Entrepreneurship isn’t easy but if anyone has made it look that way it is Joe Lonsdale, founder of Palantir. Here is his advice on becoming a great entrepreneur.
What would I advise an aspiring young entrepreneur? Certainly I’d say read the works of great entrepreneurs and investors like Ben Horowitz, Peter Thiel, and many others. But what’s more important is to get real experience at a great startup.
Learn from those that have done it before you
Don’t go to a big company to learn about how to be a great entrepreneur — go to see an example of what you want to do in action.
If you aren’t already obsessed with an idea you have to work on right away, join a successful technology company. Figure out how you can add value and then learn — and remember, a great entrepreneur needs to build strong skills around product (+engineering) or marketing (+sales) or both.
Successful technology companies can be found all over the world, but the highest concentration is in Silicon Valley. It’s not a coincidence that top technology companies are often built in the same area — you learn a huge amount from being part of a top team and seeing a great technology company function firsthand.
There’s no substitute for experiencing ups and downs — seeing how it’s okay that things are overwhelming or broken sometimes and how companies recover from mistakes. You learn how a top engineering team works with a sales team, or how marketing strategy impacts other parts of the organization.
You can learn what types of adviser relationships are helpful, and how to create a culture of transparency — and all sorts of other leadership lessons for attracting and retaining the best people.
If you are able to learn from a successful fast-growing technology company, you can later leverage your colleagues and industry friends and work on something new — ideally with the support of the leaders of your former company, who can be great mentors and investors.
Create success for those around you
One of the best pieces of advice I got in my early twenties was that it isn’t important to make money myself in the near-term, rather, it is important that I create success for people around me — friends, colleagues, and investors.
Great entrepreneurs see the world with a positive sum mindset.
Their higher levels of success come from the people around them whom they have helped in a variety of ways. If you make a million dollars for yourself, you have a million dollars, but if you make $100,000 for ten great people around you, you have several eager allies who are going to support you and bring their friends to add fuel to the fire in whatever you want to do next.
Each success is a platform for your next success, and nothing worth doing works without great allies who trust you and want to see you succeed.
Work on something unique
When it comes to actually building your business, one challenge is to work on something that nobody else is doing. In my experience, some Europeans seem to have more trouble with this aspect of entrepreneurship because their culture is more politically correct or consensus-minded — for example, if everybody says working on a “green business” or “web 2.0” is good, let’s do it!
Unfortunately, if everybody says something positive it’s probably a bad idea for a successful venture — and if you receive a lot of accolades right away, it’s probably a negative indicator.
A great entrepreneur will form their own opinions and doesn’t need accolades — your goal as an entrepreneur is to figure out a way the world is broken and a unique way that you can fix it.
Most of the time this involves something slightly esoteric — and it almost always involves building a really strong technology team and culture, and iterating on hard problems as you figure out the business.
Share your idea early on
Another sound piece of advice I got as an entrepreneur was to share my idea with smart friends and have them challenge it and iterate on it, rather than keep it secret.
Inexperienced entrepreneurs often want to keep their plans secret, but this is never how I’ve seen any of the great companies get built.
Imagine if five people have the same general idea in a space and four of them keep it secret and start trying to build, and one goes and chats with lots of smart people and iterates. Who do you think wins?
Finally, entrepreneurship is really hard — leadership can be lonely. Great mentors help — sometimes they even play the role of therapists — and everybody trying to build something new has ups and downs.
Creating a successful technology company is not a job, it’s an obsession that’s often thankless for years — but the impact and satisfaction you can create is enormous.
Technologists’ Duty Can Go Beyond For-Profit Industries
Early last year, I wrote an article explaining how our team views the concept of duty for leaders in the technology ecosystem. We believe that this duty involves looking beyond conventional startups to study complex industries and using technology to tackle the biggest problems we can find.
Our belief is based on an observation that many of the large industries in the U.S. are in some form of crisis, but few top technologists — and few investors — set their sights on fixing the parts of our economy that could have the greatest impact on overall prosperity and well-being (financial services, healthcare systems, government, education, agriculture, logistics, etc.).
Not so long ago only a few of us inSilicon Valley were building companies in these areas, but now we’re happy to see more and more entrepreneurs applying technology to hard problems in huge industries that will have lasting effects for people across the globe.
We think that Silicon Valley is at the very beginning of this important wave of innovation, and at 8VC we have partnered with dozens of these companies because we believe that improving these industries will enable general prosperity while also providing for the highest returns. Our philosophy is that many companies that present the greatest economic opportunity are also those that create the most value for society.
However, there are clear exceptions to this rule. In certain cases, market incentives fail to align, or even exacerbate an issue — and mission-driven non-profit organizations are needed to solve the problem. Technology is playing an increasingly critical role in these organizations and they are badly in need of our help.
The problem of child exploitation is a glaring example of such a scenario. Economic motivation has created a perverse and underground marketplace where children are bought and sold as slaves. It’s a harsh reality that exists in our own backyards, with thousands of children in the US alone — many from the foster care system or from broken families — being commercially exploited every year.
Many of these individuals are coerced into prostitution as teenagers, long before they are legally old enough to consent to sex. The average age at which girls are forced into this exploitation is 13, and this illicit market is growing and is now second only to drug trafficking, according to research from the Ashton Kutcher-backed non-profit, Thorn. So far, the US government has been just as successful in stopping exploitation as they’ve been with drugs, and they need our help.
As with every other market, the proliferation of the Internet has driven activity online. Today these children are bought and sold on many of the same sites where you can source a roommate, sell your bike or find a job. Further, connectivity has also spurred an explosion in the online trade of child sexual abuse imagery. Peer-to-peer platforms and anonymous networks like Tor allow images and videos of the most egregious types of abuse to be traded globally, continuously re-victimizing these children and creating networks of people who connect with one another to share content and justify their behavior to one another.
There’s no economic incentive in trying to stop the spread of this content or to use the digital trail to identify more victims and stop the abuse, but there’s definitely a moral one.
The team at Thorn has extremely passionate and talented individuals who partner with government organizations and leading software and new media companies, and work with child exploitation experts to save children and attack the problem from multiple angles. Thorn’s partners include Facebook, Palantir, Google, Twitter, Microsoft, Salesforce, Tumblr, Twilio, SV Angel, 8VC, and others.
While the financial support of Ashton and these allies is valuable, their technological expertise is invaluable. From machine learning to detect patterns in perpetrator behavior to complex data integration to the design of simple and useful UX, backed by tools such as semantic classifiers, for law enforcers to prioritize cases on online escort boards that may involve minors, it’s technology that’s providing new tools to fight back against these predators.
Joe Lonsdale (8VC) and Ashton Kutcher (Thorn) are interviewed by Pierre Arys in front of the 25 teams at the anti-child-sex-trafficking hackathon at Twilio in San Francisco on August 23.
8VC recently helped Thorn organize a hackathon, gathering nearly a hundred talented computer scientists at Twilio’s offices in San Francisco to participate in fighting child exploitation.
Joining Ashton and myself other judges included: Del Harvey (VP Trust & Safety at Twitter); Ellen Levy (Managing Director, Silicon Valley Connect); Megan Smith (recently named incoming CTO of the United States); and Ilya Grigorik (Web Performance at Google).
Engineers worked hand-in-hand with Thorn’s subject matter experts to develop a variety of tools that could be potentially used by the National Center for Missing and Exploited Children (NCMEC), law enforcement agencies, and other non-profit or government organizations tasked with working on these sorts of issues.
While there has been some public criticism of faulty statistics around child exploitation and trafficking, after interacting with the experts and others at Thorn and viewing the log data about U.S.-based searches for child-exploitation for context, it was clear to everybody how serious and widespread of an issue this is.
The event was hugely successful, with winning projects including visualization layers of perpetrator activity, databases of ontologies specific to child exploitation, and discovery methods for potential predators using bitcoin to pay for child sexual exploitation content.
These projects, along with many others, can be put to use almost immediately and the energy and creativity we saw these teams bring to bear on this serious issue was inspiring to all of us.
Traditional hackathons are fun and focused on skill and competition, but we believe that events which focus on the positive social impact of technology engage a wider and more diverse set of participants.
Lilli Oetting, who won second place with her partner Bowen Lu said this was the first hackathon she has ever competed in. “Hacking for the sake of hacking isn’t at all motivational to me, but hacking to diagnose a disease or catch terrorists or save a child from sexual exploitation is a great honor as well as an exciting technical challenge. In my experience, many women share the mindset that technology is most interesting in its application to social problems.”
Oetting, who is a rising senior at Stanford studying computer science, noted that this further substantiated earlier observations she had while teaching a class titled Code the Change: Learn Web Development Through Nonprofit Projects. “It was by far the most gender-balanced computer science class I’ve been a part of,” she said. “Over half the students were female.”
We hope we can continue to highlight additional amazing role models in our community who are not only very respected technologists and leaders, but are engaged in great social causes. We want to inspire everyone to recognize the positive social impact they can have if they choose to become technologists.
Ashton’s leadership on this issue continues to be inspiring — at the end of the hackathon he announced that he’s sponsoring three $100,000 fellowships for data scientists and software engineers who want to continue working with Thorn. We’re excited to see what can be accomplished with that kind of team, given how much progress was made in just a weekend.
The reality is technologists hold great power in the world, and not only does big industry need our help right now, but so do a lot of the most important causes. My first company, Palantir, has also engaged in anti-child exploitation technology work pro bono with NCMEC, a variety of anti-human trafficking work, as well as other pro bono technology-enabled causes such as sophisticated disaster relief in Haiti, Philippines, and elsewhere with the Clinton Global Initiative.
I’ve also been inspired by the philanthropy work at Salesforce, Google, and other companies. While it can be overwhelming to realize how many problems there are to solve in the world, it’s always inspiring to see so many talented people willing to spend their time and energy in hopes of making a difference. We are tremendously appreciative of the work our hackathon participants did in hopes of potentially rescuing even just one child from exploitation; we believe the work that was done will save many.
We urge any technologists who might be reading this — and the leaders in our community — to think about what you are working on, and how that is impacting those around you. There are few other communities who have ever had similar potential to create widespread and scalable progress, or to positively impact so many lives.
We might remember an important quote from our civilization’s past: “From everyone who has been given much, much will be demanded; and from the one who has been entrusted with much, much more will be asked.”
We sit at a very unique place in history, and I hope that our peers in Silicon Valley will continue to remind and inspire each other about the role we can play in the world.
Special thanks to Del Harvey, Julie Cordua, Claire Schmidt, Drew Oetting and Pierre Ayres in the writing and editing of this article.
Building an Engineering Culture
Joe|September 11, 2014
“Excellence is an art won by training and habituation: we do not act rightly because we have virtue or excellence, but rather have these because we have acted rightly.”
– Will Durant
Building an engineering- and technology-led culture is the hardest and most important challenge faced by entrepreneurs building tech companies. Great technology companies are valuable not because of their IP but because they are engines equipped to discover and build the tools necessary to solve hard problems and achieve their vision. People power these engines, and getting culture right in a young, fast-growing company requires a significant, ongoing investment in strategy and tactics that involves the entire team. We’ve noticed many of the great technology companies share several key characteristics and want to share what we’ve observed as well as highlight three foundational principles that lead to top engineering cultures.
Top engineering cultures
“I have a great idea in a huge market, I just wish we had some great people to build it. Can you help us find a couple of elite engineers?”
This question is like asking a famous sales leader if they can find a few customers for you; it’s missing the point of engaging that advisor. Yes, recruiting is hard. The old-fashioned institutional mentality views engineers as cogs in a machine, whirring along and stamping out parts. As individuals and groups with this view get exposed to Silicon Valley-style technology companies, their instinct morphs to view engineers as shiny coins, to have and collect.
This is still the wrong model, and the leader above is asking the wrong question. The problems an engineering team works on are some of the most important aspects of the job for any prospective hire. A strong, technology-driven culture signals to these recruits that the company values challenging problems. The companies that are most successful in recruiting great engineers focus on establishing a technology-centric culture early on and maintaining it as the business grows into other functions.
Just like building a top sales culture requires a focused set of processes and principles, creating and maintaining a top engineering culture is a long term, institutional effort. One might be able to convince a few good engineers to join a company before nailing down the core principles, but without the right culture and mindset the engineering organization will not go far. If one creates and maintains an amazing technology culture, recruiting is still challenging, but eminently possible.
A great sales organization creates and iterates on their pipeline strategy and develops processes at every step. There is a culture of driving to metrics, closing, and helping customers win; this culture in turn powers an execution engine that moves the company forward with increasing velocity. Similarly, we have observed that great engineering organizations have a few key characteristics:
• Engineers lead with the support of the rest of the company. Building technology platforms requires long-term vision, matching that vision to what will actually be used, and an intuitive understanding of the technical implications of that match. The engineering organization is the only part of the company with this combination of skills. Even the very best sales teams quite rightly devote their focus to winning the current quarter. Allowing sales or similar parts of the company to drive product development may result in very strong execution for several quarters, but eliminates a longer-term effort that owns a market. Top engineers are the keepers of culture in a technology company, and truly great things happen with their complete buy-in. Getting that level of involvement sometimes takes many long, iterative conversations, but magic happens when the culture is completely aligned with the vision for the company.
• Individual engineers are encouraged to develop a deep understanding of and near obsession for their customers and industry. More so than any other function, engineers face an immense amount of individual design choices every day–many of which significantly affect the end result. Companies that keep their engineers behind locked doors have a fundamental misunderstanding of what engineering actually is. Conversely, engineers’ direct exposure to customer environments–whether that means installing the company’s app on their personal phone or living on-site for a week or more–allows the people actually making design choices to develop an intuition for what will win.
• They ship. A vision only manifests if a team executes against it every day. The very best engineering teams have a palpable velocity and sense of urgency: this will solve pain, this will be revolutionary, this will change how people think about my industry. Engineers thinking about joining a company should ask: is great work getting out into the world, or is it stuck in endless design reviews, side projects, or deprioritized ticket queues? The best engineering organizations rapidly push products and features into real-world use, pay attention to the results, and iterate on what they learn.
The craft of engineering is deeply appreciated and rewarded. Engineers have a unique ability to literally make lives better through technology. A culture that celebrates this potential attracts the engineers who will fulfill it. The best technology leaders recognize this capability and help engineers develop the skills to discover, design, and build over the course of their careers. It is crucial to reward the skill sets of both the masters of their craft, and the people who support them as they develop that mastery.
So how do you get there?
A Cohesive Strategy Matters
The investment to create this culture extends far beyond terrifying technical interviews and other mechanical screens for talent; it must be a cohesive strategy that plugs a company into the larger tech ecosystem. This strategy starts with the company vision and should inform which external events the company goes to, what kinds of meetups and guests the company hosts, and who on the team should attend. For example, if mobile engineers are
critical to the success of the company, the CEO should be speaking and writing about how their mobile product is changing lives and the engineering team should be hosting educational sessions on noteworthy items. For example,
Addepar–one of the top engineering cultures in tech–hosts developer competitions that both engage the top engineers in the country and showcases that many of those engineers call Addepar home.
It is essential that the engineering team understands and is involved with shaping the company culture. Individual engineers are the best recruiters; given the tools to communicate the company’s vision, they organically grow the team by engaging their personal networks. When it feels like the mission is truly important and a major win is just within reach, engineers start calling their friends, encouraging every smart person they can to join the company. Everyone at the company should feel proud to expose their friends and mentors to the culture and opportunity of their organization. A major part of a CEO’s job is to help inspire that feeling by building that culture and momentum.
Elite teams proactively engage with top engineers outside the company when the team does something particularly great in the engineer’s area of interest. They keep following up every few months, helping the engineer feel the sense of opportunity and velocity of the company. When the individual is just starting to think about his or her next move, they pounce with a hard sell.
Incidentally, one of the strongest indicators of success for us as investors is when great engineers want to join a business. That can’t be faked; people don’t recruit their smartest friends or close the very best people without something special happening.
Use Your Allies
Companies are not alone in this endeavor and can proactively engage their allies in high-leverage ways. The best companies don’t ask for individual referrals, but instead seek strategic mentorship on building organizations. Likewise, the best seek out the top thinkers in their space to get them excited and inspire them to share the company’s vision. These companies engage their friends, advisors, and investors to triangulate on top leaders, bringing them to small company events or formally engaging them as advisors and mentors. We believe creating this sort of ecosystem around a company scales recruiting efforts far beyond the core team, which in turn attracts the very best to the company. Building a company is a team endeavor, and recruiting should reflect that.
Top Engineering Cultures Win
Industrial economies focused on stamping out part after part; knowledge economies instead focus on better tools and services, where what is known is productized, automated, and abstracted away, freeing humans to focus on the frontiers. Good engineering is critical to these new economies, which in turn means finding and recruiting the best engineers.
The companies with the very best engineering engines made a significant, early commitment to invest in and seek out their talent. Places like Dropbox, Google, and Palantir all made this investment and have built their organizations in very deliberate ways. As a result, each was able to focus on the hard technology challenges within their business in their earliest days. Solving these challenges has built organizational muscle memory, allowing them to take on even harder problems as their businesses have skyrocketed.
There are no shortcuts to building a top technology culture. Much like training to compete for gold in the Olympics, changing an industry with technology requires an obsession that borders on being unhealthy. The best leaders passionately work long, hard hours, and are there with their team confronting the problems of their industry. The culture will follow the example the leader sets; having a leader who is a great engineer, setting the direction for the company, and willing it into existence, is irreplaceable.
Formation 8 focuses on helping these kinds of top technology cultures. Investors can never create a culture, but as allies we can help entrepreneurs attract and close the most talented people in the world. We work with a lot of our friends and other entrepreneurs about the best ways to create and guide these cultures, and are often fortunate to invest in the most inspiring ones with the strongest and most passionate teams.
Fundamentally, we are not investing in what a company is doing today, but what that company will be five or ten years from now–which means investing in its people and culture. The best people come to companies with inspiring visions, and the greatest visions are only achieved with the best people. Entrepreneurs have to start this cycle, but as investors and friends, we can act as an accelerator. Ultimately, this means helping to create places that inspire and leverage the world’s most talented people. We are proud to aid these extraordinary groups as they push frontiers and move society forward.
CEO, Context Relevant
Why Oscar Is The Most Important Startup In NY
Joe|June 16, 2014
Healthcare consumes more than 17% of US GDP, and our government is on course to go bankrupt based on promises it’s made in the space. This is nearly twice what other major countries spend, and those countries aren’t exactly efficient either — but we in the US are worse. Whether or not you blame companies, our regulatory framework, or both, this is clearly a huge problem.
Health insurance is the main system we use to manage healthcare, and realistic solutions from both political parties acknowledge that the nearly 1 trillion USD in market cap of these companies is not going away. Insurance companies will continue to play a central role in our health system for years to come. Healthcare is a giant ecosystem with a lot of players and interests, and in the US, insurance companies influence which new practices are applied and when. A lot of us in the technology world are immensely frustrated because conservative and tech-backwards insurance giants are often slow to implement advances that could save people money and improve patient experiences and outcomes, such as data-driven preventative medicine apps or emerging IT-enabled genomic tests.
On the bright side for entrepreneurs, like many other big industries at the moment, there is a giant gap between how insurance companies work today and how they could work if they were more technology-savvy and efficient. Frankly, I’m surprised at how wasteful and archaic a lot of the industry is — for example, many of these companies still hire thousands of fax operators and data transcribers. It’s as if nobody told them the ’80s are over. Don’t get me wrong, there are a lot of smart and highly motivated doctors in the system, and great hospitals pushing key innovations — but they aren’t able to drive the kind of change needed without the insurance industry playing its part.
Oscar, the first new for-profit insurance company in 15 years, is working hard to do just that. By creating a technology-driven culture and pairing it with some of the most experienced forward-thinking experts from the industry, Oscar is just starting to scratch the surface of what’s possible. From utilizing telemedicine to make doctors more accessible, to showing customers the data they need to make more informed care decisions, Oscar is already using new techniques to allow patients to get great care more efficiently and enable doctors to deliver a better experience at the same time.
This role is especially important as new advances emerge over the coming years that will change the healthcare landscape: synthetic biology, genomic IT, big data-enabled diagnostics and new forms of preventative medicine. As these new technologies are proven out, it will be critical for the healthcare system to adopt them correctly to cut waste and ensure better outcomes.
Insurance sits at base of our whole system and decides on the incentives for every player. Simply put, more efficient, more accessible and smarter insurance companies will help make that system better. Oscar is the first health insurance company to combine great technology (a truly elite group of hackers and designers) with forward thinking industry veterans. The company is well positioned to play an important role in the evolution of our health system, and 8VC is proud to be part of the mission.
The Conventionalization of Big Data
Joe|November 1, 2013
“But far more numerous was the herd of such, who think too little, and who talk too much”
– John Dryden
The term ‘big data’ is a pervasive Silicon Valley colloquialism. The expression now describes a range of technologies, from back-end infrastructure to front-end consumer software applications. This development corresponds with a trend: the allocation of billions of dollars by investors into ‘big data’ companies which, simply put, stand little chance of becoming transformative companies.
This statement may be unexpected coming from a group which is frequently identified with ‘big data’ companies. To be certain, we focus on a subset of ‘big data’: Smart Enterprise Data Platforms, which we described in Platform Plays and elsewhere. The term, however, has grown to encompass a much larger (and far less valuable) group of companies.
The chart above illustrates the rapid conventionalization of ‘big data’ over the past two years. This should scare investors. We remember there was much truth behind the “new economy paradigms” of the late 90′s, but most of the resulting companies were nonsense. As investors we know that investing along popular sentiment leads to crowded trades and lost money, and this time it won’t be any different.
What are the most common mistakes being made in the area? We offer five archetypes of investments to avoid as well as positive attributes of the Smart Enterprise companies we focus on. We hope these will help guide entrepreneurs to properly allocate their time and investors to better allocate their capital.
Common ‘Big Data’ Archetypes to Avoid:
Dashboards, Visualization Tools and Presentation Layer.
Making data consumable is vital, and a fundamental feature of a Smart Enterprise company. Visualization, however, is just that — a feature. Standalone companies create the bulk of their value by using proprietary data to continuously improve work flows and build network effects, not simply displaying it. Dashboards are one feature of a Smart Enterprise company, but rarely represent a successful company’s core value proposition. We see Tableau (NYSE:DATA) as an exception which proves the rule — a well-executed first mover which leaves little room (or need) for competition.
Horizontal Business Intelligence and Analytics.
Structuring data and drawing insights is vital for companies, especially given the exponential growth in data created by modern enterprises. This data is often disparate and idiosyncratic. Companies that are industry agnostic ignore the importance of owning and understanding work flows in structuring data. We see these companies facing three common pitfalls: 1) They fail to produce a product which is differentiated; 2) They over-build the technology and never produce a product; or 3) They are forced to customize to win customers, and become more a consultancy than a platform.
Artificial Intelligence and Predictions.
Advances in data science and software engineering have paved the way for computers to contribute in decision-making, but automation of strategic thinking is still science fiction. Companies that base their value proposition off of making predictions or replacing high-skill knowledge workers ignore the limitations of computers and the realities of selling a product. AI plays a vital role in many Smart Enterprise companies. But we do not invest in “black-box” algorithms; we invest in companies which use the power of computers to structure data and expose results for people to use. “Black boxes” are rarely valuable in their own right, and when they are, they are not billion dollar companies. As stated previously in The Smart Enterprise Wave, our interest is in technology which augments and extends the human mind, not that which attempts to replace it. One day, there may be an exception; but AI and predictive technology is not a coherent business strategy.
Reliance on Partnerships for Data / No Ownership of Infrastructure.
The key to generating proprietary data is owning infrastructure, and in many industries the infrastructure seems locked away by incumbents. Examples include EMRs in healthcare, inter-bank networks in financial services and hardware in agriculture. Many ambitious young companies partner with incumbents to access data. This approach is a sound one; in many cases infrastructure is so entrenched in core work flows that partnership is the logical first step. However, this dependence means companies are constantly at risk of being held hostage. Smart Enterprise companies mitigate this risk by aligning incentives and creating inter-dependency with necessary partners, and then quickly work to build work flow tools which turn user engagement into proprietary data.
Company solves a Technology Challenge, not a Business Need.
The increase in data generated by enterprises has presented a variety of difficult technical problems. Many of the top data scientists and software engineers are excited by these problems, and are building companies to bring their solutions to market. While intellectually interesting, not all of the technical challenges presented by increasing data scale are valuable to businesses. We find a great number of clever technologists (especially in more academic geographies such as Boston) who start with an intriguing technology solution and then search for a business application. We believe the most valuable companies solving real problems will be vertically focused and have direct influence on crucial business processes. These companies empower knowledge workers to directly create ROI — they are not clever technology which sits as middleware or back-end infrastructure.
Key Aspects of a Smart Enterprise Company
Vertically Focused Work Flow Software.
Certain business functions are similar across industry verticals and therefore are appropriately served by horizontal platforms (e.g. Workday, RelateIQ). However, ‘front-office’ roles (which tend to be the main driver of business success) demand software which is specialized. Building software which standardizes the best practices from the industry improves these vital workflows, and in doing so previously disparate meta data produced by engagement is now structured and ‘purpose built’ to be re-introduced in a meaningful way.
Network and Platform Effects.
Advances in computer science, data storage, and infrastructure have made software more cost efficient to create. While this phenomenon has driven innovation, it has also reduced technical barriers to entry in software. Entrepreneurs must thoughtfully architect defensibility into their business models; it is not enough to deliver a better and cheaper solution. Companies should structure solutions where each additional client brings more value to the platform. For example, networks are strengthened when additional clients contribute relevant data that can be used (anonymously if needed) by the broader customer base, or when an ecosystem of applications develops on top of the platform.
Solves a Real Business Problem (Corollary: Replace Existing Spend).
Smart Enterprise companies are first and foremost technology driven, but to succeed they must also solve current problems for business. The most critical business needs are almost always manifested on the income statement; identifying the line item being targeted is crucial. That isn’t to say that the analogy is obvious to find — a quill and a printing press look quite different — but a successful company will be laser focused on the cost center it seeks to usurp. It is rare that an immediate business challenge isn’t being tackled in some way, so be skeptical of companies looking to solve a problem that is currently completely ignored. Many times this is evidence of a non-problem, a sign of a fundamental lack of domain expertise, or the premonition of an impossibly long sale cycle.
There has been a shift in market focus from consumer to enterprise technology over the past two years, resulting in a proliferation of companies looking to leverage data. We are excited as well, but we caution over-optimism. We urge investors and entrepreneurs alike to think beyond ‘big data’ and study the workflows and challenges facing our economy’s key industries.
The promise of the Smart Enterprise wave is radical improvement to the core workflows of industry. These new companies will improve outcomes in healthcare, drive transparency in finance and transform energy infrastructure, among other improvements. Building these companies is not easy. Billions of dollars and man hours will be wasted by ‘big data’ companies which fail to target the right areas. This is a shame. We urge investors and entrepreneurs to re-focus on solving proven business problems in the core industries of our economy. With human and financial capital properly allocated, we are optimistic humanity will realize increases in prosperity at a rate never experienced before.
B2G: The Excitement Of An Old-Line Industry
Joe|October 15, 2013
“It is not ‘Can any of us imagine better?’ but ‘Can we all do better?’
Object whatsoever is possible, still the question recurs, ‘Can we do better?’”
– Abraham Lincoln, Second Annual Message to Congress, 1862
Government represents one of the most challenging sectors in which to build a business. Yet the challenges represent opportunities for those bold enough to tackle them. Winning requires patience, deep pockets, and cutting-edge technology.Below we discuss four key points that indicate dramatic upside for the best companies: 1) Old technology provides opportunities for order-of-magnitude improvements; 2) Big institutions signal huge markets; 3) Industry pressures demand new efficiencies; and 4) Challenging sales cycles increase barriers to entry and foster customer retention. One can expect similar dynamics across other old-line industries like finance, energy, healthcare, and education.
1. Old Technology Provides Opportunities for Order-of-magnitude Improvements
Government information technology is notoriously antiquated. Interfaces stem from the 1980s and 1990s. Code-bases in most enterprise platforms stem from the 1970s. There’s paper everywhere. Most major deployments are customized monstrosities built by paid-by-the-hour engineers from giant consultancies. Dissatisfied customers represent the norm.
Why is this exciting? Because chances for radical improvement lay around like gold nuggets in 1849. New technologies can streamline basic workflows across whole enterprises, and create transparency and intelligence where little exists. Collectively, this represents an opportunity to fix the world’s most important and pervasive industry by shining a light on inefficient structures and enabling insights and comparisons that are impossible with current IT.
Consider a basic question that the CEO of a city (called a City Manager) might ask: “How much have we spent on police pensions in the last five years?” Finding that answer in most cities constitutes a research project. One might call “IT” to run reports from the accounting system, scroll through Excel spreadsheets with tens of thousands of rows to find a few disparate lines, or sift through a 300-page budget PDF.
With new reporting technology, that question and others like it now require five clicks and about 15 seconds. The answer comes with manifold visualizations, each of which can be exported and shared digitally or in print.
More complicated workflows result in more dramatic gains. Comparing actual operating expenses to budget, for instance, requires hours each month from department, division, and program directors across a city. Rather than catch bad guys, the police chief must sift through Excel spreadsheets to see whether his units are spending according to plan. Some governments forego certain analyses altogether, waiting until the end of the year to evaluate performance.
These workflows can now take minutes, and department heads and finance professionals can complete them on the web from their laptops in their pajamas over the weekend (rather than the customary in-office desktop log-in). For its part, the City Council (like a Board of Directors) can prepare for weekly and monthly meetings without bothering senior staff for expenditure reports.
Man-machine symbiosis, which we have described in The Coming Transformation, reaches its apogee in the government space. Hard, zero-sum decisions present themselves weekly, and highly trained and experienced managers make million-dollar decisions as a matter of course. The best technology enables better policy analysis and trade-offs, while increasing the accuracy of, and reducing the time required to, pull data and crunch it.
2. BIG INSTITUTIONS SIGNAL HUGE MARKETS
Even small governments make for big customers. By revenue, many cities and counties would rank in the Fortune 500. These massive institutions, the number of them, and the need for productivity and technology gains means that extracting value is possible at scale.
The U.S. boasts 19,000 cities and towns, and twice that number of Special Districts. (Cities are typically general-purpose governments that provide a range of services like fire, police, library, and parks, whereas special districts are special-purpose governments that serve one function like the provision of water, sewers, or flood control). There are 12,000 school districts, 3,000 counties, and 50 states, each with hundreds (or thousands) of separate agencies and departments.
The United States has 50 states, 3,000 counties, 12,000 school districts, 19,000 cities and towns, 38,000 special districts, and tens of thousands of state agencies and departments.
The nearly $60 BN spent in the U.S. by these 80,000 state and local governments on IT will grow around the rate of inflation (3%+). Software sales will grow faster both nominally and as a percentage of the pie. Spending on hardware and consulting will shrink. Whether one looks to create a niche business or accrue a big chunk of the market, opportunities are ripe for software-as-a-service (SaaS) models, business intelligence, and waste and fraud prevention technology.
Equity opportunities may be significant for early employees and investors in major enterprise endeavors. (Opportunity costs for those focused on games, mobile apps, or new social networks may be significant as well). We see an additional element of social responsibility involved, however. Our society and the large institutions that direct its course suffer from a decaying IT infrastructure. New advances in technology make possible a reformulation of sprawling bureaucracies and their workflows. This will result in years of time-savings, improved decisions, and a stronger cultural fabric based on value creation and productivity gains.
3. Industry Pressures Demand New Efficiencies
Three cities in California fell bankrupt in 2012. In 2013, Detroit set the record for the largest Chapter 9 filing. With tax revenues just returning to pre-2008 levels, governments need to do more with less. Accordingly, products that can increase “top line” revenues or reduce “bottom line” costs will win customers and build value.
New technologies will enable cities large and small not only to produce insights from their own data, but also to compare spending trends to those in other cities. Performance benchmarks or “apples-to-apples comparisons” have been called the “holy grail” of municipal finance, because present capabilities force cities to call neighboring cities to gather data or hire expensive consultants to prepare reports that go out of date by the time they print.
In addition to comparative analytics, cities will take advantage of financial trend monitoring and drill-downs to the “checkbook level.” Imagine seeing not only a budget category, like uniforms for the fire department, but also the payments for the boots, pants, and belts. This will result in cost savings through comparisons with purchases from other municipalities and improved competition among vendors in bidding.
Immense technical challenges present themselves. Platforms will leverage natural language processing to map the ontology of charts of accounts (the financial structure of a government), machine learning to recommend quality comparisons and throw up flags for financial trend monitoring (“your reserve balances have declined for three years in a row — might want to check that!”), and rapid processing and searching of massive transactional data sets to answer questions on and find efficiencies in vendor payments (for example, to show all payments between $25,000 and $50,000 out of enterprise funds and help evaluate them against market metrics).
Initially, this type of technology saves time for government knowledge workers accessing and analyzing data. It can then grow into software that will save billions in the aggregate by improving decisions and offering intelligent comparisons and recommendations across the expenditure spectrum. The challenges require rare engineering expertise across a variety of subfields; the solutions will come from true technology companies, not large consultancies.
4. Challenging Sales Cycles Increase Barriers to Entry and Foster Customer Retention
Government purchasing processes are cumbersome. Governments frequently require “wet-signatures” on snail-mailed “hard-copies” of contracts. Vendors have to pay for business licenses, show proof of insurance policies, and file extensive (even notarized) disclosures. Organizational cultures reward risk-aversion and conservative leadership.
The weeks or months spent in the government sales process explains why so many smart technologists focus on the consumer space. Entrepreneurs launch start-ups so they can avoid bureaucracies. But this gap between consumer and enterprise in the startup world gives the best enterprise startups room to run.
In the mobile world, a startup might expect 5% attrition per month. In the government space, expect less than 5% attrition per year. Provided one keeps improving, serving, and building value, “once you’re in, you’re in” and customers may stay customers for years.
With officials recognizing the imperatives of innovation and embracing the Open Government movement in particular, a new generation of leadership will emerge. This leader, like many before her, is highly trained and educated. Yet she carries a tolerance for risk. She sees value in new technology, prizes its acquisition, and remains open to iterating on business processes. She champions innovation within the organization. And, by force of will and repeated wins (and mistakes), she infuses a culture of agile decision-making.
Managers like Jim Keene in Palo Alto and Joni Patillo in Dublin, CA; Finance Directors like Matt Pressey in Salinas and John Adams in Thousand Oaks, CA; and Mayors like Alex Torpey in South Orange, NJ and Mike Kasperzsak in Mountain View, CA demonstrate these qualities. These elected and appointed officials see value in cutting new paths based on better tools. They build trust in their communities and engage other administrators and electeds in the business of politics.
Most startups won’t find these visionaries. Most startups will wither and die for lack of deep pockets. Or they’ll just give up. Selling to bureaucracies often requires creating a network effect, because so few purchasers will go near the bleeding-edge. This is why “red tape” actually excites us with respect to the business we are building at OpenGov.com. The bureaucracy obscures the changes taking place, makes it hard to find the early-adopters and reach critical mass, and ensures that winners take all.
Other important industries promise similar problems and opportunities. In finance, for example, Addepar has battled its way into elite institutions with the promise of improving the financial reporting landscape. Other success stories are emerging in energy, education, healthcare, logistics, and construction.
The right path for a startup-company in an old-line industry is arduous and immensely rewarding. Conventional wisdom says that it’s too hard to build a business in government (or other major industries), and this has kept many from trying. Grand outcomes await for those top young companies bold enough to venture and win.