Tech and the Fortune 500: Building Sustainable Businesses

I was reading an article recently on how Wal-Mart re-took the top spot in the Fortune 500. I clicked to see the latest ranking

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Seems like just yesterday that Apple was the biggest company in the world, leading many of us in Silicon Valley to mentally pat ourselves on the back. Finally, everyone could see what we already knew – tech was king. Yet here we are a year later and Apple isn’t even in the top 5. Scroll through and you see that there is only 1 tech company in the top 10, 3 in the top 20, and 5 in the top 50. We can argue all day long about what the right metrics are to measure “big”, but the fact remains that the last 40 years of exceptional innovation and growth in technology as a sector has only resulted in a handful of sustainable companies. Why?

All of the things that I adore about working in tech – the speed of change, the innovation, the entrepreneurial spirit – have created the potential for and threat of disruption in every market and vertical. And yet, building a world-class technology business has never been harder. As the Atlantic points out, “…failing fast–the crux of the lean approach–doesn’t make succeeding easier. It just makes it cheaper and less risky.”

All of this innovation, which can be had for a fraction of the historic capital, is also continually lowering the barriers to entry. Sounds good, but with so many new companies entering the market, competition is fiercer than ever. Gone are the days where a company can rely on first-mover advantage or technical differentiation alone for long term sustainability.

For example, major advances like “the cloud” with all of its instantiations of infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS), and software-as-a-service (SaaS) is making it easier for smaller players to build new products, but it is also making the value proposition of the product much more important than ever before, because that is the only differentiator. Capital, too, is cheap and plentiful as many investors rush to find the next quick flip or as they seek outsized returns in one of the only growing markets in the macro-economy.

Of course, “getting product out” is still critical, but it isn’t the only step in building a long term, sustainable company. Not only does that product have to solve real business problems for customers, the product also needs to be part of a viable business itself.

As an investor, I have developed some “predictors”  – the 3 Ls – to gauge the longer term viability and sustainability of a company.  In my view, a business that can they go beyond great technology must have:

  1. Loyalty: Loyal customers who will wait for new product, because they love the company, the service and the value. Nothing makes me smile more than when I speak to a customer of a portfolio company, and I feel like the customer is actually pitching to me. I want to hear the ardor of a true fan. It is this type of advocacy that helps penetrate a solution throughout a customer deployment, getting more users, stickiness and executive buy-in.And “tough” customers can be the best fans. I was doing a diligence call for a data & analytics company and spent 20min writing the list of all the features the customer wanted in the product and didn’t have today. I was getting disheartened and asked ‘So, you will likely not be renewing your contract?’ The customer was stunned and said ‘Of course we will. Why else do you think we would be investing so much time into how these guys should develop?’”
  2. Leadership: Self-aware management who knows the power of true leadership. Every team needs internal cohesiveness and singularity of purpose to achieve their goals, and while collaboration is important, employees go the distance when they believe that they are a part of something bigger. Good leaders also know what they don’t know, and when they do, they ask for help. They think long term and choose partners carefully. They hire only the best, but also create a strong culture by investing in training, career development and culture. In this period where secondary sales of private company stock and start-up hopping to diversify the chances of quick riches is becoming normal, I love seeing high, multi-year employee retention rates and fully vested founders who continue to take risk and grow the business. I had the pleasure of hearing a CEO in an intro call recently say, “I have been the darling of Silicon Valley at least twice over the last 6 years. Now, I need to build a real business.” I made sure I met him in person as soon as possible.
  3. Longevity:  What is a brand? It’s more than any set of products or employees or even customers. It’s what persists as the image of a company in the minds of not just customers, but an entire ecosystem. It is longevity. It’s what allows Microsoft to be months or even years late with new technology, but still survive. It’s why you felt bad when Apple didn’t come out with the best new iPhone ever. And it takes time and investment to create. I once heard a senior executive respond, when asked what was the difference between marketing and branding, “Marketing is what you do, branding is what you are.”

And that seems to be the crux of it. Building a sustainable business takes all of what you are. It’s not about building a quick app and trying to sell to Facebook, or raising the valuation you get on your Series C. I’m trying to do exactly this with my two partners, and it’s not easy. But it’s who we are.

Tech and The Common Good

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I have lived in Silicon Valley and worked “in tech” since 2001 – the majority of my career. However, I am still an economist by formal training – and in my heart and mind – and I have always brought this lens to the world of tech. Initially, I remember carrying a bit of a chip on my shoulder, not having a traditional engineering degree or technical background. But I have found that my ability to “cross-pollinate” ideas and concepts from the realm of business and economics and apply them to tech problems has helped me to innovate from a different perspective, solve problems with a new approach and ultimately help me to build new tech businesses. As I launch a new venture as a tech investor, I’m also launching a new blog that I hope incorporates this outlook for the benefit of those who may be interested.

In economics, “Common goods” are defined as goods which are rivalrous and non-excludable. In other words, resources that we all share that get depleted if one person consumes too much and does not contribute. This has of course been expanded to a more general philosophical term. Lately, with the economy still so fragile, many have raised questions about whether the tech industry really does contribute to the common good. Tech corporate profits remain relatively strong as cash piles up on their balance sheets and exec compensation skyrockets. There are outcrys of outsourcing overseas to save money and of technology replacing jobs, as corporations make substantial productivity gains without hiring. Those of us who live and breathe the daily energy and innovation of tech sometimes miss the broader implications of what we do, or at least, perhaps, how we are perceived. This blog is my small attempt to think about and comment on these themes, and perhaps, indirectly, contribute to the common good.