The Blogging Will Continue Until Morale Improves


This blog is currently hibernated until the future year (or a decade, or a century) when exciting news from Russian startups will qualify for its resurrection. Naturally, as things stand right now, Russia is crashing down into impoverished third-world semi-military dictatorship, leading to ongoing unprecedented wave of high-tech emigration. For now, Russia remains a high tech graveyard with no prospects for high tech growth and investing. In meantime you are very welcome to read my essays about startups and investing in Silicon Valley on my personal blog.

The Epic Fail

Silicon Refinery


In the cult classic book “Founders at Work” the founders of many high tech startups repeatedly return to the subject of failure and how they recovered from it. One of the hottest conferences in San Francisco last year was FailCon. This year a series of FailChats became regular. Failure is regular subject of panel discussions at high tech conferences. That may sound strange to an external observer. Isn’t Silicon Valley all about innovation and success stories? Why such fascination with failure?

In truth, the popular perception of the Valley as a magical conveyor belt that churns out billion dollar companies from startups is just a trivial case of survivor bias. The Valley creates thousands of failed startups that go away without notice during same time it creates  a couple of Netscapes, Googles, and Facebooks. The latter get all the press and attention while the former disappear in the dark.  This creates an illusion of an unbroken string of successes. If one looks at the actual time spent by entrepreneurs, as a distinctively different class of people than salaried employees of successful startups, they spend the most of their time and effort creating, enduring, and recovering from failure rather then creating success.

The very first company I started failed with a great bang. The second one failed a little bit less, but still failed. The third one, you know, proper failed, but it was kind of okay. I recovered quickly. Number four almost didn’t fail. It still didn’t really feel great, but it did okay. Number five was PayPal.  Max Levchin (Cofounder, PayPal)

The real machinery of Silicon Valley creation resembles a complex chemical factory. Raw ideas and visions are funneled into it, and undergo multiple transitions from one stage to another in a high pressure startup environment. 90-95% break down and fail, and their raw materials recycle right back into furnace. The rest emerges from the silo years later as winners we all know today. One of Silicon Valley’s many secrets is the system of managing and dealing with systematic and constant failure of individual startups, while creating  almost guaranteed small percentage of winners in the end. Lets take a closer look at how this refinery of massive failures actually converts a few ideas into real successes.

Errare Humanum Est

One of the popular topics high tech pundits like to discuss is relative importance in startup destiny between initial idea, founding team, and the market. The answer usually puts lowest priority to an idea and splits the reminder of the  importance between the team and the market, often putting more emphasis on the team. Something like 55% team, 35% market and 10% original idea. Such analysis has some merits and is helpful for founders to maintain healthy state of mind while assailing huge odds stacked against them. However, after observing Valley life for 15 years this author realistic estimate would along the following figures: 70% market, 29% team, 1% original idea.

Lets start with simple example. Microsoft was floundering tiny company from 1975 till 1982. There is a rumor Microsoft was on verge of bankruptcy when 25,000$ check from then roaring Apple Computer for BASIC license saved the day. Things changed for the better when IBM deal revenues started to come in 1982 and the rest was history. Yet think on this timeframe. Its full 7 years. Google went from nothing to 23,000,000,000$ IPO in 6 years. It took Bill Gates himself to work like crazy for 7 years to just survive as tiny obscure startup.

AdventureWhat changed between ’75 and 82’? Did team get radically better? Did Bill Gates suddenly get much smarter? In reality all that changed was market. Instead of serving hobby market of selling BASIC and other niche software to early computer enthusiasts company changed its market – which was delivered to them on silver platter by IBM – to what would become most mass produced computing platform in history. Then the very same teams vent on to create unimaginable amount of wealth, which Google is yet to beat after 12 years of trying.

We can go on and on about this. Say Steve Jobs returning to Apple and reinventing the company. He does this by not trying to beat the markets Apple already lost to Wintel platform by late 90ties. Instead, he went to find new markets: high-end laptops, portable music players, smart phones where Apple unmatched design and elegance allowed them to dominate.

What this short excursion into history shows is that even the absolutely best of the best leaders of technology companies are:

  • Powerless to change the outcome if they are in wrong market
  • Can only succeed if underdeveloped market (smart phones) or new market (IBM PC) is created for them to enter.

Trick question: do you think founders of Silicon Valley startups are better or worse then Bill Gates or Steve Jobs to evaluate, pick and enter correct market when they just create first outline of their company? And what happens when they enter wrong markets? Simple – their company most likely will fail.

There is one little caveat to that whole marketplace discussion. We easily and confidently discuss metrics and timeframes of markets determined many years ago. The problem is we have some (not great) visibility into the past and virtually no visibility into the future.

Here is typical example from personal experience. Today we all know of multi-billion companies like Zynga formed on Facebook application platform. Yet how things looked when the platform was just opened up in summer of 2007? Back then we had no visibility whatsoever on platform future. Facebook was fairly small network, much smaller then dominant Myspace at that time. Nobody ever saw anything like app platform on social network, thus no industry record to compare it with. Recalling many conversations with I had with entrepreneurs and investors at that time opinions ranged from treating it as small curiosity not worth investing much time into (opinion of highly experienced VC who generated $800,000,000 returns from his investments) to guarded optimism it could be a good helper tool to bring audience to existing stand-alone websites.

The prediction that there will be its own vertical industry with dozen of companies, doing nothing but building facebook apps which will bring hundreds of millions in revenue and have market capitalization in billions of dollars was so out of the realm of conceivable reality nobody came even remotely close to predicting that. As we know now from many interviews of the Facebook insiders they also had no clue what was coming! Their thinking was it would be a nice side addition to the Facebook product to bring incremental growth for their user base. The platform explosive growth caught them completely by surprise, unprepared and lacking resources in many areas, thus creating very interesting experience for everybody who was on the Facebook platform the first year.

Lets look at this again. We have collective wisdom of Silicon Valley best and brightest estimating new high tech product (Facebook platform) and completely missing its importance and impact. The Facebook team and their venerated young founder completely missed the scale of their own product. So who the heck knows the answer?

The hard truth any Valley founder realizes sooner or later is that answer to such question is: nobody. Future is practically unpredictable and therefore markets are impossible to predict as well.

No amount of past experience or industry standing helps much to predict what is the best market or the best product to enter the next year. While bigger companies can deploy (barely useful) the tools like focus groups and market research initiatives, a typical startup won’t have even these dubious tools at their disposal. The only option remaining to them is to take a completely blind guess. 90%+ of time such blind guess will be wrong, and startup will either fail or – a very important option! – pivot to something new.

Market miss is probably the biggest and the most important factor in startup death rate. It is also practically unavoidable. Founders can be inhumanly smart or hard working, they can hire best team on the planet, and still fare no better then Bill Gates during ’75-82 or pre-iPod Steve Jobs.

Systematic failure is an irremovable part of startup ecosystem. Silicon Valley has naturally structured itself around constructive integration of such failure. Yet missing the market is not the only way in which startup can fail.

Digital Klondike


A reader may get surprised at this point in our story. Did not we argue just recently how important is talent and how one must follow all these cardinal talent rules? Yet now author goes on to saying markets are everything, and team is almost an afterthought.

Not so simple. In that complex multi-layer refinery of startup lifecycle team does play a huge role. It just plays it later. The negative of being in wrong market are obvious – there are not that many customers, or not that much money, or there is no growth and momentum. Best team can blunt its pickaxe trying to make startup biz model work, and still most likely fail no matter how hard their try. However, what happens if they actually guessed correctly and find themselves in hot market?

Exploding new market has certain feel to it, it is like a digital Klondike. Nobody yet knows the future, but few prospects already have stricken rich gold veins (revenues, customers or growth) and there is a frenzy to grab the best parts of the market. That is where the team expertise and quality comes to the forefront. That is where “startup mode” of 24/7 non-stop marathon becomes typical, and the quality of people who can survive such inhuman wear and tear while keeping reliability to produce stellar results . I recall our own experiences during such supernova periods of startup life, and the most telling attribute that changes is one perception of time . Day of the week and time of the day largely loose meaning, and you start to think about the events in terms of “deliver +2 hrs from now”, “meetup +10hr from now”, “deploy +18hr from now”. The whole lifestyle becomes how to cram the absolutely most events in activities in the shortest timeframe and grabbing some sleep when you see a few hours not showered with the upcoming inner events. Sufficient to say very few people can survive such mode of operation for long, and one needs the whole team of them to run a successful startup.

There is one big caveat to all that. Remember Youtube sale to Google for 1,700,000,000$ ? Good outcome for #1 player in web video market. Quick, how much #2 fetched? Frankly, I have no idea. Probably you don’t either. The difference between #1 and #2 in such market, especially in consumer-facing industries is not just huge, it is astronomical. Sometimes #2 is good enough to get “just” 10-20 times less then #1 player. Most often #2, #3, …., #10 get all about the same amount – next to nothing. #1 takes the majority of the market and huge share of proceeds. Just ask Microsoft about their search revenue versus Google. Or their mobile share vs iPhone.

If you’re growing at 50 percent a year, and your competitor is growing at 100 percent a year, it takes only eight years before your competitor is 10 times bigger than you. And when it’s 10 times bigger than you, it can buy 10 times as much advertising and do 10 times as many projects and have meetings with 10 times as many customers. And you begin to disappear. –Joel Spolsky

What differentiates #1 from #2, #3,…#10 players is the team. What is ironic they did not even have to work twice or ten times better. 10% difference could be all it takes. The team works just slightly better and faster, customers flock to its product faster then they flock to competitors, that attracts more investors, more creative talent, success breads success, and before you know it such startup gets x 1,000 times better outcome.

Needless to say that fate of these #2, #3,…#10 players in the market is the same: absolute or relative failure. Guessing hot marketing is not enough. One got to build best team comparing to all others who guessed the same market. Yet even that is not the final story.

Random Olympics

What about our tiny little 1% importance of the initial idea in startup? Why not make it 0% and say its completely irrelevant? The reason is that initial idea has significant yet indirect influence on both resulting market and team.

Imagine yourself in big dark forest in darkest hour of the night. Think of starting idea as very weak flashlight in very dark forest of big trees of unknowns: market, industry and overall future. You can sort of see where you going to make your next few steps next week. The future picture is quickly becoming blurry and  fuzzy, just some projections and schedules. Anything more then half year out is very dark, only few very big shapes (big vendor platform plans, broad trends) are visible in ray of that weak flashlight of initial planing. Starting idea is the direction where founders point that flashlight initially. Hence based on shapes and predictions that they recognize in the dark they make decisions about market they enter and team they recruit.

So all these predictions are unlikely to be true. So what do founders do when the first few steps with flashlight show an unpenetratable wall or  an unexpected object right on their projected path? They pivot and start moving flashlight slightly away trying to find the way around it. The initial idea starts to morph and change the shape. Paypal negotiated a big funding round as a payment system for the early Palm handhelds, and then a few days later pivoted into the web payments. Microsoft started with BASIC for Altair and then pivoted into operating systems.

By the time we had our first board meeting a month later, we had already realized that wasn’t going to to work…We started the board meeting basically saying “Hi, John. Hi, Pete” – the new VC guys – “We changed our business plan.” And these guys were like, “What?” They just put down $4 million to see something happen, and we said, “Sorry, we’re not going to do that; we going to do this.
– Max Levchin (Cofounder, PayPal)

The key understanding of pivot is that a startup cannot change its course completely. The existing team, existing products or prototypes if there is any, general expertise and knowledge of founders limit such freedom. That flashlight can only move to directions adjacent to the initial idea, and the speed of such transition is fairly slow. Even in extremely high energy startup environment people don’t like to give up something they worked months or even years on. It is harder to change existing habits even of a 6 months old startup than to create entirely new ones on a blank slate of a new startup.

Here we come to main bottleneck of startup life, and therefore the main reason of such astonishingly high rate of startup failure. Look how all components are coming together. Founders no matter how experienced they are have very little chance of predicting and guessing future markets. All they have is tiny flashlight showing just where they putting their feet next few weeks or months. Initial idea realistically is just an excuse to form a team and find investment in general lightcone of that flashlight. The real most important event in startup life will happen when absolutely unpredictable opportunity in absolutely unpredictable market opens up and then it because death race for #1 stop against few other teams who also ended up in right place at right time.

The Olympic Games between all teams is officially on… yet nobody even gets the signal the games are started!

Imagine Olympic runner who is training all his life to be fastest athlete on the planet. He is not just good, great or best. He is inhumanly good, his extra “supplements” are borderline to illegal substances to make his muscle work beyond any limit. There is no silver or bronze medal. It is #1 or nothing. Furthermore, he cannot just train on background and wait for Olympics. Instead, he must tire himself to death everyday working on his initial idea. And here is the clincher: At some random unpredictable moment at time, at some unpredictable market (with luck) adjacent to our Olympic runner initial idea will create an opportunity of all-or-nothing potentially huge win. The Olympic Games between all teams is officially on… yet nobody even gets the signal the games are started! Nobody will even signal clearly thats it is time to morph initial idea and pivot with all speed toward the Olympic Games. Spending extra 3-6 months working on originally designed product – “oh, we just got to ship it, and then we will see what is up with that new little windows/web/facebook ” – could be all the difference between #1 and #2 (if not #10).

Having an idea in a largely right general direction is not enough. Building and recruiting the best team in that market is not enough. Just being lucky of recognizing the right market is not enough. One has to have an incredible luck of having the perfect timing while having all other requirements lined up to succeed in order to finish line and claim #1 prize.

Successful startup is such an improbable event, that it is even astounding we have only 90% failure rate, instead of much more comprehendable 99.999%.

I fail, therefore I’am

The formation of the Valley culture took many decades. All that time market forces outlined above were fully active. Incidents built upon incidents to form the knowledge. Or perhaps more exact term would be meta-knowledge. Nobody could predict next market hit, yet VCs started to learn how many startups would fail even with the best proven founders as helm, although they could never know exactly which ones of them. Rockstar employees going from startup to startup saw how many best ideas backed by the best effort would fare and evolve. First pioneers passed some of these lessons to the next generations, which learned or re-learned them anew. Good habits sometimes helped startups to survive and these habits were more likely to end up in minds of founders and executives who made it big, and thus their lessons and speeches were eagerly learned by growing youngsters. Bad habits inescapably led to failed startups and had harder time to be replicated. It was Darwinian selection with meta-knowledge of running and operating startups evolving for more then 50 years and seeing many generations of investors and entrepreneurs. While good habits did not guarantee success at all, bad habits certainly led to failure. One way or another almost all of these bits of knowledge were connected with dealing with failure.

Lets take a broad look at ecology formed by living and breathing in 90%+ failure atmosphere:

  • Failure is never ever penalized. On the opposite: the whole community of investors, advisers and related professions will constantly and strongly signal that any failure is just an attribute of experience and will do their outmost best to reinvigorate startup teams to try again.
  • There is a mild penalization for wasting time. Spending extra 4-6 months on trying to revive a product or idea which clearly did not connect with the market even after a few iterations will be grumbled about yet tolerated. Delaying one year or more will be actively resisted and overridden. For first time startup team it is the hardest thing to admit that their vision actually failed. By forcing startups to fail fast , it gives them the chance to try something new and reapply they immense talent to something that may actually work.
  • Operate at the maximum transparency. You don’t know the right market, the time when “Instant Olympics” start and how to adjust your product vision to it. The only cure is to open all the possible barriers for communications. Instead of building walls that isolate fragile startup from the outside, integrate it into all possible channels to the broader community. Conferences, industry pundits, bloggers, old friends from previous carrier, etc. Users, potential partners, investors and rockstar employees will be able to find you easily and quickly. Your seed ideas, which as we now know are most likely to be imperfect, will be chewed upon and criticized by other brilliant entrepreneurs thus giving you invaluable feedback. The most important benefit will be that you are much less likely to miss the signals about incredible new markets opening up, or about critical shortcomings about your current product or startup roadmap.
  • Be flexible. Remember these old kung-fu movies? The main hero is kicked so hard that he flies across the room, yet somehow he just lands on his feet with no apparent damage and jumps back in the fight again. Startup life will be like that. By the very definition pretty much everything out there is bigger and more powerful then a startup. The market is unpredictable, the product’s future is unknown. The team make up depends on both factors, which most likely will change and multiple times. Investors may get tired of waiting. Your platform vendor may turn against you. Since you can not predict and be ready for any potential surprise the only option is to embrace flexible and agile workstyle. Concentrate on being as quick as you can in shorter timeframes (few weeks, couple month). As circumstances around you change, immediately adjust your plans and reiterate.
  • Iterate fast. That just same advise about startups as whole reduced down in size for  internal operations. As we said failed startup is normal, it better to fail fast without wasting time. Why not to apply the same logic to your internal operations? Any project, experiment, research should have a clear criteria what it should achieve and what will be considered as a failure. If given milestone is not reached on time, have a clear team-level discussion if given data is valid indication of failure, and kill failing projects as fast as practically possible. Startup biggest sin is keeping the failed project around “oh, we spent so much time building it!” just for sentimental reasons while their upkeep distracts and defocuses the team from working on something really important.
  • Bottom up instead of top down. The chaotic nature of describe process destroys any possibilities of operating old top down models. The unpredictability surrounding a new startup will break all layers of any top down model conceived in advance. Top down model are just in general not compatible to constant tweaking and iteration. Therefore a startup team after establishing broad area what kind of problems they trying to solve (flashlight cone) should concentrate and follow any seeds of early success (first customer, first users, first media excitement) and make up bigger plans as that success story unfolds. Even more then twenty years ago such thinking was becoming prevalent on much slower development cycles comparing to current lighting fast speeds of startup iterations.

Russian Lessons

America threw off the old world’s hostility to failed businessmen along with British rule. Back in the 1830s one of the things that most struck Alexis de Tocqueville about the country was “the strange indulgence which is shown to bankrupts”, which, he said, diverged “not only from the nations of Europe, but from all the commercial nations of our time”. The Economist, Jan 7th 2010

Silicon Valley undoubtedly got it start due to the great leniency USA was traditionally showing to its failed businesses. After half a century of future development, that culture is amplified and focused many hundreds times more then it ever was before. The benefits of such approach impressive such as they are, are staggering when one considers compound interests of multi-generation selections of leaders and top talent such breding grounds reliably produces.

This lesson may be hard to learn for Russian community. It is not just a method of operations that few enlightened executives can agree to adopt. It requires a broad acceptance by investors, government, employees, and to a degree by a larger public and especially media. European culture traditionally puts a high price on failure. Russian culture amplifies that to extreme degree by attaching huge social stigma, personal disrespect and huge social costs.


One common theme recurring in publications of Russian investors/govt officials is that Russia desperately lacks entrepreneurs and startup-friendly talent. Lets take a look at that from perspective of young brilliant graduate of some Russian top institute. He is just beginning his professional carrier and has roughly two options. Join established company; say a bank or an oil company. He will get a great compensation, a full job security and a good carrier. However, he understands such choice will result in fairly boring and routine job. He is excited about the possibilities of doing a startup and researches the option further. Being brilliant, he quickly realizes that startup is a very chancy proposition. Even if in a great and remote Silicon Valley 9 out of 10 startups fail! Yet he is still willing to take even that chance. Then he finds out that the whole system is stacked up against him. Investors insist on grandiose top-down plans to validate the investment, which they actively meddle in and micromanage. Furthermore, they are very unfriendly to loosing money, with few founders even being afraid for their physical security in case of failure. Society as whole is not tolerant to failure. While our young graduate will try and fail, his peers will be making good money in oil companies and steadily climb corporate ladders. Estimating what is going to happen in the next few years our graduate realizes he runs a very real risk to be stigmatized by society, permanently harm his carrier and potentially even make some enemies just by trying a risky startup. Being brilliant he does the rational thing: he joins a big company.

In meantime, life in Silicon Valley goes on. In given cohort 10 startups start, and 9 fail. One winner captures everybody attention and Russian investors/govt community is yet again amazed at the Silicon Valley creativity. Yet the main product created in that cohort goes unnoticed by the external world. These 9 failed startups with 5-10 person each, had just created 50-100 people tempered and experienced by the failure. Reinvigorated by Silicon Valley community these people will now jump back into fray, some to join other startups, some to start their own. The real full production of 10 startups was one winning startup and 100 high quality people. While representing the loss of individual investors (from which they are of course protected by portfolio system), it’s a big win for the Valley as whole. These people will bring new ideas, experiences and most importantly even higher tolerances to failure to any startup or company they join.

In Silicon Valley failure is constantly refined into materials of future success, and it is one of the most important components of the Silicon Valley system.

Notes from TechCrunch 2010

Naida and I had lots of fun last week at TC Disrupt and this Russian-only article is summary of what has been happening during these three days and what is worth paying attention to. We exploring  TechCrunch Disrupt for the Russian audience!

Another Fail And A Great Story

In almost perfect example of our “Epic Fail” theme read awesome story by Marc Hedlund “Why Wesabe Lost to Mint“. You can see the abstract general concepts we described in previous post unfolding in real life as Wesabe briefly enjoyed first mover advantage before losing ground to well funded competitor which clearly operated under very different set of assumptions. Just go ahead and read it.

Mint launched first – I hear this surprisingly often; they didn’t. Wesabe launched about 10 months before Mint. More the shame that we didn’t capitalize on that early lead.

Wesabe never made any money – untrue. We started generating revenue in late 2008, a year and a half before we shut down;

Design matters a huge amount, without question, and Mint’s design was exceptional, but if other, stronger forms of lock-in are in place first, design alone can’t win a market, nor can it keep a market.

And the critical insight:

My goals may have been (okay, were) noble, but in the end we didn’t help the people I wanted to since the product failed. I was focused on trying to make the usability of editing data as easy and functional as it could be; Mint was focused on making it so you never had to do that at all. Their approach completely kicked our approach’s ass.

Very well played Mark ! A noble failure and much thanks on massive amount of  hard startup knowledge you created by trying with Wesabe and sharing these lessons!

Axis of Khans

The Legacy

Being over a thousand years old, Russian heritage is certainly a very impressive part of its national legacy. Yet not everything we carry over from our hallowed antiquity will be useful in the ultra-competitive, modern world. When reflecting upon the systems of governance and decision-making, Russia can trace a virtually unbroken line of autocratic, top -own rule from its early beginnings. Mongol invasion, Moscow knights,  all-powerful Czars (later rebranded as chairmans of the communist party of the Soviet Union) represent fairly analogous systems of large scale “problem solving”. Or to be exact, a system of un-solving and creating a terrible waste in the process. The most recent regime managed to rebrand that message yet again as “the power vertical”.

What exactly have hundreds of years of repeated top-down hierarchical rule left as generally accepted methods of management and governance? What decision making systems have become prevalent among both the general public and elites? Giving the timescale involved we are not really talking about a few odd habits here and there, we are talking about a system as a whole that has been massively ingrained into the culture. It’s a whole system of behavioral patterns and social interactions accepted by all as “self evident”, since they have been used in the country since “dawn of times” – literally!

One prominent feature that is instantly apparent to anybody dealing with Russian business, is the strict management hierarchy, which is very similar to Asian-styled dominance and obedience. Let’s call this management system a Khanocracy.

Axis of Khans

Every khanerarchy obviously needs a khan. It need not be a big khan. It can be your boss, your project manager, anybody with any relative authority and few direct reports will do. It can be yourself.

  • Khan is always right. Khan never admits mistakes, (as that would weaken his absolute power).
  • Public disloyalty to khan is treason. Khan always punishes disagreement or disobedience by underlings, otherwise they think he is weak.
  • Khan never does anything that makes him look weak. Even if it means doing something astonishingly stupid.
  • Khan directly controls and micromanages what underlings do. Thats his right as a khan. At same time khan doesn’t communicate much with underlings. That yet again looks weak.
  • Khan must keep his current position no matter his skills or knowledge in relation to that position. Khan should always try to climb to a higher position whether or not he has the skills or knowledge necessary.
  • Public loyalty to the khan is the only merit. Everything else is optional.
  • Khan will extract all monetary value for himself from his current position. Thats why bigger Khan assigned him to it.

When stated out loud such a system seems somewhat obsolete and even a burden to the creative environments of the 21st century. Unfortunately Russians have the ingrained habit to jump back into their natural khanist groove of hierarchy at slightest cue. Companies, organizations, teams, projects – it could be anything and everything.  Its almost subconscious.

What additionally confounds the problem is that the production methods of the late Industrial Revolution seem to conform to the same rigid hierarchical structure. Early corporations weren’t that much different internally from a typical obedience driven hierarchy, just softened up a bit thanks to the western tradition of law and civil liberties. One can look at an organizational chart from any big company and not find that much of a difference from that of a bunch of guys in furs kneeling at the feet of a khan with a horse, bow, and inflatable yurt.

IMB Org Chart 1963

The differences between early 20 century rigid industrial hierarchies and its much softer knowledge-economy cousins of the last decades are somewhat hidden from plain sight. Tree-like schematics may look similar yet the vast difference exists in operational models. Even the most prestigious MBA course will spend way more time explaining the details of the time-value of money or modern portfolio management theory rather than dealing with these subtleties.  When students in Russian business schools see the familiar tree-like hierarchy they consider themselves in familiar territory and therefore miss everything hidden between the leaves.

The Soft Power

Every organization must adopt some sort of hierarchical organizational principles, with key people managing throughout. Let’s call the people sitting in management nodes Bosses to contrast with original Khans. I’m going to present very idealized, perhaps almost romantic, view of the Silicon Valley startup environment. It’s even more liberal than the mainstream western business tradition. Not all attributes would hold true for every single Valley high tech corporation. Only the best of the best (Google, Apple) can say they are close to being fully compatible with such a Platonic ideal of creative talent management. It is an everyday struggle for most of the companies to reach even half of the goals listed here. Yet this is the vector towards which all Valley startups or big corporations aspire.

Only the best of the best (Google, Apple) can say they are close to being fully compatible with such a Platonic ideal of creative talent management

The most fundamental truth is that the “Boss position” is just a job for a person with good organizational and management skills. Its not better or worse then any other job. A Boss earning less salary than his or her subordinates is a common occurrence.  In this world, the concept of ”loyalty” is senseless. A Boss’s employees may be absolutely unique individuals with unique skillsets: developers, designers, artists, editors, copywriters, animators, bloggers, marketing specialists,3d modelers, sketchers, ux experts, etc etc etc. The advise and feedback of these diverse and talented individuals will be absolutely incomprehensible to the Boss’s expertise in management. So as to not go crazy trying to understand it all, his only practical choice is to trust them to perform as they see fit in their own respective domains. High tech economy creates so many unique and deep specializations that even the thought of a single person understanding all its aspects and making relevant decision all by himself is a delusion. Only communication and delegation allow such teams to work together.

The Boss’s role is to coordinate the collective efforts and information flow within his team, and motivate the members when they hit a bottleneck. The Boss is completely dependent on his team to produce  tangible results, upon which the Boss’s own performance will be measured. Stories of “rockstar” primadonna performers, capable of performing amazing feats of technological power or creativity, yet who bring with them massive personal problems, and make their Bosses bend over all out of shape to please the primadonnas are frequent in Silicon Valley. Many Valley organizations during annual performance reviews give employees options to anonymously rate their managers; the resulting score directly impacts the managers  annual compensation.

Arguments and disagreements inside the team and with the Boss are common. Smoothly merging a diverse set of incompatible skills is difficult. Finding commonalities between different fields so as to encourage collaboration is challenging. A Boss’s management and human skills are tested in finding resolutions to these daily conflicts. The duty of each team member is to present his expertise, his domain point of view, and exposing all facets of a problem to the team and Boss. The result is often many sore throats and bruised egos that lead into very constructive compromises or even brilliant solutions.

Direct control and micromanagement are useless artifacts of prehistoric management, that have been abandoned for decades. To remove even the temptation to micromanage, Google makes their directors have 100-150 direct reports. Every senior person in organization (with noteworthy exception for junior guys who do need mentoring) is very talented, otherwise they wouldn’t be hired in first place. Therefore they will find on their own the best way to apply their skills to given problem. The concept of “ownership” of problems, domains, and areas of responsibility is common. The vote of a domain owner is decisive, no matter what relative position he holds in organization. A Boss is most certainly not talented in all areas his reports are, and won’t even try to give them specific advice. All he can do is to define broad areas or desired results and let his team figure out the rest. Managers at early Microsoft were known to never take a position or use their authority to dictate specific decision during team conflicts. They reasonably argued that being the people with the least amount of technical information, they should have nothing to do with making a technical decision.

Now you’ve got three people in the room: a designer, a developer, and a manager. Who’s the person who knows least about the problem? Obviously, it’s the manager. [..] At Microsoft, the manager would usually refuse to make the decision. After all, they have the least information about the problem.
Joel Spolsky

Mistakes are embraced, declared, and discussed. Mistakes inside the team are blessings. Out there, behind the walls of given company there are always five rutheless, well funded competitors. They will use and exploit any mistake a company will make. Discovering a mistake early, and getting the team to recover from it early and quickly  is a default action. Learning from one’s mistakes is a huge part of the Silicon Valley culture. Since startups always explore unknown waters, mistakes are common and often. Thats how startup constantly improves and self corrects in uncharted waters. The meritocratic culture is centered around personal talent. In discussion and open debate the only “strength” recognized is expertise in given area or well reasoned argument which turns other members of the team, usually the ones which do not share same professional domain, to the side of the orator. Since winning one argument usually does not help much next time in an argument about a different topic the general idea of relative “strength” and “weakness” to be gained through arguments is fairly pointless.

The Bosses in Silicon Valley make “open communication channels” almost a religious cult

The Bosses in Silicon Valley make “open communication channels” almost a religious cult. They opt not to have their own closed offices, but to sit right in middle of their teams. Mark Zuckenberg, in the new Facebook office, placed his desk to be most equidistant point from all sides of the building, thus making that point the easiest to be reached by every other employee as they mingle in the office. This example is a practical consequence of team diversity described above. Since the Boss is completely dependent on the diverse and unique skillset of his team, his only way of connecting with reality is to communicate, communicate and communicate with his team. The position and title in an organizational chart has no direct correlation with salary or compensation. For years

Microsoft has prided itself on having a completely parallel career track for developers, which had nothing to do with their formal management skills. Developers were so valued that they could receive massive multipliers to their salary and stock positions without ever managing any teams or people. Position assignments are strongly influenced by organizational meritocracy. It is common for employees (developers, artists, etc) to interview and hire their own Bosses, depending on which will be best for the team. Of course, vertical career growth is desired by many. However it always comes with a clear understanding of that position’s responsibilities – which are often many. It not that rare that a person tries to bite more then he can chew and then asks to be demoted back to old position.

Cardinal Talent Rule

As one digs deeper and deeper into the actual workings of high tech management hierarchies, it becomes apparent that there really is no clearly defined organizational chart. Its more of big collection of fuzzy spheres and circles of different domains intersecting in many more dimensions then any org chart can show. Its glaringly different than the typical Russian management hierarchies.  We can continue to list even more subtle differences. However more or less it all boils down to one thing, which we will call the Cardinal Talent Rule. From that rule one can pretty much derive everything else. This rule will need a bit of explanation to really understand it. Bear with me.

From the outside, Silicon Valley may look like an ideal world. Like the “Avatar” movie: all the beauty, harmony, blissful creation of ever better technologies appearing year after year. However if you look below the surface it is actually a bloodthirsty jungle, in which endless competitors fight for scarce resources and similar markets.

The parade of mind-bending products & technologies do not show up as some sort of happy arrangement where we all hold hands, sing songs and strive to do good. It comes from brutal Darwinian competition for resources: press coverage, conference presence, angel/venture/late stage funding, key talent, etc. The scarcity is built into the system. Without scarcity the competition wouldn’t be so intense, and resulting products wouldn’t be as great. The times when – for short periods – the Valley actually goes into oversupply are known as bubbles, and they do end fast…and painfully.

What is the scarcest resource? Startup will always be a more challenging endeavor than a regular company. The market is unknown, revenue sources are unknown, and everything is in the dark. Therefore, the demand for startup early stage employees is much greater than for people in similar positions in more established companies. Bigger companies have real markets, real revenues, and therefore are pay better. The Startup job is therefore much more challenging. And because of the hardships of entering or even creating new markets, the quality of work must be at its best. Being in a startup is a very demanding job, requiring one to deliver stellar results, for much less money but with insane work hours….oh, and only the remote 1% possibility to strike it very rich. Needless to say what motivates people to join startups is not just that 1% remote chance, its the whole lifestyle of endless challenge.  It takes a very very unique kind of person, who likes and strives in such unpredictable conditions, all the time fully knowing they have options to be better paid and lead calmer lives in more predictable (boring) companies. And thankfully for all of us, the Valley has lots of people who want to do exactly that. In valley terms such startup-friendly people are called “rockstars”.

Silicon Valley may look like an ideal world. Like the “Avatar” movie: all the beauty, harmony, blissful creation of ever better technologies appearing year after year

The recurring scarcity is that there are never enough people of such caliber and talent to fill all positions in all startups. Time to time you see a rat race when pack of similar startups race in the mind bending VC rounds for some crazy amounts of cash, which are completely out of alignment with their revenues and market positions. Why do they need that much cash? Its really about one thing: talent. The real war is to get best and brightest people in a given domain before your competitors do. Brilliant people can figure out all problems. Shut out talent supply to your competitors and your startup already won half a battle. Brilliant rockstars are lifeblood of the valley. Bosses conversing in bars will be discussing how they spent insane amount of effort seducing rockstars to join their team. VCs will descend from the clouds at moments notice to help their portfolio startups recruit a key person.

This leads us to Cardinal Talent Rule. The key job of a Boss in any Silicon Valley company is to keep his rockstars happy and productive. To say rockstars are fickle is to say nothing. The whole humor of calling them rockstars or prima donnas is just about that. Every rockstar is to certain degree a “startup” of himself. He will use his time and talent only if he feels working within given startup and given team is bigger then working by himself or somewhere else or just plainly starting his own startup. The only correct solution to 1+1 equation in the valley is 1+1=10, and we’re not speaking in binary. Any part of a Boss’s ego or methods that will hamper natural cooperation among creative individuals (which is pretty much all the garbage on a Russian khan ‘slist) will be ruthlessly thrown away. Any mistake by the Boss or the company will result in rockstar immediately presented with multiple offers from competing startups. Any Boss who spent 5 seconds on a personal power trip will be faced with the duty of delivering the same results without his rockstar, but with the same competition that now has THAT rockstar! That is not a happy thought for any Boss to contemplate.

Survival of the Smartest

These lessons are hard to apply in the Russian environment. They cut deep across of many cherished Russian legacies. One must realize that the old history is over. The very loyalty and obedience that worked great in the defense of Stalingrad won’t win any high tech battles today. There have been more technological breakthroughs in the past twenty years than in the whole history of mankind. New world – new rules.

An important caveat to understand is that in the more and more globally interconnected world, local inefficiencies are exposed fairly quickly. If adhering to the legacy management style will hamper sufficient number of Russian high tech companies, it will only create a big advantage to countless energetic Indians, Chinese, Brazilians, Mexicans, and many others nations rapidly entering the high tech race. It is stingingly ironic, that the act of holding true to the ancient and cherished Russian legacy will accelerate the fading or disappearance of Russian prominence in the future.

There are many things intrinsically unpleasant to Russians. We don’t like to admit or discuss mistakes in public. We don’t like to publicly point out our mistakes to our Bosses. We just plain hate to listen to criticism from our direct reports. Etc etc as per list above. Yet there is no choice. Keeping mistakes secret will only make your products and team less efficient on world market where they will appear faster then you can type an URL into a browser. Russia must learn to encourage a culture of critique, open discussion, and constant self-assessment. Every problem you uncover internally means one less problem to be uncovered when your product or company is in the eyes of 2,000,000,000 of World Wide Users. Failure to create a business culture, which addresses such problems fast, will only further reduce your products and therefore future Russian presence on world stage.

It is stingingly ironic, that the act of holding true to the ancient and cherished Russian legacy will accelerate the fading or disappearance of Russian prominence in the future

Don’t ever micromanage anybody. Don’t let yourself be micromanaged. By micromanging somebody you demotivate them and prevent them from ever learning from their own mistakes. By letting yourself to be micromanged you accept the loss of most precious asset you have: your creative freedom.

Unconditional personal loyalty, punishment for disloyalty, public displays of “strength” by blindly applying naked authority, are outdated tools that should go directly to the garbage bin of history. You must building a meritocracy, meaning each and every personal status, action and decision must have merits. They come in the form of well thought out arguments, personal expertise, market data, and research. Opposing arguments should be in same form. You can not make any authoritative decisions without backing them up with merit-based support. The strength you project is illusion. The objective weakness you create is the same as always: you prevent your talented team from finding a merit-based decision for a given issue. Therefore you give competitive advantages to competitors.

Top talent will be scarce. Even in Moscow and other high tech centers there will be many fewer startup friendly people than in Silicon Valley. Therefore, the cardinal talent rule will be thousand time more relevant in Russian than it ever was here. Every startup rockstar will be extremely precious for the nascent Russian high tech community. The one and only job of key people in new Russian hierarchies will be retaining that talent and letting it bloom to its full creative potential. Perhaps for the first time in long and proud Russian history.

From Silicon Valley With Love


These are exciting times right now in Russia. After a long history of existing on a resource-driven oil & gas economy, the country has made great strides  to becoming a high technology powerhouse. The press is a-buzz with talk about technology parks and fostering a start-up culture. Lots of attention has been given to learning from Silicon Valley’s history and applying those lessons into creating a Russian high-tech sector.

Silicon Valley 2010

We had started, joined, sold and wrecked a few startups

We are the group of energetic Russian-American entrepreneurs based in Silicon Valley. We have been here for many years and done many things grand and small. We have been in and out of huge technology companies. Started, joined, wrecked, and sold quite a few startups. Gotten, spent, given, and advised on many high tech investments. From our front-row seats right here in Mountain View, Palo Alto & San Francisco, we experienced first hand the .com boom and bust, enjoyed the spring of web 2.0, watched the rise of Google and Facebook, and were generally awed by the never-ending evolution of the Valley. Being Russian in Silicon Valley is interesting and humbling. Sometimes our heritage has been an aid, but more often than not it has led to confusion & bedazzlement. Things here get done so fast!!!!  It helps to realize which of our historical baggage we should take or abandon, and  what else we needed to learn in order to compete with the best and the brightest of Silicon Valley.

Like everybody else, we got excited hearing the recent news from Russia. What can be more interesting than thinking of biggest startup of them all, restarting the whole country! Silicon Valley’s first teaching is that no challenge is too hard. Small determined teams are capable of astonishing results, thousands of times bigger than their inputs. If two guys in garage can take down a multi-billion dollar international corporation by building an even bigger mega-multi-billion dollar company on two laptops and folding table, why can’t a rag-tag group of entrepreneurs reform a whole country by using a blog and powered by an unstoppable drive to succeed? Just roll out the white-boards and start brainstorming.

Silicon Valley’s first teaching is that no challenge is too hard.

We are not going to waste your time on obvious “startup/entrepreneur” entry level advice. There are plenty of other resources for that on “the internet”. What we are going to do is to dig deep to unearth the roots of how Russian legacy culture looks like through the prism of Silicon Valley innovation; what the real fundamentals of Silicon Valley system are, so hidden from the surface, yet so critical for success; what must change in the broader Russian mindset and worldview to see the world like we do here in Silicon Valley.  We will try to analyze and uncover these deeper truths.

Stay tuned for more great stuff coming up soon!