Marc Andreessen, Act II

What's still true — and what was never true — about the Internet.

The first stage of the Internet revolution has come and gone. It was certainly one helluva run. But with the NASDAQ flat on its back, with one high-profile dotcom after another dead and buried, and with more and more executives in big companies wondering what it means to have an e-commerce strategy these days, almost everyone recognizes that the Internet economy has arrived at an inflection point.

Is the new economy dead? Hardly. At times, though, what seemed like breakthrough strategic thinking about the Internet in 1998 and 1999 now feels like a path to ruin. Even so, the Web-driven opportunities for growth and innovation remain as tantalizing as ever, and doing nothing is a guaranteed ticket to obscurity. Somehow, there must be a way to digest the unpleasant lessons of the past year and then pick a wiser, sounder course.

Enter Marc Andreessen. Of all the entrepreneurs and executives trying to figure out Act II of the Internet economy, no one brings a more intriguing set of credentials. Andreessen will forever be famous as the 22-year-old engineer who cofounded Netscape Communications in April 1994 — attracting millions of users and a frenzy of Wall Street interest as his company distributed the first widely available, easy-to-use Web browser. Many commentators think of the day of Netscape's IPO (August 9, 1995) as the shot heard 'round the virtual world — the event that triggered the first Internet revolution.

During his five-year tenure at Netscape, Andreessen, now 28, was at first idolized, then severely tested in an all-out battle for market share against Microsoft. He emerged from that showdown with hard-earned knowledge about what it takes to hire well, build a team, keep strategic momentum going, and adapt to drastically changed circumstances. Andreessen is now chairman of a second-generation Web company, Loudcloud Inc., which manages Internet operations for a wide range of business customers.

In an interview with Fast Company, Andreessen talked about what it will take to succeed in the next stage of the Internet revolution. Outspoken as ever, he has blunt words for the strategic missteps of recent years, touching on everything from venture capitalists' investing habits ("They went nuts") to the right way to build a brand online ("Advertising is the last thing you do''). But he says that opportunities on the Internet have never been bigger, and he is brimming with insights about how companies and entrepreneurs can capitalize on them. In two sidebars, we distill his thinking on the "Five Things That Are Still True About the Internet " and the "Five Things That Were Never True About the Internet." Get ready for the next revolution.

As we look at the Internet landscape, it's clear that many companies are seriously overhauling their strategies. How do the leaders of a startup — or the top executives at an established company — retool successfully? At what point does strategic zigzagging become so hopeless that employees say, "Enough already, I'm going skiing"?

You have to ask a couple of questions. One is "How well respected is the management?" When people quit, they tend to leave because they've lost faith in their manager. A management team with a lot of respect can do a much better job of retaining employees in such an environment — which is why historically a company like Microsoft , Intel, or Cisco could turn on a dime, do radically different things, and still have people say, "Okay, we'll follow.'' I sometimes think the key to leadership is having people willing to follow you, if only out of curiosity to see what's going to happen.

The other question is "Has the culture of the company been built on the concept of change from the very beginning?" A lot of high-growth companies discover that during the first two or three years, it's smooth sailing. They come out with the right product, customers come to them, and everything is going just fine. Bankers suck up to them. They go public. Everybody tells them they're geniuses.

Then, for the first time, they run into a serious competitor, or a customer defects, or there's a negative article in the press. And then they're like, "Oh God!" It's the first time in that culture that anything bad has ever happened. Those companies tend to be the most vulnerable. In many ways, the companies that do better are the ones that had a more trying experience getting from point A to point B.

You had a bit of that experience at Netscape. What kinds of things are you doing differently at Loudcloud?

It's a challenge. In the startup world, you're either a genius or an idiot. You're never just an ordinary guy trying to get through the day. If you're a market leader, the press is going to report that you're great. But in fact, you're maybe just 10% better than the competition. If you let the publicity go to your head, you start to slack off and lose your 10% edge. Then, all of a sudden, the next story is that you're an idiot. That's what happened to Priceline.

Any company that's going to be around for more than two years is going to go through the whole cycle. Oracle, Sun, Microsoft, IBM — all the big names go through it every few years. If you have that perspective, and your employees expect it, you'll withstand it just fine. At Netscape, we were always suspicious, because the environment was so euphoric in 1995 and 1996. We knew we weren't that smart. But everyone has to go through it once. One of my favorite examples involved iVillage. Right at the top of iVillage's stock price, its CEO, Candice Carpenter, said some insulting things about Netscape. And I said, "The wheels of justice are going to turn on this one."

So what's a better way to keep a handle on reality — and not get swept up in giddiness that might ultimately be self-destructive?

I keep a list of the 10 most serious threats to the company. The lawyers hate this. It's actually called "Ten reasons we're going to go out of business." It definitely focuses the mind as much as the prospect of imminent hanging. So we ask ourselves, If we end up failing, what will be the reason? And we go through the list. You're starting to build in what seems like paranoia, but it's really just clear-eyed objectivity. I always enjoyed it. In fact, working on the risk-factor section is my favorite part of drafting prospectuses. It lets you look at your company and say, Okay, what might go wrong? You have an obligation to be as complete as you can, so it liberates your mind.

Let's talk about some of the myths of doing business on the Internet. A year ago, there was an enormous amount of rhetoric about first-mover advantage. Does that still ring true, or is a different dynamic at work?

It's a tricky, tricky game. Most first movers end up lying facedown in the sand, with other people coming along and learning from their mistakes. Who knows what people are ready for in their lives? Are you willing to carry around an email pager? Are you willing to buy things from strangers via online auctions? Or spend an hour a day online? A few years ago, the answer to those questions was no. Today, the answer is yes. Being the first mover with the right approach is very important. Being the first mover with the wrong approach means you're dead.

What's your current thinking about the get-big-fast mentality? Three or four years ago, there was this belief that the opportunities were so great, you couldn't be too aggressive. What changed?

The key question is, What were the great opportunities? That strategy worked when the opportunities really were there, say for Amazon, AOL, Yahoo!, or eBay. But it wasn't true for just about everybody else. Especially in the past 24 months, people really lost sight of whether there was any real hope or prospect of a sustainable business. The truth is that some of these ideas may ultimately work — they just came to market too soon. I wouldn't be at all surprised if there was a wave of new startups over the next 5 years that are basically reincarnations of all business-to-consumer ideas that are currently going out of business.

What have you learned about staffing a startup? How fast can you increase your head count before you regret the way you did it?

We hired very fast at Netscape. We ended up with some groups filled with supergeniuses and others that weren't. It was very dependent on who the managers were. If you hired the right manager, that particular group was going to be great. But if you happened to hire a bad manager, that whole place was going to be horrible. We call it the Rule of Crappy People. Bad managers hire very, very bad employees, because they're threatened by anybody who is anywhere near as good as they are.

But the hidden danger in startups is not hiring bad people; it's hiring good people instead of great people. Competent managers can usually screen out bad people, but they have a hard time screening out good people.

So how do you fix things?

At Loudcloud, we address that challenge head-on. We have full-time recruiters on staff, and we hired them very early. We say, "Good isn't good enough; it's got to be great." And we have a rating scale for each candidate. The trick is that people don't get hired if they are just above average. People get hired only if they are at the very top.

What's your thinking about "Internet time"? What actually takes place faster because of the Web, and what still creeps along?

Software evolution goes much, much faster. In the pre-Internet software industry, we all got used to these two- or three-year product cycles. Companies would spend two years building a piece of software in the lab, and then they'd run it through this elaborate internal testing process. On the Web, it's different. You build software, put it on your Web site, and it's deployed globally. So Yahoo! and eBay and Amazon can iterate their software environments every couple of weeks. And then the world does your beta testing. You can do market research pretty much instantaneously. When I was at Netscape, Bill Campbell used to say, "Put up a new service on the Net, and if it works, it's a product. If it doesn't, it's market research.''

People don't change so fast. That's human nature. Everyone is in favor of change in the abstract, but when it comes to things that will specifically alter people's lives, they freak out. What's more, people don't change their reading or shopping behavior all that fast. I use instant messaging and Amazon — which I didn't three years ago. I have a global-positioning system in my car and a Replay service on my TV. But that's about it. We're not going to take in three new Web sites a month. This is particularly striking when you look through Fast Company or Red Herring or Fortune, and you see advertisements from hundreds of companies that you've never heard of. Your response is, "There's not enough room in the market."

You just mentioned advertising. What have we learned about brand building on the Internet?

The ongoing myth is that brands get built by advertising. Actually, the evidence is exactly the opposite. Brands get reinforced by advertising, but they get built by grassroots adoption and word of mouth. That was true of Amazon, AOL, Yahoo!, and eBay. It was true of Netscape. In the past 10 years, all the new Internet brands got built through grassroots adoption before the companies actually had enough money to mount a nationwide advertising campaign.

So now we know what not to do. What advice would you give to a big company that still wants to "get" the Internet? Are there ways that the big guys can become nimbler as they compete with startups?

You need to set up a separate group — and one that's sized for the market as it is today. If you put 3,500 people on the project and expect them to generate enough revenue to pay their way, you're going to be disappointed. If you put 50 on it, you're probably better off. A lot of the actual work is software engineering — and that tends to work better with smaller numbers of people.

There's another paradox at work here. In the high-tech industry, at least, it turns out that dictatorial management works pretty well. It's been conventional wisdom for 20 years that you're supposed to involve all of your employees, build consensus, and have ideas coming from the bottom up. But the only way for a big company to change fast and capitalize on its strengths is to have an order from the top.

What you also discover is that the market for ideas is pretty efficient. Most of the good ideas are already out there. For example, if you said, "I think everyone's going to buy a lot of optical-network equipment in the next three years, so I'm going to start an optical-network company,'' that wouldn't get you very far. This is in fact probably the exact wrong time to do an optical startup, because there are so many of them already. Instead, you need some fundamental piece of data that other people just don't have, or some level of conviction that other people lack. It's very hard to fight conventional wisdom. It's one reason why I avoid industry conferences: They are a breeding ground for conventional wisdom. They will almost defile your thinking.

And yet no one wants to develop products in isolation. What's the right way to get to market quickly with a winner?

You can't shoot for perfection in your product. You have to get the product to market, and you have to target the right customer at the right time. If you do that, the product will eventually achieve perfection over the next 20 or 30 years in the way that Windows now has, for its purpose, or in the way that Oracle now has. But the luxury of having all the right features comes only if you're so entrenched in the market that you can afford the R&D to do that.

This isn't a matter of sacrificing product quality. It's a matter of sacrificing scope. I mean, there's no question that you have to get to market really fast. You have to get the product in front of a customer. You have to get real-world feedback, because every day that you're not hearing from an actual paying customer is a day that the market is moving further away from you. When you start these companies, you have only a vague clue about what the actual market opportunity might be. There's nothing scarier than a startup that is doing the same thing it originally set out to do 18 months later. Look at Microsoft. In no way was it founded to do what it does today. It got started to do software tools. At one point, Oracle was a consulting shop.

What you absolutely don't want is to get stuck with "second-system syndrome." Something works wonderfully the first time, and then for the next version, the engineers have a list of 130 things they want to fix. If they try to do everything, deadlines end up slipping two years or more. Either the next version never comes to market or what finally emerges is so big and cumbersome that no one wants it.

At Netscape, I was paranoid about second-system syndrome from the very beginning. I read the book many times. So we managed to avoid it on Version 2 of the Netscape browser. We avoided it on Version 3. We avoided it on Version 4. And then...

Where's Version 5?

Exactly. We started Version 5.10, which is now 6.0, in early 1996. Here we are, almost five years later, and it is only now coming to market. The engineers kept saying, "Oh my God, we've got to re-architect. We've got to rewrite the LAN engine. We've got to rewrite the whole thing in Java. We've got to do this, we've got to that." I didn't understand half the stuff, and past a certain point you just say, "Well, all right.'' So despite our best efforts, we didn't totally avoid second-system syndrome. We just deferred it to the fifth version.

You did something interesting and provocative at Netscape. You gave away the basic Internet browser on the belief that you could collect other revenue down the road. When does that business model work? When is there no "down the road"?

Well, Netscape was designed to be a full-range software company with servers, commerce applications, and all sorts of technical support and consulting services built around the basic Internet browser. So we knew from the very beginning that we could give away one product and then charge for all the other software. It's kind of a razor-razor blade model. You can see something similar in the cellular industry, or even with AOL, if you think about the true acquisition cost for each new customer.

But if you start thinking, "I've got lots of eyeballs, and I'm going to monetize some of that traffic," well, that's the kiss of death. At that point, you're trying to construct a revenue stream for the sole purpose of keeping you going as an enterprise, as opposed to addressing an actual problem that a customer might have.

For the past few years, you've argued that the Internet will burst open what might be called the "cathedrals of knowledge." No longer will big, powerful enterprises decide on their own what software, music, or news the public wants — and then create it in secret before rolling it out in full. Suddenly, we'll have all of these choices, and we'll all get to help make the product. Is that coming to pass?

If you look at the interplay between open systems, where everyone gets to see the source code and refine it, and propietary software, there's definitely room for more of both. There's a lot more adoption of linux [an open operating system] now than there was a few years ago, but there's also a lot more adoption of Sun Microsystems's Solaris. There's a lot more adoption of open-source application servers, but there's also a lot more adoption of WebLogic from BEA Systems Inc. For a certain class of customers, there's no substitute for a large mainstream company backing them up. In part, that's because buying behavior is not always as logical and advanced as the open-source advocates want it to be. It's often based on risk aversion. This goes especially for highly complex things.

That said, a top-notch technical team working with an open-source environment is able to move faster, change faster, fix bugs faster, and expand faster. That's why a lot of the really advanced government agencies — NASA and so forth — tend to be pretty aggressive users of things like Linux. They actually have a lot of technical talent in those organizations. So they would much rather just fix the damn bug than wait for X Corp. to go through its three-month patch process, whether that's Oracle, Microsoft, or whomever. But there are many other organizations, such as your local insurance company, that just never will make that kind of decision.

In a way, almost everything we've discussed so far highlights the intensely social dimension of the Internet. That wasn't the case with early generations of information technology. Back in the 1960s and 1970s, computing was a nonsocial, almost lonely experience. Then we started networking everyone together. When did you first sense that the mere act of connecting everyone had huge implications?

When I got to the University of Illinois in 1989, what struck me the most was that people at the supercomputing center were already sharing computers, downloading images, and doing distributed software development. It was part of our lives. And yet everyone else at the university had never heard of this. That's because the system was set up to be almost deliberately hostile and foreign. So it wasn't much of a leap to say, "Well, the barriers to easy use aren't going to last forever. If this is useful for a physics researcher, it's going to be useful for a grandma to communicate with her grandkids."

After all, we're social animals. The story of civilization is the story of communication. Whenever people have had an opportunity to communicate, they've taken it. The more communication there is, the more we can specialize and the more our skills become transferable.

We're nowhere close to realizing the consequences of the Net, for two reasons. First, we've only got about 3.5% of the world's population on the network. Second, the Net is still in an immature state, relative to what it will be 5 to 10 years from now.

Let's get back to basics. Of all the things we can do with the Net, isn't it striking that the most popular application remains email?

It's still the killer application for the Internet, although instant messaging may eventually become even more important. I remember getting started with email in 1989. Originally, it was just a way of testing network connectivity. People were sending out updates about the status of the system. And then pretty soon, we were communicating with people who were one office over: "Want to have lunch?''

Look at this little gizmo [a BlackBerry email transmitter and receiver]. This is my email device. I carry it around and deal with all of its idiosyncrasies and replace the battery every three days. I mean, I pay about as much attention to this as I do to my dog. You've got to clean the screen. Stuff gets stuck in the keyboard. And it's invaluable. I swear to God, I type more with my thumbs on a BlackBerry than I do with all 10 fingers on a conventional keyboard.

I think in the future we're going to have very long thumbs with many joints, just so we can use these devices better. And people with those kinds of thumbs will be much more attractive to the opposite gender. Forget a firm butt; I want my spouse to have long thumbs, because my kids will not be disadvantaged!

George Anders (ganders@fastcompany.com), a Fast Company senior editor, is based in San Francisco. Learn more about Marc Andreessen and Loudcloud Inc. on the Web (www.loudcloud.com).

Sidebar: Five Things That Are Still True About the Internet

  1. Small teams work best. Even within big companies, the best way to take advantage of Internet opportunities may be to put 50 people on a project, instead of 3,500. That's the best way to make sure that vital software is developed quickly, crisply, and with a tight focus. It also ensures that spending is in line with realistic current revenue prospects. There will be lots of time to hire later.
  2. The Net allows you to get closer than ever to your customers. Feedback — both positive and negative — now arrives in real time. "Ad hoc testing of new market concepts becomes practically unlimited," says Andreessen. Click-stream analysis, for example, helps companies understand customers' thought patterns as never before. That makes it imperative for companies to put such knowledge to work, fast, within their own organizations — because if they don't, their competitors will.
  3. Information travels faster than ever. That applies to news events and, of course, rumors: Just consider the way the stock market fluctuates in response to new data. But it also applies to software, as we have seen with the stunningly rapid spread of Napster. The implications of this kind of change are jarring at times — but ultimately, they will be beneficial.
  4. Open systems become a lot more appealing than they were before. With the Internet, it's possible to have the whole world debugging your software, suggesting new products, or providing customer service. That creates an intriguing alternative to the traditional "cathedrals of knowledge'' — big, centrally run companies that do their development in secret and that share only finished products with the outside world. For now, though, both models are working well; it's too early to say which will dominate.
  5. Email remains the Internet's killer app. It's simple and unglamorous, but email meets a critical set of human needs. In business settings, it lets people communicate quickly, efficiently, and cheaply — and whenever they want to. And the social implications of enabling so many people to be a mere email address away from one another keep growing all the time.

Sidebar: Five Things That Were Never True About the Internet

  1. First movers always win. In fact, says Marc Andreessen, "most first movers end up lying facedown in the sand, with other people coming along and learning from their mistakes." Timing, execution, and having the right fundamental approach are what matter most. It's rare for the first entrant into a new industry to get all of those elements right. More often, a later arrival is the one that thrives.
  2. Everything happens faster on Internet time. It's true that software evolution occurs much faster in the age of the Web. But a lot of other things don't speed up at all. Consumer preferences don't change quickly. And "the minute you get back into the physical world," warns Andreessen, "it's a lot harder to change fast."
  3. It's all about traffic; the site with the most page views wins. Plenty of people created free sites, dreaming that they would soon be making money by turning brisk traffic into a paying proposition, either through advertising or through e-commerce. "That's the kiss of death," says Andreessen. In fact, attracting lots of eyeballs isn't worth much of anything if visitors to a Web site don't have an inherent reason to do business there.
  4. Advertising can build a brand in a hurry. Not so. The Internet's best-known brands, such as Amazon, AOL, eBay, and Yahoo!, were all "built by grassroots adoption and word of mouth," says Andreessen. Advertising only reinforced that initial appeal to users. Internet companies that thought they could advertise their way to lasting fame were just plain wrong.
  5. The popularity of the Internet puts us on the brink of some great convergence between voice, data, computers, and television. "Whenever anyone says 'convergence,' reach for your wallet," warns Andreessen, who believes that technological innovation is likely to produce greater divergence and greater specialization of devices. In particular, "the whole concept that people will want to interact with their television set is silly," Andreessen argues. "Interactive television happens when your football team loses, and you pitch a beer can at the screen."

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