Chris Dixon

Please see update at bottom

Most websites spend massive amounts of time and money to get any of their pages index and ranked by Google’s search engine. Indeed, there is a entire billion dollar industry (SEO) devoted to helping companies get their content indexed and ranked.

Twitter and Facebook have decided to disallow Google from indexing 99.9% of their content. Twitter won’t let Google index tweets and Facebook won’t let Google index status updates and most other user and brand generated content. In Facebook’s case this makes sense for content that users have designated as non-public. In Twitter’s case, the vast majority of the blocked content is designated by users as public. Furthermore, Twitter’s own search function rarely works for tweets older than a week (from Twitter’s search documentation, they return “6-9 days of Tweets”).

There is a debate going today in the tech world: Facebook and Twitter are upset that Google won’t highly rank the 0.1% of their content they make indexable. Facebook and Twitter even created something they call the “Don’t be evil” toolbar that reranks Google search results the way they’d like them to be ranked. The clear implication is that Google is violating their famous credo and acting “evil”.

The vast majority of websites would dream of having the problem of being able to block Google from 99.9% of their content and have the remaining 0.1% rank at the top of results. What would be best for users – and least “evil” – would be to let all public content get indexed and have Google rank that content “fairly” without favoring their own content. Facebook and Twitter are right about Google’s rankings, but Google is right about Facebook and Twitter blocking public content from being indexed.

Update: after posting this I got a bunch of emails, tweets and comments telling me that Twitter does in fact allow Google to index all their tweets, and that any missing tweets are the fault of Google, not Twitter. A few people suggested that without firehose access Google can’t be expected to index all tweets. At any rate, I think the “Why aren’t all tweets indexed?” issue is more nuanced than I argued above.

Three years ago, Fred Wilson wrote a great blog post called When Talking About Business Models, Remember that Profits Equal Revenues Minus Costs. The point he made was both simple and profound. The simple part is summed up in the post’s title[1]. The profound part is that high growth, early-stage tech companies often have a choice about how to become exceptionally valuable businesses: they can focus on growing revenues at the expense of margins, or margins at the expense of revenues.

Most recent successful tech companies seem to have chosen the former: growing revenues at the expense of margins. Again and again, we see S-1 filings with revenues growing rapidly but profit margins that are low to negative. The same is true for the rumored financials of private companies. I think I understand why they made this choice, but wonder if it was a mistake.

To understand why these companies made this choice, you need to look at their formative stages. Many of them raised money from VC’s at multi-hundred-million to multi-billion dollar valuations, often before the companies were profitable or had even settled on a business model. In most cases, the companies and investors were acting reasonably[2]. But the end results might have been to unwittingly commit themselves to revenue over margin growth.

Why? Money has its own inertia and somehow always seems to get spent. Some of this spending is reasonable and even necessary (infrastructure, defensive expansion to international markets). But then there are harder choices. For example, do you invest heavily in sales and marketing to grow your revenue faster? Do you stay open and try to become a platform and therefore force yourself to experiment with new business models? Or do you become closed to “own the user” and therefore benefit from existing business models like advertising? Fast revenue growth seems to be the best way to justify your valuation. But the next thing you know you have a high cost structure that requires you to raise even more money and grow revenue even faster.

The root cause here is a deeply held belief throughout the business world that exceptional revenue growth is more likely than exceptional margins. For example, if you talk to professional public market investors and analysts you’ll often hear statements like “that’s a low margin industry” – implying that every industry has “natural” profit margins which companies can only defy for short periods of time. This belief is also reflected in public market valuations for recent tech IPOs: companies like Groupon that put revenue over margins command very healthy valuations.

The problem is that this deeply held belief in “revenue exceptionalism” over “margin exceptionalism” is a hangover from the industrial era. Unlike industrial era companies, information businesses tend to be deflationary, shrinking the overall revenue of an industry. They also tend to have network effects (and complementary network effects), making them more defensible and therefore higher margin than non tech businesses. Given this, why do companies continue seeking revenue at the expense of margins? Fred made this same point in his original post, but people didn’t seem to listen.

[1] Companies (like all cash generating assets) are ultimately valued at a multiple of present and projected future profits. The historical average P/E ratio of the DJIA is about 15, meaning that (on average) if a company is generating $100M in profit, it is valued at $1.5B (Fred prefers to use a 10 multiple, perhaps to be conservative?). One way to understand this is to imagine that companies dividend out all their profits every year. If you bought something for $1.5B and it dividended out $100M every year, that would be a 6.6% annual return.

[2] Why are these high-priced financings reasonable? From the company’s perspective: your traffic is growing so fast you need to invest millions of dollars in infrastructure. Meanwhile copycats are popping up in other countries. You don’t know if the financial markets will suddenly dry up. Someone offers you, say, $50M for minimal dilution. Seems like a reasonable hedge. From the investor’s perspective: the history of venture capital shows that almost all the returns are generated from big hits like Amazon, eBay, Facebook and Google. (As Paul Graham once put it: “The difference between a bad VC fund and a great VC fund is one big hit”).

In stark contrast to other major airlines, Southwest has been profitable for 40 years. If Southwest had one core “startup premise” it was this: for every second the planes sat on the ground, their airplanes and people were costing them money but not generating revenue. So Southwest designed an airline from the ground up that maximized capacity utilization. They avoided the hub-and-spoke system that led to cascading delays. They removed meals to reduce ground crew times, along with assigned seating so passengers would hurry onto the plane to get good seats. They used only one aircraft type to reduce maintenance times.

Some of the most interesting startups today are founded on the same premise of maximizing capacity utilization. Being information technology startups, their method for doing so is generally by matching demand for capacity with supply of un-utilized capacity. AirBnB lets people rent out unused space, increasing the utilization of their homes. Uber lets drivers rent out their unused time, increasing the utilization of their cars and labor. Services like TaskRabbit are trying let people fully utilize their “labor capacity”. Over time, services that increase capacity utilization tend to drive prices down (even if, at first, they sometimes have higher prices).

Whenever Southwest would begin servicing a new city, it drove prices down so dramatically that economists began referring to it as the “Southwest Effect“. One particularly remarkable aspect of the Southwest Effect: when Southwest began servicing a city, it would stimulate new business activity – and thus air travel – to such an extent that even Southwest’s less efficient competitors ended up benefiting.

For a long time, there were niche communities of “lo-fi” camera enthusiasts: people who shared photos taken on old cameras that had interesting ways of filtering shots. The iPhone app Hipstamatic popularized lo-fi filters, selling over 1M copies. Because Hipstamatic lacked sharing features, many users took pictures with Hipstamatic and then shared them using other apps. Then came Instagram, which combined lo-fi filters and easy sharing. Instagram has been downloaded 15M times and has apparently crossed over to mainstream users.

Instagram built a product devoted to a job that users were previously performing improvisationally using multiple products. This is a common pattern for popular software and services. Before Twitter, people shared interesting links through email or “link round-up” blog posts. Tumblr’s short-form blogging/re-blogging was inspired by an “unintended” use of long-form blogging platforms like WordPress. Before Foursquare, power socializers sent out mass text messages with their locations (in fact, Foursquare’s predecessor Dodgeball did exactly that).

New startup ideas are all around you, in the improvised behaviors of people you know. It takes a keen product eye, however, to notice these improvisational behaviors and recognize which ones are worthy of being developed into standalone products.

Here are some things I’ve learned over the years about recruiting programmers* to startups. This is a big topic: many of the points I make briefly here could warrant their own blog posts, and I’m sure I’ve omitted a lot.

- The most important thing to understand is what motivates programmers. This is where having been a programmer yourself can be very helpful. In my experience programmers care about 1) working on interesting technical problems, 2) working with other talented people, 3) working in a friendly, creative environment, 4) working on software that ends up getting used by lots of people. Like everyone, compensation matters, but for programmers it is often a “threshold variable”. They want enough to not have to spend time worrying about money, but once an offer passes their minimum compensation threshold they’ll decide based on other factors.

- Software development is a creative activity and needs to be treated as such. Sometimes a programmer can have an idea on, say, the subway that can save weeks of work or add some great new functionality. Business people who don’t understand this make the mistake of emphasizing mechanistic metrics like the number of hours in the office and the number of bugs fixed per week. This is demoralizing and counterproductive. Of course if you are running a company you need to have deadlines, but you can do so while also being very flexible about how people reach them.

It is sometimes helpful to think of recruiting as 3 phases: finding candidates, screening candidates, and convincing candidates to join you.

- Finding means making contact with good candidates. There are no shortcuts here. You need to show up to schools, hackathons, meetups – wherever great programmers hang out. If your existing employees love their jobs they will refer friends. Try to generate inbound contacts by creating buzz around your company. If you have trouble doing that (it’s hard), try simple things like blogging about topics that are interesting to programmers.

- Screening. Great programmers love to program and will have created lots of software that wasn’t for their jobs or school homework. Have candidates meet and (bidirectionally) interview everyone they’ll potentially be working with. If the candidate has enough free time try to do a trial project. There are also more procedural things that can be useful like code tests (although they need to be done in a respectful way and they are more about getting to know how each side thinks than actually testing whether the candidate knows how to program (hopefully you know that by this stage)).

- Convincing them to join you. This is the hardest part. Great programmers have tons of options, including cofounding their own company. The top thing you need to do is convince them what you hopefully already believe (and have been pitching investors, press etc): that your company is doing something important and impactful. The next thing you need to do is convince them that your company is one that values and takes care of employees. The best way to do this is to have a track record of treating people well and offer those past employees as references.

A few things not to do: you will never beat, say, Google on perks or job security so don’t even bother to pitch those. You’ll never beat Wall Street banks or rich big companies on cash salary so don’t pitch that either. You’ll never beat cofounding a company on the equity grant, but you can make a good case that, with the right equity grant, the risk/reward trade off of less equity with you is worth it.

Finally, I’ve long believed that early-stage, funded startups systematically under-grant equity to employees. Programmers shouldn’t have to choose between owning a fraction of a percent of an early-stage funded company and owning 50% of an unfunded company they’ve cofounded. Naval Ravikant recently wrote a great post about this:

Post-traction companies can use the old numbers – you can’t. Your first two engineers? They’re just late founders. Treat them as such. Expect as much.

Making those first engineers “late cofounders” will dramatically increase your chances of recruiting great people. This is a necessary (but not sufficient) condition for getting the recruiting flywheel spinning where great people beget more great people.

* As someone who personally programmed for 20 years including about 10 years professionally, I preferred to call myself a “programmer.” Some people prefer other words like “hacker” “developer”, “engineer” etc. I think the difference is just uninteresting nomenclature but others seem to disagree.

It was a mixed year for me as a blogger. I didn’t post much as I would have liked – I spent most of the year working with eBay in a process that eventually led to Hunch being acquired. But I also learned a lot and tried to share some of those learnings here. Below are the posts I think were the best and also seemed to get the most pageviews and reader comments.

An internet of people

Making industries “garage ready” for startups

Business development: the goldilocks principle

Some lessons learned

Do you want to sell sugar water or do you want to change the world?

What the NYC startup world needs (and doesn’t need)

Founder/market fit

Best practices for raising a VC round

There are two kinds of people in the world

Apple and the TV industry

Google’s social strategy

MIT is a national treasure

Dropbox and why you should invest in people

SEO is no longer a viable marketing strategy for startups

Selling pickaxes during a gold rush

Predicting the future of the Internet is easy: anything it hasn’t yet dramatically transformed, it will.

For older posts, see the contents page. I haven’t updated this page in a long time but plan to do so soon.

Michael Lewis’ Boomerang is the best book you can read to understand the global credit crisis. Here’s an excerpt from the chapter on Iceland that involves fishing, smelting, banking, and elves. Yes, elves.

Alcoa, the biggest aluminum company in the country, encountered two problems peculiar to Iceland when, in 2004, it set about erecting its giant smelting plant. The first was the so-called hidden people—or, to put it more plainly, elves—in whom some large number of Icelanders, steeped long and thoroughly in their rich folkloric culture, sincerely believe. Before Alcoa could build its smelter it had to defer to a government expert to scour the enclosed plant site and certify that no elves were on or under it. It was a delicate corporate situation, an Alcoa spokesman told me, because they had to pay hard cash to declare the site elf-free, but, as he put it, “we couldn’t as a company be in a position of acknowledging the existence of hidden people.” The other, more serious problem was the Icelandic male: he took more safety risks than aluminum workers in other nations did. “In manufacturing,” says the Alcoa spokesman, “you want people who follow the rules and fall in line. You don’t want them to be heroes. You don’t want them to try to fix something it’s not their job to fix, because they might blow up the place.” The Icelandic male had a propensity to try to fix something it wasn’t his job to fix.

Back away from the Icelandic economy and you can’t help but notice something really strange about it: the people have cultivated themselves to the point where they are unsuited for the work available to them. All these exquisitely schooled, sophisticated people, each and every one of whom feels special, are presented with two mainly horrible ways to earn a living: trawler fishing and aluminum smelting. There are, of course, a few jobs in Iceland that any refined, educated person might like to do. Certifying the nonexistence of elves, for instance. (“This will take at least six months—it can be very tricky.”) But not nearly so many as the place needs, given its talent for turning cod into PhDs. At the dawn of the twenty-first century, Icelanders were still waiting for some task more suited to their filigreed minds to turn up inside their economy so they might do it.

Enter investment banking.

It’s a short book – just 5 chapters covering Iceland, Ireland, Germany, Greece, and California. What’s particular fascinating is how each place had a wildly different reaction to the credit glut.

- Great startup story. Raised a total of $4.2m in venture capital, sold to IAC/Expedia for $210M, and had some interesting adventures and pivots along the way. They started out by trying to aggregate reviews from other websites and white label their product to Expedia and other large travel websites. TripAdvisor.com was just a showcase that accidentally became a destination site. As of today TripAdvisor is an independent public company, trading at a market cap of $3.5B.

- Great for Boston. Fairly or not, Boston is often typecast as an infrastructure, B2B, hardware, and biotech town. Between Tripadvisor and Kayak, Boston now has at least two very important consumer internet companies.

- Big win for the “golden age of SEO”.  By which I’m referring to roughly 2001-2008 when “demand” for content (people typing in search queries) far outpaced supply (good content). Companies like Yelp and TripAdvisor (along with Wikipedia, IMDB, etc) grew huge during this period, almost entirely through SEO. They did this by getting highly defensible flywheels spinning where more content meant more SEO which meant more users which meant more content. It is now far more difficult to grow a startup primarily through SEO. Almost all monetizable search categories have vast excesses of SEOd content. Moreover, Google is creating their own content (e.g. Google Places) which, at least at times, they have favored in their search results.

- The user experience should improve. MG Siegler and others have criticized TripAdvisor for an excess of ads. I don’t disagree with MG, but I also think this is largely the result of the broken online ad attribution system that punishes intent generators and rewards intent harvestors. Travel reviews are for users at the beginning of the travel research process (which on average takes weeks), but all CPA and CPC ad programs pay only for the last click which usually means when users are purchasing tickets or making reservations. Hence review sites are forced to saturate their website real estate with purchasing widgets and display ads. Hopefully as online ad attribution improves this will no longer be necessary.

- It’s weird how little coverage this IPO got and how the financial press missed the interesting stories. TripAdvisor ended the day at ~$3.5B in market cap, making it the second most valuable East Coast consumer internet company (after Priceline). Every story I saw focused on the share price drop over the day. The fact that the price dropped from its opening price simply means the bankers mispriced the stock and therefore insiders didn’t get the sweetheart deal they thought they were getting.

Update: I interviewed the CEO/founder of TripAdvisor on TechCrunch yesterday. Topics include the company’s origins, relationship with Google, SOPA, and advice to fledgling entrepreneurs.

One of Clay Christensen’s favorite concepts is that instead of dividing your customers into segments and asking which features each segment would like, you should think about what “job” the customers are “hiring” you product to perform. Here is an example:

A fast-food restaurant chain wanted to improve its milkshake sales. The company started by segmenting its market both by product (milkshakes) and by demographics (a marketer’s profile of a typical milkshake drinker). Next, the marketing department asked people who fit the demographic to list the characteristics of an ideal milkshake (thick, thin, chunky, smooth, fruity, chocolaty, etc.). The would-be customers answered as honestly as they could, and the company responded to the feedback. But alas, milkshake sales did not improve.

The company then enlisted the help of one of Christensen’s fellow researchers, who approached the situation by trying to deduce the “job” that customers were “hiring” a milkshake to do. First, he spent a full day in one of the chain’s restaurants, carefully documenting who was buying milkshakes, when they bought them, and whether they drank them on the premises. He discovered that 40 percent of the milkshakes were purchased first thing in the morning, by commuters who ordered them to go.

The next morning, he returned to the restaurant and interviewed customers who left with milkshake in hand, asking them what job they had hired the milkshake to do. “Most of them, it turned out, bought [the milkshake] to do a similar job,” he writes. “They faced a long, boring commute and needed something to keep that extra hand busy and to make the commute more interesting. They weren’t yet hungry, but knew that they’d be hungry by 10 a.m.; they wanted to consume something now that would stave off hunger until noon. And they faced constraints: They were in a hurry, they were wearing work clothes, and they had (at most) one free hand.”

The milkshake was hired in lieu of a bagel or doughnut because it was relatively tidy and appetite-quenching, and because trying to suck a thick liquid through a thin straw gave customers something to do with their boring commute. Understanding the job to be done, the company could then respond by creating a morning milkshake that was even thicker (to last through a long commute) and more interesting (with chunks of fruit) than its predecessor. The chain could also respond to a separate job that customers needed milkshakes to do: serve as a special treat for young children—without making the parents wait a half hour as the children tried to work the milkshake through a straw. In that case, a different, thinner milkshake was in order.

There are at least three obvious ways to apply this concept: 1) when searching for startup ideas, think about jobs people want done that they can’t currently get done, 2) when thinking about how to fix or improve your product, understand why existing users are hiring your product (or should be hiring your product) and try to improve those experiences, 3) when analyzing markets, segment companies by the jobs they are hired for. Sometimes products that might appear similar (e.g. two photo sharing apps) are actually hired for very different purposes, and are therefore misclassified as competitors.

In response to my post yesterday about how an internet of people has enabled a new wave of web-based marketplaces, Nick Mango commented:

There’s actually 2 levels of trust here. The first is knowing and trusting the person you’re buying from. And if you don’t know who they are, then you must move on to the second level of trust, which is do you know and trust the platform the person is using.

The ability to have “second order trust” is one of many reasons the internet has made so many institutions obsolete. Take the SEC’s role in policing private companies that market themselves to potential investors. This was sensible consumer protection back when the government was arguably the only organization that had the means and incentives to identify fraudulent investment schemes. But today we have many examples of websites that’ve built mechanisms for reliably tracking the reputations of individuals and organizations. This means the SEC could – in theory – make the unit of regulation platforms instead of investors and startups (something the crowdfunding bill being considered by Congress seems to do at least in part), which in turn could unleash a new wave of innovation among crowdfunding platforms and crowdfunded startups.