About Javier Rojas
Javier Rojas is a managing director at Kennet Partners, a private equity firm that invests in growth companies in Europe and North America. He has been reviewing the best business books for awhile, posting summaries of the authors’ big ideas on his blog and also monthly on Entrepreneur Corner at VentureBeat.
Latest Posts by Javier Rojas
There have been a number of interesting articles spotlighting two growing/related trends that I have been following: robotics and drones. Most recent was Paul Rand’s filibuster calling attention to the risk of US drone strikes on US soil. As a result, I thought it would be timely to repost my book review on Wired for War, first posted on Venturebeat.
In the book, the author Peter Singer discusses how military funding is driving dramatic advances in robotics and robotic warfare. In turn, this is rapidly reducing the costs of robotics and drones for eventual commercial use. Recently, 60 Minutes did a piece on the automation of the work environment through robots. They pose an interesting question: what will happen when robots displace more workers than can be reabsorbed by new jobs? How will we manage the economy when producers require little labor as well as a reduced number of skilled and white collar workers? Wired for War discusses how this reality is changing the military in a very real way today.
I tweeted a New York Times article about a related trend: attempts and new rules against drones being used to monitor people (in the US!). We can expect more drone/people tracking activity as these and related technologies – sensors, cameras, lenses, batteries, visual/data crunching hardware – continue to decline in price and footprint.
If you question whether these robotic/drone devices will have the agility for meaningful task: check out this video on quad-copter acrobatics. And here is a demonstration of how computer coordinated quad-copters can build skyscrapers in the future.
These articles highlight how fast these technologies are becoming mainstream and signal rapid commercial market growth in the future.
If you’ve been keeping an eye out for emerging market opportunities, it might interest you that robotics is one of today’s fastest growing technologies. Innovation takes place primarily in the battlefield (Iraq and Afghanistan) and through defense contracts, so most of the developments taking
place are not yet widely known. In “Wired for War,” author P.W. Singer explains how this progress will dramatically change the way that war is fought.
Science fiction fans will be struck at how much art and reality are converging. The author explains why this transformation is happening now, accelerating after 9/11, and covers some implications including our future propensity for war. Billions of development and procurement
dollars and the continued price/performance improvement of the low cost off-the-shelf hardware from which robots are built means that the capabilities of inexpensive robots will soon begin to dazzle us in the domestic market, as far-fetched as that may seem.
Robots are getting cheaper, faster and smarter – really fast. Your autofocus camcorder lens offers the same technology as robots being deployed in Iraq. Common, low cost, USB connectors are used for robot arms and appendages. The same technologies that deliver reduced size and improved performance in PCs, consumer electronics and smart phones will deliver exponential progress in robotics. 9/11 changed military interest levels in unmanned systems, when (for example) an unmanned Predator armed with a hellcat missile destroyed several key Al-Qaeda operatives.
The US government got robotics religion in 2001. At that time, the Senate Armed Services Committee mandated that one-third of all attack aircraft be unmanned within the decade, and a third of all ground combat vehicles be driverless by 2015. At the core of the shift is U.S. public resistance to American casualties on the battlefield.
IRobot is an example of a newly public robotics company capitalizing on this revolution. The company has two market-leaders in radically divergent applications. Roomba, a robotic domestic vacuum cleaner, has sold millions of units. Its predecessor, though, was developed for the Air Force to collect cluster bomblets from airfields.
IRobot also sells Packbot, a leading bomb disposal robot, first introduced in the 9/11 World Trade Center rescue effort. Thousands now support both Iraq and Afghanistan military efforts in the field, delivering hundreds of millions in sales, and saving the lives of hundreds of soldiers. Packbots have also been adapted to applications including field rescue (Medbots), armed with liquid bandages, morphine and diagnostic equipment.
In the Air Force, the most dramatic shift that’s taking place is unmanned drones. Cadets
with extensive video game experience often do well at controlling them remotely
from locations half way around the world in Nevada. Systems are being
designed more and more like video games to help users pilot them,
processing the large amount of data information required to do so
effectively from a long distance.
In the sea, robotic ships are being developed that require little or no crew, as well as
submersibles that can explore areas that humans can’t. The BP oil spill
recovery effort provides a timely civilian demonstration of what underwater
robots can accomplish.
For the future – the military has begun field-testing robotic soldiers: Packbots and other
Explosive Ordinance Disposal (or EOD) robots armed with weapons
for selective operations. One day, squads of robotic soldiers headed
by a human squad leader may effect raids and similar operations. Robotic
soldiers are more accurate and lack the human emotional challenges facing their
Today’s robots can only operate on about 30 percent of battlefield terrains but designs are
being tested that overcome the limitations of robot ‘legs’ and make robotic
soldiers a reality. The first soldier may have three or four legs to deal
with balance and special terrain issues, looking more like an armed dog.
Clearly there are questions and repercussions: How will this new battlefield help or challenge
American security cover; How will our enemies react? Will America (or others
with this technology) be judicious with force if its own troops are not at
For entrepreneurs, the lesson is clear: Robotics will be a large growth
market. We will see more opportunities emerge alongside these first
applications in the military, but also in vertical industrial applications
where a hazard exists – or even household uses.
Be on the lookout for single function applications that can be effectively
replaced (biohazards, nuclear plant maintenance) or by remote monitoring
with increased safety or process improvement. The best robotic
applications are jobs with the three ‘D’s – dirty, dull and dangerous.
At a glance:
Title: Wired for War: The Robotics Revolution and Conflict in
the 21st Century
Authors: P.W. Singer
Publisher: Penguin Group
Length: 512 pages
Why listen to the author?
It’s fair to say that Stephen M. R. Covey has spent his life and career studying the principles in this book. He is the son and business partner of Stephen Covey, author of “The 7 Habits of Highly Effective People,” which was named the most influential business books of the twentieth century.
The Big Ideas:
The author does a masterful job of clearly dividing trust into four core components: integrity, intent, capability, and result. The first two define character; the latter two define competence. Measuring where trust falls short with any of these components provides a road map for how to repair, build, or extend trust. Furthermore, the book articulates how to build trust with more than a dozen concrete actions. Finally, the book provides helpful rules to prioritize your trust investments. Integrity.Without integrity you have no foundation on which to place trust. Covey defines integrity as being honest, telling the truth, and leaving the correct impression. Beyond honesty, integrity requires three things:
- Congruence: Behavior consistent with your values inspires trust.
- Humility: What is right has to be more important than being right.
- Courage: When the right action is hard, integrity requires courage.
Intent.The author defines intent as plan or purpose, and breaks it into three components:
- Motive: This is the “why” of intent. The most motive trust-inspiring motive is one that shows genuine care for your employees or customers. If your motive doesn’t have this, then be prepared to pay a “trust tax.”
- Agenda: What do you intend to do based on your motive? The agenda that inspires the greatest trust is mutually beneficial.
- Behavior: This is the actual action that results from the motive and agenda. The behavior that inspires the greatest trust is acting in the best interests of others. As an entrepreneur, I focus on customer and partner relationships that focus on shared win outcomes.
Capability. Do you have the ability to accomplish the required task? This is critical, since you won’t deliver without it. The author breaks down capability into four key parts: talent, attitude, knowledge, and style. The more these suit the needs of the situation, the higher the competence. As I assess investment opportunities, I often focus on management team capabilities: can they meet the demands that a company’s high growth requires. Results. The most powerful and simplest test for trust is results — not just what the results were, but how they were accomplished. This is critical for entrepreneurs thinking of starting a new venture. In interviewing senior executives, I place the greatest weight on proven results, their contribution to prior successes and its relevance to our company needs. Inspiring/Investing In Trust.The author identifies 13 different initiatives entrepreneurs can take to inspire trust. Since creating trust in your workplace is essential to driving growth, the key issue is how and where to make those trust investments. Ask yourself these questions:
- What can you gain from investing in trust?
- What are you risking by putting resources toward building trust?
- What is the character/competence of the individual or organization in which you are making the investment?
Clearly, the lower the risk, the safer the investment. The higher the risk, the more you need to see strong character, competence, and prior results to justify the investment.
I felt this book had clear relevance to many of my startups and portfolio companies. As a model for my life – I have always felt the more trust you develop, the more effective you will be as an entrepreneur. The same goes for personal relationships. Most relevant to an investor, our fund places a lot of trust (shown in-part through multimillion dollar investments) in the entrepreneurs in which we invest. As a result, we focus on their track record, capabilities, and how well they manage their money, as a predictor of how they will use our money. We also seek to provide support through a board of advisors consisting of other executives with a track record of success and capital efficiency, to help improve the team’s capabilities. At a glance: Title: The Speed of Trust: The One Thing that Changes Everything Authors: Stephen M.R. Covey, Stephen R. Covey, Rebecca R. Merrill Publisher: Free Press Length: 384 pages
Key Takeaways from Kennet Partners’ Dinner Panel on High Growth companies…..the following story is part 1 of a 2 part series on a panel Kennet Partners held for high growth companies.
What do great high growth private companies have in common? My partners and I hosted a conference for high growth companies and executives last month around the INC 500 event in National Harbor, Maryland to discuss this topic in detail. Our motivation for the panel topic came from a book called “The Breakthrough Company” by Keith McFarland (review here) that explores this topic in detail – think “Good to Great” for companies going from $5M to $250M.
McFarland’s book covers several themes relating to growth: shifting goals from the founder’s success to that of the company; investing in new markets and approaches (including how and when to do that); and making the transition from being nimble to competing with scalable advantages. In the spirit of the book, we invited a great group of capital-efficient founders to discuss some of the books major themes and their personal experiences. The panel speakers, listed below, all led fast growth capital-efficient companies that achieved high value outcomes.
- Bill Edwards: Bill was part of the founding team of Siebel where as CTO/VP of Engineering he helped the company grow revenues from zero to nearly $2 Billion in 6 years, through an IPO and a successful exit to Oracle.
- Scott Hammack: Previously, Scott was CEO of Cyberguard which he turnaround and sold for $295 million to Secure Computing. Prior, Scott founded and was CEO of MasterChart, a company he bootstrapped, grew rapidly and sold to Allscripts for $125 million in 2000. Scott is currently the CEO of Prolexic, a Kennet portfolio company in the cyber security space.
- Frank Fawzi: Frank is CEO of Intelepeer, a fast growth VoIP provider of on-demand, cloud-based communications services that recently filed an S-1 with the SEC for an IPO (the company is a Kennet portfolio company). Prior, Frank founded, built, and subsequently sold CommTech Corporation, a bootstrapped, fast growth leader in the communications software sector, to ADC for $178M.
In the first part of the panel discussion, we discussed the topic of team development.
Team Development – Power of the Team versus the Power of the Founder
A big challenge we often find in bootstrapped companies between $5-$100m in revenue is that the company can be founder centered. Decision-making is really the founder working with department heads to make key decisions. This can work early on but the company runs into trouble as it grows. Founders/CEOs need to focus their employees on the company’s success rather than the founder’s success. As organizations grow, the organization’s ideas, decisions, and employees need to focus on building the company. McFarland refers to this important step as “Crowning the company”.
Panel Question: How important is a strong CXO team? How do small companies attract and recruit important CXO hires?
Bill Edwards (Selected Quotes):
-“A company needs to have a big vision to recruit top executives. A big vision will attract and retain high quality / senior executives. Siebel had a big vision from the beginning. This vision attracted high quality people that can run their respective business units through each stage of growth.
For example, Siebel’s marketing accomplishments are largely attributed to its marketing executive. Siebel wanted to create a tradeshow around CRM (Customer Relationship Management) when none existed. DCI was one of the companies running tradeshows, and they were not convinced of the market potential of CRM. DCI wanted a return, so a deal was struck that guaranteed them a profit. Siebel would cover any DCI losses. In return, DCI would highlight Siebel in all CRM tradeshows as the biggest sponsor and give Siebel all the keynotes in perpetuity. Moreover, by carefully managing expenses and ensuring strong partner sponsorship, the first (and all subsequent) shows were profitable. Only a highly capable executive could have pulled this off.”
-“Another important lesson in team building is to replace people that are not working quickly, especially people that do not fit with the company’s values. Siebel went through a number of CFOs in its first several years until one with the right skills was found.
-“Using references, particularly blind references from your network, is critical to recruiting top quality people.”
-“In addition, recruiting people that are doers is important. Some people have impressive backgrounds, but CEOs, founders, and managers need to understand what they did, not just what the company did.”
Frank Fawzi (Selected Quotes):
-“Company’s also need to keep in mind the timing and revenue stage of the company in making hiring decisions. As a company scales, the company needs to bring in more experienced executives that have managed larger organizations in the past. Founders and CEOs also need to make the right judgment calls and hire/let go of executives at the right time without delaying the process, since it becomes harder to terminate someone as more time passes – especially if the founder/CEO develops loyalties with early employees.“
-“Creating a strong work ethic in the company is also crucial. Companies with great teams need to create a culture where expectations are set very high for every employee. Employees and executives need to constantly deliver and exceed expectations.”
Scott Hammack (Selected Quotes):
-“If the company is a startup in a basement, similar to my first startup called MasterChart, then the founder/CEO needs hard working managers that are very smart and hands-on operationally.
If the company is broken and is more of a turn-around situation, similar to my CEO role at CyberGuard, then the founder/CEO needs to bring in new people and replace underperformers quickly.
If the company is working well, but missing key positions, then it needs to ensure all positions are filled with great people that can continue to scale the company.”
-“Leadership and teamwork are crucial at every point in the company’s life. I would set a plaque in the offices of all my managers to emphasize an important principle: Leaders build teams that build a business.”
-“Another key lesson learned building teams and companies is tracking employees using KPI’s. A company needs managers that can measure an employee’s performance effectively. Even in positions that are not easily measurable, leaders need to create new ways to measure people. For example, if a manager cannot track someone using sales figures or project deadlines, then measure an employee’s task completion status.”
Moneyball is hardly a new book. Written in 2003, it’s back in the spotlight these days as anticipation builds for the Brad Pitt-starring movie adaptation in September. But while sports and Hollywood might be the big focus these days, there are several lessons startup owners can take away from the story.
Author Michael Lewis explains how a baseball team applied analytics to compete with wealthier competitors and, in the process, changed baseball. It’s a rare case study for entrepreneurs showing how analytics can enable them to identify and execute a disruptive strategy in virtually any market.
Billy Beane, general manager of the Oakland A’s, took advantage of new sources of data to help pinpoint weaknesses in what had long been the standard approach in baseball, based mostly on intuition and rules of thumb. Beane determined which attributes really contributed to winning games, enabling him to snap up undervalued players and trade away the overvalued. The result: He competed with the Yankees, a team that had three times his budget for acquiring talent.
Despite the book’s age, its lessons are timely because virtually every business today has access to a treasure trove of data sources—such as the explosion of mobile and social applications, and their data exhaust—that it can use to compete disruptively. And Lewis has an amazing gift for both captivating readers and enlightening them about how things really work.
Here are the points that worked for the A’s in a way that any business can apply.
Big ideas from “Moneyball”
Every industry has rules and conventions worth challenging. Google changed search by looking at data correlating to documents rather than at text analysis, the industry standard. Netflix figured out how to monetize the long tail of movies rather than following Blockbuster’s mega-hits model. In your market, what’s the biggest element of waste your customers and employees face? If you had perfect information and could fix that problem, how big would the payoff be? Billy Beane could no longer afford to hire talent that didn’t generate wins. Because his team had a limited budget, he had to find another way.
Look for data or create your own.
The data that the A’s used to spot inefficiencies was widely available, so you’d think every team would have acted on it. Instead, many teams hired data analysts but then ignored their advice. Finding a breakthrough answer is easier than finding the will to capitalize on the new insights. Therein lies a great opportunity for entrepreneurs: They can start with a clean slate.
The A’s got their data from a baseball enthusiast (and night watchman) named Bill James, who brilliantly perceived that baseball stats failed to determine what really affected the outcomes of games. Look for people like James in your market who track interesting data sources or who have counter-market views on how the industry should work. Or develop your own data and data crunchers.
No PhD required.
The A’s had a college graduate with a degree in economics do most of their data crunching. You don’t need an expensive statistician to start; you need someone good with spreadsheets who can do basic statistics and regressions analysis such as a bright economics major college grad. If the opportunity is big and untapped (important for a bootstrapped entrepreneurial venture), simple tools will help you spot it. You can bring in experts to squeeze out incremental value later.
Less money is more.
It’s no accident that one of the league’s poorest teams came up with this revolutionary approach. Developing and applying analytics is not expensive, but it does require time, focus, and willingness to make changes. This too favors bootstrapped companies – modest capital dictates a different approach.
Look for runs, not wins.
It would have been difficult to create a model that simply predicted wins—too many variables affect the final score. Instead, Beane focused on the most important variable: runs. Statistics showed that if you generate more runs, you usually generate more wins, allowing Beane to focus on what created runs: avoiding strikeouts and getting on base. And so on-base percentage became the stat to manage: Walks, relatively unimportant before, increased in value. Base stealing was discouraged; the risks outweighed the gains.
In your business, what is a major variable that can lead to a good outcome? Think about who’s likely to read your content, go to your site, or attend your webinar. Focus, not just on predicting what delivers the outcome you seek, but on predicting what “moves the ball forward” more efficiently.
I’ve used analytics successfully in multiple ventures. In my prior career as an M&A banker, I developed a model to predict when a company would likely pursue a sale, based on variables such as the founder’s prior success, and the business’s revenues and growth rate relative to the market. Using this model, we invested in and spent time with founders most likely to benefit from our experience in commanding a high exit value. The results were stellar.
Link to the movie trailer on Moneyball, the new movie based on the book.
I submitted the following story on Moneyball to Venturebeat back in June – it is quite relevant given the recent release of the movie.
One of the biggest challenges entrepreneurs have is managing change – for prospects, customers and employees. Using research studies and integrating ideas from top authors with related insights, the Heath brothers, authors of the best-selling “Made to Stick,” have woven a concise, actionable formula for managing change and illustrated it with real life stories to drive the message home. It’s simple and powerful.
“Switch” addresses two parts of the decision-making process: analytical and emotional (the Rider and the Elephant). It’s a good way to understand why people behave as they do, address both parts of the process and achieve change
Big Ideas from “Switched”:
Making change happen is a three-part challenge. The more you address each part, the more successful you will likely be:
1. The Rider (our analytical self). Give clear guidance to the Rider to address his tendency for analysis paralysis in any change situation
2. The Elephant (our emotional self). No action or change takes place unless our emotional self is bought in, motivated, has clarity and is not ‘spooked’. He is slow to move but steadfast when put in motion
3. The Path – Most change problems are about situations, not people – and these can be controlled. Create a path that minimizes friction while reinforcing the needs of the driver and the elephant, and you can make big changes happen more easily
Big changes start small is a recurring theme of the book. Our ‘riders’ have a tendency to believe that big changes need big solutions. We often shoot ourselves in the foot before we even start.
Tactics that work with the rider include:
- Finding bright spots – Narrow in on something that works – then copy and promote it
- Scripting critical moves – Our ‘riders’ love to analyze, rather than take action. A carefully scripted starting action breaks this log jam
- Pointing to the destination – With a vision of the end goal, our ‘riders’ stop debating and start thinking about how to make it happen
The elephant and rider have to work together, though. Otherwise, the elephant is immovable and the rider becomes exhausted. Motivating and removing ambiguity for the elephant is critical.
Important tactics include:
- Finding the Feeling – The elephant works on emotion, so make people feel something to take action
- Shrinking the change – Elephants get scared of unachievable goals. Break the problem into small steps and show that you are already making progress
- Minding the environment – People are much more affected by their surroundings than we would expect. To keep the elephants marching in the right direction, don’t make radical changes. Instead, tweak the environment – making the change as easy as possible. Amazon’s 1-click shopping made online buying easier and Rackspace became more customer-oriented by getting rid of its call waiting system, forcing customer support to pick up the phone quickly.
- Building Habits – Habits that reinforce the change increase your chances for success. Use ‘action triggers’ – environmental landmarks that trigger a change. You can lay out your clothes the night before so that you are ready to work out in the morning, or clear your email while drinking your morning coffee, for example.
- Rallying the Heard – Get the group moving in a direction and it will keep supporting itself (although the social dynamics can be tricky). To make a revolutionary change, your change leaders need free space to meet in private and develop their own language.
Change is a constant in my portfolio companies and in our organization. Perhaps the most insightful part of “Switch” is the idea that big changes start small.
One of the reasons bootstrapped companies are often successful with little capital is that they often look to prove their value initially and profitably on a limited scale, then grow profitably from that point by replicating their success. By highlighting their prior successes – their bright spots – and focusing where they can be most effective (and capital efficient) they build momentum to eventually make big changes happen.
At a glance:
Authors: Chip and Dan Heath
Who should read it: Entrepreneurs, Marketers, Managers, Educators, Parents
This review also appeared on Venturebeat’s Entrepreneur Corner.
I have known Ajay Shah for more than 15 years. His success runs counter to the approach of most technology companies in Silicon Valley, and provides valuable insights in today’s technology market. Rather than rely on a technology breakthrough to create a large market, he created an innovative business model in a rapidly growing existing market: device memory systems. Another recent example of a company that had success following a similar market approach is Motricity. The company had an IPO last year and built its business by solving a customer problem for market leaders in a fast growth market consumer portals for mobile carriers.
Below is an interview I had with Ajay Shah on how he built Smart Modular, the interview was published on SandHill.com last year.
Some leading companies arrived at the top without taking early venture capital funding. Today’s market may call on companies to be more prudent in how they apply capital to generate returns. In this continuing series of discussions with founders whose capital-efficient businesses are recognized “Return Leaders,” Kennet Partners Managing Director Javier Rojas sat down with Ajay Shah, co-founder of Smart Modular Technologies, to learn how he bootstrapped his startup to create a billion dollar revenues business with only $80,000 of initial capital in just 11 years.
JUST THE FACTS
Name: Ajay Shah
Company: Smart Modular Technologies Inc.
Headquarters: Newark, Calif.
Date Founded: 1988
Venture Capital Raised/Used: $80,000
M&A Exit/IPO Valuation: IPO valuation of $500 million; $2 billion purchase by Solectron
M&A Exit/IPO Return Multiple: Very High/Not Meaningful Figure
Company Description: Smart Modular Technologies, Inc. designs and manufactures dynamic random access memory, computer memory modules, solid state drives, compact Flash cards, flash-based storage, and embedded storage systems for original equipment manufacturers. It sells products directly and through independent sales representatives primarily to major OEMs that compete in computing, networking, communications, printer, storage, and industrial markets. Communications companies comprise the bulk of the sales.
I have known Ajay Shah for more than 15 years. His success runs counter to the approach of most technology companies in Silicon Valley, and provides valuable insights in today’s technology market.
- Rather than rely on a technology breakthrough to create a large market, he created an innovative business model in a rapidly growing existing market: device memory systems. Investors call these businesses “execution plays” because they require great execution instead of innovative technology.
- Identifying a customer problem that his employer, Samsung, did not want to address, he jumped into the market with existing customers and support from a large corporate partner.
- Through excellent execution and continued product expansion, he grew the business to $1 billion in revenues.
The low cost and easy deployment of technology today is creating billion dollar market opportunities for entrepreneurs who can innovate new business models. These new billion companies often start as capital-efficient execution businesses. Here is how Ajay started.
Javier Rojas: How did Smart Modular get started?
Ajay Shaw: In 1989, I was director of marketing for Samsung’s memory business. I noticed customers kept asking for custom memory devices. We would send them to other companies to design and manufacture the product, but they wanted a more integrated solution from a dedicated provider. Together with Samsung’s Head of Application Engineering, Mukesh Patel, I proposed a new internal business to meet the requirement, but after several trips to Korea, Samsung’s management said, “no thanks.” They saw the memory market as a high volume business poised for rapid growth and did not want to create and manage custom designed solutions within it.
So, Mukesh Patel, my wife Lata Krishnan (who left a great position at Montgomery Securities to become our CFO), and I started a company ourselves. Samsung supported us on the condition we committed to a six-month transition period. This worked great for us. We used this time to develop the business plan and put together some of the first products, while working to meet their customers’ needs. We didn’t fully prototype the products, but designed and developed them with a little bit of our own money.
JR: How long did it take you to break even?
AS: Six weeks after leaving Samsung in 1989, we had a product, two potential customers designing our product into their devices, and an agreement from Samsung to supply memory in a tight market. Eight weeks after starting we had a customer, Network Equipment Technologies, and enough revenue to break even within the first quarter without taking a salary. We also had about 10 employees.
JR: Sounds like an amazing start. How did you handle the need for a manufacturing facility? Those aren’t cheap.
AS: This was in the middle of a tech downturn, so there was a lot of excess capacity. We went from outsourcing to manufacturing the product ourselves within four months by sub-leasing real estate on terms that didn’t require us to pay until the company generated cash. Manufacturing equipment vendors had new products sitting on the shelf, so Lata negotiated with them to lend us the money to buy their new equipment and rent space to make our product. This made a good first impression when customers came to visit. It was key bootstrap creative financing that got us going; early in the process, we took $80,000 from a friend of my father-in-law to build inventory.
JR: How long did it take for revenues to ramp?
AS: In 1989, our first year, we generated $3 million in revenues and became profitable. Back then margins were between 40 and 50 percent, but that didn’t last. Memory devices became plentiful the following year, pushing Samsung to increase business with us, which drove up revenues to more than $10 million.
IBM came in shortly after. They wanted to purchase our product, but their payment terms were lousy and we didn’t have enough money to fund inventory requirements. So, when we turned them down, Big Blue offered to guarantee specific purchases, which pushed Smart Modular Technologies’ revenues to $80 million in 1992. They prepaid before Smart Modular Technologies paid the vendor. IBM became a big customer and the positive working capital cycle allowed us to extend business elsewhere.
Apple, Cisco, Hewlett-Packard, and Sun Microsystems became customers after we landed IBM. It really shows how fast things can come together after being validated by a major vendor. Cisco was very small then. Operations Manager Tom Fallon (now Infinera CEO) and Randy Pond (now Cisco EVP of Operations, Processes, and Systems), who reported to Fallon, spent time at our manufacturing facility monitoring operations. Both men spent lots of time hanging around our operations.
As Apple grew into a major company in 1993 and 1994, they became nervous with our ability to supply the company with product because we were so small. They convinced Samsung to reverse the order of the business. Rather than sell us memory so we could build the device into the product, they sold the memory with our modules directly to Apple. This meant less revenue, but we were still paid for our value-added services. As a result margins looked much healthier and we didn’t need as much cash. Revenues in this period were:
JR: That’s amazing growth. Why did you decide to purse an IPO in 1995?
AS: That’s an interesting question. As founders, we weren’t going to get liquid, at least not initially, so the primary drivers were other shareholders and customers. First, employees had now been with us for a number of years and wanted liquidity for their equity, or at least a clear path to getting it. Also, it helped with customers. Compaq and Hewlett Packard were prospective customers that wanted to see us having the financial resources and transparency that comes with being a public company. Obviously it would make us more secure, but I suspect they also wanted transparency to have a better view on what our margins were.
Finally, we also acquired a company called Apex Data to enter the data communications market. That product acquisition wasn’t successful but the team, technology, and credibility it provided allowed us to form a new division that grew to more than $250 million. The investors in that company also looked for liquidity, which also drove us toward an IPO.
The stock was rocky after the IPO. It first went very high, then collapsed. We kept focused on the business and kept growing.
JR: Sounds like you were all set with financial resources, what happened next?
AS: The next five years we grew very fast. Our memory business was strong, but we realized that we needed to get into some new areas for additional growth and to diversify. The first was communications, as I mentioned before. The Apex team and their capabilities helped us land HP in this market. We then signed Qualcomm and Toshiba. We grew from virtually zero revenue in 1994 to a $250 million business by 1999. This market was driven by the rapid growth of telecom company investments in new communication equipment.
The other big market for us was embedded systems. These were basically racks of computer boards loaded with customer software and custom chips to deliver a custom appliance. We grew this to about $30 million in revenue organically and then we acquired Compaq’s (formerly DEC’s) operations adding $100 million in revenue in 1998. This market was driven by enterprise networking requirements with Cisco being a major customer. By 1999, this was a $140 million business. Memory made up for the rest of the growth, more than doubling our growth from 1995 to 1999. Here was the annual breakdown:
JR: Why did you merge with Solectron in 1999?
AS: By this time, we had grown the business to a sizable level and would need a partner to keep expanding or enter new markets. As founders, we were also ready for some liquidity and the $2.2 billion acquisition was attractive for $120 million in earnings.
Solectron, a contract manufacturer for the electronics industry, wanted to expand their offerings services by becoming a product company. They had an embedded systems group, Force Systems, like ours with $150 million in revenue, so combined we had a $300 million division.
Prior to the merger, Smart Modular Technologies generated about $1 billion in revenue. The newly formed Solectron Technology Solutions Business grew to about $3 billion during the next two years. In that time we acquired a few other businesses.
In 2002, when new management came in, I left Solectron’s board. At the time, margins dropped and manufacturing continued its move to China. The CEM divested the solutions group in 2004. I led a group that bought it back with another partner because we liked the business and believed we could revive margins.
JR: What lessons did you learn from the experience?
AS: Most people ask if I’m glad that I didn’t take VC funds other than money from small investors. It worked out well for us, but as I look at what others accomplished in this period, I feel a partner could have helped us accomplish more. Institutional money allowed others to take more risks and professionalize sooner. Smart Modular Technologies professionalized but not in the same way or timetable. This may have lead to a bigger outcome, but we will never know.
Two key lessons I learned:
- When you see a customer problem not being addressed by your company, look to see if that might be an entrepreneurial opportunity. The opportunity that was presented to us required great execution, not technology innovation, but it was sizable just the same and well suited to our skill set. This brings me to my second point.
- To pursue an execution-focused business it helps to have some large company management skills—they certainly favored us—and you need to execute flawlessly while you are growing rapidly. That’s not easy to do but it was what led customers to grow their business with us, providing strong references to others.
One of the most important roles we can play as entrepreneurs is to inspire and motivate, evangelizing our ideas to recruit partners, employees, customers and capital. It’s a 24/7 job and mastering the skill is vital. Yet I, like most entrepreneurs, have a healthy skepticism for much that passes as lessons in marketing communications or ‘Marcom’. Advice is often based on ‘spin management’ and lacks concrete, actionable recommendations.
This is why this book is so wonderful: it provides a concrete formula for making your messages stick and spread. There is a formula for being a master at evangelizing great ideas and the Heath brothers have captured it. If you remember nothing else remember this – the reason you are not doing as well as you could in your communication is that you know too much. Amazing but true – read on.
The authors have developed a formula to rate any message or presentation on exactly how memorable and effective you are likely to be in your call to action. Even better, the formula can be tested and also shows you how to improve. The model was developed based on analysis of a broad range of proven and effective messages ranging from famous speeches like Aesop’s fables, to sports quotes, successful lesson plans and advertising messages. It also combines a splash of neuroscience to support why the brain needs these elements to hold on to an idea. The resulting formula can be used to significantly improve your ability to define the core message. Use it to get people’s attention, get them to believe you, get them to care and then finally – get them to take action. And the best part is that the Heath brothers practice what they preach so there are lots of interesting stories with surprising turns, that demonstrate the power of their advice.
Why should we listen to the authors? Chip Heath is Professor of Organizational Behavior professor at Stanford Business School, teaches on the subject and has spent 10 years researching it. His brother is a researcher at Harvard Business School, works in the new media textbook market and has also spent years researching how to most effectively communicate ideas to students to make them stick. The two teamed up to distill the lessons they have learned into this handy guide.
The Big Ideas:
The Curse of Knowledge – This is the prime culprit in non-inspirational communication. The more you know the worse you are at spreading the word. There are several reasons for this:
First it is very difficult to think like a novice when you are an expert, yet most messages are targeted at those who know less about your subject than you do. You cannot solve the problem by trying to imagine that you are not an expert because ‘you can’t get there from here’. You need to use techniques (like those provided in the book) that force you to speak their language.
Second, the more you know about a subject, the more your brain shifts into abstract thinking. Subject experts can process ideas at a higher level (it happens without you realizing). This is exactly the opposite of how novices think: they need concrete information and influence to understand, believe, get engaged and take action. The curse of knowledge blinds us (Great Concept!). Get your executives to try the tapping exercise to drive this message home.
S.U.C.C.E.S – The authors have a simple acronym for their checklist: Simple, Unexpected, Concrete, Credible, Emotional and Stories. They may seem self-explanatory, but the Heath brothers have and share great insights to make them happen. You don’t need all, but the higher you score on each, the greater the impact. You can also use this checklist to ‘score’ any message that gets put in front of you. Here are some of the highlights:
- Simple – get to the core of your message and make it compact so it’s memorable. What single word or words define your message? For Southwest, it is that it is THE low cost airline – a defining principal. If people have this insight, will they know what to do? Sharing this requires compactness. Palm founder Jeff Hawkins walked around with a wooden block the size of the product around his neck to communicate his goal. A great tactic is to hijack a well defined idea: for a movie think Jaws on a spaceship = Aliens. This allows you to quickly tap a rich map of defining characteristics and associate them with your concept. Analogies work well here also.
- Unexpected – You need to get people’s attention in a relevant way. Our brains are brilliant pattern-recognition engines designed to filter out and forget the expected. You need to create unexpected insights relevant to your message to get engaged. A great story is how Masaru Ibuka, Sony’s co-founder, inspired the company to build its first breakthrough product – the pocket radio – at a time when radios were furniture. The shock of the challenge captivated 1000 engineers through an innovation breakthrough and put the company on the map with their first consumer product.
- Concrete – This is critical to understand and one of the best tools for overcoming the curse of knowledge. Concrete is the common language of novices and experts. The Velcro theory of memory is also a great insight – the more hooks your idea has into the mind, the more it sticks. How do you build those hooks? The answer is that a concrete object focuses and mobilizes the brain. Jerry Kaplan, founder of GO Computer, raised his start up capital from Kleiner Perkins in a few days with the use of a leather notebook to focus their minds.
- Credible – There are multiple strategies for building credibility and the authors share some great ideas such as statistics. Often poorly used, you need to make statistics accessible. One idea is to use metaphors that people can relate to. For example: About 1000 people die due to hospital mistakes per month: ‘if hospitals were 747’s, pilot error would be accountable for 2 plane crashes a month’. Validate your idea by the best. The Frank Sinatra credibility test is a great insight – market leader validation – ‘if you can make it here you can make it anywhere.’
- Emotional – Emotion gives people the power to care to take action. To quote Mother Teresa : “If I look at the mass will never act, if I look at the one I will.” Appeal to people’s higher needs and aspirations, often these are more empowering than base instincts like money. What is the benefit of the benefit? The authors make an interesting point on the power of people’s self identity: Voters often vote against their own self interest in favour of the interests of a group with whom they identify.
- Stories motivate action. They are the best way to get people to act. They communicate lessons and simulate action. They are also easy to retell, spreading your ideas. The best stories aren’t created – they occur naturally, are spotted and then retold. There is a great example of Jared from the famous Subway ad campaign – this powerful story and successful campaign was spotted and initiated by a franchisee and was developed despite the lack of support from the company’s marketing department (curse of knowledge – they hadn’t read this book!)
The book captures key lessons that I have used for years to help fellow founders communicate their ideas. Different components are useful in different areas. As an example, when we speak about the ability to use bootstrapping to create a market leader we don’t quote statistics: we ask ‘What do Microsoft, Dell, Cisco, Ebay and Siebel all have in common? Answer: They were all bootstrap-financed to between $5 and $60M in revenue.’ This message is unexpected and on point. My favorite use of these principals is story-spotting. I love hearing about how other entrepreneurs started and built their businesses. To me these stories are inspirational – particularly those that did it with modest sums of capital, relying on their own abilities. They are empowering. As an example, here is a link to a great story about how Mark Leslie started VERITAS and built it to a $1.5 billion business on primarily a $4M capital investment.
When I get ready to talk to people, I spend two thirds of the time thinking what they want to hear and one third thinking about what I want to say. Abraham Lincoln
From the author:
Thanks for reviewing Made to Stick. I love the Microsoft, Dell, et al, example of the power of bootstrapping. It’s a perfect example of a situation where a lot of people use statistics (“83.2% of entrepreneurial ventures are bootstrapped, blah, blah…”) but there’s nothing more Concrete and Emotional than that Hall of Fame list of companies—something to inspire every entrepreneur whereas the statistic wouldn’t.
Authors: Chip and Dan Heath
Who should read it: Entrepreneurs, Marketers, Managers, Educators, Parents
Note: An abridged version of this review originally appeared on Venturebeat’s Entrepreneur Corner.
Entrepreneurs are always trying to break new ground, so it is inspiring to look at how others have succeeded. Tony tells the story here of how he started his two very successful companies, the lessons he learned along the way and a model he has developed for creating intensely passionate corporate cultures. Unlike business books by researchers that observe trends, this book is about what Tony has learned personally and how he thinks other companies can benefit from his experience. Interestingly it pulls together many themes for my last few book reviews – Switch, Drive and Made to Stick.
Tony also likes reading and applying the latest learning from the emerging field of positive psychology (a.k.a. how to be happy). He is the first entrepreneur that I have seen to take many of the tenets from the positive psychology field and apply them to make his customers, partners and employees work together for a great, shared outcome: very forward-looking and clearly successful. His insights are helpful for anyone building an organization looking to deliver amazing results.
Why listen to the author?
Tony is a proven entreprereneur having sold his first business, Linkexchange, to Microsoft for several hundred million with a very small venture investment. His second business is Zappos which he still runs. He built this to over a billion dollar sale to Amazon. He is an avid reader of business books and works to incorporate proven lessons into his management approach. Tony is now looking to help other companies learn from his success.
The Big Ideas:
Develop Core Values – Tony woke up one day after having built a successful startup and realized he wasn’t happy with the culture he had built. Not excited about going to work every day he decided the best move was to sell his company. He decided that in his next company, Zappos, he would develop a set of core values among the team so he would always enjoy being with the people at work. He outlines the process he went through at Zappos to develop and ingrain the culture. It seems to have worked since he was initially reluctant to sell Zappos to Amazon.
Focus on a Core Competence – At Zappos, he wanted to not just build a company but rather to pursue an inspirational mission. In discussions with his founders, they concluded THE thing they would focus on would be insanely great customer service. With a reputation for amazing service they would be able to expand well beyond shoes to be an ecommerce vendor of a wide range of products. As a low margin ecommerce vendor of shoes this is an expensive and, at the time, risky decision. Not just an empty proclamation, they made three audacious moves to purse this goal: they walked away from 30% of their revenues overnight, they brought their warehouse capabilities inhouse (in Kentucky) and finally, they moved the entire company from San Francisco to Las Vegas (then almost 100 people).
Develop a great team – Tony realized that he would only be able to achieve his vision of delivering amazing service if he had the best people working together and that they were trained and focused on the goal. He calls this the “Pipeline” for the pipeline of talent. He has an innovative talent development program that starts with four weeks working on the customer service desk, incentive pay to leave after four weeks (to weed out the noncomitted), extensive training on the Zappos way of doing things and then a step by step progression to make sure that successful employees are seeing steady progress and career growth. I was very impressed with Zappos University, and ongoing program of distilling what Tony and others have learned from leading business books to help employees continue to improve. By continuously investing in the pipeline of talent, he will have a steady stream of future leaders to drive growth and realization of their shared vision.
Transparency – Probably one of the most interesting programs Tony put in place to promote, ingrain and promote the Zappos culture is that they annually publish a book about what the Zappos culture means to the employees and partners. By making it community generated and visible, he has a feedback loop to make sure that everyone knows what it means to work with Zappos and spotlight potential issues. They also host tours and share much more information with partners than most ecommerce vendors. The theme for these initiatives and others he mentioned are transparency – make your goals, actions and results visible to build trust.
Pulling it all together – Tony calls his program BCP which stands for Brand. Culture and Pipeline. In his view a company’s core competence becomes what it is known for, so that becomes the company’s Brand. The company’s core values and mission statement define a unified Culture so if people are really living to the values and mission, the culture will be easy to identify. Zappos has 10 core values; they are pretty interesting and, like all else in Zappos, a bit different. And the Pipeline of great talent, trained to execute against the core values and focused on the shared mission creates and unstoppable force. What is striking about Tony’s view is that thinks about very long time horizon to achieve his very ambitious goals so he can make long term investments in junior talent that few competitors would seriously pursue.
Long term View – This long term vision can be a problem for investors that have shorter time horizons. The result was that Zappos was bought by Amazon but Jeff Bezoz, Amazon’s founder and CEO had so much respect for the model that they agreed to run Zappos as an independent business, giving Tony and the Zappos team room to pursue their vision.
As an investor in a range of businesses, a constant is the importance of working with great teams. Founders and executives with a strong and coherent set of core values and a strong mission are the most successful. One of my companies had 5 well defined core values: drive, integrity, collegiality, humility and intellect. By embracing these values, we were able to manage a large scale recruiting effort growing to over 400 people with a homogeneous culture. These values, coupled with an inspirational mission enabled us to assemble a great team and grow dramatically in people and revenues. They also helped us build a set of lifelong relationships that have transcended that business.
Happiness is that state of consciousness which proceeds from the achievement of one’s values. Ayn Rand
Author: Tony Hsieh
Who should read it: Founders, Entrepreneurs, Managers, Coaches, Teachers
This review was first posted at VentureBeat’s Entrepreneur Corner