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Organizational Concepts for Entrepreneurial Technology Companies -the cathedral or the bazaar?. Vinod Khosla Kleiner Perkins Caufield & Byers vkhosla@kpcb.com. There’s change and then there is change!.

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organizational concepts for entrepreneurial technology companies the cathedral or the bazaar

Organizational Concepts for Entrepreneurial Technology Companies-the cathedral or the bazaar?

Vinod Khosla

Kleiner Perkins Caufield & Byers

vkhosla@kpcb.com

slide2

There’s change and then there is change!

“…every strategic inflection point [is] characterized by a ‘10X’ change …”“There’s wind and then there is a typhoon, there are waves and then there’s a tsunami”- Andy Grove

visible signs wealth creation
Visible Signs:Wealth Creation

New company value in Billions

First 10 years of PC

First few years on Internet

visible signs corporate tech spending continues to rise

50%

45%

Commercial Internet

40%

35%

30%

PC Introduction

25%

20%

15%

10%

Source: U.S. Department of Commerce.

5%

0%

1960

1961

1963

1964

1966

1967

1969

1970

1972

1973

1975

1976

1978

1979

1981

1982

1984

1985

1987

1988

1990

1991

1993

1994

1996

1997

Visible Signs: Corporate Tech SpendingContinues to Rise

U.S.-based Information Technology Spending as a Share of Business Capital Equipment Spending - 1960 to CQ2:1997

Note: Information technology spending includes purchases of information processing and related equipment (including office, computing, and accounting machinery), computers and peripheral equipment, communication equipment, instruments, and photocopy and related equipment.

visible signs public pure play internet winners billion club
Visible Signs: Public Pure Play Internet Winners - $ Billion Club

Market

Value (3/99)

Market

Value (4/98)

Yahoo!

Amazon.com

eBay

@Home

Netscape

Excite

$6.3

2.2

n/a

2.2

4.0

1.3

B

$34.2

20.8

18.8

14.9

9.7

5.7

B

Priced as of 4/22/98, 3/17/99

visible signs social change

Radio = 38

TV = 13

Cable = 10

120

Internet = 5

90

Users (Millions)

60

Cable

Radio

Internet

30

TV

0

‘22

‘30

‘38

‘46

‘54

‘62

‘70

‘78

‘86

‘94

‘02

Visible Signs: Social Change

Years to reach 50M users:

Source: Morgan Stanley.

behind the scenes changes economics of reaching new customers
Behind the Scenes: Changes Economicsof Reaching New Customers

Cost per Response/Click-Through

Even with lower click-through / response rates, Net advertising costs much less on a per-response basis!

Source: Direct Marketing Association, Morgan Stanley, KPCB analysis.

behind the scenes changes the cost of serving customers

Cost / Transaction

ATM

Branch

Internet

Telephone

PC Banking

Source: Booz Allen Hamilton.

Behind the Scenes: Changes the Cost of Serving Customers
  • Net transactions cost far less than through traditional channels
  • Investment for a commercial bank to reach 10M potential customers
    • Bricks-and-Mortar: $900M
    • The Net: $1M
behind the scenes revolutionizing the way companies interact with customers
Behind the Scenes: Revolutionizing the way companies interact with customers
  • New customer acquisition
    • 80% of Dell’s small business Web customers never purchased from Dell before
  • New channels to the customer
    • 70% of Internet users plan to make travel plans and purchases on the Web
  • Increased availability to customers
    • 40% of AOL’s merchant online sales took place between the hours of 10 P.M. and 10 A.M.
  • Building an online customer base
    • Amazon.com has 6.2M records – mailing addresses, e-mail addresses, credit card numbers – of customers who have made purchases on their site

Source: Company reports.

behind the scenes brand building is changing
Behind the Scenes: Brand Building is Changing
  • Amazon vs. Barnes & Noble
  • Yahoo vs. Mickey Mouse
  • SportsLine vs. ESPN
  • e-Trade vs. Merrill Lynch
  • C|Net vs. CNBC
  • CD Now vs. Tower Records
behind the scenes internal operations are changing

Savings

$500-700M

(3 yrs.)

$360M

(annually)

6 Million calls per year

Behind the Scenes:Internal Operations are Changing
  • Procurement: GE purchases $1B in supplies over the Internet in 1997
  • Customer Service: Cisco reports customer service productivity has improved 200-300% from using the Internet
  • Logistics: FedEx reports that PC and Web interfaces are used by 950K customers to track 12M packages annually

Source: Company reports.

behind the scenes communications networks are changing
Behind the Scenes: Communications Networks are Changing
  • Qwest changing the rules on backbone fiber capacity
  • Level 3 investing $10B in an all IP network
  • DWDM growth causing dramatic changes in available capacity
  • Voice over IP projects proliferate at Lucent, Nortel, Cisco
the new economy
The New Economy
  • Conventional wisdom: American dream over. “I’m OK, but my kids...”
  • 40% of GDP growth from tech
  • Silicon Valley is symbol: <3% unemployed, high wages, every segment moving up
  • Silicon Valley is state of mind: it’s everywhere, for everyone...
the new economy15
The New Economy

OldversusNeweconomy

a skill life long learning

managers entrepreneurs

labor v. mgt teams

bus v. environ encourage growth

security risk taking

monopolies competition

job preservation job creation

wages ownership, options

plant, equipment intellectual property

the new economy16
The New Economy

OldversusNeweconomy

status quo speed, change

standardization custom, choice

top-down distributed

hierarchical networked

regulation pub/private partners

zero sum win win

sues invests

standing still moving ahead

slide18

The “Environment”

  • Change as a “process”
  • A new Competitiveness -Adam Smith II
  • Technology : “driver” or “tool”
  • People
  • Whose Rules?
  • Static vs. Dynamic - Creation of new markets
  • Amplification of Events & Time Compression
  • A “winner take all” economy
pace of change
Pace of Change
  • Diseconomies of scale
  • Diseconomies of process / hierarchy
  • Timeliness of information disbursement
  • The role of standards
success factors old new
Success Factors - Old & New
  • People vs. Organization
  • Process vs. Instinct
  • Questioning vs. Hierarchy
  • Leverage vs. Entrenchment
  • Managing Risk vs. Risk avoidance
  • Paranoia & Persistence vs. History
  • Role of Trial vs. Consistency
  • Best of breed Offerings
internal factors
Internal Factors
  • People: Building the “balanced” team
  • Culture
  • Technostructure & Infostructure
  • Engineering Methodology
  • Organized Chaos : Execution vs. innovation.
  • Pull vs. Push
  • About Customers & Marketing
  • Planning & process
people
People
  • Top 5% - “winner take all”
  • Instinct & Vision
  • Personality mixes
  • Role of the “Flakes”
  • Leading vs. managing
culture
Culture
  • Setting the goals
  • Managed Conflict
  • Persistence & iteration
  • Tolerating mistakes & rewarding failure
  • Sense of urgency
  • Paranoia
  • Success & Complacency
technostructure infostructure
Technostructure & Infostructure
  • Specialization and complexity of technology
  • Decision-making: top down or bottom up?
  • The role of the “fringe” employee.
  • Nuances as Pitfalls
  • Horizontal and vertical communication & cooperation.
slide26

Engineering Methodology

  • Evolvability
  • Specialization
  • Experimentation
  • Change isolation
organized chaos the shepherd or the sargent
Organized Chaos: The Shepherd or the Sargent?
  • The Flakes vs. Engineering vs. Marketing
  • Experimentation
  • Execution
  • Budgets, Schedules, Tasks vs Project Stage
push vs pull
Push vs. Pull
  • Products
  • Brands
  • People
  • Leverage
changing roles marketing customers
Changing Roles: Marketing & Customers
  • Listening to the customer
  • Participants in Design / Experimentation
  • Meeting vs. Teaching Requirements
  • Discovering “Applications”
  • Growth Patterns: the “stairstep”
  • Perception & Reality; the Halo effect
  • Momentum
planning process
Planning & Process
  • Process vs. Instinct
  • Risk Balancing & Burn Balancing
  • Risk Balancing of Projects
  • Planning & Variability
slide31

Optimized for what?

“The early movers are the only companies that have the

potential to affect the structure of the industry and to define how the game is played by others.”

-Andy Grove

evolvable systems cathedral building
Evolvable Systems: Cathedral-building

The traditional development model reflects the “cathedral-building” model...

  • Follow a single approach and vision
  • Optimize for performance
  • Release only bug-free products
  • Products and technologies are developed in isolation
  • Examples: IBM System/360, MSFT Windows platform, Intel Pentium, AT&T network
evolvable systems the bazaar model
Evolvable Systems: the Bazaar model

The new development model is evolving to the “bazaar” model...

  • Optimize for evolvability
  • Adopt new approaches and agendas regularly (“plan to throw it away”)
  • Delegate/buy/outsource everything you can
  • Be open to the point of promiscuity
  • Release early, and often
  • Products and technologies have to exist in a dynamic community
  • Examples: Linux, Apache, Sendmail, Excite, Microsoft (the company), QWEST/Williams networks
weather forecast
Weather Forecast
  • Rate of change will accelerate - life will be more complex, more busy...
  • Innovation, opportunities & entrepreneurship will thrive
  • Fun & fortunes will be in abundance
  • Adaptability, agility & momentum will be the key to success!
slide36

“As long as we maintain the practices that have us made us what we are today, there is no limit to the longevity of this situation”

-F.E.Terman, Vice President, Stanford University

slide38
KPCB
  • Who we are:
  • a handful of professional technologists and operating execs - not financiers
  • portfolio of 340+ companies with $244B+ market cap, $61B+ revenue, 162k+employees, 127 IPOS
  • Forbes 500: Sun, Compaq, LSI Logic, Ascend, AOL, @Home, Quantum, Linear Technology, Amazon, Tandem, Lotus, Netscape, Intuit
slide39
KPCB
  • What we look for:
  • People
  • Unfair advantages
  • Risk up front
  • Characteristics: sense of urgency, corporate partners, home run swings
  • Defensibility in critical mass, technology, franchise, content, distribution
  • Shared upside & simple structures
slide40
KPCB
  • What we do:
  • Technology oriented, pioneering industries
  • IPO oriented big companies
  • Incubations, early stage, speedups
  • Co-ventures
slide41
KPCB
  • What we bring:
  • Company building experience
  • Experience with pitfalls of new markets, technology management...
  • Credibility
  • Relationships
  • Repertoire of mistakes
  • Knowledge of industry trends
the internet does it change everything
The Internet: Does It Change Everything?
  • First two way mass communication medium
  • The phenomenon: fastest social change, largest legal creation of wealth
  • Adam Smith II - efficiency & economics revisited
  • Role of information & infomediaries
  • Changing economics: distribution, specialization, narrowcasting
  • Technology driving business strategy
  • New Models: Excite, Amazon, Priceline, Ebay, Preview, Home Grocer, Della&James...
the internet does it change everything44
The Internet: Does It Change Everything?
  • Corporate culture & infrastructure: “real time”
  • Fastest social change and largest legal creation of wealth (Cisco, Dell)
  • Tight feedback loops
  • Ideal for experimentation (Vs. planning)
  • Leverage
  • People as the killer app
the internet does it change everything45
The Internet: Does It Change Everything?
  • This is a winner-take-all economy ...
  • Winners and losers diverge quickly
  • Adaptability, agility, momentum, and execution are the keys
  • Examples: Amazon/Barnesandnoble.com, AOL/Compuserve, @Home/Roadrunner, MSFT/Apple/IBM/Lotus, Cisco/Bay
key principles
Key Principles
  • Knowing what you don’t know
  • Whose opinion ?
  • Identify your liabilities & assets