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Why did so many successful entrepreneurs and startups come out of PayPal? Answered by Insiders

by Vincent Chan on Jun 28, 2010


Why did so many successful entrepreneurs and startups come out of PayPal? I long have been fascinated by the extraordinary achievement from the ex-Paypal team and wonder about the reasons behind their success. In the past, mass media tried to answer this question several times but still couldn’t give us a clear answer.

I once asked David Sacks the same question during an event in Los Angeles. He told me the secret is that Paypal has built a “scrappy” culture. No matter what problems they faced, they would find a way to solve them. I kind of got the idea, but was still confused about the execution details.

So when I saw some of the past Paypal employees answering this question on Quora, I was super excited! After all, they should be the only ones who can tell people the inside stories.

Below are some highlights of their answers. *If you want to check out the sources or leave your comments, please go to here and here.

On Talent Management

“Peter and Max assembled an unusual critical mass of entrepreneurial talent, primarily due to their ability to recognize young people with extraordinary ability (the median age of *execs* on the S1 filing was 30). But the poor economy allowed us to close an abnormal number of offers, as virtually nobody other than eBay and (in part) google was hiring in 2000-02.” (by Keith Rabois, former Executive Vice President of Paypal)

Extreme Focus (driven by Peter): Peter required that everyone be tasked with exactly one priority. He would refuse to discuss virtually anything else with you except what was currently assigned as your #1 initiative. Even our annual review forms in 2001 required each employee to identify their single most valuable contribution to the company.” (by Keith Rabois, former Executive Vice President of Paypal)

Dedication to individual accomplishment: Teams were almost considered socialist institutions. Most great innovations at PayPal were driven by one person who then conscripted others to support, adopt, implement the new idea. If you identified the 8-12 most critical innovations at PayPal (or perhaps even the most important 25), almost every one had a single person inspire it (and often it drive it to implementation). As a result, David enforced an anti-meeting culture where any meeting that included more than 3-4 people was deemed suspect and subject to immediate adjournment if he gauged it inefficient. Our annual review forms in 2002 included a direction to rate the employee on “avoids imposing on others’ time, e.g. scheduling unnecessary meetings.” (by Keith Rabois, former Executive Vice President of Paypal)

Refusal to accept constraints, external or internal:We were expected to pursue our #1 priority with extreme dispatch (NOW) and vigor. To borrow an apt phrase, employees were expected to “come to work every day willing to be fired, to circumvent any order aimed at stopping your dream.” Jeremy Stoppelman has relayed elsewhere the story about an email he sent around criticizing management that he expected to get him fired and instead got him promoted. Peter did not accept no for answer: If you couldn’t solve the problem, someone else would be soon assigned to do it.” (by Keith Rabois, former Executive Vice President of Paypal)

Driven problem solvers: PayPal had a strong bias toward hiring (and promoting / encouraging, as Keith mentions) smart, driven problem solvers, rather than subject matter experts. Very few of the top performers at the company had any prior experience with payments, and many of the best employees had little or no prior background building Internet products. I worked on the fraud analytics team at PayPal, and most of our best people had never before done anything related to fraud detection. If he’d approached things “traditionally”, Max would have gone out and hired people who had been building logistic regression models for banks for 20 years but never innovated, and fraud losses would likely have swallowed the company.” (by Mike Greenfield, former Sr. Fraud R&D Scientist of Paypal)

Self-sufficiencyindividuals and small teams were given fairly complex objectives and expected to figure out how to achieve them on their own. If you needed to integrate with an outside vendor, you picked up the phone yourself and called; you didn’t wait for a BD person to become available. You did (the first version of) mockups and wireframes yourself; you didn’t wait for a designer to become available. You wrote (the first draft of) site copy yourself; you didn’t wait for a content writer.” (by Yee Lee, former Product & BU GM of Paypal)

On Culture & Ideology

Extreme bias towards actionearly PayPal was simply a really *productive* workplace. This was partly driven by the culture of self-sufficiency. PayPal is and was, after all, a web service; and the company managed to ship prodigious amounts of relatively high-quality web software for a lot of years in a row early on. Yes, we had the usual politics between functional groups, but either individual heroes or small, high-trust teams more often than not found ways to deliver projects on-time.” (by Yee Lee, former Product & BU GM of Paypal)

Willingness to try – even in a data-driven culture, you’ll always run in to folks who either don’t believe you have collected the right supporting data for a given decision or who just aren’t comfortable when data contradicts their gut feeling. In many companies, those individuals would be the death of decision-making. At PayPal, I felt like you could almost always get someone to give it a *try* and then let performance data tell us whether to maintain the decision or rollback.” (by Yee Lee, former Product & BU GM of Paypal)

Data-driven decision making – PayPal was filled with smart, opinionated people who were often at logger-heads. The way to win arguments was to bring data to bear. So you never started a sentence like this “I feel like it’s a problem that our users can’t do X”, instead you’d do your homework first and then come to the table with “35% of our [insert some key metric here] are caused by the lack of X functionality…” (by Yee Lee, former Product & BU GM of Paypal)

Radical transparency on metrics: All employees were expected to be facile with the metrics driving the business. Otherwise, how could one expect each employee to make rational calculations and decisions on their own every day? To enforce this norm, almost every all-hands meeting consisted of distributing a printed Excel spreadsheet to the assembled masses and Peter conducting a line by line review of our performance (this is only a modest exaggeration).” (by Keith Rabois, former Executive Vice President of Paypal)

Vigorous debate, often via email: Almost every important issue had champions and critics. These were normally resolved not by official edict but by a vigorous debate that could be very intense. Being able to articulate and defend a strategy or product in a succinct, compelling manner with empirical analysis and withstand a withering critique was a key attribute of almost every key contributor. I still recall the trepidation I confronted when I was informed that I needed to defend the feasibility of my favorite “baby” to Max for the first time.” (by Keith Rabois, former Executive Vice President of Paypal)

Extreme Pressure – PayPal was a very difficult business with many major issues to solve. We were able to see our colleagues work under extreme pressure and hence we learned who we could rely on and trust.” (by Keith Rabois, former Executive Vice President of Paypal)


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Is DST Going to Be The Next Berkshire Hathaway?

by Vincent Chan on May 7, 2010

To many people, DST, the Russian Investment Firm, came to the web industry pretty much out of nowhere. Yet, in the past 16 months, this five-year-old company has purchased nearly 10% of Facebook (worth near $2 billion), led a $135 million financing round for Groupon, invested $180 million in Zynga along with others, and paid $188 million for AOL’s instant messenger service ICQ, which holds more than 50% of Russia’s instant messenger traffic. It’s like they are gathering all the hottest collectable toys today! And they make it look so easy.

So are we witnessing the birth of an Internet giant of this era? What is the story behind this secret company? Why did all the hottest startups take its capital when they still have enough funding in the bank?

Let’s reveal the story behind this extraordinary company now.

Serious Connections

According to its website, DST only has four partners, who have a strong complementary background from operations, investments and finance. And they also have seven analysts, all veterans of Goldman Sachs, Morgan Stanley or Citibank. Their investors are all well known investors or institutions, such as Goldman Sachs, Tiger Global and Alisher Usmanov, one of the Russia’s richest man. A Russian newspaper, Kommersant, estimated that Alisher should own no less than 30% of the company.

Most recently, DST got an investment of $300 million from Tencent, the huge Chinese internet company which has a market capitalization almost twice the size of Baidu, in exchange for near 10% stake.

Based on this long term strategic partnership, DST and Tencent are positioning themselves to benefit from global Internet growth. And obviously, DST’s portfolio companies like Facebook and Zynga will also benefit from these influential connections. Not only increase their exposure to the fast growing emerging Internet market, but also get the expertise from Russia, Euro and Asia Internet companies which are traditionally better at monetizing online games and social networks.

Invest for the Very Long Term

Yuri Milner, founding partner of DST, has analyzed all the tech IPO in the past 10 years, and he thinks that many companies went public too early. In his point of view, some companies didn’t have to go public that early. He thinks that if IPO is only driven by liquidity concerns, companies can get the additional capital from private sources, like DST, in order to release the financial pressure of the company.

Based on his experience, it turns out that only providing 5-10% of the liquidity could be enough for a good company to move forward for a few years and still makes IPO. In this way, the team will have more time to focus on product development making the enterprise more valuable in the long term. The fresh capital will also provide a cushion for the company as it continues its fast-paced growth and explores new revenue sources beyond advertising.

Like what Mark Zuckerberg said:

Facebook did not need the money. The financing will serve as a cash buffer to support our continued growth, allowing us to scale.

and Mark Pincus, CEO of Zynga, said:

Milner is a natural choice for any Web business that is at scale and interested in bringing more investors—but not in an IPO. He already had a very sophisticated understanding of social gaming. It was a very good alignment of goals.

After all, given that Yuri Milner greatly admires Warren Buffett, who is known for his long term investment advice, it’s not surprising that they have similar investing style.

Creative Financing

Their strategy is to make huge bets on market leaders at very generous valuations that other investors can’t afford. DST’s terms are very different from traditional VC deals. For example, they first invested in Facebook in May 2009 at a $10 billion valuation and later funded employee buyouts at a $6.5 billion valuation (a 35% discount for common stock). They did a similar deal with Zynga as well.

In this way, it will provide an attractive exit opportunities for early employees and founders. Milner explained, as the company grows, the spread between common and preferred stocks will become narrow. That’s why they want to invest early.

Also, according to VentureBeat, DST not only did not request a board seat, their deals happened really fast. From start to finish, it only took about a week with a term sheet of one or two pages. This investing style is extremely similar to what Warren Buffett did 🙂

The way they bought preferred stock from the company and common stock stock from employees has become the hottest new way to invest in startups. People refer it as “DST deals”.

Expert in Scaling and Monetizing Social Networks

In the eye of DST, display ads are dumb. They believe that social media sites can do much more than that, such as virtual goods, micro-payments, social ads…etc, because the site knows who the customers are.

Yuri Milner was the CEO of Mail.ru, a Russian web portal, where he turned the company around operationally and positioned it to become the number one Russian speaking website. Their portfolio also includes two large social networking sites in Russia, Forticom and vKontakte.

With all these companies, DST already controls 70% of all Russia’s web traffic. Most importantly, these sites have already figured out how to make money using various business models, such as collecting micro-payments from users and selling virtual goods, something Facebook not very good at in this stage.

You may ask why those Russian sites are so profitable? One of the reasons is that Russia has the word’s most engaged social networking audience, according to comScore. The average Russian web user spent 9.3 hours on social sites, while the U.S. users spending 4.5 hours on them.

Given all these track records and experience, Milner is confident that Facebook, which has more than 400 million users, will be able to get into these new sources of revenue.

The Man – Yuri Milner

As you can tell, Yuri Milner, who earned an MBA at the Wharton School, is not a regular entrepreneur. He really knows how to play this game.

Marc Andreessen, a Facebook board member once said:

Yuri and his team were bringing in a level of knowledge about these businesses that was the best I’ve ever seen. They are walking encyclopedias of all business models of Internet businesses globally.

Milner was able to convince Mark Pincus, Zynga’s CEO, to get their additional funding when his company was already cash rich. Mark once said:

Milner already had a very sophisticated understanding of social gaming. It was a very good alignment of goals.

Although his company has so much capital, Milner did not blindly invest in big name startups. He typically follows a company for one to three years before investing. Prior to investing big money in to major US consumer web companies, Milner bought into smaller Eastern European web companies which is using similar strategies to better understand their different business models. Like Andressen said:

Milner and the DST team are walking encyclopedias of Internet business models.

At the same time, he is aggressively pursuing new investment opportunities. He spends as much as 75% of his time traveling to meet global startups which are in his potential investment list. He told Bloomberg BusinessWeek:

“I am making big investments. You just have to be personally involved. We monitor close to 50 companies globally that can be potential investment opportunities. I’d like to see DST as a significant global investment company in the Internet arena.”

DST is planning to invest $1 billion dollars on emerging web social startup companies around the world. And most of the new investors he is bringing in now are non-Russian. Milner really turns DST into a global investment group.

Conclusion

Although we are still not sure if DST’s investment will eventually pay off, it seems to me that Milner and his team are doing some great things for the startup and web community. Their real Big Hairy Audacious Goal probably is to become the Berkshire Hathaway of the tech industry in modern time. Can they make it? Is Milner going to be the next Warren Buffett? Time will tell.


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Two Ecosystems: iPhone vs Facebook

by Vincent Chan on May 3, 2010

When Zynga’s valuation is approaching $3 billion, with the possibility of an IPO over the next year, I wonder why the iPhone platform still hasn’t created a monster startup like Zynga yet. Apparently, I am not the only one with this question in mind. Ray Valdes from Gartner recently did an excellent analysis of the difference between these two developer ecosystems after attending the Facebook F8 conference.

So there is a long-standing perception in the market that the iPhone App Store represents a gold-mine opportunity for developers. This perception is not only found in the developer community, but among the broader audience of consumers and also investors, contributing to a high stock-market valuation for the platform owner. However, the gold-mine perception seems to me to have aspects that are more illusion than reality.

Check out the post for more!


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How Gilt Grew Sales from $25 million to $170 million in 2 years

by Vincent Chan on Apr 27, 2010

Do you know any female friends who are obsessed with designer brands or designer sample sales? If you do, then it’s not difficult to understand why Gilt Groupe and other flash sales or private sales sites are so successful. Why is Gilt so golden? Gilt’s CEO, Susan Lyne, explained:

“Gilt was going to solve a problem for a lot of women I knew. How do we shop for things we love when we really can’t get out to shop the sales, the good sales, the sample sale?”

and…

…there’s no store in the world that could change its entire inventory in a night. We do that every night. Customers know they’ll see something new tomorrow.

When talking about the rise of non-tech focus web startups, besides Groupon, everyone pay attention to the success of flash sales sites, like Gilt, HauteLook, Rue La La, ideeli…etc, as they are extremely profitable. Founded in 2007, Gilt Groupe reportedly had US$25 million in sales in its first year, posted another US$170 million in 2009 (a stunning figure for a start-up), and planned to double that amount in 2010!

During its most recent round of venture capital financing, the company was valued at $400 million. And not surprisingly, with this tremendous growth rate, Gilt is planning for an IPO in a year or two.

Invitation only shopping

Inspired by a highly successful French company called Vente Privée, which sells fashion overstock, Kevin Ryan, former CEO of DoubleClick, decided to bring the same business model to the US in 2007.

His company sells high fashion at prices around 50 to 70 percent off retail. Access is invite-only, limited to friends of the Gilt community, although everyone can get an account if you ask for an invite. Their sales are announced by email a week ahead of time with most of them lasting 36 hours or until everything is sold. According to New York Magazine:

During the hour after its weekday sales kick off, between noon and 1 pm…its site is visited by an average of roughly 100,000 shoppers. For that time, it might as well be the most crowded store in New York.

Gilt is simply a viral-marketing phenomenon because they don’t really have to advertise. Instead it gets referral through users’ personal networks and offers incentives (e.g. $25 credit) to current members to invite their friends to join their community. Result: more than 2 million members and growing rapidly.

High sell through rates

Also, the site’s members are ideal for designer brands because most of them are female, young and high income. According to New York Magazine:

At a department store, a designer’s sell-through rates—the proportion of inventory that is actually purchased—might be around 65 percent over a twelve-week season, but on Gilt, several designers told me, sell-through rates can top 90 percent. Its customers buy everything.

Savior for young designers during recession

From the beginning, the company’s greatest challenge was going to be getting enough merchandise at such a low price level. Many brands worried that lowering prices will hurt their images.

And then recession came in late 2008. People predicted that a deep recession would mean the death of demand for luxuries; however, Gilt has thrived amid challenges.

As incomes tightened during recession, the fashion brands was left with a large amount of inventory. Gilt took the opportunity to suck up all those extra goods, saving a lot of young fashion designers from going out of business.

According to their CEO:

If a designer believes in six items and thinks they’re going to be really big, we’ll agree to take x number as a minimum but we’ll agree to take as many as y. If they can sell the difference at full price, fantastic. If they can’t, we’re going to buy them.

In this difficult times, Gilt offered a quick way to generate some cash flow for these young high fashion brands which operate as small businesses without their own warehouses or factory outlets.

Help designers make more money

However, besides liquidation, why would designers use Gilt if they can’t make any money?

In order to help designers make more money, the site allows members to place orders at the beginning of the seasons, purchasing items that haven’t become overstock yet. In this way, the cost per item will go down because of the increased volume which means that the designer can make more money overall.

Moreover, Gilt is demanding designers to make exclusive lines just for the site. There is a secret in the fashion industry that nobody wants to talk about – designers actually make low quality clothing specifically for sale at outlet malls, which means you could never see those items at retail. Basically, they are planned overstock, helping designers to make an extremely high margins.

Gilt wants to use the same model to expand its inventory. According to their CEO, 35 to 40 percent of Gilt’s women’s apparel will be acquired through this channel this year. Of course, Gilt nor the designers want to let the buyers know which items were made exclusive for the site because they are usually lower in quality.

Sustainability problem

Although the site is wildly successful now, their CEO believes:

This is an easy business to start; it’s a really hard business to scale.

Why? Because there is only so much surplus product in the world. As the company expands and competitors come in, it will be harder for them to get enough pipeline and maintain the quality of their deals.

As a result, diversification is crucial to the future of the company. Before their IPO, they have to prove that their model is able to work outside of just female luxury fashion products. At this moment, Gilt has expanded into multiple categories like men, children, gifts and travel deals.

Conclusion

As legendary angel investor, Ron Conways, recently said on TechCrunch:

Flash marketing, or social commerce, startups like Gilt Groupe and Groupon have “come out of nowhere” and are revolutionizing ecommerce. In three years, he says, you won’t think about Walmart, Target and Amazon when you think about ecommerce. You’ll think about this whole new wave of companies doing flash marketing.

To put it another way, we are witnessing a fundamental and systematical changes taking place in the way products are bought and sold online.

Finally, the success of Gilt has taught an important lesson that happy customers is everything. Why? Not sure if you have noticed, Gilt’s website actually doesn’t apply any Web 2.0 features, SEO tricks or SEM strategies. They just work hard to deliver a simple brand promise – you come every day and it’s new every day. Result: a huge community of loyal customers.


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What's the Secret Success of Groupon?

by Vincent Chan on Apr 21, 2010

If you have never heard of Groupon recently, you probably are not working in the tech industry because it is all over the blogosphere. After all, growing from zero to US$1.35 billion valuation in 18 months is pretty AMAZING.

So what are their secret weapons? What are they doing right? How are they gaining customers at such a rate? Let’s take a look.

Crystal Clear Value Proposition

Groupon’s goal is clear: help introduce people to your business. Each coupon on the site has a predetermined minimum. If not enough people sign up for the deal to take effect, neither Groupon nor the business makes any money. Groupon makes money by getting a cut of these promotions from the retailers.

According to Jeremy Liew from Lightspeed Venture Partners, Groupon went from around US$100,000 in revenue in Jan 2009 to around US$10 million in revenue in Jan 2010 – a 100X increase in just twelve months.

When many retailers are struggling to survive in this economy, Groupon has become their savior. According to Andrew Mason, Groupon’s founder and CEO, nearly all of their deals have succeeded so far. And there is currently a 120 deals waiting list in Chicago alone. As you can tell, Groupon uses collective buying to create a win-win for local businesses and their customers. No wonder so many merchants are eager to participate.

Built Virality inside the Product

Since each deal is only good for one day, it creates a sense of urgency for the users and make them feel excited.

Obviously, users want to make sure the minimum is hit. What can they do? Tell their friends. Groupon takes that social component to the next level through Facebook Connect and Twitter, inviting a user’s entire network to get in on the deal.

Their user acquisition costs? Zero.

Groupon also invested a lot resources on customer service, from our help line to quick online response to customer issues. So customers are happy and continue to help Groupon reach new heights.

Alternative to Traditional Advertising for Local Businesses

Andrew wants people to treat Groupon like “a city guide that offers promotions“. He wants to help people have fun in the city and save money using the tremendous power of group buying.

In order to do so, they have to work with retailers to create attractive deals. Like the founder said:

We help businesses navigate the new world of social media and Internet marketing in an approachable, creative way. An appearance on Groupon validates these businesses as a cool part of their community.

For local business owners, Groupon has become an alternative to traditional advertising, where they pay up front and hope for the best. In this new platform, these promotions are like a whole new form of local advertising, where merchants only have to pay for REAL result.

Moreover, because of those unbelievable prices, customers will purchase something they’ve always wanted to try but never had the chance, bringing a flood of new customers to local businesses, at least some of them will hopefully get hooked and become loyal clients eventually.

Negative Working Capital

In accounting:

Working Capital = Current Assets – Current Liabilities

It is the amount of money that a business needs to stay in business. According to Business Insider:

Some businesses have negative working capital: they get money from sales before they pay suppliers.

For companies like Walmart and Amazon, they actually need no working capital because they negotiate deals in such a way that they only pay for things after 1-3 months. Most of the time, the stuff they buy is long sold by then. And people who go to Walmart to buy stuff will pay immediately, which means that Walmart is actually sitting on a pile of cash that it really does not need. So they can pay their debt slowly or use the extra cash for investment.

These businesses basically are financed by their customers. Negative working capital is a tremendous thing to have in a business. Apparently, Groupon has a large negative working capital (4 million Groupons have now been sold already). They first charge users upfront, take a cut and pay merchants back later. This is one of the reasons why Groupon is such a great business.

What’s your opinion? What makes Groupon such an attractive investment to VC? Let us know in the comment area.

*UPDATE: One of our readers asked what caused the visit jump from a hundred thousand or so to 2 million in mid 2009.

*ANSWER: Good question! Groupon originally operated only in Chicago, New York City, Boston, Washington, D.C., Los Angeles, and San Francisco. They started to launch to other cities in mid 2009, like Atlanta, Denver, Dallas, San Diego, Phoenix and Seattle…etc, more than 20 cities by the end of 2009.

*CORRECTION: Oops! It seems my answer is not correct. Andrew, the founder of Groupon, just told us the real answer in the comment section. “mid-2009 traffic jump: we used to be groupon.thepoint.com; that’s when we changed to groupon.com”. Thanks a lot, Andrew!

**UPDATE 2: One of our readers asked how Groupon has managed to distance themselves from the pack.

**ANSWER: And he got the answer from Andrew directly on Twitter! His answer, “customer service, copywriting, etc… all the little things you put time into when you care about more than making a quick buck”.


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The Rise of Non-tech Focus Web Startups

by Vincent Chan on Apr 21, 2010

It seems that the rise of social networking and open source technology has helped level the playing field for startups outside Silicon Valley. As noticed by Jeremy Liew from Lightspeed Venture Partners, majority of the current fastest growth web companies, which have grown revenues over US$1 million per month within 12-18 months of launch, are from outside the bay area and many of them are focus on creative business model rather than technology innovation.

Some of these “hot” companies are:

Most of these companies represent what Josh Kopelman called “the future of eCommerce” (e.g. flash sales, local deals, group buying & subscription businesses). They have invested a lot of resources in marketing, sales, customer services and merchandizing. While technology is an important part, it is not the core to the success of their companies.

Lesson: technology is only part of the equation to be successful on the web.

In future posts, we will find out how some of these companies achieve such a tremendous growth.


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Ask Startups: Is Employee Retention Overrated?

by Vincent Chan on Oct 30, 2009

employee-retention

During Startup School 2009, Mark Zuckerberg, chief executive of Facebook, and Tony Hsieh, chief executive of Zappos, talked about two contradicted theories on employee retention and hiring:

Facebook aims to recruit talented, entrepreneurial hackers who may not want to stay for long, while Zappos wants to hire the best people to fit its culture and try to keep them as long as possible.

Obviously, these two fast growing internet startups are highly successful. So is it possible that these very different approaches can actually achieve the same goal? Is employee retention really that important to startups?

In my opinion, Facebook’s current method can only produce strong near-term outcome. After all, technology is one of the most talent-intensive fields. If your employees think that moving out is more attractive than moving up inside the company, your corporate culture probably is not designed for a long-lasting company.

If you expect many of your best talents are going to leave the company in 3 to 4 years, will you still provide any career development planning for them? It is not only bad for the company’s effectiveness but also creates extremely expensive costs.

To reinforce the idea that employee retention is essential to create a great workplace, let’s look at one more internet company which is using Zappos’ method – Netflix.

In the famous 128-page presentation about their corporate culture, Netflix talks about something interesting related to “loyalty”:

People who have been stars for us, and hit a bad patch, get a near term pass because we think they are likely to become stars for us again. We want the same: if Netflix hits a temporary bad patch, we want people to stick with us.

And of course, this doesn’t apply to every case:

Unlimited loyalty to a shrinking firm, or to an ineffective employee, is not what we are about.

As you can tell, Netflix truly values their employees and they are trying to build a long term relationship together. Given Netflix’s successes as a fairly large company, it would seem that their strategy is working quite well. They are creating a high performance culture and attracting stunning employees.

Besides, Netflix expects their employees to seek what is best for the company, rather than best for themselves. Just like any sport teams, some players have to sacrifice their own interests for the good of the team. A coach will never ask a player to come and learn all the skills, and feel equally happy when the player wins a championship for another team after 3 or 4 years later. Great teams will try their best to keep all their best talents. I believe startups should do the same.

If an extremely talented hacker didn’t want to stay in your company for long, I would argue that if you should hire him/her in the first place. Ultimately, ability and loyalty of an employee should be equally important to every business.

What is your view on employee retention? Which way do you prefer? Facebook’s or Zappos’? And how do you view your employees? Are they long-term or short-term assets? Let us know in the comment section. Your feedback is priceless to us. Thanks.

Photo sources: Mathieu Thouvenin @Flickr, mathoov @Flickr


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Startup to IPO: Why Few Companies Make the Leap and What We Can Learn from Them (Part 4: Differentiation & Marketing)

by Vincent Chan on Oct 7, 2009

differentiation

At a time that many people building safe businesses and not enough startups trying to change the world, are we, as entrepreneurs, still supposed to dream big? Should we build a company that will go public someday? Or should an exciting startup define success on a $170 million exits?

While I am happy for Aaron Patzer, the founder of Mint.com, the world has just lost the Steve Jobs/Bill Gates/Scott Cook of this generation because of this acquisition. Many young entrepreneurs have to find another role models to look up to now.

Growing a company from a startup to IPO sometimes requires more than ability and knowledge. It also takes a strong will for an entrepreneur to want to build a lasting company. I am sure there are entrepreneurs somewhere building the next big things right now. And I hope this “Startup to IPO” blog post series (Part 1, 2, 3, 4) can inspire them to keep fighting for their dreams.

In this last post, we will look at how these four elite companies (Vistaprint, Rackspace, OpenTable, Salesforce.com) differentiate and market themselves when they just got started.

Pursue Customers that Competitors Hate

In the printing industry, companies usually hate to work with small business customers because of the low printing volume and low profit margin. They rather go after big companies which spend large amounts of money on printing. Yet VistaPrint had a different strategy. Their founder, Robert Keane, once said:

Our experience gave us confidence that there was a market with micro businesses. Other companies did not want to pursue them. Everyone else thought it was a horrible market. We happened to be in the right spot at the right time.

In order to achieve this goal, they have developed technology to automate desktop publishing and manufacturing so that they can sell products at low quantities and superior prices. However, there were another problem. Another reason their competitors hated the micro businesses market was because these customers are not easy to get to. VistaPrint solved the problem through direct marketing but in an unusual way. They gave their products away for free to generate buzz. According to Robert,

That became a runaway success. At the time, full-color business cards were selling online for $85 and $200-$300 at traditional printers. We gave them away free with a $5 shipping and handling fee. That offer was so successful in getting people to try us that it became an acquisition engine that drove our business. Our business model got to scale very quickly.

This free sample offer also built up the credibility of the company. So the customers will buy other things when they come back for the second time.

Do your company and competitors ignore a portion of potential customers now? In fact, even President Obama targeted a tribe (young people, minorities and the poor) that were usually ignored by traditional candidates during his presidential campaign. If you want to be successful in a crowded market, you have to be creative and do something very different from your competitors. Love the customers your competitors hate. They may just be the ones who help your company grow to the next level.

Must-Have Business

During tough times, if your company was a must-have business for your customers, I am sure your company will do pretty well. OpenTable happens to be that kind of business. Like AdWords and regular affiliate programs, OpenTable’s customers only have to pay for results providing an extraordinary lead-generation marketing tools for restaurants. Like one of their customers said:

OpenTable.com has given us new ways to understand who our guests are, and what they want. Their system is helping us utilize the Internet to communicate more easily with consumers, and makes it easier to cater to the desires of our regulars…52% of the reservations that OpenTable.com delivers to us are first-time visitors to the restaurant, which means that OpenTable.com is bringing us significant numbers of new customers, as well as giving our regulars an easy and efficient way to visit us.”

Their system revolutionized the way that restaurants are managed and marketed, and add depth to the way that they welcome and communicate with their guests. OpenTable allows their customers to see who is eating at the restaurant at any given moment. So the restaurants can treat some guests like regulars. Oftentimes, their reservation system is indispensable to the diner, too. Like a restaurant owner said:

Next to the name of one regular, who has a habit of bringing in women he is not married to, is an instruction to make sure the man’s wife has not booked a separate table for the same day…Of another, who takes many of his first dates to Town Hall, the instructions read, “Do not treat like a regular!”

The bottom line: is your product a pain killer (got to have it) or a Vitamin (nice to have)? If you could create values to your customers during downturn, your company will be in a great position to continue to outpace the competition after the bad times.

Specialize in Just One Thing

When asked the key to success for Rackspace to become the fastest-growing managed hosting company, Pat Condon, the cofounder, believes their customers have chosen Rackspace because of their sharp focus.

We specialize in just one thing – managed hosting. We’re focused exclusively on managed hosting with Fanatical Support, and as a result we’re very good at it. Think about it this way: If you needed to have brain surgery, what kind of doctor would you choose? A general practitioner or a brain surgeon? I’d know I’d choose a brain surgeon – a brain specialist.

Moreover, combining this focus with their Fanatical Support, they have created a brand with tremendous value. Whenever potential customers hear about Rackspace, they will have a positive impression of the company. In fact, 60% of their new business comes from referral showing their existing customers are fully satisfied with their services.

For Rackspace, some of their most effective marketing actually came from serving their customers fanatically every day. It’s no surprise that their customer turnover rate is one of the lowest in their industry. Their customers not only stay with Rackspace but also purchase more from them as well. According to Pat,

Our customer base grows organically every month, month-over-month. What this means is that even if we didn’t sell anything to new customers, our existing customer base would keep purchasing additional servers from us. This has caused the Rackspace business to grow at a fairly rapid pace and it is something of which we’re extremely proud.

Rackspace has proven that the most effective marketing strategy sometimes just doesn’t cost you that much. How do your customers feel about your company? Do they have a positive impression of your business now? Do they recommend your services to others? If you want to find out these answers, creating a customer development survey probably can help you get started.

Strong Relationship with the Media

Salesforce.com, on the other hand, uses a totally different approach in marketing. They do marketing on the cheap through public relations and creating buzz. The company has a reputation of being able to work the media very well, especially for the founder, Marc Benioff. He is very outspoken and not afraid to take on their giant competitors like Microsoft, SAP and Oracle. He once said:

Relationships with the media are really important. The media has a more important voice today than it has ever had. We don’t advertise. We only have one marketing vehicle, which is editorial, and our ability to get our message out and communicate it effectively.

Besides disparaging large competitors as dinosaurs, 20th century fossils and monopolists, Salesforce.com is very good at guerrilla marketing as well. They once hired actors to stage mock protest rallies outside a competitor’s conferences, which brought tremendous attention to their company. The reason of doing that? Like Marc said:

In both good times and bad, people are always eager to hear about challenges to the status quo.

After all, does your company have a position in the market? Are you trying to be all things to all people? Find the customers who share your vision and stop blindly follow your competitors in the industry.

Conclusion

After this post series, we have heard consistently that their leaders have defined success on a very big scale. And it seems they are all using similar but actually different approaches to achieve their success. So stop looking for the silver bullet now. There are million ways to scale your business rapidly. Find your dream and fight for it till the end (hopefully).

I would like to end this series with a quote by another highly successfully entrepreneur, Glenn Kelman, the founder of Plumtree and Redfin:

If first-timers don’t create public companies, nobody will.

Telling young entrepreneurs that they’re not ready to be a Jedi yet, just because they’re young” is simply wrong. Fight on to victory!

Photo source: nickwheeleroz @Flickr

Part 1: Leadership & Vision
Part 2: Obstacles
Part 3: Growth
Part 4: Differentiation & Marketing


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