Cultural Competence

What is Cultural Competence?

Core competence is a factor that cannot be easily replicated and gives the business a competitive advantage in delivering their product or service to customers. Core competencies are how a business does something.

Cultural Competence is the lens through which opportunities are identified and evaluated. Cultural competencies are how a business figures out what to do. [1]

Implications

Every business, no matter the size, has cultural competencies.

  • Cultural competencies are a reflection of the founders’ personalities. It’s no coincidence that Google was started and led by Ph.Ds, Apple by a designer-perfectionist, and Amazon by a quant from a hedge fund.
  • Cultural competencies are directionally set as you go from 0-20 people. If you achieve product-market fit, you will only deepen your cultural competencies. You can inject new culture via new (strong) leadership, but the existing leadership has to be receptive. The larger the organization, the harder this is.
  • Product market fit is easier to achieve if you work with your cultural competencies, not against them. Often times when a company builds the wrong product, the market they are pursuing does not align with their cultural competencies.
  • If you understand your cultural competencies, filtering potential opportunities becomes much easier. Be honest about whether or not the market you are pursuing can be won given your cultural competencies.
  • Don’t emulate another company’s cultural competencies, as many do against Apple. Pursue a market through your own cultural competencies to create a differentiated (and more successful) offering, as Amazon has done with Kindle Fire.

How do Cultural Competencies develop?

Cultural competencies are an emergent property of people in an organization. It starts with founders who pursue ideas and markets they understand. If they get traction, they hire a team that thinks about the opportunity similarly (belief in the vision). If they achieve product market fit, they hire more people. These people then pursue scaling a business in the way that has worked best thus far, reinforcing the cultural competencies and world view. This yields more revenue, which results in more people hired to support that core business. At each iteration, the new hires cause a deepening of existing cultural competencies.

An example: Amazon vs. Google

Amazon and Google share core competencies. They’re focused on large data problems, machine learning, exploiting massive infrastructure, experiment driven monetization, and more. They have non-overlapping core competencies, as well. Amazon has phenomenal customer support and logistics, while Google has deep expertise in search and performance-based advertising.

Given their similar core competencies, no one should be surprised that Google and Amazon both pursue the smartphone and tablet markets. However, their approaches are dramatically different because of their different cultural competencies.

Google’s cultural competence sees the world as signal and noise that must be filtered. A minority of the signal is commercially useful, and Google monetizes the shit out of it. This is how they manage to make money on search, email, and maps when few others can.

Amazon’s cultural competence sees the world as a series of transactions on which it can build a platform. Amazon pursues opportunities that will facilitate repeated transactions and then builds the platform to own all of these transactions. The Kindle was made to drive the sale of digital books. Free Shipping and Amazon Prime are levers to drive more sales on Amazon. It’s all about increasing and owning transactions.

How Cultural Competence Skews Perspective

For Google, Android is the key to owning mobile search and ads. Google’s cultural competence perceives Android as a moat for Google’s castle — search and ads. For Amazon, Android is about selling more video content, pushing Amazon Prime (which results in more sales on Amazon.com), and the Amazon Android Market (a digital goods store). Amazon’s cultural competence sees Android as a platform to enable more commerce and monetize directly.

Same platform, yet dramatically different perspectives, and ultimately different ways to extract value out of the ecosystem.

How Cultural Competence Impacts Product Success

It is not a surprise that Google makes a small amount of money directly from Android. Google’s cultural competence does not align with what the market demands from a direct monetization product — Google Wallet, Checkout, and the Play Market are examples of how Google fails because their cultural competence prevents them from building the right product.

For example, Google has rich analytics in the Android Developer Console and has search baked into the core Android experience. Given their cultural competence, it makes sense Google would prioritize these features. At the same time, the platform has no subscription billing and has yet to create a seamless integration of apps and content, 9 years after iTunes revolutionized digital content delivery. Google’s cultural lens has led them to either build the wrong product or be unable to come to a decision about what the right product is for a direct monetization market.

Meanwhile, Amazon has had no problem defining a transaction platform because of their cultural competence, and they execute on this market opportunity efficiently because their core competence is building transaction based products. Amazon has demonstrated this in multiple markets.[2]

Google’s lack of direct monetization from Android is not a surprise. Apple’s lack of monetization via iAds is not a surprise. Amazon’s lack of monetization through auctions is not a surprise. [3]

Credits

Thanks to Elad GilCurtis Spencer, Aditya KoolwalDan Siroker and Yin Yin Wu for reading drafts and providing input.

Appendix


1 – I just created the term “cultural competence” to apply to something that people have talked about informally for a long time, so the definition will likely evolve. The concept itself has been floating around in lots of brains for a long time. Edit: Turns out it’s been used in the HR world to mean something different (see comments below). So the definition in this post is more of a “secondary definition” than an “invention”


2 – Another Amazon vs Google example
Hosting platforms are another great example of how cultural competence skews outcomes. Amazon looked at Amazon Web Services the way they look at their retail site. Find the simplest set of things people will buy, then broadening out to related offerings. They manage inventory, demand, and have efficient pricing. Amazon figured out what developers wanted (S3 and EC2), sold it to them, and then expanded the offerings.

Google’s cultural lens skewed their perspective towards thinking that what developers want is the most efficient way to manage large amounts of data and not worry about scaling. Most businesses don’t have Google scale problems and don’t want Google’s internal platform approach to manage their non-Google problems. They need something that works with existing (open source) systems and leaves them the freedom to customize infrastructure. Google tried to apply it’s cultural lens to a market, rather than find a market where it’s cultural competence would give it a competitive advantage.

Hosting is fundamentally a retail problem, not a signal vs. noise problem. Amazon Web Services does $1 Billion in revenue and Google has been tweaking App Engine for years. This is a prime example of how to filter opportunities and pursue ones that align with your cultural competence.

3 – Examples of Cultural Competence Failure
Companies that have a strong cultural lens will stay focused and thrive. Those that dilute their cultural competence die because they lose a very important filter for which ideas to pursue and how. Companies that try to build outside their cultural competence tend to fail as well.

  • Apple – Apple’s cultural competence is finding large industries full of geeky products and Apple’s core competence is building simple, cool status symbols in their place. Laptops, desktops, phones, and music players are all examples. Ping (their music social network), MobileMe, Pages/Keynote/Numbers, and iTunes are great examples of where if the product succeeds by piggybacking on their hardware business, not because it’s a great in its own right.
  • Facebook – Facebook’s cultural competencies lie in identifying opportunities to enable sharing. Every software, app, or platform upgrade is about fostering more connections and data flow between people. Facebook sees markets as an opportunity to get users to share more, find out more about their friends/connections, and elicit relationships (family, friends, worked with, who likes whom) that were previously unknown. When they try to extend this into another area, like daily deals, they don’t do well. Daily deals are not about the relationships between peers, they’re mostly about Facebook’s relationships with merchants.
  • eBay – has core competencies in peer-to-peer transactions (sometimes with goods changing hands). eBay’s cultural competence is around bringing groups of people together into a marketplace and getting them to trust each other and the marketplace. When they diverged from this (Skype, StumbleUpon) they failed. When Skype and StumbleUpon spun out from this cultural lens, they thrived. When eBay applied their cultural competence to Paypal, it worked beautifully because Paypal is fundamentally a trust network.
  • HP – has core competencies in manufacturing, distribution, and enterprise sales. What is their cultural lens? How does HP decide what opportunities to pursue and how to leverage its core competencies? They’ve floundered on this for quite some time.
  • Microsoft – has core competencies around desktop software, business applications, and selling through enterprise distribution channels. Their cultural competence has always been finding ways to make businesses more efficient with their PCs. They make a healthy profit in their servers and tools division since this aligns nicely with their cultural lens. Every time they stray away from this cultural competence, they struggle. Signal vs Noise businesses (Bing) burn cash and Entertainment (Zune, Xbox) operates at break even.

Good resumes vs. Great resumes

Below are three traits I’ve noticed all great resumes exhibit. This is not an exhaustive list and applies to the for-profit and non-profit sectors. Academia, art/music, and other fields likely exhibit other dynamics. I’m hoping to be helpful by sharing some tips I haven’t seen mentioned before.

Great resumes:

  1. Quantify accomplishments
  2. Focus on skills acquired and required, not activity
  3. Think about a career stepwise

1. Quantify accomplishments

Quantifying accomplishments allows others to understand impact and demonstrates that you measure things. People who are in the mindset of measuring are the ones who improve most over time. And if you aren’t measuring yourself, then you probably aren’t measuring other day-to-day things like your team’s progress or your employees’ progress. Using numbers is a nice way to have the data stand out from the surrounding text and save space.

2. Focus on skills acquired and required, not activity

Most people talk about what they did instead of what they had to learn and how they learned it. Great companies look for someone who will excel at the required job, but who can grow into a larger role as well. Since there is rarely a perfect candidate, finding someone who can do 85% of a role and can grow into the other 15% is often the best hiring strategy. The best indicator of how you will grow is how you have already grown.

3. Think about a career stepwise

The jobs you’ve held should be the steps to reaching your dreams and ambitions. The best candidates think of the job for which they’ve applied as a stepping stone to these goals. Show how each position you’ve held built on the previous positions and it should be clear very quickly to someone scanning your resume that you’ve purposefully developed skills and progressed over a career.

You should also project this forward. Why is the job you’re applying for a natural extension of what you’re currently doing?

Examples

Not Great:

  • Work with a team to provide reliable tracking of users (Flurry, Mixpanel and custom tracking tools) and to analyze customer behavior through frequent analysis of usage statistics and power users.

Better:

  • Implemented user-metrics tracking that resulted in 50% faster resolution of support issues and a 25% drop in in-bound customer support requests.
  • Analyzed customer behavior to proactively identify power users, resulting in 10% faster conversion of free users to paid and was part of an effort that increased sales $250,000/year.

Not Great:

    Some University (Sweden), Bachelor, Software Technology Programme, 2009

  • Awarded President’s Scholarship
  • Bachelor Thesis: Comparative Analysis of Development Frameworks

Better:

    Some University (Sweden), Bachelor, Software Technology Programme, 2009

  • Awarded 100% scholarship, offered to 5 students per year
  • Bachelor Thesis: Comparative Analysis of Web Development Frameworks, available at: http://www.someURL.com

Not Great:

  • Developed websites for clients. Included database design and implementation, use of the Model-View-Controller methodology and creation of unit tests. Involved extensive use of PHP / CakePHP and MySQL, HTML, CSS, XML, Ajax and JavaScript.

Better:

  • Designed, architected, and developed websites for 12 clients in 6 months.
  • Learned Model-View-Controller paradigm using CakePHP, MySQL, HTML, CSS, and Javascript in 2 weeks to launch our first client’s website.
  • Developed a custom unit testing framework in 1 month which resulted in a 25% reduction in bugs per client over the life of a project.

Not Great:

  • Led several projects and initiatives involving the automation of previously manually tested functionality and migration of data to a database.

Better:

  • Led team that automated testing tasks that previously took 50 hours per launch, saving 5000 hours/year.
  • Promoted to database administration team after 6 months. Self-learned SQL and helped migration to scalable database systems that could handle 10x more load.

Not thinking about a career stepwise:

  • Company1  – Premiere Field Engineer (Sept 2009 – Sept 2011)
    • Engineered some project and worked on a team that did something
  • Self Employed – Independent Consultant (Sept 2007 –  Sept 2009)
    • Technical consulting in IT and security projects
    • Trainer in courses for MCSE and MCSA
  • Company3 – Trainer & Engineer (June 2004 – June 2007)
    • Trainer for Microsoft certified Systems Engineering courses
  • Self Employed – Independent Consultant and Engineer (June 2002 – June 2004)
    • Security Consultant
    • Trainer and Consultant with deployment software

Stepwise positioning, with a clear building and career progression:

  • Company1  – Premiere Field Engineer (Sept 2009 – Sept 2011)
    • Engineered some project and worked on a team that did something
    • Led Europe’s leading IT support company in initiatives to educate and train 450 support staff in Microsoft technologies
  • Self Employed – Independent Consultant (Sept 2007 –  Sept 2009)
    • Started consulting business to train others for MCSE, MCT, MCSA
    • Consulted 45 companies on best practices for IT, security, & Citrix projects with an average class size of 23 trainees
  • Company3 – Trainer & Engineer (June 2004 – June 2007)
    • Earned MCSE, MCT, MCSA certifications
    • Promoted to train others in the company on Microsoft certifications
    • Developed xyz things for the company
  • Self Employed – Independent Consultant and Engineer (June 2002 – June 2004)
    • Security consultant focused on training new engineers on best practices for building secure software

Focus on building 10x teams, not on hiring 10x developers

There are a lot of posts out there about identifying and hiring 10x engineers. And a lot of discussion about whether or not these people even exist. At Spool, we’ve taken a very different approach. We focused on building a 10x team.

We believe that the effort spent trying to hire five 10x developers is better spent building one 10x team.

10x matters because of the Economics of Superstars

The “Economics of Superstars” observes that in some industries, marginally more talented people/groups generate exponentially more value [0]

The Economics of Superstars phenomenon requires a distribution channel to move a large volume of goods. For superstar athletes, television enables endorsements and merchandise sales. For software developers, the Internet enables scalable distribution of digital goods.

Finding a way to be 10x better than median can now generate exponentially more value for people who make digital goods.

In software, the superstar is the team, not the individual

In the Economics of Superstars, if an individual has tremendous control over the outcome (points scored in a basketball game), that individual is the beneficiary. So Kobe gets a big chunk of the value he generates for the team, stadium, and advertisers.

Software development, however, is more like rowing. It’s a team sport that requires skill and synchronization. This applies at all scales. On a three-person boat, one person out of sync will stall your boat. As you get bigger, no single developer can impact your team’s performance, so again synchronization is key.

Making your team as efficient as possible is what determines long-term success. [1]

A bunch of 10x people != A 10x team

Most hiring processes assume that if you find a great developer and put them on a great team, the individual and team will do well. Good teams try to nail down “culture fit” but this is usually only based on whether the candidate gets along with the team.

Throwing together a bunch of great developers who get along does not make for a 10x team.

How to Think About Building a 10x Team

Building a 10x team is a different task than trying to make an existing team 10x more efficient. The hardest part about building a 10x team is that who you need next is a moving target because it’s a function of who is already on the team.

The following are the top three non-technical questions we (Spool) ask ourselves when considering a candidate:

  • Does this person extend the team’s one strategic advantage? Successful startups do NOT have world class design, engineering, sales, and marketing all at once. They tend to be phenomenal at one thing and competent at the rest. Eventually they upgrade talent for “the rest.” For example, Zynga first nailed virality with crappy graphics, then later upgraded their art teams.
  • Is there enough shared culture? – Communication overhead will cripple most teams. Hiring people with a common culture is the simplest way to solve this problem. For example, alums of a university tend to use the same  jargon, think similarly, know the same programming languages, etc.. They will communicate naturally and are free to focus on higher order problems. It’s not a surprise that Paypal was mostly UIUC, for example. At Spool we’ve consciously hired mostly Stanford alums because Curtis and I are Stanford grads. Update: I apologize if I gave the impression that we don’t value diversity. As you can read in the comments, we’ve gone out of our way to build a diverse team. But there are many things that don’t impact your success early that you can short-circuit by picking people who have a similar enough background. Goldilocks Principle ftw 🙂
  • Does this person make other people better? A friend once told me that the best hire he made was a mistake. Had he properly screened this candidate’s technical ability, he wouldn’t have hired the candidate. But it turned out this engineer was so driven that he immediately made everyone else on the team more driven. Just by hiring him, the team became more productive, which far outweighed that individual being an average engineer. It’s sometimes worth trading off some technical ability to get a multiplier for your whole team.

What sorts of people make other people better?

When we were building Spool’s founding team, we looked for people who were technically solid but especially good at making other people around them better. The following are the types of people we identified that do this. There are probably others.

  • The Lead Engineer  sets the technical standard. She will conduct the hardest interviews and will generally work technical magic. She will raise everyone’s technical bar. This is usually what someone says when they mean 10x developer.
  • The Hustler will bend the rules a little when need be, find loopholes in a system, find people you need to find, hack together systems to extract data, and set the standard for just getting things done. She challenges everyone’s thinking about how to get things done.
  • The Little Engine That Could refuses to lose. She manages to do great things through sheer determination. Sometimes she will tell you about this in an interview, but many times you will need to dig into someone’s background to get a read on this. She makes everyone else more driven, focused, and makes them believe great things are possible.
  • The Teacher soaks up and disseminates information. A teacher is constantly learning new technologies or synthesizing large amounts of information. She then distills the critical points and actively shares them with others. She makes everyone more productive almost immediately. This adds up tremendously over the years.
  • The Anti-Pinochio  is willing to call b.s. on anyone, including the CEO. She is great at spotting b.s. and willing to ask questions of anyone. This keeps a team honest and a company transparent. This is different from being an asshole or a heretic.
  • The Energizer Bunny throws herself into a task fully and doesn’t have an off switch. She gets everyone to give 100% and is so enthused that everyone else becomes enthused. She sets the bar for effort and make everyone want to work harder just so they don’t disappoint her. This extends outside work too. She’ll be the first person at the party, the last one to leave, and will make everyone have more fun every day. Happy, enthusiastic teams are productive teams.
  • The Heart – this is the person on the team that everyone misses when she’s not around. She’ll bring cookies in for the office, she will remember birthdays, she will make people feel better when they’re down, and she will make people do great things because she’s just so lovable. People want to come to work to see this person everyday. Just having people look forward to showing up every day is a huge productivity boost.
In the following diagram, each color is a team-member rated from 1-10 on these characteristics. You can see that there’s a big hole with no color. I would gladly say no to a traditional 10x engineer to get one person with tremendous grit/determination on this team.

These personalities all play off each other. For example, a Teacher loves working with an Energizer Bunny because there is someone around to soak up all of that knowledge she shares. Or a Hustler and Lead Engineer can combine to uncover a new distribution channel because they iterate fast and are ruthless. As a result of having these people, you get massive productivity gains from complementary personalities and abilities. Combine these with your favorite/appropriate software development methodologies and you’ve got a killer team.

I’m sure there are other people who have techniques for building 10x teams. And the dynamics of what makes for a great team are going to be different across industries and stages of company. If you’re reading this and have thoughts, please do leave a comment. I’d love to incorporate it into our hiring practices.

Footnotes

Thanks to Curtis SpencerChristine TieuAditya Koolwal, Chandra Patni, Daniel WitteShazad Mohamed, Blake Scholl for reading drafts of this and providing input.

[0] – More on the Economics of Superstars

For example, Kobe Bryant is in the 99.999th percentile of ability, while the median NBA player is in the 99.99th percentile. For that small percentile improvement in ability, Kobe Bryant generates millions more in ticket sales, merchandise, concessions, and tv advertising for his team. This pattern repeats every where and is starting to appear with software development teams and startups. If you’re good, you can be Facebook, Google, Dropbox, etc. If you’re not, you can’t get a series A to get off the ground.


[1] Evidence building 10x teams matters more than finding 10x individuals

[2] – “Crazy” offers from Google/Twitter/Facebook/etc.

Historically, engineer/product manager/designer salaries have been relatively constrained (red line below). This is because we lacked an efficient distribution mechanism to take advantage of their special talents, so teams had to be very large to achieve scale and no individual could easily have massive impact.

But we are experiencing the beginnings of a world where the Economics of Superstars applies for small 10x teams because a small team can use Internet distribution as leverage. What is really interesting is that retention packages now are not about the individual. They are about keeping 10x teams together. The people who are really getting great retention bonuses are the people who make 10x teams possible. They are either the leaders in a product or engineering organization that know how to build 10x organizations, or they are the employees who make everyone around them better, or they are key employees whose departure would be seen as a signal that the team is no longer a 10x team. These packages are also a defensive move to prevent competitors from acquiring the building blocks that enable 10x teams. Losing key members of a team will result in other members leaving, and will enable the competitor to aggregate a team that operates like a 10x team. It’s not about the individual; it’s about team dynamics.

Another example from Google is how well they reward great teams and keep them together. Google’s Founder Awards disproportionately reward the best teams internally for exceptional accomplishments.

It seems like we’re moving to a world where a great team of developers can make $300k+/year each. But not by just walking in the front door — it really messes with team dynamics and manager-employee dynamics to hire people with those sorts of salaries. But rewarding a team and keeping great teams together is much easier to justify.

How the Economics of Superstars will play out for 10x Teams

[3] – More on Talent Acquisitions: Talent acquisitions are like record contracts

Startups eliminate the guess work that a large organization has in identifying teams with 10x ability. The startup ecosystem is as close to a meritocracy as we have — no bureaucracy, no legal department, no recruiting pipeline, minimal funding required to get started, etc. If a five-person team manages to build something and get any traction, they’ve accomplished something tremendous.

Identifying startups with 10x teams, is like a scout going through YouTube to find the next great band. If you find raw talent and give it the right platform (publicity, marketing, new instruments), you can turn that talent into something huge. Industries that have recognized their industry operates under the economics of superstars take these bets regularly – think about the English Premiere League, NBA, music industry, film industry, publishing industry, etc. If a bet pays off, you get Ronaldinho or The Beatles. Would you have given the following talented band $1 million/year and have full rights to all of the revenue they generated?

The Beatles before they were The Beatles

(This is The Beatles before they were The Beatles)

Again, because software is complex and you need teams to execute, the value aggregates in the team, not the individual. You rarely see Google hiring random individuals for $2.5 million over 4 years. Google, Facebook, Twitter, Groupon, etc. are paying to keep teams together and working on the things they’ve developed expertise in. These acquirers understand that it’s about finding 10x teams and giving them the resources of a bigger company. $10 million for four people over 4 years is worth it for many acquirers, because the incoming team has to be marginally better and the result will be exponential value generated for the acquiring company .

Amazon owning app distribution is irrelevant

Some people are writing about how Amazon is going to steal Android app market distribution away from Google. Not only is this statement incorrect, but it is a clear misunderstanding of how Google and Amazon think about Android. I’ve worked at both Google and Amazon, and have written apps for both iOS and Android, so I’m going to chime in.

Amazon won’t own the app market

Amazon is going to be one tablet manufacturer and maybe one phone manufacturer. Even if Amazon owns 20% of all Android devices, they will have the same share as Samsung and less share than HTC and Motorola have in phones (see below). Or, let’s be generous and assume that Amazon manages to sell the same number of total tablets as the iPad — 40 million by Apple’s count for both iPad + iPad2. That total number of Amazon tablets is as many Android phones as are currently being activated every quarter. Let’s get real: Amazon will not have the leverage to do any serious damage to Google’s hold on the pre-installed App Market bundled with Android (which powers both tablets and phones).

Android Manufacturer Market Share

Google does not care about app sales

Even if Amazon does own the app store, thinking about app sales is a failed attempt to apply Apple’s iOS model to a totally different ecosystem. Android does not work like iOS because Google has different priorities than Apple. Google is a search company. Owning the platform is Google’s way of making sure they own search — both on the web and for apps. Google makes over $30 billion in revenue from search. The revenue that flows through the app market to Apple is about $1 billion ($3B in sales, $1B flows to Apple). Google does not care about facilitating app sales because they can make 15-30x the money from search.

Furthermore, Google clearly believes that the web will win out in the long term and native apps are a stop-gap, so they are skating to where the puck will be — open and web based. Google saw this with AOL and hand curated directories like Yahoo in Internet 1.0 and is betting history will repeat itself. Even if apps stick around, Google wants to own search on top of the apps just like they do on the web and they’ll monetize the hell out of that. Google does not care about owning Android or the app market for app sales. They want to own search.

Amazon does not care about app sales

Kindle Fire is about selling more digital content and facilitating e-commerce. Apps happen to be one type of digital content, but they’re far from the focal point for Amazon. Amazon is the world’s biggest online retailer. They want you to buy stuff on Amazon.com. From free shipping, to Amazon Prime, to Kindle 1.0 it’s always been about getting you to spend more money on Amazon. Tablet users love to buy stuff online. The Kindle Fire is about facilitating old school e-commerce. Owning 20% of app sales is lame. Owning 20% of e-commerce on tablets is what Amazon is salivating over. Instant Video and having an App Market are nice secondary revenue streams, but a drop in the bucket to what Amazon does in it’s core commerce business. Amazon would make the Kindle Fire if they were guaranteed to make $0 on app sales because they will make billions on increased commerce.

Amazon “owning” app distribution is not only wrong, it’s irrelevant. It misses the point of Android and is a fundamental misunderstanding of Google and Amazon.

“Build something people want” is not enough

Most people take “Build something people want” to mean “Pick a problem to solve and solve it well.” This is not sufficient to build a world changing company.

“Why now?” is the question entrepreneurs really need to answer. “Why now” encompasses two important and closely related concepts:

  • Why have previous attempts at this idea failed?
  • What enabling factors have emerged that enable you to succeed today?

The world is full of smart people who have the same idea

There are a lot of smart people out there. At least five of them have already tried to solve the problem you’re trying to solve. But you haven’t heard about any of these people.

Why would a similar product in an extremely similar world be vastly more successful? Most entrepreneurs essentially say: “There are other smart people who saw this opportunity. But none of them were smart enough to figure out the right product/marketing/sales strategy to succeed.”

Betting that other people are less capable than you is a bad idea. For you to be massively successful where multiple startups before you have failed, something in the world has to have changed. If the world has not changed in some fundamental way, you too will fail.

How do you do this looking forward?

You can’t answer “Why Now?” until you look back (years later). But you can look for patterns. Some common answers to “Why Now?” are:

  • A new enabling technology has emerged (GPS)
  • Consumer behavior has changed (Consumers understand the idea of “the cloud”)
  • New distribution channels (The iTunes app store)
  • Legislative changes (Environmental regulations drive cleantech)

An Example

I’m going to use my company, Spool, since I think about this every day. Spool lets you save any URL and cache it locally on all of your devices. It’s like a TiVo + personal web crawler for any media.

Why do we think now the right time for Spool? Why have previous startups in this space been unsuccessful?

  • Content consumption has fragmented across multiple devices. We aren’t in a 1 browser, 1 PC world anymore. (Consumer behavior change)
  • Content consumption now happens on wireless networks and infrastructure can’t keep up with demand. (Consumer behavior change)
  • The Internet will be touch based. This introduces a number of user input issues. (Enabling technology)
  • Cloud processing is shockingly cheap. Amazon Silk is a great indicator of this. (Enabling technology)
  • Mobile stores have global reach and the stores keep evolving. (New distribution channel)
  • Social networks are deeply integrated into mobile phones. (New distribution channel)

How many of these will enable to Spool get big? I have no idea. But there are a lot of trends here that expose new opportunities, and Spool sits right in the middle of all of them.

Summary

To succeed, you have to clearly articulate “Why now?” You need to have a thesis about why the world is different today and be able to back that up with some data. As a corollary, if  you cannot clearly articulate why now is the right time for this business, and why 2, 3, 5, or 7 years ago were not the right times — then you are probably going to fail just like the other very intelligent entrepreneurs who previously tried to solve this problem.

Some Historical Examples

Here are a few examples of companies that weren’t novel ideas but succeeded after the world finally changed or caught up to the idea. In addition to enabling technology or consumer behavior changes, they executed on a new distribution channel.

Foursquare

Foursquare was an overnight success 10 years in the making. Dennis Crowley has been predicting the coming of location based services since feature phones. He built Dodgeball in 2003 and sold it to Google in 2005. He vested. Left. Started Foursquare. 7 years after he started Dodgeball, he finally got the idea to work. Why? Because the iPhone came along. GPS became standard in smartphones (thanks to a variety of influences including the US government requiring it in every cell phone). And consumers became comfortable with broadcasting information about themselves publicly on the Internet. He saw the world had finally caught up to his idea thanks to the iPhone and social networks.

LinkedIn

Reid Hoffman has been playing around with social networks since the mid 1990s. He started SocialNet.com in 1997. Reid tried and didn’t succeed. He was way too early. So he tried again at the end of 2002 with LinkedIn. No one gave him money because consumer Internet was dead in the post-bubble Internet era. But the world had changed. There were finally enough companies and mainstream business professionals online to build a real social network. And enough businesses were looking for employees online that they would pay for it and enable a business. There was a critical mass of users online was and it was finally possible for this idea to scale virally. (If you’re interested in a great, short read check out this article from 2005 with a bunch of names you know and some you’ve forgotten about, including Mark Pincus’s Tribe.net, Friendster, and “Thefacebook” — http://www.nytimes.com/2005/05/09/technology/09network.html)

YouTube

Social video sharing sites had been tried many times before. It was going to happen at some point and dozens of sites were funded to pursue the opportunity. But YouTube piggybacked on the back of a perfect storm of trends. Laptops started shipping in 2005 with built-in webcams, so no setup was required by the user and Flash could access these as a standard peripheral. By 2005, playing a video finally didn’t require any downloads. Broadband penetration finally got to a point where video was streamable. And MySpace enabled embedding of videos and YouTube doubled down on easy embedding as their distribution strategy. By the time MySpace realized YouTube was massive and tried to ban YouTube, it was too late. Meanwhile, Google launched Google Video. Google didn’t pursue embeds, focused on making sure copyright violations didn’t happen instead of relying on the DMCA, focused on non user generated videos at first, and required a download to do video uploads. They missed all of the “Why now?” insights that YouTube nailed.

Zynga

Casual games have been a part of the Internet since the very beginning. But no one aggregated enough user attention to make a massive business out of it until Zynga came along. Zynga managed to piggyback on the Facebook API, the launch of the NewsFeed, and the lack of spam controls in the early days of the Facebook Platform. They spammed the hell out of the News Feed, acquired millions of users, funneled them around to a bunch of other games, and when Facebook shut off spam in the NewsFeed the window for anyone to build a meaningful Zynga competitor was closed. Along the way, they bought as many users as they could because they knew that the value was in having all of your friends playing games. Facebook (spam and ads) was the perfect distribution channel for games. Brilliant move.

A few clarifications

  • Stating “If now is not the right time, then people didn’t want it” is a cop out. Almost everyone interprets “Build something people want” to mean “Pick a problem and solve it really well.” If you want to think this way, consider “Why now?” a better way to figure out what people want may want.
  • This applies to startups where you need a small group of smart people executing well. Launching a smartphone requires manufacturing and capital at large scale. Large organizations can mis-execute, build bad products, and screw up  because politics makes people do funny things. If only large companies have tried, you should ask if a startup can even build the right product, and if it can it’s fair to ask if the right product was actually ever built.
  • This applies to startups that want to get to massive scale. This does not apply to businesses that make less than $5 million in revenue.
  • This is not about timing a market. This is about a framework of thought to evaluate the opportunities that are presented to you as an entrepreneur. If you see an opening that clearly answers the “why now,” then you can capitalize on it.
  • This is not about multiple startups competing against each other in a short window of time. This is about comparing a startup today against a similar startup from an earlier point in time. Determining which of Startup A or Startup B will do better today is a different question. However, you can still ask whether or not today is the right time for either of them to try.
  • “Why now” does not say that successful entrepreneurs happen to be in the right place at the right time. Why Now?” reinforces how much execution really matters. Not only do you have to come up with a brilliant insight, build a product that people want, but you have to build your company with a deep understanding about how the world was, is, and will be. Doing all of this is HARD.

Credits

This framework came out of several discussions with friends. I don’t recall who distilled the framework into the brilliantly simple “Why Now?” but it was probably either David King or Ashvin Kumar. Thanks to Curtis SpencerChristine TieuAditya Koolwal, Chandra PatniYin Yin Wu, and Elad Gil for reading drafts of this and providing input.

Why Education Startups Do Not Succeed

 I co-founded PrepMe in 2001. We were one of the first education companies online and the first purely online, personalized platform. We were acquired in 2011 by Providence Equity-backed Ascend Learning. In the last month, I’ve had 3 VC firms bring me in to chat with their partnership about education and 6 independent entrepreneurs reach out to me about their new education startup. This is a summary of what I tell them in person. 

Note: I am going to make some generalizations below. Clearly there are nuances around education policy, economic policy, technology, and more. But this is a blog post, not a book, so take it for what it’s worth. These views are my own, not PrepMe’s (or Spool’s).

Summary

  • Most entrepreneurs in education build the wrong type of business, because entrepreneurs think of education as a quality problem. The average person thinks of it as a cost problem.
  • Building in education does not follow an Internet company’s growth curve. Do it because you want to fix problems in education for the next 20 years.
  • There are opportunities in education in servicing the poor in the US and building a company in Asia — not in selling to the middle class in the US.
  • The underlying culture will change and expose interesting opportunities in the long term, but probably not for another 5 years.

What Entrepreneurs and VCs Think

“Education is ripe for disruption. Technology and great products could make education so much better. If a product like Blackboard or University of Phoenix can succeed, then imagine how great a company you could build if built educational products like Apple does for consumer electronics!”

First, let’s qualify what they’re saying here. Almost always what they are really saying is “consumer, Internet, online education in the Western world is ready for disruption. Everyone is online now and everyone gets an education, so clearly there are massive businesses to be built.” They probably aren’t talking about education in Asia because the companies in that space are started on the ground in Asia. They most likely aren’t selling to schools, districts, the government, or universities. VCs usually don’t like to invest in businesses that sell to the government until those businesses are big (at which point it’s really a private equity deal, not a venture capital deal). Angels will invest in education companies because they’re more motivated by making a difference, not by making a big return in 5 years. For now, let’s focus on US and European online education targeted at consumers.

Why they are wrong

The average person in a developed country does not think about education the way a well educated VC or entrepreneur thinks about education.

VCs and entrepreneurs tend to be well educated. Well educated people think about education as an investment. You put as many of your resources in to an investment as you can. It may take 20 years to pay off, but if the return-on-investment is high (which it is for education) then you invest. This group of people — if you’re reading this, you fall into this group — generally understand that education is an investment, and as a result are price insensitive and will optimize for quality (a higher return on investment). For this group of people, quality is the primary driver of a purchasing decision, not cost.

The average, middle class person thinks about education as an expenditure, not an investment. It’s something they have to do because it’s mandated and the lack of the highest quality education hasn’t negatively impacted their lives in a meaningful way. Step back for a second before you judge. Imagine it’s 2005, and you live in a small town in the middle of Ohio (where I grew up) and you don’t get a college degree. If you get a factory job and make $25k/year and your wife gets a factory job and makes $25k/year, you’re making $50k/year. But houses only cost $90,000 and food is affordable and you can get a loan for a car for $300/month. So you’re not doing terribly and the default state for your children is the same life. You can afford a house, food, have a car, and have weekends off.

So, what has the lack of an education done to the typical American’s life? It’s removed job security, screwed your retirement, and maybe set you up to go bankrupt if you get sick. There are no immediate consequences, there are no immediate consequences for your children, but there is an immediate cost. So the average person thinks of education as an expenditure. If you get sick when you’re 70, you’re screwed. Or if you don’t save in your 401k, you may have to work till you’re dead. Or maybe your children won’t be as competitive in a global workforce 30 years. Don’t believe me? Only 15% of kids taking the SAT pay for an out of school test prep course like Kaplan. Over 50% of Americans don’t have beyond a high school degree.

This fundamental investment vs. expenditure mindset changes everything. You think of education as fundamentally a quality problem. The average person thinks of education as fundamentally a cost problem.

What does this mean for education companies?

Educational companies that focus on delivering higher quality solutions to consumers will not scale to the mainstream. Educational companies built around driving down costs to the end consumer will scale. Or a corollary, an enterprise sales or government sales company that taps into government revenue streams will scale but will not have a consumer Internet growth curve.

Let’s look at some data from the marketplace:

  • Chegg – A company that is in education and sells to consumers. A $1 billion valuation and growing quickly. But, Chegg sells you the same textbook experience for much cheaper. It’s a great consumer focused business with offering real savings to students. Note that even in 2011, the “Netflix of education” is booming because of the equivalent of its DVD (physical textbook) business. Digital, personalized learning online or tablet based, interactive, social textbooks aren’t anywhere to be found.
  • University of Phoenix – $6 billion market cap. They make it easier to get a degree because it’s convenient and subsidized by government backed loans. Consumers make the decision but ultimately the government is footing the bill. They aren’t a consumer company and they are a marketing machine. They are a company that makes it easy to get the same quality diploma that you would get at the local college. They don’t compete with Harvard, they compete with the local university that costs more and only has on campus night courses. They weren’t an overnight success either; UofP was started in 1976 and they IPO-ed in 1994.
  • Kaplan – they didn’t get huge because of their test prep business, which is a consumer business and (arguably) delivers educational value. They became huge because they started following the University of Phoenix model for Kaplan University. Again, the primary value they offer is not quality of education, but convenience.
  • K12 – they are not a consumer, online education company. They sell to school districts and their model revolves around being able to drive down costs for school districts in their high cost students — special needs, gifted, rural, etc. They have built an interesting consumer business overseas — in the Middle East and Asia.
Here are a few examples of companies that tried to do consumer Internet style education plays and how it worked for them:
  • TutorVista – started by offering online tutoring to Western students using tutors in India. All you can eat for $99/month or so. They burned millions on search engine marketing and were able to build a business that generated eight figure revenue — nice but not enough to IPO on. So they pivoted and opened education centers in India and were acquired for $213 million by Pearson. A $200+ million acquisition in India is unheard of.
  • Tutor.com – started a decade ago to offer online tutoring to the masses. Never went mainstream, even after 5 rounds of funding. They’ve built a niche business that survives through deals they’ve struck with various government bodies — libraries, schools, etc.
  • GlobalScholar – started by the CEO of Drugstore.com, tried initially to do a direct to consumer play. Realized it wasn’t working and bought an electronic gradebook company that works with schools and was sold to Scantron that has great distribution with schools.
There are dozens of examples of companies that have tried to build around quality and hit a revenue ceiling in the few millions. Think about the 10 local tutoring centers in your city that probably make $1 million each. This early traction is very misleading because you see engaged, happy, paying customers. So you assume that it will scale but it turns out that this business won’t scale because your early adopters behave fundamentally differently than the mass market.

An Aside: Being Asian or poor changes your perspective

Yes, this section is a little hand wavy and full of generalizations. These are observational insights with some data points that show the generalizations are directionally accurate at the end. This is not a rigorous sociological study, so take the generalizations for what they’re worth.

If you’re living in most of Asia (South Asia included) and you don’t get an education, you’re screwed. Part of this is cultural (you have no social capital if you’re not well educated) and a lot of it is economic (if you don’t have an education, you will do menial labor and not have enough money to feed your children). Consider the difference between some random person in China vs. some random person in Kansas. If the Chinese person doesn’t get an education there’s a good chance they will not get a job. They will die poor, unable to adequately feed their children, and unable to take care of their parents (since the model is that the young take care of the older members of the family). But if they do get an education, they have a shot at a good life — call centers, banks, government jobs, the army, etc. And if it’s too late for that individual, they know that they can give a good life to their children. The non-college educated person in Kansas probably won’t have a great life and a secure retirement without an education. But they, their children, and their parents probably won’t die hungry and homeless on the streets of Topeka. This cultural mentality is carried over to many Asian Americans via immigration. This is not universally true, of course, of Asian Americans but there is no denying there is a strong correlation. So if you want to start a consumer education company in Asia, you can make it work and make it scale — MegaStudy and Kumon are two great examples. However, there are not enough Asian Americans to support the same scale of business in the US.

Being poor also changes how you think about education. Interestingly, in the US, the people who are most willing to try new things are the poor and uneducated because they have a similar incentive structure to a person in rural India. Their default state is “screwed.” If a poor person doesn’t do something dramatic, they are going to stay screwed. Many parents and teachers in these communities understand this. So the communities are often willing to try new, experimental things — online education, charter schools, longer school days, no summer vacation, co-op programs — even if they may not work. Why? Because their students’ default state is “screwed” and they need something dramatically better. Doing something significantly higher quality is the only way to overcome the inertia of already being screwed. The affordable, but poor quality approaches just aren’t good enough. These communities are on the hunt for dramatically better approaches and willing to try new things. Unfortunately the poor don’t have a lot of money to spend so servicing this community requires selling to the schools, which is an enterprise sales type of business — not a consumer business.

Consider Kumon, which is worth almost $1 Billion. They started in Asia, they are essentially a franchise model that caters to well educated parents, and a key part of the value proposition is in giving students a place to go and be supervised (babysitting!). It’s a great business that serves 4.2 million students worldwide. Of this, about 200,000 are in the US. The overwhelming majority are in Asia.

It’s not a perfect dataset but the Quantcast data for Khan Academy’s US demographics support this. The people going to the site are:

  • the already well educated who value education and want supplemental resources
  • Poorer (which unfortunately correlates with being African American and Hispanic)
  • Asian

Khan Academy Demographics

Education is a huge market and there are opportunities

Clearly education is billions (trillions!) of dollars. There are lots of opportunities, especially if you take a long term view of it and want to build something meaningful for the next 25 years. However, don’t make the following mistakes:

  • Don’t believe that building a better product will make you successful. Delivering something for cheaper will. Even if that cheaper thing is lower quality. This is usually repugnant to most well-educated entrepreneurs.
  • Don’t start in developed, western countries because that’s where large, Internet businesses have been built. Asia is a much better education market if you want to target consumers.
  • Don’t take VC funding because the growth curve in your education business will not live up to VC expectations early on. Take angel money from people who want to make a difference in education. Then take private equity money once you’ve figured out how to get to $10 million in revenue on your own. Even better, don’t take any PE money and grow it on cash flows. Successful education businesses are often not capital constrained.
  • Don’t target suburban or urban, middle class users with disposable income. You’ll build a niche business that can’t go mainstream. Target poor students in the US and get to charter schools who are desperate to try new things. Target families in China and India where a family will put down half of their monthly income on education. Or target people who really value education and will pay 10x more for something that is higher quality. That’s where there are big businesses to be built and a willingness for new solutions.
  • Don’t expect a quick flip or quick growth. Building a large, successful education company will take 20 years. The growth curve will not be like an Internet technology company until you hit $10+ million in revenue. Then things will ramp  quickly because you will have identified your core market and built the beginnings of a brand; the education industry is small and people will know if you deliver real value.

Some Additional Reading

I threw some numbers in here. A lot of it just stuff I’ve read over the years but I tried to track down some stats on things that I thought would be harder to believe for the people who will find this article.

Thanks to Curtis SpencerKaran Goel, Jon Bishke, Elad Gil, Dan Siroker, Christine Tieu, Aditya Koolwal, and Yin Yin Wu for reading drafts of this and providing input.

Marvel MMORPG

Marvel should license their brand and all of their superheroes to a video-game company or hire a good video game company to create a massively mult-play online role playing game. World of Warcraft is huge these days and to get into that world you have to learn all of this backstory and character types and blah blah blah. With the Marvel Universe, thanks especially to their movie success in the last 10 years, everyone knows the main characters. The X-men characters, Spiderman characters, Hulk characters, the Avengers, the Fantastic Four…you could be one of those people, customize your character, get level upgrades and special body-armor and things like that for going on quests.

Given their brand names I bet they could get a million people on that thing pretty quickly. I know I would consider that and I really wouldn’t consider World of Warcraft.