. This would be the summer of Hip Hop and Seth. Maybe we could do more than listen to the music. Maybe we could get into the game. As soon as I returned home, I started writing rhymes.
The first song that I wrote was based on an obsession with the Flintstones and was naturally called "Bedrock". I showed it to my friend David Stern who said that his friend Keith McArthur was a musician and could help put some beats together. I then called Seth and told him that we were forming a rap group and needed him. He was excited.
The Blind Def Crew you know we’re fly
3 of us, but we got 4 eyes
—The Blind Def Crew, "Blind and Def"
Keith was amazing and figured out how to make my rhymes into songs. We all came up with proper rap names. Seth was The Blind MC, I was Tic Toc and Keith was The Phantom. Heavily influenced by Russell Simmons’ Def Jam records, we decided to call the group Blind and Def.
We were hanging out, listening to Red Alert and writing songs. It was heaven. One thing that I noticed at the time was that everyone other than Keith and me were extremely sensitive about the shooting and the resulting blindness. It was almost as though they were tiptoeing around Seth as so not to offend him. Meanwhile, Keith and I were relentlessly cracking jokes about how he couldn’t see and how funny that was. Within the context of the blindness, it was like there were two possible views of life: Either life was horrible and tragic or life was extremely brutal, but you had to embrace it—you had to be in the game. We chose the Hip Hop way; we chose the latter.
Perhaps because of that, we thought a great way to open the mixtape was with an amazingly racist sample from the Disney movie, Dumbo, from the black crows scene followed by The Phantom and me screaming at The Blind MC: “That’s the wrong record blind man, can’t you hear?”
Eventually, we recorded 4 songs on Keith’s 4-track recorder and were extremely pleased with the result. We were so excited that we decided to take a road trip to LA to try to record on my brother Jonathan’s 8-track recorder for higher quality and maybe get signed to a big time record contract.
The road trip didn’t go quite as planned, including the car overheating on the Grapevine and us getting stranded on the side of the highway, but we did record on 8 tracks. More importantly, through Hip Hop, Seth found his new self. Today he is a PhD student of history at UC Davis and has a beautiful family with his wife Chris.
I have posted the original mixtape to Rap Genius and annotated it here. It’s not a lost classic and it probably makes sense that we didn’t get signed, but if you listen close enough, you can hear the resurrection of The Blind MC.
That’s why I love hip-hop. So when people complain about the rap lyrics in my blog being hokey or gimmicky, I just defer to Nas:
This our thing, you know what I'm saying
This came from the gut, from the blood
From the soul, right here, man
This is our thing, man
You know? So I say what I say
There is a woman in Somalia
Scraping for pearls on the roadside
There's a force stronger than nature
Keeps her will alive
This is how she's dying
She's dying to survive
Don't know what she's made of
I would like to be that brave.
Never believe that a few caring people can't change the world. For, indeed, that's all who ever have.
I will donate all of my proceeds from The Hard Thing About Hard Things to American Jewish World Service to support their efforts to help women fight for their basic rights throughout the world.
Since there are many important causes, I thought that it would be worth explaining why I am supporting this one.
When I was 11 years old, I was exposed to chronic cruelty on a global scale. I watched the miniseries “Roots” based on Alex Haley's bestselling novel about slavery in the United States. I was riveted and horrified. It was my first real introduction to slavery and I could not believe what I was seeing. I saw families broken apart as they were sold to different owners. I saw slaves pleading for their lives only to be brutalized and killed. How could anybody be so cruel? How could everybody sit by and watch it happen? How was this even possible? I could not have been more shocked.
I was deeply disturbed by the whole experience and sought to find out how it happened. I studied humankind's long history with slavery. I learned that in the 1600s, 75% of the world's population was enslaved. I learned that the Caribbean form of the African slave trade was far more brutal than the U.S. version. I studied the complex economics of slavery and why it was difficult to unwind once started. I began to wonder how slavery ever ended.
Then I began to study the abolitionists. Men like former slave ship captain John Newton who later wrote the song “Amazing Grace”. People like the great Thomas Clarkson who at times seemed to be alone in taking on the world. I learned how a few unimaginably brave people took on the entire globe and its brutal institution. They did not care about the twisted history or corrupt cultures that created slavery. They just wanted it stopped. Clarkson took great personal risk in traveling by boat back and forth across the Atlantic to record and tell the story of slavery for no reason other than he wanted it ended. He dedicated his life to stopping the cruelty. His story is among the most inspirational in human history.
It had to be, because the most incredible thing about slavery was how it ended. An institution that was embedded into human culture, endorsed by the Bible, promoted by the Qur’an, pervasive in society, and embedded in the global economy was taken on and defeated by a movement started by a tiny number of people. These brave souls had no Twitter or Facebook. They had no Internet or telephones or automobiles, but they organized people across the world and largely stopped slavery globally.
After understanding how slavery ended, I promised myself that if something like that ever happened in my time, I would be part of the group who tried to stop it.
Sadly, something like slavery is happening in my time. It's not happening in the United States, but it is happening and the victims are women. In many parts of the world, women are literally owned by men. Women do not enjoy basic rights, are denied access to education, can be arbitrarily raped, robbed, and killed, and live in fear with no chance for self-determination. A few revealing statistics:
- Every year 10 million girls under the age 18 enter into early and forced marriages
- 2 million girls a year undergo genital cutting
- Two-thirds of the world's illiterate adults are women
- Women constitute about 70% of the world’s absolute poor (i.e., those living on less than a dollar a day)
Meanwhile, the rhetoric deployed in resistance to women's rights is eerily reminiscent of resistance to freeing slaves. Consider this statement from the Muslim Brotherhood in resistance to a U.N. declaration calling for an end to violence against women:
This declaration, if ratified, would lead to complete disintegration of society, and would certainly be the final step in the intellectual and cultural invasion of Muslim countries, eliminating the moral specificity that helps preserve cohesion of Islamic societies.
And compare it to this poem written in defense of slavery in England in 1789:
If our slave trade had gone, there's an end to our lives
Beggars all we must be, our children and wives
No ships from our ports, their proud sails e'er would spread,
And our streets grown with grass where the cows might be fed.
Like Thomas Clarkson and the abolitionists, Ruth Messinger and AJWS are starting at the grass roots level, but are already making great progress.
Consider Rehana Adib. At age 12, she was raped by a group of older relatives. She bravely told her father, but he responded by arranging for her to marry a middle-aged man—a match designed to protect her security and reputation. Like many other girls her age, she was forced to drop out of school and was expected to be a subservient wife and mother. She was not free to make choices about her daily life and her own future.
But Rehana refused to be silent. She found a women’s organization in her neighborhood and began to learn about her rights. She took workshops in leadership and activism and gained the courage to speak out about her experiences. By the time Rehana was 18, she was an active member of the local women’s movement and was already helping other girls overcome the challenges they faced. Although her family and community criticized her work at first, she slowly gained their respect and is now looked to as a leader in her community.
In 2005, Rehana founded her own organization, Astitva, in Muzzafarnagar—a rural area in Uttar Pradesh, India. With AJWS’s support, Astitva works today to stop both sexual violence and child marriage, helping give girls a chance at a brighter future.
The systematic cultural abuse of women worldwide must end. Let’s end it.
A lot of people have been asking me what my upcoming book, The Hard Thing About Hard Things, will be like. Here's a piece that I wrote for the book that did not make the cut. I still think it's a pretty good story and gives you a flavor.
I just tell the truth so I'm cool in every hood spot
21 years and I ain't ever met a good cop
—Drake, “I’m Goin In”
After we transitioned the business from Loudcloud to Opsware, we needed a head of finance. Therefore, when the CFO from one of the best-run enterprise software companies became available, I jumped at the chance to hire her.
Michelle (note: her name has been changed) comprehensively understood software accounting, business models, and best practices, and she was beloved by Wall Street in no small part due to her honest and straightforward reporting of her previous company’s business. In my reference checking, at least a dozen investors told me that they made far more money when the numbers disappointed than when the company outperformed, because they trusted Michelle when she said that things were not worse than they appeared and bought on the dips.
Once she came on board, Michelle rapidly reviewed all of our practices and processes to make sure we were both compliant and competitive. One area where she thought we were less than competitive was our stock option granting process. She reported that her previous company’s practice of setting the stock option price at the low during the month it was granted yielded a far more favorable result for employees than ours. She also said that since it had been designed by the company’s outside legal counsel and approved by their auditors, it was fully compliant with the law.
It all sounded great: better incentives for employees at no additional cost or risk. However, after nearly four years of disastrous surprises, nothing made me more nervous than things that sounded great. On top of that, changes related to accounting law always worried me.
They worried me, because every incentive that we put in place as a company was designed to encourage people to achieve their goals. All these incentives had the caveat that the goals must be achieved while obeying the law. Now that may sound simple, but in virtually every meeting every day people discuss their goals and how they will achieve them. They almost never discuss accounting law. In a sales forecast meeting, you will often hear, “What can we do to get this closed by the end of the quarter?” You never hear, “Will the way we made the commitment comply with Statement of Position-97-2 (the critical software accounting rule)?”
Beyond that, U.S. accounting law is extremely difficult to understand and often seems illogical and random. For example, the law in question with respect to stock options, FAS 123, is filled with paragraphs such as this:
“This Statement does not specify the measurement date for share-based payment transactions with nonemployees for which the measure of the cost of goods acquired or services received is based on the fair value of the equity instruments issued. EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, establishes criteria for determining the measurement date for equity instruments issued in share-based payment transactions with nonemployees.”
And that is the clear part.
To guard against employees purposely or accidentally breaking the law in pursuit of their goals, I took two broad measures. First, when we started the company, Marc and I agreed that the company’s General Counsel would always report directly to me. This is different than in many technology companies where the General Counsel reports to the Chief Financial Officer. That way, there would be no way for another executive to subvert the law in pursuit of the number. Secondly, I would regularly give a speech to the finance employees that went like this:
“In this business, we may run into trouble. We may miss a quarter. We may even go bankrupt, but we will not go to jail. So if somebody asks you to do something that you think might put you in jail, call me.”
With that as a backdrop, I told Michelle that a better stock granting process sounded great, but I needed Jordan Breslow, my General Counsel, to review it before making a decision. Jordan lived in my hometown of Berkeley and he certainly belonged there. With hippie sensibilities, Jordan was nearly allergic to corporate politics, showmanship, or any behavior that covered the truth. As a result, I knew that what he said was 100% what he believed and had nothing to do with anything else. I could trust it. Michelle was surprised, as her previous company had run this practice for years with full approval from PricewaterhouseCoopers, its accounting firm. I said: “That’s all fine and good, but I still need Jordan to review it first.”
Jordan came back with an answer that I did not expect: “Ben, I’ve gone over the law six times and there’s no way that this practice is strictly within the bounds of the law. I’m not sure how PwC justified it, but I recommend against it.” I told Michelle that we were not going to implement the policy and that was that.
Well, that was that for a while. Then, almost two years later, the SEC announced that it was investigating Michelle’s previous company for stock option accounting irregularities. This started a massive investigation of all Silicon Valley companies and their stock option accounting practices. All told, more than 200 companies were found guilty of some sort of irregularity.
In November of 2005, Michelle’s previous employer announced that it was removing most of its management team in an admission of wrongdoing. The SEC issued Michelle a Wells notice, a letter stating that it planned to recommend enforcement action against her personally. It was not an indictment, but it was a formal investigation, and it would be very distracting. I had to ask her to step down. In some ways the choice was obvious—we could not put the entire company at risk for one person. Still, firing somebody who had done nothing wrong at Opsware was tough. Nonetheless, Michelle graciously resigned as she did not want to bring negative attention to the company.
In the days that followed, I carefully positioned the change to both protect the company and not put Michelle in a bad light. I told our employees that there was a difference between accounting fraud and accounting mistakes and I believed that Michelle made mistakes at her previous company, but did not commit fraud. I explained to our investors who loved Michelle that I also thought very highly of her, but I had no choice. The company came first.
Michelle ultimately served 3½ months in jail for her part in the other company’s stock option practice—the same practice that we nearly implemented at Opsware. Since we had the same head of finance, we almost certainly would have been investigated. I obviously don’t know what happened at the other company, but I do know that Michelle had no intention of breaking any laws and no idea that she’d broken any laws. The whole thing was a case of the old saying: “When the paddy wagon pulls up to the house of ill repute, it doesn’t matter what you are doing. Everybody goes to jail.” Once the SEC decided that most technology company stock option procedures were not as desired, the jail sentences were handed out arbitrarily.
In retrospect, the only thing that kept me out of jail was some good luck and an outstanding General Counsel, and the right organizational design.
Co-authored with Sten Tamkivi, EIR at Andreessen Horowitz
Being someone reasonably well-known in technology, I have been getting a lot of questions lately about Healthcare.gov. People want to know why it cost between 2 and 4 times as much money to create a broken website than to build the original iPhone. This is an excellent question. However, in my experience, understanding why a project went wrong tends to be far less valuable than understanding why a project went right. So, rather than explaining why paying anywhere between $300M and $600M to build the first iteration of healthcare.gov was a bad idea, I would like to focus attention on a model for software-enabled government that works. In doing so, perhaps this will be a step toward a better understanding of how technology might make the US government better and not worse.
Early in my career as a venture capitalist, we invested in a company called Skype and I went on the board. One of the many interesting aspects of Skype was that it was based in Estonia, a small country with a difficult history . Over the centuries, Estonia had been invaded and taken over many times by many countries including Denmark, Sweden, Germany, and most recently the Soviet Union. Now independent, but well aware of their history, the Estonian people were humble, pragmatic, proud of their freedom, but dubious of overly optimistic forecasts. In some ways, they had the ideal culture for technology adoption: hopeful, yet appropriately skeptical.
Supported by this culture, Estonia built the technology platform to serve its citizens that everyone wishes we had here. Estonia developed an infrastructure that enabled its government to serve its people so well that Estonians would like to see more, not fewer, government technology projects. To explain how they did it, I've asked one of our Entrepreneurs in Residence and Estonian, Sten Tamkivi to tell the story.
At a casual glance, Estonia might not show up on the US radar too often. It is a tiny country in North Eastern Europe, just next to Finland. It has the territory of the Netherlands, but 10x less people. 1.3 million inhabitants is comparable to Hawaii. Estonia belongs to the European Union, Eurozone and NATO. In other words, as a friend from India recently quipped: "what is there to govern?"
What makes this tiny country interesting as a governance benchmark is not just that the people can elect their parliament online or get their taxes back in two days. It is rather that this level of service for citizens does not start from their government building a few web sites. Instead, Estonians started by redesigning their entire information infrastructure from the ground up with openness, privacy, security and future proofing in mind.
As the first building block of e-government, you need to be able to tell your citizens apart. Sounds blatantly obvious, but sometimes referring to a person by their social security number, then by a taxpayer number and at other times by something else doesn't cut it. Estonia uses a very simple, unique ID methodology across all systems, from your paper passport to bank records to any government office or hospital. A citizen with personal ID code 37501011234 is a male born in the 20th century (3), on January 1st of year '75, as baby #123 of that day. The number ends with a computational checksum to easily detect typos.
For these identified citizens to transact with each other, Estonia passed the Digital Signatures Act back in 2000. The state standardized on national Public-key Infrastructure (PKI), which binds citizen identities to their cryptographic keys, and now doesn't care if any Tiit and Toivo (to use some common Estonian names) sign any contract between them in electronic form with certificates, or plain ink on paper. A signature is a signature in front of all laws.
As a quirky side-effect, that foundational law also forced all decentralized government systems to become digital "by market demand". Namely, no part of Estonian government can turn down a citizen's digitally signed request to ask for a paper copy. As citizens opt for convenience, bureaucrats see a higher inflow of digital forms and are self-motivated to invest in systems that will help them manage the process. Yet a social worker in a small village can still provide the same service with no big investment by handling the small number of digitally signed email attachments the office receives.
For future-proofing, the law did not lock in the technical nuances of digital signatures. In fact, the implementation has already been changing over time. Initially, Estonia equipped all traditional ID cards issued to every citizen for identification and domestic travel inside EU with a microchip. The chip carries two certificates: for full legal signatures and for authenticating to any trusting web site or service (used widely from government services to Internet banks). As every person over 15 is required to have one, there are now over 1.2M cards active, a close to 100% penetration of population.
As mobile adoption in Estonia rapidly approached the current 144% (#3 in Europe), the digital signatures adapted too. Instead of carrying a smartcard reader with their computer, users can now get a Mobile ID enabled SIM card from their telecom operator. Without installing any additional hardware or software, they can access systems and give signatures by just typing PIN codes on their mobile phone.
As of this writing, between ID cards and mobile phones, 1.3M Estonians have authenticated 230M times and given 140M legally binding signatures. Besides the now daily usage for commercial contracts and bank transactions, the most high profile use case has been the elections: since being the first country in the world to allow voting for local elections in 2005, the system has been used for both Estonian and European Parliament Elections and in 2011 counted for already 24% of all votes. (Interestingly, the citizens voted from 105 countries in total, where they just happened to be physically at the time - like my own vote submitted from California).
To further speed this sort of innovation, the state tendered building and securing the digital signature certificate systems to private parties, namely a consortium led by local banks and telcos. And that's not where the public-private partnerships end: the way the data interchange in the country works is that both public & private players can access the same data exchange bus (dubbed X-Road), enabling truly integrated e-services.
A prime example is the income tax declarations Estonians "fill". Quote marks are appropriate, because when an average Estonian opens the form for submission once a year, it usually looks more like a review wizard: "next -> next -> next -> submit". This is because data has been already moving throughout the year: when employers report employment taxes every month, all the data entries are already linked into a particular person's tax records too. Non-profit reported charitable donations are recorded back as deductions for the giver the same way. Tax deductions on mortgages come directly from data interchange with commercial banks. And so forth. Not only is the income tax rate in the country a flat 21%, after submitting this pre-populated form the citizens actually get any overpayment back on their bank account (digitally transferred, of course) on the second day!
This liquid movement of data between systems relies on a fundamental principle to protect the privacy of the citizens: without any question, it is always the citizen who owns their data. People have the right to control access to their data. For example, in case of fully digital health records and prescriptions, people can granularly assign access rights to the general practitioners and specialized doctors of their choosing. And in scenarios where the rule of law can't allow them to block the state from seeing their information, like with the Estonian e-policemen using their real time terminals in police cars or offices, they at least get a record of who accessed their data and when. If an honest citizen finds any official checking on their stuff without valid reason, they can file an inquiry and get them fired.
Having everything online does generate security risks on not just personal, but systematic and national level. Estonia was the target of The Cyberwar of 2007 when well coordinated botnet attacks following some political street riots targeted government, media and finance sites and effectively cut the country from the internet abroad for several hours. But as a result, Estonia has since become the home for NATO Cyber Defence Centerand EstonianPresident Toomas Hendrik Ilves has risen internationally to be one of the most vocal advocates for cybersecurity topics among the world's heads of states.
Even more interestingly, there is a flip-side to the fully digitized nature of Republic of Estonia: taken to the max, having the bureaucratic machine of a country humming in the cloud increases the cost of any potential physical assault to the state. Imagine if physical invasion of this piece of Nordic land by anyone would not stop the government operating, but booted up a backup replica of the digital state hosted in some other friendly European territory. Democratic government would be quickly re-elected, important decisions made, documents issued, business & property records maintained, births and deaths registered and even taxes flowed by those citizens still with access to the internet. May sound futuristic, but this is exactly the kind of world Estonia's energetic CIO Taavi Kotka can not just dream up but actually implement, on the e-foundations the country already has today.
Yes, the circumstances of the Estonian story are special by many means. The country emerged to re-independence from 50 unfortunate years of Soviet occupation in 1991, having skipped a lot of technological legacy the Western world had built up during '60-'80s, such as checkbooks and mainframe computers and jumped right into the mid-nineties bandwagon of TCP-IP enabled web apps. During this social reset, Estonians also decided to throw their former communist leaders overboard and elected new leadership - with ministers in their late twenties from whom one can expect disruptive thinking.
But then again, all this was 20 years ago. Estonia has by many macroeconomic and political notions become more of "a boring European state," stable and predictable, if just somewhat faster growing to close the gap with Old Europe from the time they were behind the Iron Curtain. 20 years, but you can still think of Estonia as a startup country, not just by life stage, but by mindset.
And this is what United States, along with many other countries struggling to get the internet and their increasingly more mobile citizens on it, could learn from Estonia: the mindset. Willingness to question the foundations and get the key infrastructure right, and to continuously re-invent on them. States can either build healthcare insurance brokerage sites for innovation, or really look at what key components need to exist for any service to be built: signatures, transactions, legal frameworks and such.
Ultimately, the states that create pleasant environments will be where the mobile citizens will flock to live their lives. And by many means, tiny Estonia in 2014 is no worse positioned to be the destination than New England was in 1814.
The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.
-George Bernard Shaw
Lately, it’s become in vogue to write articles, comments and tweets about everything that’s wrong with young technology companies. Hardly a day goes by where I don’t find something in my Twitter feed crowing about how a startup that’s hit a bump in the road is “fu&%@d” or what an as*h%le a successful founder is or what an utterly idiotic idea somebody’s company is. It seems like there is a movement to replace today’s startup culture of hope and curiosity with one of smug superiority.
Why does this matter? Why should we care that the tone is tilting in the wrong direction? Why is it more important to find out what’s right about somebody’s company than what’s wrong?
The word technology means “a better way of doing things.” This is easy to say, but extremely difficult to do. Making a better way of storing information, a better currency, or a better way of making friends means improving on thousands of years of human experience and is therefore extraordinarily difficult. At some level, it would seem logically impossible that anybody could ever improve anything. I mean if nobody from bible days until 2014 has thought of it, what makes you think you are so smart? From a psychological standpoint, in order to achieve a great breakthrough, you must be able to suspend disbelief indefinitely. The technology startup world is where brilliant people come to imagine the impossible.
As a Venture Capitalist, people often ask me why big companies have trouble innovating while small companies seem to be able to do it so easily. My answer is generally unexpected. Big companies have plenty of great ideas, but they do not innovate because they need a whole hierarchy of people to agree that a new idea is good in order to pursue it. If one smart person figures out something wrong with an idea–often to show off or to consolidate power–that’s usually enough to kill it. This leads to a Can’t Do Culture.
The trouble with innovation is that truly innovative ideas often look like bad ideas at the time. That’s why they are innovative – until now, nobody ever figured out that they were good ideas. Creative big companies like Amazon and Google tend to be run by their innovators. Larry Page will unilaterally fund a good idea that looks like a bad idea and dismiss the reasons why it can’t be done. In this way, he creates a Can Do Culture.
Some people would like to turn the technology startup world into one great big company with a degenerative Can’t Do Culture. This post attempts to answer that challenge and reverse that tragic trend.
Dismissive rhetoric with respect to technology is hardly new. Sometimes the criticism is valid in that the company or invention does not work, but even then it often misses the larger point. Here are two historical examples to help illustrate:
In 1837, Charles Babbage set out to build something he called The Analytical Engine the world’s first general-purpose computer that could be described in modern times as Turing-complete. In other words, given enough resources the machine that Babbage was building could compute anything that the most powerful computer in the world today can compute. The computation might be slower and the computer might take up more space (OK, amazingly slow and incredibly huge), but his design matched today’s computational power. Babbage did not succeed in building a working version as it was an amazingly ambitious task to build a computer in 1837 made out of wood and powered by steam. Ultimately, in 1842 English mathematician and astronomer George Biddel Airy advised the British Treasury that the Analytical Engine was “useless” and that Babbage’s project should be abandoned. The Government axed the project shortly after. It took the world until 1941 to catch up with Babbage’s original idea after it was killed by skeptics and forgotten by all.
171 years later, it’s easy to see that his vision was true and computers would not be useless. The most important thing about Babbage’s life was not that his timing was off by 100 years, but that he had a great vision and the determination to pursue it. He remains a wonderful inspiration to many of us to this day. Meanwhile, George Biddel Airy seems more like a short-sighted crank.
Alexander Graham Bell, inventor of the telephone, offered to sell his invention and patents to Western Union, the leading telegraph provider, for $100,000. Western Union refused based on a report from their internal committee. Here are some of the excerpts of that report:
“The Telephone purports to transmit the speaking voice over telegraph wires. We found that the voice is very weak and indistinct, and grows even weaker when long wires are used between the transmitter and receiver. Technically, we do not see that this device will be ever capable of sending recognizable speech over a distance of several miles.
“Messer Hubbard and Bell want to install one of their “telephone devices” in every city. The idea is idiotic on the face of it. Furthermore, why would any person want to use this ungainly and impractical device when he can send a messenger to the telegraph office and have a clear written message sent to any large city in the United States?
“The electricians of our company have developed all the significant improvements in the telegraph art to date, and we see no reason why a group of outsiders, with extravagant and impractical ideas, should be entertained, when they have not the slightest idea of the true problems involved. Mr. G.G. Hubbard’s fanciful predictions, while they sound rosy, are based on wild-eyed imagination and lack of understanding of the technical and economic facts of the situation, and a posture of ignoring the obvious limitations of his device, which is hardly more than a toy… .
“In view of these facts, we feel that Mr. G.G. Hubbard’s request for $100,000 of the sale of this patent is utterly unreasonable, since this device is inherently of no use to us. We do not recommend its purchase.”
Today most of us accept that the Internet is important, but this is a recent phenomenon. As late as 1995, Astronomer Clifford Stoll wrote the article entitled Why the Web Won’t Be Nirvana in Newsweek, which includes this unfortunate analysis:
Then there’s cyberbusiness. We’re promised instant catalog shopping—just point and click for great deals. We’ll order airline tickets over the network, make restaurant reservations and negotiate sales contracts. Stores will become obselete. So how come my local mall does more business in an afternoon than the entire Internet handles in a month? Even if there were a trustworthy way to send money over the Internet—which there isn’t—the network is missing a most essential ingredient of capitalism: salespeople.
What mistake did all these very smart men make in common? They focused on what the technology could not do at the time rather than what it could do and might be able to do in the future. This is the most common mistake that naysayers make.
Who does the Can’t Do Culture hurt the most? Ironically, it hurts the haters. The people who focus on what’s wrong with an idea or a company will be the ones too fearful to try something that other people find stupid. They will be too jealous to learn from the great innovators. They will be too pig headed to discover the brilliant young engineer who changes the world before she does. They will be too cynical to inspire anybody to do anything great. They will be the ones who history ridicules.
Don’t hate, create.
Today we are announcing Shana Fisher as a new board partner at Andreessen Horowitz. Although she keeps a low profile, people in high tech investing know all about Shana. They know about her because she is so good at what she does. As an early stage investor, she has invested in a broad set of outstanding companies including MakerBot, Pinterest, Vine, FiftyThree, Refinery29 and Stripe.
In addition, she is our kind of investor—one who combines the street smarts of how to build companies with the book smarts of how to invest in them. She first became involved in the Internet when she downloaded Mosaic. At a16z, we also have a high affinity for Mosaic and its bald headed co-inventor. After understanding the Internet, she became program manager at Microsoft. Later she went on to become a Vice President of Technology and Media M&A at Allen & Company, and then she led strategic planning and mergers and acquisitions at IAC before starting High Line Venture Partners, her own early stage investing business.
Perhaps the most difficult thing to do in high-tech venture investing is to identify winning consumer products before they have traction, yet Shana has done this as consistently as anyone over the past 3 years. Even more amazingly, she’s done it across a broad variety of categories from 3D printing to payments.
When I asked Shana how she figured out which consumer companies would succeed so early in their lifecycle, her answer surprised me. She said, “I understand the markets and products and technology from my background, but I don’t think that I evaluate them better than others. That’s not my competitive differentiation.” She explained: “When entrepreneurs come to me, they come with an idea and a product. No team, no traction. So, I evaluate the entrepreneur and the product. I’d like to think that I have a strong grasp of human psychology. I really try to understand what great entrepreneurs have in them, and I look for the ones who have it, and then I do what I can to help them realize their greatness.”
In talking to the many entrepreneurs that we have in common, Shana definitely helps them become great. So much so that she is their first request as a new board member, which makes this partnership a natural.
If you are an entrepreneur, you have probably heard some crusty old CEO or investor say something like “cash is king.” You probably read the Twitter S-1 and thought to yourself: “What the hell are those old guys talking about?” Twitter is still burning cash six years after founding and they, not cash, seem to be king.
In a situation such as this, I usually just say to myself: “That’s the problem with wisdom, you can get it, but you cannot share it.” But this particular nugget is so fundamentally important that I will attempt to represent the old guys in this imaginary conversation.
I was a founder/CEO during the period when cash seemed more like a serf than a king in 1999 and 2000. It was the era of “go big or go home.” Investors loved anything Internet and could not care less about profits. I grew my company and I grew it fast. In less than nine months after founding, I booked a $27 million quarter. I was going big and definitely not going home.
Then the dot com crash happened and investors changed their collective minds. Investors hated anything Internet and wouldn’t fund anything that couldn’t fund itself.
After two years of struggle, three layoffs and very little sleep, we got the company in a position to potentially generate cash. But at that point, doing so was still an open question. We had tough competitors and lots of work to do and still had plenty of time before becoming insolvent. Still, when Marc Andreessen, my co-founder and chairman of the board, said we should start generating cash, something told me that he was right.
When I sat down with my team and told them that we would generate positive cash flow no later than Q2 of 2003 and I planned to commit that to Wall Street, one of the best people on my team questioned the direction. He pointed to our low cash burn, money in the bank and long list of urgent features to be completed. He asked, “Why draw a line in the sand if we don’t have to?” Sometimes it takes a tough question like that to gather one’s thoughts. My response then is my response now to entrepreneurs who ask me this question:
“We should first decide how much we like laying people off, because if we love it then lets stay cash flow negative, because when we don’t generate cash, the capital markets decide when we have to lay people off. In fact, we will have to listen very carefully to investors on everything because as soon as they stop liking us, we will start dying. I don’t know about you, but I do not want to live my life that way. I do not want to have to tell all of our employees that we will do what we think is right until investors tell us we have to do otherwise. I want to control my destiny.”
The manager didn’t even have to reply, because his eyes told me that he knew what I was talking about. This wasn’t about strategy or tactics; this was about freedom. The freedom to build the company the way we thought was best.
Over the next five years, investors wanted us to do lots of things. Some things they wanted were smart and some very stupid. We listened to what they had to say, but we always did what we thought was right and we never worried about the consequences. Investors did not control our destiny. Over those five years the company’s value grew 40-fold as a result of controlling our own destiny and being able to make our own decisions.
There are many examples of companies that finance their way through massive profitless growth. In the right circumstances and with the right company, this can be a good strategy. For companies like Twitter, it’s a good strategy for two reasons. First, they're building something massively important with every rational expectation that it is spring-loaded to generate huge amounts of cash in the future. Second, the capital markets over the last six years have been willing to support them (as compared to the capital markets between 2000 and 2006 which wouldn't have). So, if you are just like Twitter and if you are in this era, everything works beautifully.
However, if you are not Twitter or if times change, then be careful. Until you generate cash, you must heed investors even when they are wrong. If investors wake up one day and think you are toast, you are indeed toast. When you generate cash, you can respond to silly requests from the capital markets the way Kanye would:
Excuse me, is you saying something?
Uh uh, you can't tell me nothing
Recently, major shareholders and board members of the legendary, but now troubled, retail chain JCPenney have been fighting over the best direction of the company. 18% shareholder and hedge fund manager Bill Ackman proposes removing current CEO Mike Ullman and opening a search for a new CEO. Meanwhile, Starbuck’s founder Howard Schultz counters that suggesting such a thing is despicable, especially when the company’s current position is Ackman’s fault. Meanwhile, the spat climaxed with Ackman resigning from the JCPenney’s board of directors on August 12th and subsequently divesting his holdings.
While observing this, a friend of mine asked me a question: “Aren’t they both highly motivated to do what’s in the best interests of shareholders? Why are they pulling the company in different directions?” What an excellent question.
Despite appearing to have totally aligned interests, these two can’t seem to agree on anything. Beyond that, they have almost no regard for each other’s opinions. How can that be? Is one of them an idiot? Is Howard Schultz soft? Is Bill Ackman despicable? Certainly, both have been quite successful in their careers. Why the sharp disagreement about the future of the franchise?
There are at least two major reasons why these two do not agree. The first is time horizon. If your objective is to restore JCPenney to its former glory, then your time horizon is “as long as it takes”, and you stand to lose nothing if you are wrong. Conversely, you might come up with an entirely different strategy if your objective is to get the stock price up long enough to get your money out. It is often the case that conflicting time horizons among shareholders lead to sharp disagreements about the right leadership for a company. One might assume that Howard Schultz, as an entrepreneur and former CEO with no financial stake in the company, has a longer time horizon than Ackman who has a huge stake in a good short-to-medium term outcome. As a result, Schultz may be more focused on making hard decisions in the short-term, even if those decisions cause a temporary decrease in the stock price. Ackman, on the other hand, will have to answer to his own shareholders if he takes such a short-term hit, so he has a real incentive to employ a strategy that yields a monotonically increasing stock price.
The second reason is that almost nobody knows what’s in the shareholder’s best interests when it comes to corporate strategy. Specifically, the right answer for JCPenney isn’t actually clear to anybody. When a company goes into a spiral, better execution on the current path will not work. Therefore, a new path must be chosen. Choosing a new path for any company is extremely difficult. Choosing one for a business as old and large as JCPenney is rocket science. When Apple was winding down the drain in the late 1990s, nobody other than Steve Jobs thought that further vertically integrating the product line was the right strategy. Every publication, analyst and reporter considered it self-evident that Apple needed to become more horizontal to compete with “PC economics”. It turned out that the right answer wasn’t obvious. It was so complicated that only the founder of the company and perhaps the greatest CEO of our time came up with it. Certainly no board member or shareholder had the answer.
Similarly, when I was CEO, I radically changed the direction of my publicly held company in 2002. Nearly all of my shareholders promptly gave me a vote of “no confidence” and sent Opsware’s stock plummeting from $2/share to $0.035/share. By 2007, I sold the company to Hewlett-Packard for $14.25/share. It seems that all of my shareholders voted with their wallets and against their own best interests.
It’s not clear that it’s possible for any outside board member or shareholder to have enough knowledge to pick a company’s new direction accurately. I was working 16 hours/day on the problem and I barely knew enough to make that decision. As a result, the best that outside parties can do is vote for or against the CEO. Clearly that’s not easy when you don’t know where the company should be headed.
Because I am a prominent advocate for founders running their own companies, whenever a founder fails to scale or gets replaced by a professional CEO, people send me lots of emails. What happened, Ben? I thought founders were supposed to better? Are you going to update your “Why We Prefer Founding CEOs” post?
In response to all of these emails: No, I am not going to rewrite that post, but I will write this post. There are three main reasons why founders fail to run the companies they created:
The founder doesn’t really want to be CEO – Not every inventor wants to run a company and if you don’t really want to be CEO, your chances for success will be exceptionally low. The CEO skill set is incredibly difficult to master, so without a strong desire to do so the founder will fail. If you are a Founder who doesn’t want to be CEO, that’s fine, but you should figure that out early and save yourself and everyone else a lot of pain.
The board panics – Sometimes the founder does want to be CEO, but the board sees her making mistakes, panics and replaces her prematurely. This is tragic, but common.
- The Product CEO Paradox – Many founders run smack into the Product CEO Paradox, which I explain below.
The Product CEO Paradox
A friend of mine led his company from nothing to over $1 billion in revenue in record time by relentlessly pursuing his product vision. He did so by intimately involving himself in the intricate details of his company’s product planning and execution. This worked brilliantly up to about 500 employees. Then, as the company continued to scale, things started to degenerate. He went from being the visionary product founder who kept cohesion and context across and increasingly complex product line to the seemingly arbitrary decision maker and product bottleneck. This frustrated employees and slowed development. In reaction to that problem and to help the company scale, he backed off and started delegating all the major product decisions and direction to the team. And then he ran smack into the Product CEO Paradox: The only thing that will wreck a company faster than the product CEO being highly engaged in the product is the product CEO disengaging from the product.
This happens all the time. A founder develops a breakthrough idea and starts a company to build it. As originator of the idea, she works tirelessly to bring it to life by involving herself in every detail of the product to ensure that the execution meets the vision. The product succeeds and the company grows. Then somewhere along the line, employees start complaining that the CEO is paying too much attention to what the employees can do better without her and not enough attention to the rest of the company. The board or CEO Coach then advises the founder to “trust her people and delegate”. And then the product loses focus and starts to look like a camel (a horse built by committee). In the meanwhile, it turns out that the CEO was only world-class at the product, so she effectively transformed herself from an excellent, product-oriented CEO into a crappy, general purpose CEO. Looks like we need a new CEO.
How can we prevent that? It turns out that almost all the great product-oriented founder/CEOs stay involved in the product throughout their careers. Bill Gates sat in every product review at Microsoft until he retired. Larry Ellison still runs the product strategy at Oracle. Steve Jobs famously weighed in on every important product direction at Apple. Mark Zuckerberg drives the product direction at Facebook. How do they do it without blowing their companies to bits?
Over the years, each one of them reduced their level of involvement in any individual set of product decisions, but maintained their essential involvement. The product-oriented CEO’s essential involvement consists of at least the following activities:
Keep and drive the product vision – The CEO does not have to create the entire product vision, but the product-oriented CEO must drive the vision that she chooses. She is the one person who is both in position to see what must be done and to resource it correctly.
Maintain the quality standard – How good must a product be to be good enough? This is an incredibly tough question to answer and it must be consistent and part of the culture. It was easy to see the power of doing this right when Steve Jobs ran Apple as he drove a standard that created incredible customer loyalty.
Be the integrator – When Larry Page took over as CEO of Google, he spent a huge amount of his time forcing every product group to get to a common user profile and sharing paradigm. Why? Because he had to. It would never have happened without the CEO making it happen. It was nobody else’s top priority.
- Make people consider the data they don’t have – In today’s world, product teams have access to an unprecedented set of data on the products that they’ve built. Left to themselves, they will optimize the product around the data they have. But what of the data they don’t have? What about the products and features that need to be built that the customers can’t imagine? Who will make that a priority? The CEO.
But how do you do that and only that if you have been involved in the product at a much deeper level the whole way? How do you back off gracefully in general without backing off at all in some areas? At some point, you must formally structure your product involvement. You must transition from your intimately involved motion to a process that enables you to make your contribution without disempowering your team or driving them bananas. The exact process depends on you, your strengths, your work style and your personality, but will usually benefit from these elements:
Write it; don’t say it. If there is something that you want in the products, then write it out completely. Not as a quick email, but as a formal document. This will maximize clarity while serving to limit your involvement to those things that you have thought all the way through.
Formalize and attend product reviews. If teams know that they should expect a regular review where you will check the consistency with the vision, the quality of the design, the progress against their integration goals, etc., it will feel much less disempowering than if you change their direction in the hallway.
- Don’t communicate direction outside of your formal mechanisms. It’s fine and necessary to continue to talk to individual engineers and product managers in an ad hoc fashion, because you need to continually update your understanding of what’s going on. But resist the attempt to jump in and give direction in these scenarios. Only give direction via a formal communication channel like the ones described above.
Note that it is really difficult to back off of any non-essential involvement yet remain engaged where you are needed. This is where most people blow themselves up: either by not letting go or by letting go. If you find yourself where my friend found himself—you cannot let go a little without letting go entirely—then you probably should consider a CEO change. But don’t do that. Learn how to do this.
If you run a startup and are currently raising money, you probably planned for a somewhat different fundraising environment than the one you find yourself in today. You probably thought that valuations would be roughly the same as they were the last time you raised money. But they most certainly are not. Perhaps you are caught in the “Series A crunch” or perhaps you are a consumer company and expected that you would be valued on users rather than revenue like the last time. Or maybe you are a lucky enterprise company and are pleasantly surprised—this time.
How could this be? What about the efficient market hypothesis? Aren’t markets rational? Won’t we just return to the “normal” environment that we experienced before? To find out, let’s look at the Price/Earnings (P/E) ratio of all S&P 500 IT companies at various points over the past 18 years. If markets behave rationally, one might expect the ratio of price to earnings to be reasonably stable over the period (click here for complete data set). One would be wrong:
So, the average company on the S&P 500 IT index with $10M in annual earnings would be worth $210M in March of 1995, $820M in March of 2002, $310M in March of 2004 and $155M in March of last year. And those are big companies with real earnings, so you can imagine how a private company’s valuation might fluctuate. If you have no imagination, consider my experience. In June of 2000, I raised money at an $820M post-money valuation. By the end of the year and despite more than doubling bookings, I could not raise money at any price in the private markets and was forced to take the company public at a $560M post-money valuation. Things change. Why do things change? Because markets are not logical; markets are emotional.
Now that we’ve established that climate change is real, what should you do if the current environment is much worse than you expected?
In some sense, you are like the captain of the Titanic. Had he not had the experience of being a ship captain for 25 years and never hit an iceberg, he would have seen the iceberg. Had you not had the experience of raising your last round so easily, you might have seen this round coming. But now is not the time to worry about that. Now is the time to make sure that your lifeboats are in order.
Before we begin doing that, let’s understand the depth of the problem. First, if you did not understand how radically the fundraising environment might change, then there is no chance that your employees would have understood it. In fact, if you are like most companies, your managers probably implied to your employees that your stock price would only rise as long as you were private. They might have said something ridiculous like: “Based on the current price of the preferred stock, your offer is already worth $5M.” As if the price could never go down. As if the common stock were actually the same as preferred stock. Silly them. As a result, if you raise money at a lower price, your people will likely not only freak out, but possibly believe they were lied to. Note that they may very well have been lied to. As Scooby Doo once said, “Ruh roh.”
Now about those lifeboats.
If you are burning cash and running out of money, you are going to have to swallow your pride, face reality and raise money even if it hurts. Hoping that the fundraising climate will change before you die is a bad strategy because a dwindling cash balance will make it even more difficult to raise money than it already is, so even in a steady climate, your prospects will dim. You need to figure out how to stop the bleeding, as it is too late to prevent it from starting. Eating shit is horrible, but is far better than suicide.
When you go to fundraise, you will need to consider the possibility of a valuation lower than the valuation of your last round, i.e., the dreaded down round. Down rounds are bad and hit founders disproportionately hard, but they are not as bad as bankruptcy. Smart investors will want the founders and employees to be properly motivated post-financing, so there may be a way to a reasonable outcome for both you and your people. Make sure that you figure out what kind of deal is better than bankruptcy and be sure to communicate to both your existing and potential new investors what you think makes sense. In this situation, it’s better to start low and get one bidder that may lead to many and the market-clearing price than have no bidders and the dream of a high price.
Once you begin your process, keep in mind that you are looking for a market of one. You don’t need every investor to believe that you can succeed. You only need one. If 20 investors tell you “no”, that does not mean that there is no market for your deal. You just need one to say yes and she will erase all 20 no’s.
After, God willing, you successfully raise your round and it’s a down round or a disappointing round, you will need to explain things to your company. The best thing to do is to tell the truth. Yes, we did a down round. Yes, that kind of sucks. But no, it’s not the end of the world. We can probably re-price your options. If we took too much dilution, we will work with our new investor to make sure that every employee is still highly financially motivated. We are the same company that we were yesterday and if you believed in that company, then you should believe in this one.
If your managers intentionally or accidentally lied, then you will need to address that too. Find out what happened and deal with the damage as best as you can. Do not ignore these things or stick your head in the sand, as you cannot afford to lose any more trust than you have already lost.
If you by some miracle make it through this process, then the most important thing to learn from your experience is this: The only surefire antidote to capital market climate change is positive cash flow. If you generate cash, investors mean nothing. If you do not, then your success will depend upon the kindness of strangers.