Some people are disappointed with Silicon Valley: “Why don’t we have flying cars?” they ask. Or: “Why haven’t we eradicated poverty?”
Technology is not reaching its full potential, but we think that world-changing applications are closer (and different) than people realize. Information technology has advanced dramatically over the last few decades, and it is starting to revolutionize nearly every industry. Silicon Valley entrepreneurs and their teams are focusing their talents on new areas, because nearly every industry can operate much differently and better than it currently does. The realization of this potential in the coming years will lead to a shift in global prosperity.
In 2011, we started OpenGov after discovering the current state of government technology. The systems in use in nearly 100,000 governments in the U.S. have not seen much change in 20 to 30 years. Few executives or operators could use the systems well, as they belonged to back office workers and IT consultants accustomed to managing accounting and other business practices. This state of affairs contributed to opaque business practices like those that occurred in local California disasters like Bell CA and Stockton CA, and bigger problems like those in Detroit MI. Government executives and other officials want better technology to do their jobs well, gain context, and leverage masses of data.
Modern information technology is changing and with it will change the fundamental processes at these organizations. Changes like this come about through hard work and collaboration between top officials with domain expertise in finance, management, and budgeting, and top engineers and designers who can create new capabilities and refashion old processes to work faster and smarter.
Suddenly, citizens and government decisions makers can more clearly understand where they are spending money, and what are the trade-offs. They can see where different departments compare and differ to peers, and know what is outperforming and where they might spend more effort. They can see where to push back on aggressive vendors, or where new companies might play a larger role in achieving their goals. As the team innovates and further applies modern technology to the “last mile” of transparency and decision-making, new applications and achievements will unfold.
Good government is one of the most important factors in economic growth and social well-being. In the U.S. alone, the types of government organizations that OpenGov works with spend over 7 Trillion dollars per year. The decisions these organizations make influence the very fabric of our society.
Government officials and citizens care about many causes — and they all require resources. For example, I am personally passionate about ending the human trafficking that still occurs within our borders. Zac Bookman, OpenGov CEO, has an interest in criminal justice, including solutions to improve outcomes and decrease costs in the criminal justice system. Helping to allocate billions in financing for these and other causes like education, infrastructure, and safety will impact and improve communities and millions of lives.
We’ll get to flying cars someday (or drones that can carry a person). But we’re optimistic about what our society can do now with the latest IT advancements. And we are proud to be innovating and working to improve government administration to make our modern democracy function better in the meantime.
Real-world innovation is hard — it requires months of painstaking and creative iteration with engineers, city officials, and other experts to create systems that provide meaningful insights, highlight relevant contextual information and trade-offs, and flag real issues. Working with complicated data and developing formats and interfaces that make it easy for stakeholders to access requires special skills. The potential good that can come from helping to efficiently allocate tens of billions of dollars a year may have an even bigger impact than flying cars.
Announcing our Investment in Branch
Joe|May 7, 2015
“The most valuable of all capital is that invested in human beings”
-Alfred Marshall, Principles of Economics (1890)
There are hundreds of millions of people around the globe who could safely repay loans but nonetheless do not have access to a line of credit. Financial institutions in developing economies are broken and inefficient, and hard-working people have not been given the chance to establish a credit history. The inability of middle-class people to receive loans in developing countries has had a stifling effect on economic growth and prosperity around the globe.
When I first met Matt Flannery, he was hard at work solving this problem. At the time, Matt was running Kiva, the world’s first peer-to-peer microfinance company. Kiva is a nonprofit organization that allows anyone in the world to make a small loan (usually around $25) to an entrepreneur of his choice in a developing economy. In just eight years, Matt and his team took Kiva to incredible heights, processing $600 million on the platform with a loan repayment rate of 98.73%.
I was inspired by what Matt was working on, and he was also interested in what my co-founders and I were doing at Palantir, and how modern data infrastructure systems and analytics could solve critical challenges across various industries. Matt realized that he could also leverage advancements in data analytics to change the microfinance landscape for the better. As the smartphone was spreading like wildfire across the developing world, Matt understood that he could use the latest Silicon Valley technology, apply what he’d learned at Kiva, and build something even more data-driven and transformative.
That is why 8VC is proud to lead the early-stage round at Matt’s new company Branch. Branch will apply cutting-edge machine learning to the data available on smart phones to safely open up lines of credit to millions of middle-class people in developing markets around the world.
Branch sits on top of mobile payment platforms to make loans and receive payments. Rather than put borrowers through an intense in-person application to receive a loan, Branch lets them prove themselves over their phone. It uses local data generated on the user’s smartphone to make an initial credit decision, taking in factors such as call history and social media presence. Once a borrower has been approved for a loan of between $20–1,000, Branch lets them prove their trustworthiness by tracking their repayment. If they repay the loan on time, the system will alter their risk profile, and they’ll get a better loan the next time. If they repay the second loan on time, they’ll get an even better loan the third time. Branch intends to build a “robot in the sky” that makes the decisions that microfinance loan officers used to make manually.
While there is admittedly some risk that borrowers default on their loan (as is the case with any crediting institution), Branch’s technology minimizes the risk of default. Machine learning is helpful to reduce fraud — Branch can combine several points of data to detect theft in ways that even traditional lending institutions cannot. As of May, Branch has already safely made over a thousand loans in Kenya.
Branch’s business is not possible in Western countries, where incumbent lending institutions have established a web of regulatory barriers to defend against new entrants. Around the world, however, the commoditization of lending represents a positive trend, as it allows more credit to flow to the parts of society that need it the most. A little cash in an inefficient economy can go a long way. Taxi drivers can buy gas so they can serve more customers; store owners can buy in bulk so they can improve their profit margins; families can afford to pay for a wedding in between harvests. $100 may not seem like a lot of money in the Western world, but it can make a huge difference to middle-class families in the world’s emerging markets. Overall, it’s a positive bet on humanity for the market system to use newly-available data to discerningly provide more credit.
We feel strongly that the Silicon Valley elite need a culture of duty. Top technologists have a tremendous capacity — and therefore a tremendous responsibility — to build things that make a positive impact on the world. We have a unique opportunity to solve some of the hardest challenges that humanity faces and create value that extends into all corners of the economy. Our thesis is that the greatest economic opportunities are often those that create the greatest amount of value for society. Branch is a company that shares our aspirations to improve the world through technology. We look forward to working with them to transform the microfinance industry and enhance the lives of millions of people around the globe.
The Quiet SMB Revolution of the 2010s
Joe|April 23, 2015
“Though only the generals’ names may be remembered in the history of any great campaign, it has been in a great measure through the individual valour and heroism of the privates that victories have been won. And life, too, is ‘a soldiers battle’–men in the ranks having in all times been amongst the greatest of workers.”
– Samuel Smiles, Self Help, 1882
The Quiet SMB Revolution of the 2010s
There are 5.7 million businesses in the United States, 89.9% of which have fewer than twenty employees. In aggregate, small and medium businesses (SMBs) produce nearly half of GDP and account for roughly 60% of new job creation. They are the lifeblood of the American economy.
The coming decade will see substantial technology disruption in the SMB space. The rise of the mobile ecosystem has opened up a positive feedback loop that is making it easier to scale technology startups in SMB. The result will be a proliferation of smart technologies aimed at improving SMB workflows: everything from sales and marketing to HR and payroll processes will be revolutionized. While these kinds of technologies have been improving for larger companies over the past several decades, startups are increasingly developing software specifically for SMBs, which require lower implementation and maintenance costs and a shorter learning curve — almost a consumer/enterprise hybrid. As SMBs benefit from new data and technology, hundreds of billions of dollars of wealth will be created.
The positive feedback loop cycles between the B2B marketplace, where startups sell technology to SMBs, and the B2C marketplace, where SMBs sell products and services to customers. This loop drives up the quality and quantity of data available on SMBs, drives down the cost of customer acquisition (CAC), and ultimately creates more demand for new technologies while making it cheaper for them to expand. Never before have so many technology startups grown as quickly within the SMB space, and as the positive feedback loops iterate, the pace of growth will increase.
Historical Challenges Of The SMB Space
Selling to SMBs has always been a large part of the U.S. economy, but there have historically been challenges to attaining scale. First, distribution has been a major obstacle. Each business is only a small customer, and it is expensive to engage with each one on an individual level. In previous eras, companies have had to rely on old-line distribution channels, such as spots on the radio or newspaper ads. The CAC was generally too high for a company to be able to attain scale. Without targeted marketing, companies were left with but one strategy to “cross the chasm”: fire enough shots in enough directions to scale by brute force. More often than not, this disjointed strategy led companies to fall through, rather than cross, the chasm.
A few major disruptions in the SMB space did occur before the mobile revolution, but they mostly came from established companies who already had economies of scale. The Microsoft Windows and Microsoft Office platforms enabled players like Intuit’s Turbo Tax to spread to millions of businesses. Intuit’s software was such a vast improvement over previous workflows that it spread like wildfire. For most startups, however, this has been a difficult space to penetrate, and millions of SMBs still perform basic workflows like payroll or ordering by hand or Excel.
THE Mobile Revolution
The rise of the mobile ecosystem changed the game for startups selling to SMBs. This was not just a one-time disruption: the result has been an ongoing positive feedback loop that continues to make it easier for startups to improve how SMBs work. What is commonly thought of as the period of creative disruption that immediately followed the adoption of the smartphone was in fact just the start of this feedback loop.
The first iteration looked like this: with a computer constantly at their fingertips, SMB owners became more comfortable than ever before using technology. Many created a website, a social media presence, an eCommerce presence, or some combination thereof. Simultaneously, customers created a web of data about SMBs through tweets, likes, and shares, and reviews, etc. All of a sudden, there was an explosion in the quantity and quality of structured and unstructured data about SMBs.
In the B2B market, companies began developing tools to help startups leverage these new Internet channels. Facebook and Twitter, for instance, offered companies the ability to do targeted advertising. Other tools allowed companies to improve lead gen and do paid conversion and upsell.
Meanwhile, in the B2C marketplace, applications such as Yelp, OpenTable, and Groupon were developed to help consumers make everyday decisions. SMBs suddenly found themselves pressed to join these and other platforms in order to stay competitive. Competition caused SMBs to increase their digital footprint or risk losing revenue.
Pressures in both the B2B and B2C marketplace led SMBs to deploy a great deal more technology in the last decade than they ever have before, which has led to a greater proliferation of data about SMBs. This has further iterated the cycle.
The Current SMB IT Landscape
While the tools created in the wake of the mobile revolution represented a vast improvement over old-line marketing techniques, they still did not give technology vendors serious insight into their SMB leads. This is because they only had the ability to analyze structured data from a single source — Facebook advertising, for instance, used to only take into account what information businesses and consumers shared on the site.
Today, tools are being built to help technology vendors leverage both structured and unstructured data in ways that were never before possible. Formation 8 has a large stake in Radius, which is emerging as a leader in the SMB data space. Radius’ software plugs into its large corporate clients’ SMB databases and Salesforce accounts and aggregates the data to understand SMBs at scale. Radius is building an incredible data set that every SMB vendor wants to access. The result is a runaway network effect; Radius is becoming the ultimate advisor to companies distributing to these millions of businesses.
Radius and other associated tools in the B2B ecosystem are continuing to drive down the CAC for technology vendors. By providing keener targeted insights about SMBs, Radius is making it possible for startups to capture a foothold in the marketplace.
Datasets like Radius’ are driving down the cost of sales, but the cost to develop and deploy technology has also dropped precipitously. Access to cheap smartphones and tablets and the presence of existing technology frameworks has made it much less expensive to start and grow a company.
As the SMB technology ecosystem matures, we are seeing numerous quickly- growing platforms. Zenefits, for instance, allows SMBs to seamlessly integrate their health insurance, paid time off, and other HR systems into a single dashboard without having to change vendors, plans, or pricing. ZenPayroll, a Formation 8 investment, automates costly and time-consuming payroll processes for SMBs. Paychex and ADP have over 70 billion market capitalization, but their sales-driven models meant their CAC was too high to conquer the SMB long-tail. Over two million SMBs still spend hours each month running payroll by hand or in Excel, and are fined hundreds of millions of dollars a year in total because of mistakes in adhering to thousands of state and federal regulations. ZenPayroll leverages modern distribution channels and makes payroll a source of positive connection to employees and a positive HR tool; it is one of the fastest growing companies we’ve seen in the space.
ZenReach, another Formation 8 investment, uses a WiFi platform to give brick- and-mortar retailers better data about their customers’ activity, which allows them to do more targeted marketing and increase their in-store presence. Online retailers have access to an abundance of information about their customers that brick-and-mortar shops do not presently have: how many times someone visited the site, for instance, and how long they stayed. ZenReach can track customers’ activity at the store and then send them targeted emails based on their recent visits and purchases. What Google did for the click, ZenReach wants to do for the visit. Platforms like ZenPayroll and ZenReach are making it easier for SMBs to grow their businesses without having to worry about the hassle of the back office.
In addition to horizontal platform plays, we are beginning to see companies penetrate vertical SMB marketplaces. One of our investments, Buildzoom, is transforming the home improvement marketplace. Hundreds of thousands of consumers interact with tens of thousands of contractors each month, and Buildzoom makes it easy for customers to find the contractor that best suits their specifications. Another Formation 8 investment, Realscout, is disrupting the real estate space by providing agents with a customizable, branded search site. This allows them to maintain high-touch relationships with their clients. Other examples abound. The emergence of vertical SMB SaaS is evidence that the market is now ready for the spread of smart technologies into disperse corners of the SMB landscape.
As more and more companies scale into the SMB space, there will be an additional erosion of old-line distribution channels. SMB owners have often taken advice on vendors from local service providers such as their local banker, their insurance broker, etc. But emerging technologies are slowly eroding the amount of interaction SMB owners have with these middlemen. Technologists are revolutionizing the banking and lending industry, reducing the need for SMB owners to ever step foot in a bank branch. HR automation platforms are eating away at the need for brokers. Because of these changes, SMB owners will naturally turn to less costly distribution channels, and as their business is increasingly digitalized, it further opens them up to technology-enabled processes and products.
SMBs aren’t just turning to new distribution channels to discover vendors — they’re also turning to consumer-facing channels to increase their digital presence. New applications are being created to help consumers make everyday decisions: everything from StyleSeat to Buildzoom is helping to drive consumer behavior. SMBs are continuing to proliferate data about themselves, which technology vendors are using to market and sell to them in new and interesting ways. The feedback loops are continuing to iterate, which is propelling new technologies into the diffuse nooks and crannies of the SMB landscape.
This is an exciting time to be investing into this space because there are multiple greenfield situations where platforms clearly should exist but don’t yet. Unlike eras past, technologists can easily reach millions of small businesses, and these businesses are simultaneously realizing that paper- and Excel-based workflows are leaving them in the dust. Venture capital thrives on economic shifts like this. Several multibillion-dollar businesses are being built already and are scaling quickly into these newly open areas in SMB.
America needs its small and medium businesses to thrive if our economy is to thrive. Until now, market conditions kept most technologists focused on streamlining workflows and reducing costs in the enterprise while ignoring the problems facing the SMB. But economizing America’s small and medium businesses and helping them leverage data to better engage with their employees and customers raises our nation’s productivity and creates more wealth and prosperity for all of us. We are proud to be backing great entrepreneurs who are leading the charge to bring SMBs into the 21st century technology ecosystem. Thank you for joining us in this quiet but important revolution.
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.