According to Jim Collins and other leading business thinkers, the instinct to create companies that are “flippable” represents a threat to the soul of the new economy. According to some of the most creative thinkers and doers in the world of startups, flippable companies represent an essential component of the innovation engine that drives the new economy.
To explore the arguments in the Built to Last-Built to Flip debate, Fast Company invited five commentators to share their views:
Steve Jurvetson, 32, a managing director of Draper Fisher Jurvetson, says that Built to Flip isn’t rampant — and that the more important game today involves creating companies that can take advantage of the corporate flux that marks the Information Age.
Christina L. Darwall, executive director of the Harvard Business School California Research Center, says that Built to Flip is a fundamental attribute of competition in the new economy — and that successful business organizations need to be ephemeral.
Gary Sutton, the CEO of @Backup and a veteran of nine companies over a 20-year career, admits that he is a “serial flipper” — but says that if “sustainability” means remaining static, then he favors Built to Flip as a means of ensuring company vitality.
Janina Pawlowski, cofounder and chairwoman of E-Loan Inc., and Joe Kennedy, president and COO of E-Loan, explain why their company is not built to flip — and outline the steps that they are taking to turn their organization into an enduring, great company.
Read their comments, read and consider the “Call to Action” that follows — and then join in the debate. Go to https://www.fastcompany.com/giveback/ to endorse the call to action and to share your thoughts.
Steve Jurvetson, 32, is a managing director of Draper Fisher Jurvetson, based in Redwood City, California. DFJ, one of Silicon Valley’s top technology venture-capital firms, has invested in such promising Net startups as Hotmail, Kana Communications Inc., NetZero Inc., and Tumbleweed Communications Corp. Of the firm’s new investments over the past five years, 15 have gone public, and 8 were sold pre-IPO.
Before joining the VC world, Jurvetson was an R&D engineer at Hewlett-Packard, a product marketer for both Apple Computer and NeXT Computer, and a management consultant at Bain & Co.
I have to suppress a smirk when I hear people questioning the sustainability of Silicon Valley companies. “Sustainability” has become a sort of code word. It represents a cluster of beliefs: that certain companies are indeed built to flip, that entrepreneurs and venture capitalists are just out to make a quick buck, and that everyone is trying to exploit an arbitrage opportunity.
Sure, flipping happens — but it’s not rampant, and it’s not being instigated by venture capitalists. No venture firm that I know of subscribes to a flip strategy. Top-tier firms understand that selling out quickly isn’t the way to make big returns. Yes, it’s better than a kick in the teeth, but it won’t deliver big profits — at least not the kinds of profits that most top firms are looking for today.
Why? Because Built to Flip is an oxymoron. You can’t orchestrate a sale, and savvy entrepreneurs realize that. In his essay, Jim Collins writes that a number of companies — among them Lotus and Netscape — were destined to flip. Yet he doesn’t really explain why. It’s easy, after the fact, to make history seem rational or inevitable. But Jim gives us no metrics that clarify what differentiates a built-to-flip company from a built-to-last company. And that’s because most startups are very much alike.
Yes, lots of companies today are being acquired even before they generate any revenue. But if you’re starting a company, you can’t say, “Hey, I’ll do that too.” That would be foolish. When a company simply wants to sell itself, it rarely makes the best possible business decisions. For one thing, it doesn’t bring on the best possible talent: Why hire a great vice president of engineering who’s going to cost you equity, when you can get by with someone who’s just adequate? Why dilute your stock if you’re going to sell out in a few months?
And if you design a company whose only exit opportunity is acquisition, then you’ll undermine your leverage with potential acquirers. The best acquisitions involve targets that have no intention of selling out. Hotmail, one of our big investments, spent five months saying no, no, no to Microsoft. The company’s leaders turned down the initial offer — $120 million in cash — because it was ridiculously low. In the end, they got $400 million in Microsoft shares; today, those shares are worth $1.2 billion. That wouldn’t have happened if Hotmail had been built to flip.
Even so, we advised Hotmail not to sell when it did. In fact, in nearly every case, we strongly advise our companies against acquisition, because the upside potential is simply greater when a company stays independent. Hotmail has 50 million active subscribers: If it had remained independent, it would have a multibillion-dollar valuation today. Saying no requires dedication; so does persuading recent hires to turn down a quick windfall. Kana and Tumbleweed, two other companies that we funded, both turned down acquisition offers just before they went public. The founders of those companies absolutely want to change the world. We look for that kind of passion in every deal that we do. We ask founders, “Why are you doing this company?” If they say, “We want to build something that we can sell quickly,” we’ll walk away from a deal.
So, if venture capitalists aren’t driving the built-to-flip phenomenon, what is? In part, it’s the speed at which the Internet economy operates. Network effects — the underlying driver of the Net — allow you to spread like wildfire on the strength of an idea. Previously, companies had to endure long life cycles in order to achieve success. Today, a good idea can take off instantly. Hotmail expanded its subscriber base faster than any company in history — faster than any magazine, any TV service, any similar medium that you can think of. It’s now adding more than 200,000 subscribers a day. That’s the rate at which an idea can change the world.
Accelerating this process is the practice of partnering, which has become ubiquitous on the Net. America Online, Yahoo!, and other companies partner like crazy, because the number of sites that link to them correlates with market share. That practice marks a huge change. In the old days, when physical products dominated the economy, geography determined the scope and strategy of most businesses, and the transaction costs of partnering were high. So companies integrated vertically in order to own more of the value chain. Henry Ford, for example, saw to it that his company owned everything from rubber-production facilities to car dealerships.
The Internet has driven down the cost of communications, making it easy to focus on a core competency — and to partner for everything else. A business model can be surprisingly narrow and still be viable. Don’t assume that a company with only one product or service won’t be able to make it. The possibility that a new Merck or GE will emerge is much smaller than it was a generation ago — and that’s okay. Growth will emerge from an ecology of nimble, small businesses, not from sprawling corporate behemoths.
Established players are responding to that development with fear. Say that you’re Eudora and you own the electronic-mail space: What do you do when, all of a sudden, you see Hotmail restructuring your business for you? In periods of rapid growth and technological dislocation, incumbents react with a vertical mind-set. “We have to own this space,” they say. “We have to acquire it.” Microsoft couldn’t live in a world where Hotmail owned a critical piece of the Internet pie, so it paid a premium to buy that piece.
To the extent that flipping exists, that sort of acquisition mentality is what’s driving it. We’re in a transitional period when the IBMs of the world think that they have to acquire everything. And that effect is magnified by the tendency of traditional companies to identify startups as competitive threats before the financial community identifies them as suitable for public offering. The Internet economy is barely six years old, and lots of Net companies were started in 1996 or 1997. In most cases, that isn’t enough time to go public — but it is enough time for a big rival with cash to pick you off. That will change: This industry is like a pipeline-loading process that hasn’t yet reached a steady state.
Certainly, there are people out there who just want to make a quick buck. That sort of thinking is shortsighted, shallow, and potentially destructive. As individuals, we must strive for excellence in everything that we do. Life is too short to sacrifice personal fulfillment for near-term financial gain. Always pursue your passion. Right now, the pace of life in the Internet economy is making it all too easy to lose sight of that principle.
But individual fulfillment is different from corporate fulfillment. Entrepreneurs must pursue their dreams, but that’s no reason for a particular organization to expand forever. Each of Hotmail’s founders and vice presidents has started a new company since the acquisition by Microsoft: Their identities were not tied to one corporation. “Sustainability,” as we have come to understand it, is a misdirected notion.
Most entrepreneurs have a fundamental need for symbolic immortality. But the vehicle for expressing that need doesn’t have to be a large company that carries the names of its founders into perpetuity. In the Information Age, more and more people will find fulfillment in the expression of their ideas through small organizations — and in the dramatic impact that they can have at the product or project level. A good idea no longer needs the support of a corporate behemoth to change the world.
Contact Steve Jurvetson by email (email@example.com).
Christina L. Darwall
Christina L. Darwall, 51, is executive director of the Harvard Business School California Research Center, Harvard’s outpost in Silicon Valley. A former partner at McKinsey & Co. in San Francisco, she also cofounded ViewStar Corp., a document-imaging software company that is now part of Lucent Technologies. She has served on the boards of several technology startups.
Flipping is a very real phenomenon. It happens all the time, and it often represents a very profitable strategy for those who are involved in it. In many cases, it is also the right strategy from the standpoint of economic efficiency. Most of us connect “long-term” with “good” and “short-term” with “bad.” But I’m not convinced that making those connections is meaningful anymore. In fact, I think that it can be quite destructive.
Increasingly, successful businesses will be ephemeral. Instead of being built to last, they will be built to yield something of value — and once that value has been exhausted, they will vanish. Their very evanescence will be a source of competitive advantage. Sheer mass and mere momentum will be predictors of failure, rather than signs of benign persistence.
Just look at what’s happening in business today. At open-source software projects like Linux and Apache, large numbers of nonemployees are working disparately to develop products that do not owe their existence to any one company. Contributors come and go. There is no master plan, and there is very little formal structure. Strategy is amorphous, depending both on the talents of various contributors and on the demands of a constantly shifting market.
At many technology companies, old boundaries are blurring. Employees, suppliers, customers, and partners communicate — every day and in real time — via intranets and extranets. Enlightened executives, such as Meg Whitman and Pierre Omidyar (both of eBay), worry as much about the culture of their user community as they do about the culture of their employee community. The tendency of employees to move more often and more easily between employers has fueled this dynamic.
At the same time, the technology economy is becoming more and more modular. Think of build-your-own PCs or plug-and-play software components: Soup-to-nuts companies — companies that integrate fully up and down the value chain — are yielding to virtual organizations that rely on partnerships and joint ventures.
Cisco Systems is a classic example. Cisco is best viewed as an extremely efficient sales-and-marketing machine. Its research-and-development strategy largely entails identifying and buying small, single-product companies just as a particular technology is beginning to prove itself. As a result, Cisco can eliminate much of the guesswork that would otherwise go into its research function. The selling price is often high, but what may seem like an outrageous valuation for an untested startup is actually a bargain for Cisco.
That strategy works well precisely because many of the companies that Cisco acquires and integrates are built to flip. Buying such a company — one that has focused almost exclusively on the creation of a new product or service — involves overcoming relatively few barriers. In this model, the acquired company is generally young. It has few ingrained beliefs about “the way we do business around here,” and so it is more adaptable to the culture of the acquiring company. And because it has not focused on building strong sales and distribution capabilities, its employees welcome what the acquiring company brings to the party.
Is it wrong for Cisco to spend hundreds of millions of dollars on such a strategy? Is it wrong for entrepreneurs to create single-product companies that they can flip to Cisco? Not at all. In my view, that’s a very creative and compelling strategy. In any case, it’s hard to argue with Cisco’s performance over the past few years.
Of course, it’s one thing to reap profits by pursuing a smart strategy — and another to fuel a culture of wealth entitlement. And clearly, we are witnessing episodes of excess on a grand scale. Many VCs now press companies to go public after just two or three years, rather than waiting five to seven years (as they might have done in the past). In some cases, that’s appropriate. But I know several CEOs of young Internet companies whose backers have asked them to hit the IPO market well before they’re ready. These CEOs are in a tough spot. “I can’t predict revenues, let alone profits!” they say. But neither can they just ignore what their backers say.
Why are VCs doing this? First and foremost, the capital markets allow it. The investing public is more than willing to fund companies that are really just thinly disguised projects, and with that willingness comes high risk — as well as the potential for high gains. For better and for worse, greed will always be with us.
Second, today’s startups have only a short time in which to reach “escape velocity” — to conquer a chunk of market territory. Achieving critical mass early is essential because, in many new-economy businesses, the barriers to entry are low. Companies that are serious about carving out a permanent leadership position need to move much more quickly than they might have moved in the past. And to do so, they need capital. VCs provide the initial funding, but later-stage capital must come from an IPO or, if the right partner comes along, from an acquisition.
And that’s healthy. In today’s economy, no one can predict what will come next, so every organization must be quick and nimble. Some large companies acquire their nimbleness — by buying small, innovative companies with big, breakthrough ideas. And many of the best-performing companies of the future will be amorphous organizations that spring up suddenly, create value, and then disappear — before the trappings of an organization come to mean more than the people who work there.
Contact Christina L. Darwall by email (firstname.lastname@example.org).
Gary Sutton, 57, is chief executive officer of @Backup, a 3-year-old company in San Diego that provides Web-based backup, storage, and remote-access services. Over a 20-year career, he has run nine companies — six of which have been sold off. The first was Montron Corp., a toy maker that was acquired by Fisher-Price. Then came USPress Inc., Checks-to-Go Inc., Smiley Industries Inc., and Knight Protective Industries Inc. Sold. Sold. Sold. Sold. Next, in 1990, Sutton founded Teledesic LLC, a satellite-telecommunications provider. It too was sold: In 1996, AT&T, Boeing, Craig McCaw, Bill Gates, and Saudi Arabian prince Alwaleed Bin Talal together acquired a controlling interest in the company, and last year Motorola became an investor as well.
I am a serial flipper. I admit it. I’ve run and sold six companies in a relatively short time, and I am embarrassed by that. In each case, selling out was a function of what the owners wanted. I wish I could go back and run any one of those companies.
But I don’t believe that flipping, per se, is a bad thing. The principle of corporate sustainability flies in the face of everything that’s happening in the economy today. Even the word “sustainability” is boring and depressing. It suggests a static condition. So-called sustainable companies are the ones that lose a lot of money and then fizzle into mediocrity. They don’t innovate, and they don’t yield real productivity gains.
Here’s an example: 3M is a sustainable company. It invented Post-it Notes, and that was a wonderful innovation. But 20 years later, 3M is still trumpeting its giant leap from Scotch tape to Post-it Notes. What has 3M done for us lately?
The problem with Built to Last is that it’s a romantic notion. Large companies are incapable of ongoing innovation, of ongoing flexibility. And that’s dangerous: Every idea that we have today will be obsolete five years from now. The only certainty about a five-year plan is that it will be dramatically wrong within five years. Companies that are built to last forever usually find out too late that the world has changed right under their noses.
Silicon Valley, meanwhile, is innovating at a level that no one could have imagined 20 years ago. Its impact on the economy recalls the California gold rush of the early 1850s, which accelerated westward expansion and promoted the creation of the railroads. Today, there’s a new gold rush, and it’s happening because single-product startups are proving to be a very efficient source of R&D for larger companies that can’t innovate on their own.
This practice isn’t all that new. During World War II, the War Department discovered that “skunk works” projects (as they came to be known) could develop new products in a hurry. That was a far more rational model than what followed in the 1950s and 1960s, when corporations built inbred R&D departments with no connection to their companies’ customer base. Outsourcing R&D to startups helps ensure market accountability: A startup receives a finite amount of money, and it has to produce something that customers will buy — or die.
The way you create a great business is by doing something that others can’t easily replicate. Do that, and you’re going to be wooed by a lot of potential acquirers. Sure, it’s naive — and, in my view, vulgar — to start a company with a schedule for selling out already in place. But remember: The best antitakeover strategy of all is to be mediocre. Acquiring companies target innovative, growing businesses, not businesses that have reached their peak.
@Backup is one of those innovative, growing companies. And because we occupy a unique spot in the marketplace, we are going to be barraged by people who want to invest in us or acquire us. I hope that we can keep going for a long time without that sort of help. My partners and I are having fun, and we believe in what we’re doing.
Still, nothing lasts forever, and one attribute of sustainability is knowing when your time has come. A key factor in IBM’s recent comeback, for example, was the decision by its board to bring in a new team of managers from outside the industry. At some point — maybe in a year or two, after we reach 1 million users — I’ll probably need to be elbowed aside.
So I’ll be flipped — yet again. And that’s entirely appropriate: The world is more volatile than ever, and organizations that remain static will die. Flipping is a measure of economic vitality.
Is Built to Flip here to stay? Is flipping sustainable? I think so. Twenty years ago, I sold my house in Woodside, California for $205,000 because I thought that the real-estate market at that time was unsustainable. Today, that house is worth $2.5 million.
I’m a believer.
Contact Gary Sutton by email (email@example.com).
Janina Pawlowski, 39, founded E-Loan Inc. in 1996, along with her friend and business partner, Chris Larsen. Today, Pawlowski is the online lender’s chairwoman. Joe Kennedy, 40, a former vice president of sales, service, and marketing at Saturn, arrived at E-Loan in February 1999. He is now the company’s president and COO. (Larsen is the company’s CEO.)
Pawlowski and Larsen had already built a brick-and-mortar mortgage business in Palo Alto, California when they decided to do business on the Net. Their model — offering loans on the Web, quickly and cheaply — caught on right away. But within two years, they faced a dire need for cash, and soon they also faced a tempting opportunity: They could sell their company to Intuit and walk away wealthy.
They chose not to sell. Instead, they secured last-minute minority investments from Yahoo!, Sequoia Capital, and Softbank. Last June, E-Loan went public, and today its market value is about $1 billion — more than seven times as much as Intuit offered to pay for it in 1998. As with most e-commerce ventures, E-Loan’s future is uncertain: In the third quarter of 1999, it lost $13 million. But there are signs of sustainability: E-Loan employs about 350 people, its revenues grew last year by 200%, and this year it expects revenues to double.
The money came looking for us. I’m pleased that it did, but we weren’t really thinking about that when we started out. Here’s what we were thinking about: The mortgage business is obviously flawed, so let’s use technology to fix it. Let’s remove as many steps as possible between the consumer and the capital markets. Let’s improve the customer experience for people who need to borrow money. We wanted to build something sustainable, something big, something that would change an industry that wasn’t working very well.
That was in 1998. For two years, we were making no money, and we were going into debt. By 1998, we were running out of cash. Chris had been chasing investors, but the best valuation that he could get for us was in the $40 million-to-$60 million range. I kept saying, “That’s ridiculous. We can do better than that.” But despite Chris’s efforts, we couldn’t do better than that — until Intuit came in with an offer to buy us outright for $130 million.
Intuit’s offer was more than double the valuations that we had been getting, and that appealed to Chris. But it meant selling a business that we had built to last. It also meant giving up a dream: I thought that if we did all types of debt really well, and did them worldwide, then E-Loan would become a much stronger company than Countrywide, for example, or Norwest. I really believed that.
We had never looked at E-Loan and said, “Here’s a space where we can make some real money real fast.” There are people who do think that way — entrepreneurs who have formulas for starting companies and then selling them, one after another. I can’t imagine being like that. I’ve never been that deliberate, and I’ve never thought that much about money.
But then I thought, “I’m killing my business partner and best friend.” At this point, we were exhausted. We were in a conference room at E-Loan, and Chris was saying, “We need this so badly. It’s a good thing. Plus, you’re going to have $20-plus million.” And I was sitting there, thinking, “That is a lot of money.” Chris knows me, and he kept saying, “You should be careful that you’re not always looking for more, or else you’ll never be happy.” So, finally, I agreed.
But the next morning, when I woke up, I realized that I just couldn’t do it. Chris said, “I’m done. I got us a $130 million valuation. Either you get us the same thing within 24 hours, or we take this offer.” He was playing very tough with me. So I said, “Okay. I’ll raise the money that we need.” That’s when I called people at Yahoo! and got a meeting with them. Yahoo! invested at a slightly lower valuation than what Intuit had offered, but we didn’t have to give up the company. We could keep building it into what we knew that it could become.
The happy fact is, we were right not to sell. E-Loan has grown, and our IPO valued the company at four times the offer that Intuit had made a year earlier. What if things hadn’t gone so well? I would not have been disappointed. We would have had other alternatives. Besides, I worry a bit about success: When you achieve success too quickly, you may end up losing it just as fast.
I joined E-Loan because I thought, “Hey, there’s a good business opportunity here.” But I also signed on because, when I met Janina and Chris, I sensed that their vision went beyond just making a quick hit. They had values and principles, and they had a dream about what the company could be. They could have sold out to Intuit and become fantastically wealthy, but they opted to take another path. They had an opportunity to “build to flip,” but they made a conscious decision to build a company instead.
Last summer, we decided to spend some time thinking through what we mean by “building a company.” We have a great business model. But if we’re going to become a great, enduring company, we need to develop an internal capacity to foster new insights and then to act on those insights — over and over again.
So, to help ourselves sort through those issues, six of us spent a day with Jim Collins at his management lab in Boulder, Colorado. We came away with several lessons. Above all, we learned that we need to be smart when it comes to speed. The Internet is fundamentally about moving fast, and speed (as Jim would say) is part of our DNA. But if we’re ever going to be the company that we dream of becoming, we have to learn to be both extremely fast (when that’s the right thing to be) and relatively slow (when that’s the right thing to be).
We’re good at being fast. We can go into a room and make a decision — even a big decision — in three minutes or less. But that’s not the right approach when it comes to developing our core corporate values. That process requires more reflection: It should lead to a deeply thought-out consensus among members of our leadership team. And once we’ve defined our core values, we need to communicate them to hundreds of people throughout our organization. All of that takes time.
There are two other essential activities that take time: developing an organization and developing a brand. Those activities are parallel and interdependent: Leadership is about teaching an organization what you stand for; brand building is about teaching millions of consumers what you stand for. Leadership and brand building require time, consistency, and constancy.
The relationship between those two activities is critical to the issue of sustainability. There is a virtuous cycle in which enthusiastic employees help create enthusiastic customers, and vice versa. It’s almost impossible for customers to feel enthusiastic about an experience with a company if the people delivering that experience aren’t themselves enthusiastic. And the more enthusiastic a company’s customers are, the more enthusiastic its service-team members will be about what they’re doing.
But that virtuous cycle depends on a foundation of systems and processes. We want to revolutionize what it’s like to get a loan, and that means building a carefully planned, high-performance organization. If we develop great systems and great processes, then we’ll end up with a great organization. If we have a great organization, then we’ll be able to deliver great service. If we deliver great service, then we’ll create a great, enduring brand. And a great, enduring brand is what will separate E-Loan from the hundreds of other mortgage brokers that are entering the online market. Sure, speed matters: Whenever we see an opportunity to improve our Web site, we want to capitalize on that opportunity in two weeks or less. But we are also developing an organization — and again, that takes time, consistency, and constancy.
Recently, we had a half-day management retreat where we focused on issues related to sustainability. We talked about our hiring processes: How can we hire people who not only have the skills that we need but also fit the values that we espouse? We talked about compensation: Everyone in the company already has options. But is there another bonus program that might help align the way that we reward people? And we talked about communication: As we grow, how do we keep everybody informed about where we’re going? How do we make sure that we get good feedback?
That’s a very full plate. What makes sustainability powerful also makes it rather hard to achieve. It requires discipline and passion. You can’t hold a half-day meeting, figure it all out, and then put it in a box. You have to work at it every day.
Contact Janina Pawlowski (firstname.lastname@example.org) and Joe Kennedy (email@example.com) by email.