Wednesday, July 9, 2008

John Doerr, Harry Potter, and the Fear of Failure

No Harry Potters were harmed in the writing of this blog...

Ok, so this article actually doesn't have much to do with Harry Potter - but it does start with J.K. Rowling! I was recently reading through J.K. Rowling's commencement speech that she did this year. Her topic was "The Fringe Benefits of Failure, and the Importance of Imagination". Quite a decent speech and certainly left me more impressed by her overall (I'm not a huge Harry Potter fan - heretic! I know...). It got me thinking a little bit about experimentation and failure within a corporate setting. I've argued before that establishing a culture of experimentation and "failing fast" is critical to innovation. However, reading through J.K. Rowling's speech got me thinking about not just the procedural element of failing fast but the human element - particularly how difficult it is to really get "type-A" folks to accept failure as a part of the process.

In Rowling's speech she makes the point:
"...the fact that you are graduating from Harvard suggests that you are not very well-acquainted with failure. You might be driven by a fear of failure quite as much as a desire for success..."
So why does this matter - in particular why does this matter to startups? Well, to start a company you need to hire the best. When you hire the best and the brightest you can't expect someone who has never truly failed to suddenly embrace failure and experimentation. You also want to maintain high expectations and high standards. As a result, there are a lot of conflciting tensions:
By hiring the best and the brightest you tend to hire folks that are not used to failure
But, starting a company involves a lot of failure and persistence
Encouraging experimentation requires encouraging failure
But, failure needs to occur within a culture of high standards and high expectations
So it wasn't really just about encouraging failure (or there is no doubt you would see a lot of it), but about encouraging the right kinds of failure. The ones you want are the ones that try and reach for the impossible but fall short, or the ones that radically alter your product and thinking.

Experimentation and innovation is necessary for a technology startup, because "You can't be normal and expect abnormal returns" (Jeffrey Pfeffer). But, how does one create a culture that conducts business exceptionally but is still willing to invest in the "abnormal" experiments?

Maybe his multiple billions means he was on to something...

At about this point in time I started thinking about a presentation that John Doerr did at Stanford where he talked about choosing to invest in missionaries rather than mercenaries. I thought about this in connection to this "Fear of Failure" topic and it began to occur to me that there might be something to the whole mercenaries and missionaries thing beyond the "Do What You Love" Oprah Winfrey-ish advice I took from it before. (Video here)

So, why is this such a BIG deal to John Doerr? He references it all the time (including in his introduction for Inside Intuit).

Why is a "missionary" entrepreneur better equipped to fight Fear of Failure than a "mercenary" entrepreneur?

Quite simply because mercenaries will be more afraid of failing.

In John Doerr's presentation, he lists a bunch of differences between mercenaries and missionaries but chief among them was "drive, paranoia" for the mercenary and "passion" for the missionary. He makes the claim that he believes that if you are an entrepreneur "for the money" that you will fail. While obviously a generalization, having a "mercenary" mindset vs. a "missionary" mindset most certainly decreases the probability of really hitting a winner and Fear of Failure plays a significant role in this probability.

There are a few reasons for this:

1. Failure to a mercenary will be in terms of personal opportunity cost

A mercenary is going to constantly think in terms of opportunity cost to himself and their personal value going into their next project. Any substantial failure radically changes the mercenaries risk/reward profile for a given venture.

2. Consistent and predictable returns require consistent and predictable management

The opposite of Pfeffer's comment on abnormal returns, is that if you are looking for consistent, stable returns then you don't take the big bets. A good mercenary who is optimizing for stable success is likely to succeed, but unlikely to generate returns well outside the norm. In order to fall outside the bell curve in returns, the mercenary needs to be willing to make bets that are outside the norm, but making bets outside the norm increases the chances of falling to the left of the bell curve just as easily as to the right of the bell curve. As a result, a mercenary will tend to overweight risks that affect their personal worth and underweight risks that don't. Their resulting decision tree will ultimately look markedly different from someone who is calculating risk and expected value from a "mission"-based perspective.

3. Sometimes good business is not just about good business

A good mercenary will be a good business person, look at the bottom line and understand the monetary inputs and outputs. However, on an operational basis, "missionaries" will make operating decisions that might not make justifiable business sense right away - they might offer a 100% guarantee on anything (like at Whole Foods), or they might offer free breakfast, lunch, dinner to employees (like at Google). It's only after these efforts are successful that folks look back at these decisions and say, "Genius!". Many forget that at the time these decisions were made the most likely response from "good business people" was, "Are you crazy?". The folks originally making the decisions optimized on something other than money.
Missionaries embrace and overcome failure

A "missionary" entrepreneur with a passion can create the culture that embraces failure while at the same time keeping expectations high. Having a true passion sets an immovable reference point for which all decisions can be optimized. It helps define "failing right". Failures that were attempts to achieve the mission in faster, cheaper, more innovative ways are good. Failures that run counter to the mission should be dealt with right away.
For example, if you are Southwest and a customer service rep accidentally runs up a $3,000 bill trying to help a customer out - fine. Set some rules, define better boundaries, but praise the employee for trying to show that Southwest "luvs" its customers. However, if a rep makes the "mistake" of being discourteous or rude (even potentially because they were trying to save the company money) there are no second chances and they should be gone asap.
J.K. Rowling's mentions in her speech that her failure helped her "..strip away the inessential..." and " all my energy into finishing the only work that mattered to me." A passionate corporate mission does the same thing. A corporate mission strips away the inessential within a company by providing the moral compass by which a company and its employees are expected to run. This provides the safe environment for innovation and failure because employees understand implicitly what "failing right" means.

"Acquiring a mission" is not simply an item to be checked on the way to success. It would be a mistake to say, "John Doerr says I need a good mission statement to succeed - therefore I need to come up with a good mission statement". Companies don't succeed because they have a good mission statement, companies that succeed have good mission statements (both Fooled by Randomness and The Halo Effect cover this natural tendency to confuse causality). The Mission Statement captures the ethos of the heartfelt goal but that goal needs to be there to start.

Said another way: the mission needs to exist before the Mission Statement. Whole Foods does not offer the 100% guarantee because of their Mission Statement but because the founder, John Mackey, believes passionately in his product and service to consumers. His passion drives the Core Values not the other way around. (He is very passionate about his ideas - his blog is here and Whole Foods posts their Core Values here)

When John Doerr talks about "Missionaries" vs. "Mercenaries" he is not just talking about personal lifestyle. He understands that the passion of the founder is very much an economic and a cultural issue. While "Mercenary"-based companies can succeed, they will not deliver "abnormal" returns. The companies that deliver "abnormal" returns are the ones with a mission and a basis for optimizing decisions outside of dollars. That mission enables them to build cultures that attract high quality employees, innovate, and fail the "right" way.

Thursday, July 3, 2008

Why Behavioral Targeting is not a Publisher-driven Technology

A colleague recently pinged me to get my thoughts on behavioral targeting companies and the new influx of a number of different companies. Basically, I argued that if you are focused solely on trying to sell behavioral targeting to publishers your company will fail. This dovetails a bit with a post Mike Nolet recently did on the Plight of the Ad-Technology startup where he points out three reasons why its hard to make money as an ad company: 1. Integration sucks, 2. IP Ownership, and 3. Pricing is Hard. While all those points are true, my argument basically comes down to the fact that no amount of technology can change the core audience of a publisher (see my value chain analysis of the ad industry for more detail).

The basic problem of behavioral targeting technology is:
  • The sites with good data / good audience don't need you
  • The sites that need you don't have good data or a good audience
This is the fundamental reason why companies like Revenue Science and Tacoda had to create their own ad networks (early on RSI tried to sell BT as a product to publishers). They needed some way to transfer value between their publisher partners. The only way to get your BT technology to work is to buy the data/audience from the sites that have it in order to sell it to the sites that don't. (Hence the recent rise of ad exchanges to help facilitate this further)

Unfortunately, if you are publisher-focused, there is an upper bound to how much money you can make. Here's why:

1. The valuable audience you have identified is fixed (if you can target all WSJ members on Facebook, you're still limited to just targeting those WSJ members)

2. If you decide to expand that audience with inferred behavior (e.g. "People like you also liked") you still can't reach the rest of the population and your CPM values will drop

3. Each individual has an upper limit to how many advertisements they will respond to, so you can only target these valuable segments a limited number of times in a given period before they burn out

4. The more niche the audience segment the harder it is to pull together enough volume to be valuable

5. After the initial obvious verticals are gone (finance, autos, electronics, real estate), new valuable verticals are harder and more costly to identify
If you are strictly focused on trying to sell BT technology to publishers, you are not going to make a heck of a lot of money based on the dynamics above. However, there are two other ways to make money if you have invested in good BT technology:

1. Start an ad network and become a facilitator of buying and trading audience between publishers


2. Align with Marketers and Agencies to improve the effectiveness of a Marketer's ad buy.

The real value in BT is actually not in raising the average CPM of a publisher site (which is a fallacy in itself), but in improving the effectiveness of a Marketer's ad buy by identifying those individuals most likely to respond to the Marketer's offer. The best way to take advantage of that value is by aligning with the Marketers rather than the Publishers.