Tag Archives: Silicon Valley

The HP Way by David Packard

Summary

  1. David Packard walks through the evolution of Hewlett-Packard from tiny startup to behemoth

Key Takeaways

  1. Finally, they hit upon the audio oscillator and sold eight units to Walt Disney, earning the company its first substantial revenues.
  2. Culture and the HP Way
    1. “But they had a great idea—the ultimate source of competitive advantage—if you can just see it,” I’d push back. “What might that be?” After ten or fifteen minutes, someone would likely voice the key point: Bill Hewlett and David Packard’s greatest product was not the audio oscillator, the pocket calculator, or the minicomputer. Their greatest product was the Hewlett-Packard Company and their greatest idea was The HP Way.
    2. The point is not that every company should necessarily adopt the specifics of the HP Way, but that Hewlett and Packard exemplify the power of building a company based on a framework of principles. The core essence of the HP Way consists of five fundamental precepts.
      1. The Hewlett-Packard company exists to make a technical contribution, and should only pursue opportunities consistent with this purpose;
      2. The Hewlett-Packard company demands of itself and its people superior performance—profitable growth is both a means and a measure of enduring success;
      3. The Hewlett-Packard company believes the best results come when you get the right people, trust them, give them freedom to find the best path to achieve objectives, and let them share in the rewards their work makes possible;
      4. The Hewlett-Packard company has a responsibility to contribute directly to the well-being of the communities in which its operates;
      5. Integrity, period.
    3. Hewlett and Packard rejected the idea that a company exists merely to maximize profits. “I think many people assume, wrongly, that a company exists simply to make money,” Packard extolled to a group of HP managers on March 8, 1960. “While this is an important result of a company’s existence, we have to go deeper to find the real reasons for our being.” He then laid down the cornerstone concept of the HP Way: contribution. Do our products offer something unique—be it a technical contribution, a level of quality, a problem solved—to our customers? Are the communities in which we operate stronger and the lives of our employees better than they would be without us? Are people’s lives improved because of what we do? If the answer to any these questions is “no,” then Packard and Hewlett would deem HP a failure, no matter how much money the company returned to its shareholders.
    4. Therein we find the hidden DNA of the HP Way: the genius of the And. Make a technical contribution and meet customer needs. Take care of your people and demand results. Set unwavering standards and allow immense operating flexibility. Achieve growth and achieve profitability. Limit growth to arenas of distinctive contribution and create new arenas of growth through innovation. Never compromise integrity and always win in your chosen fields. Contribute to the community and deliver exceptional shareholder returns. Behind these specifics lies the biggest “And” of all, the principle that underpins every truly great company: preserve the core and stimulate progress.
    5. Any great social enterprise—whether it be a great company, a great university, a great religious institution, or a great nation—exemplifies a duality of continuity and change. On the one hand, it is guided by a set of core values and fundamental purpose that change little over time, while on the other hand, it stimulates progress—change, improvement, innovation, renewal—in all that is not part of the core guiding philosophy. In a great company, core values remain fixed while operating practices, cultural norms, strategies, tactics, processes, structures, and methods continually change in response to changing realities. Lose your core values, and you lose your soul; refuse to change your practices, and the world will pass you by.
    6. Yet the ultimate test of a great company is not the absence of difficulty, but the ability to recover from setbacks—even self-inflicted wounds—stronger than before.
    7. As we investigate this, we inevitably come to the conclusion that a group of people get together and exist as an institution that we call a company so they are able to accomplish something collectively which they could not accomplish separately. They are able to do something worthwhile—they make a contribution to society (a phrase which sounds trite but is fundamental).
    8. We must realize that supervision is not a job of giving orders; it is a job of providing the opportunity for people to use their capabilities efficiently and effectively.
    9. If our main thought is to make money, we won’t care about these details. If we don’t care about the details, we won’t make as much money. They go hand in hand.
    10. Our first obligation, which is self-evident from my previous remarks, is to let people know they are doing something worthwhile. We must provide a means of letting our employees know they have done a good job. You as supervisors must convey this to your groups. Don’t just give orders. Provide the opportunity for your people to do something important. Encourage them.
    11. Profit is the measure of our contribution to our customers—it is a measure of what our customers are willing to pay us over and above the actual cost of an instrument.
    12. Get the best people, stress the importance of teamwork, and get them fired up to win the game.
    13. I found, after much trial and error, that applying steady gentle pressure from the rear worked best. Eventually, one would decide to pass through the gate; the rest would soon follow. Press them too hard, and they’d panic, scattering in all directions. Slack off entirely, and they’d just head back to their old grazing spots. This insight was useful throughout my management career.
    14. Another example of sharing, though in a much different way, occurred in 1970. Because of a downturn in the U.S. economy, our incoming orders were running at a rate quite a bit less than our production capability. We were faced with the prospect of a 10 percent layoff. Rather than a layoff, however, we tried a different tack. We went to a schedule of working nine days out of every two weeks—a 10 percent cut in work schedule with a corresponding 10 percent cut in pay. This applied to virtually all our U.S. factories, as well as to all executives and corporate staff. At the end of a six-month period, the order rate was up again and everyone returned to a full work schedule. Some said they enjoyed the long weekends even though they had to tighten their belts a little. The net result of this program was that effectively all shared the burden of the recession, good people were not released into a very tough job market, and we had our highly qualified workforce in place when business improved.
    15. GE was especially zealous about guarding its tool and parts bins to make sure employees didn’t steal anything. Faced with this obvious display of distrust, many employees set out to prove it justified, walking off with tools or parts whenever they could. Eventually, GE tools and parts were scattered all around town, including the attic of the house in which a number of us were living. In fact, we had so much equipment up there that when we threw the switch, the lights on the entire street would dim. The irony in all of this is that many of the tools and parts were being used by their GE “owners” to work on either job-related projects or skill-enhancing hobbies—activities that would likely improve their performance on the job. When HP got under way, the GE memories were still strong and I determined that our parts bins and storerooms should always be open. Keeping storerooms and parts bins open was advantageous to HP in two important ways. From a practical standpoint, the easy access to parts and tools helped product designers and others who wanted to work out new ideas at home or on weekends. A second reason, less tangible but important, is that the open bins and storerooms were a symbol of trust, a trust that is central to the way HP does business.
    16. Many companies have a policy stating that once employees leave the company, they are not eligible for reemployment. Over the years we have had a number of people leave because opportunities seemed greater elsewhere. We’ve always taken the view that as long as they have not worked for a direct competitor, and if they have a good work record, they are welcomed back. They know the company, need no retraining, and usually are happier and better motivated for having had the additional experience.
    17. No operating policy has contributed more to Hewlett-Packard’s success than the policy of “management by objective.” Although the term is relatively new to the lexicon of business, management by objective has been a fundamental part of HP’s operating philosophy since the very early days of the company. MBO, as it is frequently called, is the antithesis of management by control. The latter refers to a tightly controlled system of management of the military type, where people are assigned—and expected to do—specific jobs, precisely as they are told and without the need to know much about the overall objectives of the organization. Management by objective, on the other hand, refers to a system in which overall objectives are clearly stated and agreed upon, and which gives people the flexibility to work toward those goals in ways they determine best for their own areas of responsibility. It is the philosophy of decentralization in management and the very essence of free enterprise.
    18. I don’t argue that the job can’t be done that way, but I do argue strongly that the best job can be done when the manager has a genuine and thorough understanding of the work. I don’t see how managers can even understand what standards to observe, what performance to require, and how to measure results unless they understand in some detail the specific nature of the work they are trying to supervise.
    19. I learned everything I could about the causes of failure and decided to spend most of my time on the factory floor, making sure every step in the manufacturing process was done correctly. I found several instances where the written instructions provided the manufacturing people were inadequate, and I worked with them on each step in the process to make sure there were no mistakes. This painstaking attention to detail paid off, and every tube in the next batch passed its final test.
    20. That was the genesis of what has been called MBWA. I learned that quality requires minute attention to every detail, that everyone in an organization wants to do a good job, that written instructions are seldom adequate, and that personal involvement is essential.
    21. It needs to be frequent, friendly, unfocused, and unscheduled—but far from pointless. And since its principal aim is to seek out people’s thoughts and opinions, it requires good listening.
    22. Linked with MBWA is another important management practice at Hewlett-Packard, and a basic tenet of the HP Way. It’s called the “open door policy.” Like MBWA, this policy is aimed at building mutual trust and understanding, and creating an environment in which people feel free to express their ideas, opinions, problems, and concerns.
    23. The open door policy is very important at HP because it characterizes the management style to which we are dedicated. It means managers are available, open, and receptive. Everyone at HP, including the CEO, works in open-plan, doorless offices. This ready availability has its drawbacks in that interruptions are always possible. But at HP we’ve found that the benefits of accessibility far outweigh the disadvantages. The open door policy is an integral part of the management-by-objective philosophy. Also, it is a procedure that encourages and, in fact, ensures that the communication flow be upward as well as downward.
  3. Business
    1. Bill’s audio oscillator represented the first practical, low-cost method of generating high-quality audio frequencies needed in communications, geophysics, medicine, and defense work. The audio oscillator was to become the Hewlett-Packard Company’s first product.
    2. We designated this first product the Model 200A because we thought the name would make us look like we’d been around for a while. We were afraid that if people knew we’d never actually developed, designed, and built a finished product, they’d be scared off. Our pricing was even more naive: We set it at $54.40 not because of any cost calculations but because, of all things, it reminded us of “54°4o’ or Fight!” (the 1844 slogan used in the campaign to establish the northern border of the United States in the Pacific Northwest). We soon discovered we couldn’t afford to build the machines for that price. Luckily, our nearest competition was a $400 oscillator from General Radio, which gave us considerable room to maneuver.
    3. At the end of 1939, our first full year in business, our sales totaled $5,369 and we had made $1,563 in profits. We would show a profit every year thereafter.
    4. In those early days Bill and I had to be versatile. We had to tackle almost everything ourselves—from inventing and building products to pricing, packaging, and shipping them; from dealing with customers and sales representatives to keeping the books; from writing the ads to sweeping up at the end of the day. Many of the things I learned in this process were invaluable, and not available in business schools.
    5. He said that more businesses die from indigestion than starvation. I have observed the truth of that advice many times since then.
    6. Although the pressure to meet production deadlines was enormous, there was also lots of excitement and a great sense of camaraderie.
    7. Eventually, because of big gains in productivity, the bonus to our entire workforce rose to as much as 85 percent of base wages. At that point, which was some time after the war, we abandoned this particular bonus plan. But in no way did we discontinue the practice of sharing profits among all our people. To this day, Hewlett-Packard has a profit-sharing program that encourages teamwork and maintains that important link between employee effort and corporate success.
    8. Bill and I had decided we were going to reinvest our profits and not resort to long-term borrowing. I felt very strongly about this issue, and we found we were clearly able to finance 100 percent growth per year by reinvesting our profits. After some discussion with the members of the board, they seemed to be impressed with what we were doing but said they had a limit of 12 percent of profit they could allow on equity. I pointed out that our business had been doubling every year and that it would continue to do so for several years. I also told them that I had kept my salary at a lower level than it should have been because I did not think it was fair for my salary to be higher than Bill’s army salary.
    9. We developed additional instruments, and later on, again working with Dr. Haeff, we built a device his group developed that was capable of jamming an enemy’s ship-board radar. It was at the core of what was code-named the Leopard project. We were very conscientious about meeting our delivery schedule on this project, working around the clock. I recall moving a cot into the factory and sleeping there many nights.
    10. I believe this decision to focus our efforts was extremely important, not only in the early days of the company but later on as well. During the war, for example, we could have taken on some big—at least for us—production contracts. But that would have built the company to a level that probably couldn’t be sustained later on. I felt that we should take on no more than we could reasonably handle, building a solid base by doing what we did best—designing and manufacturing high-quality instruments.
    11. The counter was so useful when it did work that our customers tolerated its unreliability.
    12. Our collaboration with Stanford and Fred Terman continued, and in 1954 we expanded on the fellowship program and established what became known as the Honors Cooperative Program, which allowed qualified HP engineers to pursue advanced degrees at Stanford. The program made it possible for us to hire top-level young graduates from around the country with the promise that if they came to work for us and we thought it appropriate, they could attend graduate school while on full HP salary. Originally, the company paid part of their tuition as well, and more recently has paid all of their tuition. More than four hundred HP engineers have obtained master’s or doctorate degrees through this program. It has enabled us to hire the top engineering graduates from universities all across the country for a number of years—an important factor in the ultimate success of our company.
    13. As I have said many times, our success depends in large part on giving the responsibility to the level where it can be exercised effectively, usually on the lowest possible level of the organization, the level nearest the customer.
    14. There were about 4,000 people at this facility, and we were the first Americans ever to visit. It was obvious to me that what they were building would be entirely useless in modern-day combat, but I didn’t say anything at the time, except to compliment them on their workmanship.
    15. Bill Hewlett and I were raised during that depression. We had observed its devastating effects on people, including many families and friends who were close to us. My father had been appointed as a bankruptcy referee for the state of Colorado. When I returned to Pueblo during the summers of the 1930s, I often helped my father in looking up the records of those companies that had gone bankrupt. I noted that the banks simply foreclosed on firms that mortgaged their assets and these firms were left with nothing. Those firms that did not borrow money had a difficult time, but they ended up with their assets intact and survived during the depression years that followed. From this experience I decided our company should not incur any long-term debt. For this reason Bill and I determined we would operate the company on a pay-as-you-go basis, financing our growth primarily out of earnings rather than by borrowing money.
    16. Our long-standing policy has been to reinvest most of our profits and to depend on this reinvestment, plus funds from employee stock purchases and other cash flow items, to finance our growth. The stock purchase plan allows employees to apply up to a certain percentage of their salaries to purchase shares of HP stock at a preferential price. The company picks up a portion of the price of the stock. The plan has been in existence since 1959 and has provided us with significant amounts of cash to help finance our growth.
    17. I was convinced we could correct the problem through greater self-discipline. I quickly visited nearly every one of our major divisions, meeting with a host of managers and giving them a lecture that was later characterized by one manager as “Dave’s give-’em-hell talk.”
    18. One of our most important management tasks is maintaining the proper balance between short-term profit performance and investment for future strength and growth.
    19. The pricing of new products is an important and challenging exercise. Often a product will be introduced to the market at a price too low to make an adequate short-term profit. The thinking is that “we’ll get our costs down and that will enable us to make a good profit”— either next month, next quarter, or next year. But that time seldom, if ever, comes. Often pricing also falls prey to the goal of “market share.” Many managers in American industry are caught up with the idea of capturing a larger share of a market, often by undercutting the competition’s prices. In the short term, that often results in an impressive sales volume . . . but at the expense of little or no profit.
    20. What we did decide, however, was that we wanted to direct our efforts toward making important technical contributions to the advancement of science, industry, and human welfare. It was a lofty, ambitious goal. But right from the beginning, Bill and I knew we didn’t want to be a “me-too” company merely copying products already on the market.
    21. A constant flow of good new products is the lifeblood of Hewlett-Packard and essential to our growth. Early on we developed a system for measuring the flow and success of new products.
    22. At HP, as in other technical companies, there is no shortage of ideas. The problem is to select those likely to fill a real need in the marketplace. To warrant serious pursuit an idea must be both practical (the device under consideration must work properly) and useful. Out of those ideas that are practical, a smaller number are useful. To be useful an invention must not only fill a need, it must be an economical and efficient solution to that need. we often used to select projects on the basis of a six-to-one engineering return. That is, the profit we expected to derive over the lifetime of a product should be at least six times greater than the cost of developing the product. Almost without exception, the products that beat the six-to-one ratio by the widest margin were the most innovative.
    23. How do managers provide encouragement and help the inventor retain enthusiasm in the face of such disappointment? HP shows off its first computer in 1967 at the IEEE trade show in New York City. Many HP managers over the years have expressed admiration for the way Bill Hewlett handled these situations. One manager has called it Bill’s “hat-wearing process.” Upon first being approached by a creative inventor with unbridled enthusiasm for a new idea, Bill immediately put on a hat called “enthusiasm.” He would listen, express excitement where appropriate and appreciation in general, while asking a few rather gentle and not too pointed questions. A few days later, he would get back to the inventor wearing a hat called “inquisition.” This was the time for very pointed questions, a thorough probing of the idea, lots of give-and-take. Without a final decision, the session was adjourned. Shortly thereafter, Bill would put on his “decision” hat and meet once again with the inventor. With appropriate logic and sensitivity, judgment was rendered and a decision made about the idea. This process provided the inventor with a sense of satisfaction, even when the decision went against the project—a vitally important outcome for engendering continued enthusiasm and creativity.
    24. In 1994, HP’s sales in computer products, service, and support were almost $20 billion, or about 78 percent of the company’s total business. In 1964, our sales totaled $125 million and were entirely in instruments. Not a penny was from computer sales. This represents a remarkable transformation of our company and its business. It would be nice to claim that we foresaw the profound effect of computers on our business and that we prepared ourselves to take early advantage of the computer age. Unfortunately, the record does not justify such pride. It would be more accurate to say that we were pushed into computers by the revolution that was changing electronics.
    25. Several years later, at a gathering of HP engineers, I presented Chuck with a medal for “extraordinary contempt and defiance beyond the normal call of engineering duty.” So how does a company distinguish between insubordination and entrepreneurship? To this young engineer’s mind the difference lay in the intent. “I wasn’t trying to be defiant or obstreperous. I really just wanted a success for HP,” Chuck said. “It never occurred to me that it might cost me my job.” As a postscript to the story, this same engineer later became director of a department . . . with his reputation as a maverick intact.
    26. The fundamental basis for success in the operation of Hewlett-Packard is the job we do in satisfying the needs of our customers. We encourage every person in our organization to think continually about how his or her activities relate to the central purpose of serving our customers.
    27. Noel, a key member of our top-management team, was a strong advocate for helping the customer, so much so that he wanted our sales engineers to take the customer’s side in any disputes with the company. “We don’t want you blindly agreeing with us,” he’d tell them. “We want you to stick up for the customer. After all, we’re not selling hardware; we’re selling solutions to customer problems.” Noel stressed the importance of customer feedback in helping us design and develop products aimed at real customer needs. He also insisted that our salespeople never speak disparagingly of the competition. This reflected our feeling that competitors should be respected, the type of respect that existed between General Radio and HP when Bill and I were starting out.
    28. “More for less” became the goal for each new LaserJet model. This objective reveals a lesson learned from our experience with calculators. For many years we continued to introduce increasingly sophisticated calculators with greater capabilities at greater cost to consumers. Meanwhile, our competitors were offering basic features at a lower price. For the mass market, basic features were sufficient, and the lower-priced models decreased HP’s calculator market share. The sophisticated HP calculators sold to customers who needed more advanced capabilities—but we lost a large portion of the marketplace. With LaserJet printers, we decided that each revision would offer our customers greater capability at a lower price than its predecessor.
    29. Kenzo Sasaoka, our manager in Japan, and he said that I had shown him the way—that gains in quality come from meticulous attention to detail and every step in the manufacturing process must be done as carefully as possible, not as quickly as possible. This sounds simple, but it is achieved only if everyone in the organization is dedicated to quality.
    30. Especially in a technical business where the rate of progress is rapid, a continuing program of education must be undertaken and maintained.
    31. Another requirement is that a high degree of enthusiasm should be encouraged at all levels; in particular, the people in high management positions must not only be enthusiastic themselves, they must be able to engender enthusiasm among their associates. There can be no place for halfhearted interest or halfhearted effort.
    32. Thus, we made an early and important decision: We did not want to be a “hire and fire”—a company that would seek large, short-term contracts, employ a great many people for the duration of the contract, and at its completion let those people go. This type of operation is often the quickest and most efficient way to get a big job accomplished. But Bill and I didn’t want to operate that way. We wanted to be in business for the long haul, to have a company built around a stable and dedicated workforce. 
    33. Growth also affected the size and nature of company picnics. Bill and I considered picnics an important part of the HP Way, and in the early days we had an annual picnic in the Palo Alto area for all our people and their families. It was a big event, one largely planned and carried out by our employees themselves. The menu consisted of New York steaks, hamburgers, Mexican beans or frijoles, green salad, garlic French bread, and beer. The company bought the food and beer. It became customary for the machine shop people to barbeque the steaks and burgers, with other departments responsible for other parts of the menu. Bill and I and other senior executives served the food, giving us the opportunity to meet all of the employees and their families. In the early 1950s the company bought a parcel of land, called Little Basin, in the redwood country about an hour’s drive from Palo Alto. We converted part of it into a recreation area, large enough to have a picnic with two thousand people or more. We also made it available year around for our employees and their families to go overnight camping. This was such a popular benefit that we decided, later on, to duplicate the idea in other parts of the world where we had concentrations of HP people.
    34. The underlying principle of HP’s personnel policies became the concept of sharing—sharing the responsibilities for defining and meeting goals, sharing in company ownership through stock purchase plans, sharing in profits, sharing the opportunities for personal and professional development, and even sharing the burdens created by occasional downturns in business.
    35. In the United States and many other countries, employees participate in stock purchase plans and in cash profit sharing. U.S. employees with more than six months of service are eligible for profit sharing, and each year receive amounts calculated on the company’s pretax earnings. Over the years this payout has been as high as 9.9 percent and as low as 4.1 percent of base salary. Since the company has always been profitable, the program has continued uninterrupted since we started it in the 1950s.
    36. An important responsibility of managers is the selection and training of their potential successors. Management succession is especially critical at the upper levels of an organization, where a manager may be responsible for a wide scope of complex activities involving the expenditure of many millions of dollars and the efforts of many thousands of people.
    37. I have always felt that the most successful companies have a practice of promoting from within.
    38. Today Hewlett-Packard operates in many different communities throughout the world. We stress to our people that each of these communities must be better for our presence. This means being sensitive to the needs and interests of the community; it means applying the highest standards of honesty and integrity to all our relationships with individuals and groups; it means enhancing and protecting the physical environment and building attractive plants and offices of which the community can be proud; it means contributing talent, energy, time, and financial support to community projects.
    39. It took forty years for the company Bill Hewlett and I started in 1939 to reach one billion dollars in annual sales and a major part of that was from inflation. In the 1994 fiscal year that ended last October, we began the year with twenty billion dollars in worldwide sales and added five billion to that by year’s end. This occurred with essentially no inflation. Other technology companies have shown similar growth. Just as it has in the past, our growth in the future will come from new products. In 1994, we spent two billion dollars in new product development. Beginning in 1939 we generated at least six dollars of profit, spread over five or six years, for every dollar spent on new product development. By new products, I mean products that make real contributions to technology, not products that copy what someone else has done. This must be our standard in the future just as it has been in the past.
  4. Other
    1. I had to work very hard at Latin, but the math and science courses were easy because I already knew about as much as the teachers did. I was elected president of my class all four years.
    1. Bill went to a private elementary school, going to and from on a cable car. He did well with numbers and arithmetic but had great difficulty reading. He was thought to be a slow learner when, in actuality, he was dyslexic. But in those days no one knew what dyslexia was. He continued to have trouble reading and writing, and later on, in lecture classes, he couldn’t write notes fast enough to keep up with the lecturer. So, as is the case with many dyslexics, he learned how to listen, to file thoughts and information in a logical form and have them readily available from memory. “This procedure worked particularly well in learning math and science,” he says.
    2. I learned everything I could about possible causes of failure, and I decided to spend most of my time on the factory floor to make sure every step was done properly. It soon became apparent that the instructions the engineering department gave the factory people were not adequate to ensure that every step would be done properly. I found the factory people eager to do the job right. We worked together to conduct tests and identify every possible cause of failure, and as a result, every tube in that batch of twenty passed its final test without a single failure. That was a very important lesson for me—that personal communication was often necessary to back up written instructions. That was the genesis of what became “management by walking around” at the Hewlett-Packard Company.
    3. These miscellaneous jobs made us more sure of ourselves and our skills. They also revealed something we hadn’t planned but that was of great benefit to our partnership—namely, that our abilities tended to be complementary. Bill was better trained in circuit technology, and I was better trained and more experienced in manufacturing processes. This combination of abilities was particularly useful in designing and manufacturing electronic products.
    4. Another benefit from ranching was my friendship with Bill Hewlett. By running the ranches together—as well as the company—Bill and I developed a unique understanding of each other. This harmony has served us well every single day in running HP.
    5. Shortly after my arrival at the Pentagon, I called on all four of the Joint Chiefs in their offices and told them I wanted to work with them and that I needed their help. Bill and I had a deer hunt every year at our San Felipe ranch southeast of San Jose. He and I brought all the food, and we cooked and served the meals and washed the dishes ourselves with the help of our guests. In the spirit of friendship and collaboration, I invited the Joint Chiefs to join us at the deer hunt in 1969. They came and each got a deer. When it was time to wash the dishes, they rolled up their sleeves and helped us. That hunt helped establish a good rapport with the Joint Chiefs.
    6. Before I went to Washington, even the people who encouraged me to go warned me that a career in business would ill prepare me for the frustrations of government bureaucracy. And they were right.
    7. When i think of the phenomenal growth of the electronics industry over the last fifty years, I realize how fortunate Bill Hewlett and I were to be in on the ground floor. But it reminds me of a story I like to tell on myself. In my sophomore year at Stanford I took a course in American history and had the opportunity to study the westward movement beginning with the early pioneers and continuing throughout the nineteenth century. I remember lamenting that I had been born one hundred years too late, that all the frontiers had been conquered, and that my generation would be deprived of the pioneering opportunities offered our forebears. But in fact, we went on to make breathtaking advances in the twentieth century.

What I got out of it

  1. Some incredible business lessons from one of the original silicon valley companies that started it all

eBoys: The True Story of the Six Tall Men Who Backed eBay, Webvan, and Other Billion Dollar Start-ups by Randall Stross

Summary

  1. A behind the curtain look at the early days of Benchmark, one of the premier venture capital firms 

Key Takeaways

  1. Benchmark / VC
    1. It is a wee bit eerie to see, in hindsight, how the Benchmark boys’ original notion of a partnership of equals turned out to have been echoed in impersonal performance statistics. Even the partners themselves would never have guessed in advance that four and a half years after Benchmark’s founding, of the five investments that were the firm’s all-time biggest hits to date, no two had been discovered and directed by the same partner: five hits, five partners.
    2. A group of three young venture capitalists in Menlo Park—Bruce Dunlevie, Bob Kagle, and Andy Rachleff—decided to step free of their old firms, and with software entrepreneur Kevin Harvey they set up Benchmark Capital.
    3. Entrepreneurs who sought venture funding usually did not need to invest any more personal money into the venture than they had already spent to bring it to life. But some venture capitalists did demand more. Arthur Rock, the senior dean of American venture capitalists and an early investor in Intel, always insisted whenever his venture firm put money into a start-up that the entrepreneur co-invest one third of his total net worth, whether it be large or small. If the entrepreneur was extremely wealthy, the venture firm had higher expectations about his co-investing. The venture guys didn’t want the high-net-worth entrepreneur to regard the start-up as a hobby. To prove commitment, he was asked to have skin in the game, and that was what Beirne asked of Borders,
    4. On the golf course the other day, he said, a friend had floated a theory that leaders, in business or anything else, are driven by demons. The best guys have them—implacable, subterranean demons that are the source of greatness.
    5. Daniel Webster: “There is always room at the top.”
    6. No company looks better than the one that professes it does not need your money.
    7. Kagle gently cautioned Beirne: “We all have our blind spots, right? Our greatest strength is our greatest weakness. And I think in this case, Dave, we’re all conscious of the fact that there’s a lot of marquee players around this thing. You’re all about marquee players. So we need to make sure that you’re not getting too colored by that relative to all the other stuff.” “Salesmen are more likely to be sold,” Rachleff added.
    8. What the partners were looking for were categories that were ripe for “disintermediation”—removing a middle layer in the distribution chain. In this case, that layer was the twelve thousand or so art galleries in the country
    9. “There sure are a lot of signs,” Rachleff repeated. He wasn’t concerned about Benchmark’s overall reputation being badly damaged. “The amazing thing about our business is, everyone forgets the losers—they remember the winners.”
    10. Rachleff pointed out that in a portfolio, the emotions that Beirne would experience would always be biased toward the end of the spectrum representing pain. “The amazing thing is it hurts more on the downside than the good feelings on the upside.”
    11. “That’s my experience—three orders of magnitude,” Dunlevie quickly agreed. “Yeah,” Rachleff said, and then redid the ratio of intensity of pleasure versus pain. “One-X versus fifty-X.”
    12. Bob Kagle could not take much pleasure in the event either, imagining, as he did, whispers that the eBay success was a fluke, akin to picking up a winning lottery ticket. He found himself working all the harder after eBay, to silence criticism that he had not actually heard but that he could imagine, beyond his hearing. One monkey don’t make no show, he’d say.
    13. When the Benchmark partners got together, most days, most of the time, their conversations were interrupted by jokes, laughter, word play, self-confessed foibles, and still more laughter. They positively reveled in one another’s company.
  2. Gurley
    1. The cultural fit had to be just right, too. It was this issue that the partners would spend the most time agonizing over. The five Benchmark partners felt keenly the closeness of a basketball team; in moments of private vanity they liked to think of themselves as the Chicago Bulls in the early nineties, but it wasn’t apt—this was a team that was knocking down wins but without a single dominating presence like Michael Jordan. So maintaining the chemistry that permitted all to feel that the others brought out their individual best was regarded as paramount, even if it meant Benchmark could not expand.
    2. Beirne added his own high praise, which was that the attention Gurley received as a sought-after speaker at industry gatherings had secured for Gurley “a lot of mindshare.”
    3. You think he’d be a good investor?” asked Bruce Dunlevie. “I do, but the reason I do is because he’s a rare combination of highly intellectually curious and humble. I think he really is open to questioning his own thought process and what’s really working, what’s not working.”
    4. Benchmark’s self-proclaimed “fundamentally better architecture” was based on a bedrock tenet: equal partners, without hierarchical separation, with equal votes and equal compensation. They had used it brilliantly from the beginning to differentiate themselves from the rest of the firms on Sand Hill Road.
    5. Bill doesn’t know what hiring people is all about. He wants to learn it all. He’s a total learn-it-all guy. He was asking me questions: ‘How do you spend your time? How do you recruit? What do you look for? What do you ask people? What do you do?’ ” “He’s pretty humble,” said Rachleff. Beirne agreed, and added, “He does a very good job at the shows. He doesn’t just stand in the back and not talk to anybody—he’s out talking to everybody.” “How old is he?” asked Kagle. “He’s thirty-two.” “He’s a mature thirty-two, too.”
    6. Harvey had also been impressed by his willingness to chase a wild boar down a steep cliff. “He is kind of an animal,” Harvey said with manifest respect. “I love that,” said Kagle.
    7. Kagle said to Harvey, “Okay, make him the offer.” Harvey turned to Gurley. “First, I want to know if you’ll take it.” This was the way Harvey preferred to seal a deal with an entrepreneur: to secure the agreement before bringing out the term sheet with all of the details. Here Harvey feared that if he brought out the terms of the partnership offer, Gurley’s analytical bent would lead him to say, “Okay, I’ll take this home and think about it.” Harvey wanted him to show trust that the partners had put together a generous package that accorded him fully equal status from day one. Gurley came through and, without asking to see the terms, accepted on the spot.
    8. Gurley cast cold water on the proposal to go public, however, by asking, “Is it built to win?” He explained, “GM is built to last, but it’s got so much bureaucracy, it’s not going anywhere.” Maybe “built to last” was not the right criterion to optimize on.
  3. eBay
    1. When eBay, a small Internet auction company based in San Jose, California, sought venture capital, it had to pass an informal test administered by the venture guys before they would consider making an investment: Was there a reasonably good likelihood that the investors could make ten times their money within three years? 
    2. It was late 1996, and eBay’s online auction business had been solidly profitable since it was launched; the company did not need a cent. But Pierre Omidyar, twenty-nine, the original founder, and his new partner, Jeff Skoll, thirty-one, were the rare entrepreneurs who knew they needed to hire a CEO and other seasoned executives with skills they lacked. It appeared to them that the only way they would be able to attract people with deeper management experience than they had was by obtaining the imprimatur of a well-regarded venture capital firm. Selling a minority share of their equity to venture capitalists was the intermediate step they had to take to get the good people they sought.
    3. Over the next two weeks, he met with Omidyar outside of Benchmark’s office and discovered that he was an anomalous kind of engineer, one who was consumed by the idea of community—every other sentence, he spoke about the eBay community, building the community, learning from the community, protecting the community. It was a passion similar to what, in Bob-speak, Kagle had for deals that brought out the humanity; that’s what Kagle liked most of all, the humanity. The more Omidyar talked about his community vision, the more Kagle, as he put it, was “lovin’ him—this guy is good people.” And Omidyar felt the same way about Kagle.
    4. EBay was an anomaly: a profitable company that was able to self-fund its growth and that turned to venture capital solely for contacts and counsel. No larger lesson can be drawn. When Benchmark wired the first millions to eBay’s bank account, the figurative check was tossed into the vault—and there it would sit, unneeded and undisturbed.
    5. By temperament, Skoll could not help but pour himself into the work in a scarily total fashion—once he started at eBay, he worked hundred-hour weeks for the next two and a half years. But he wasn’t driven by materialist hungers, and he thought of himself not as a businessperson but as a writer.
    6. EBay had an enormous advantage over the competition that it only then, under challenge, was coming to appreciate: a nicely balanced critical mass of sellers and buyers in each of hundreds of categories. This delicate balance had been achieved through the natural evolution of the eBay ecosystem, without the intervention of any guiding hand. If in any given category there were too many sellers compared with buyers, the sellers would have been discouraged and quick to jump to eBay’s rivals to try their luck there. If there were too many buyers, and in order to win an auction one had to offer up a ludicrously high price, this too would have led to mass defections. Fortunately for eBay, the number of sellers and buyers, while growing exponentially, had remained well apportioned. EBay’s users remained loyal for another reason: feedback ratings. Buyers, after a transaction, could send in a report about their experience with the seller, which future prospective buyers could consult; sellers had an identical opportunity to evaluate their experience with the buyer. Over time, both sellers and buyers accumulated a number of positive-feedback ratings at eBay, a neatly quantifiable reputation, that they were loath to abandon. The eBay “community” stayed put.
    7. “That’s the biggest risk in the whole thing,” Kagle said. “In fact I can argue with you guys very persuasively that keeping this low profile we’ve had in the company has been absolutely the healthiest thing to do. Absolutely the healthiest thing to do. We’ve already broken the systems a couple times, in spite of that. So we’ve been barely able to manage the traffic operationally so far.” Kagle said there had been a second benefit. “This organic growth has led to this very nice set of community values; people are honest, people treat each other fairly, there’s not a lot of scamming going on in it. And if you turn up the volume way high, the woodwork gets filled with a lot of weird guys, and the whole tone of the thing could change. So that’s a risk.”
    8. On the day after eBay’s IPO, when Pierre Omidyar, just back from New York, stood on Benchmark’s terrace, he observed that the world had imputed strategic savvy to the company that it did not really have. “Our system didn’t scale,” he said, “so we didn’t grow big enough to attract competition. Everybody thought we were flying below the radar screen on purpose.” He gave a little laugh.
    9. Up until early summer 1998, eBay’s primary competition was Jerry Kaplan’s Onsale Exchange, which had launched in October 1997 and had failed to attract a critical mass. When Bob Kagle introduced eBay to Benchmark’s limited partners at the annual meeting in early June, eBay had an 89 percent market share. Kagle said that the company anticipated major entrants, but “we think they don’t get it. We think they don’t understand all the stuff about the community and what’s really special and unique about this.” He also noted that in addition to first-mover advantage, economies of scale, and definitive selection in the various categories, eBay also enjoyed another advantage: Users faced high switching costs. “After you get this reputation built up online,” Kagle explained, “you’ve got all these people who have dealt with you, you’ve got seventy-five people who’ve said good things about you. That’s a pretty fundamental thing.”
    10. A good business will attract good competitors. This eBay’s executives knew in the abstract, but like the abstract concept of war, the theory necessarily bore a limited relationship to the thing itself.
    11. But knowing that the CEO was personally fielding calls from angry customers when they could not find someone to speak with in his department would provide all the incentive he needed, and she knew it.
  4. Priceline
    1. Our biggest competition, Walker explained, was cars and couches; Priceline’s system “collected demand” from people who would not otherwise be flying. And by promising to get back with an answer within one hour—why one hour? Glasses in an hour, photos in an hour; consumers already understand the unit—Walker was deliberately creating in the consumers’ mind the idea that Priceline was a virtual gladiator fighting on their behalf: “It’s going to take us an hour to knock on everybody’s door, punch him in the jaw, give him your offer, and get back to you with an answer, but be assured we’re out there working for you!” 
    2. Since we’re not actively shopping for capital, Walker summed up, this isn’t about the money per se. It’s really about two teams—your team, our team. We’ve got a multibillion-dollar asset here if played right. We’re not greedy; we’re not pigs. We’re players. Game theorists that we are, we understand the game trade. And we’re not afraid to make a trade for the right set of circumstances.
  5. Other
    1. The very reason that start-ups had an advantage over these incumbents—speed in execution—was the same reason that the old companies acted so slowly, even when the task was to organize a new entity that would be free to compete without organizational drag. “So they know they’re in a tough spot.” Still, the inertial drag in a big company was the most powerful factor in the equation.
    2. Edward Chancellor’s history of financial manias, Devil Take the Hindmost, urging them to read it. Chancellor’s account of England’s railway mania of 1845 had made an especially deep impression on Kagle, who saw all of the similarities between the railroad, then hailed as a revolutionary advance without historical parallel, and the Internet. In both cases the technological change was as fundamental as its champions claimed, but investors’ enthusiasm about imminent opportunities to reap fortunes moved beyond the reasonable. All businesses must earn a profit in order to be viable; Kagle refused to relinquish this simple truth.
    3. Kevin Harvey took the view that Red Hat could avoid a frontal challenge to Microsoft’s business model; he worked to reposition the company away from the business of selling packaged software in boxes (Harvey’s old business) and move it toward providing support services and a central website for the Linux community. The only way Microsoft could compete with Red Hat, he would say gleefully, “is by abandoning five billion dollars of annual revenue, which they can’t!”
    4. His firm, TVI, had funded Microsoft, Compaq, and other notable technology companies, but it was not these that McMurtry wished to talk about. Rather, he wanted to talk about the companies that did not succeed. He recalled that in the mid-1970s, having been in the business a number of years, he had become depressed because “out of ten start-ups, we would lose three or four—lose all our money. Maybe just get our money back in two deals. Then you’ve got two or three where you get one to five times your money. That leaves just one or two deals [out of ten] where you make more than five times your money.” The high payoffs for one or two never erased the pain of those that did not survive: “You feel so responsible for the disasters.”
    5. The claim was empty bluster, however. Mike Moritz, of Sequoia Capital, peeled back the truth with mordant detachment: “One of the dirty little secrets of the Valley is that all the jobs-creation we like to talk about is probably less than the Big Three automakers have laid off in the last decade. One of the best ways to have a nice Silicon Valley company is to keep your head count as low as possible for as long as possible.”

What I got out of it

  1. Really fun book that gives an inside look at VC investing – power law returns and their importance really stuck out to me, as did the culture at Benchmark and how they thought about their investments 

Swimming Across: A Memoir by Andy Grove

Summary

  1. Andris Grof (Andy Grove) tells us about his childhood in Hungary and how he lived through and dealt with WWII, Russian communist influences, and how he escaped to America. “I was born in Budapest, Hungary, in 1936. By the time I was twenty, I had lived through a Hungarian Fascist dictatorship, German military occupation, the Nazis’ “Final Solution,” the siege of Budapest by the Soviet Red Army, a period of chaotic democracy in the years immediately after the war, a variety of repressive Communist regimes, and a popular uprising that was put down at gunpoint. This is the story of that time and what happened to my family and me.”

Key Takeaways

  1. But I could see in my mother’s face that there was something else. She went on, “I think it’s time for you to become Andris Grof again.” I was stunned. I had become Andris Malesevics so through and through that for a moment I was confused. But only for a moment. Then the significance of being free to use my real name engulfed me.
  2. The sensation of being in a dream kept me from feeling fatigue and also kept me from wondering what would await us at the end of our journey. I just kept walking, numb. After a while, I was neither particularly surprised nor unsurprised by anything we encountered.
  3. My father was an outgoing man. I was impressed and also a little envious at how easily he struck up conversations even with complete strangers. He was able to find a common bond with everyone he encountered — the waiter at the restaurant, the conductor on the streetcar, or somebody sitting at the table next to him. He seemed genuinely interested in these other people. Every once in a while, in his enthusiasm, he got me involved in these conversations. Most of the time, I would listen for a while, but I would soon get impatient to go home.
  4. I discovered C. S. Forester’s books about the nineteenth-century British navy captain Horatio Hornblower. Something about the character really intrigued me. Although I wouldn’t tell anyone this, I fancied myself as a latter-day Captain Hornblower, a man of few but deeply thought-out words, carrying the weight of the world on my shoulders, pacing an imaginary deck with my hands behind my back, living a rich inner life that my classmates never suspected.
  5. I felt distinctly inferior in comparison with my friends. I didn’t play the violin — or any instrument, for that matter — and I wasn’t a math or physics genius. While I was a good student, I wasn’t particularly outstanding in any one area. And I was still bad at all sports except swimming. But they accepted me as their equal. I think that the main asset I brought was that I was more comfortable with the rest of the class than they were. I served as their bridge to the wild bunch. We had something else in common: All five of us were Jewish. We weren’t the only Jews in the class. There were a few more whom we had not become friendly with. But as we gravitated to each other’s company, and hung around with each other at recess and after school, a subtle wall formed around us. No explicit acts of anti-Semitism were ever expressed toward us. But the separation was real. We never discussed the fact that we were Jewish. We just knew that we were, just as the other members of the class knew it, too. Hungarians almost always knew who was or wasn’t Jewish, kids or adults. It became a sixth sense for all of us, never a subject of explicit discussion, but one of constant tacit awareness.
  6. Even the places that specialized in chemical compounds generally didn’t have them in stock. In an economy that operated by central planning, shortages of just about everything were commonplace.
  7. One reaction to the growing political oppression was the number of jokes that sprang up about it. They acted as a safety valve for feelings that couldn’t be expressed otherwise. Jokes about current events in Budapest were an art form. They were created and transmitted almost instantaneously.
  8. (The most annoying slogan was “Work is a matter of honor and duty.” It was posted everywhere — on factory walls, in stores, and even on street signs — right above the heads of people who were listlessly trying to get away with the minimum amount of work.)
  9. I realized that I needed help. Everything, from getting a job to getting a telephone, required “connections.” My father found somebody who knew somebody who knew somebody inside Chinoin. This person moved my application along, and I got hired as a laborer.
  10. I realized that it’s good to have at least two interests in your life. If you have only one interest and that goes sour, there’s nothing to act as a counterbalance to lift your mood. But if you have more than one interest, chances are something will always go okay.
  11. This evening, I was hanging on the outside as usual, looking ahead in the gathering May dusk, but I didn’t see the traffic or the familiar streets going by. My mind was filled with atoms and molecules and experimental schemes. Then, all of a sudden, I got it. I don’t know what set it off. The experimental results that were floating around in my head suddenly jelled and the confusion of the previous weeks coalesced into a solid vision of where I was and where I needed to go. I jumped off the tram and ran home. I took out my notes and checked to see whether my recollections of the past experimental results were correct. They were. I couldn’t wait to get back into the lab the next day. With complete confidence, I planned the next sequence of experiments to confirm my hypothesis. They worked.
  12. Political parties that had long been disbanded came back to life, and dozens of newspapers sprang up to publicize their beliefs. It was as if the gradual thaw that had slowly been taking place over the past couple of years had suddenly turned into a flood.
  13. The coffee we got was made from real coffee beans. In Hungary, “coffee” was made from ground, roasted hickory nuts. Since coffee wasn’t produced in any of the Communist-bloc countries, we didn’t have it. Real coffee tasted very good.
  14. I’ve never gone back to Hungary. To be sure, as the years went on, political and economic life both improved, at least as far as I could tell. Hungary even ended up becoming a member of NATO. But although I’ve retained fond memories of Hungarian music and literature, and I still look with some warmth at picture postcards of Budapest sent to me by friends who visit there, I have never desired to revisit it myself. I’m not entirely sure why. Maybe I don’t want to remind myself of the events I wrote about. Maybe I want to let memories stay memories. Or maybe the reason is something simpler than that: My life started over in the United States. I have set roots here. Whatever roots I had in Hungary were cut off when I left and have since withered and died.
  15. I went through graduate school on scholarships, got a fantastic job at Fairchild Semiconductor, the high-flying company of its day, then participated in the founding of Intel, which in time has become the largest maker of semiconductors in the world. I rose to be its chief executive officer, a position I held for eleven years, until I stepped down from it in 1998; I continue as chairman today. I’ve continued to be amazed by the fact that as I progressed through school and my career, no one has ever resented my success on account of my being an immigrant. I became a U.S. citizen. I was named Time magazine’s Man of the Year in 1997. My two daughters now have children of their own. In fact, it was the arrival of the grandchildren that stimulated me to tell my story. As my teacher Volenski predicted, I managed to swim across the lake — not without effort, not without setbacks, and with a great deal of help and encouragement from others. I am still swimming.

What I got out of it

  1. Amazing what Grove went through by the time he was 20. You can see the foundation, the grit, the perspective he got from these difficult times and how it later informed his life at Intel, becoming one of the most respected CEOs of all time.