Modern Products

Meeting Eric Schmidt, Insights about Scaling a Start-up

One of the great things about Soluto is that we’re backed by an excellent team of investors, ranging from big-name VCs to private current and former senior executives in various companies. One of our investors is Eric Schmidt, Google’s chairman, through his personal fund (called Innovation Endeavors) that he founded with Dror Berman.

Eric recently came to visit Israel, and between meeting our prime minister and our president, came to listen first-hand to the start-ups he’s invested in (a total of 8 start-ups in Israel). So we all gathered in the new beautiful offices of BillGuard, our neighbors on Silicon Boulevard and presented who we are and what we do to Eric.

It felt like our presentation went really well, with Eric asking various super-smart questions, and after we finished, he raised one point that I think is worth sharing.  He asked (I’m using my own words here, but the key message is the same):

What in your service is so special that it’ll push to scale? What inherent property of your service is such that as you grow, you will grow more and more? Because if you cannot find such a property, then all you’re counting on is luck, and luck doesn’t scale.

I gave an elaborate answer. I talked about focusing the company’s efforts on creating such an experience that will compel users to share the news about this amazing service with their friends, and how we believe this experience a user goes through is what differentiates great scalable services from those that remain, well, meh.

This answer sucks. Not because it’s not what we’re focusing on, and not because it’s wrong. But because it’s generic. And by being generic, it missed the depth of the question. About 15 minutes later I was excited to realize I actually have a great answer, but by then it was too late to chase Eric and correct myself (and it would have probably seemed super-lame if I did).

I don’t want to focus on our own specific answer (although it’s REALLY great), but rather on some insights I had while thinking about the question, and understanding a) how brilliant this question is; b) how important having an answer is and c) how brilliant Eric Schmidt is (and this is not ass-kissing, he has already invested..)

If you ask me, the single most important factor in the success of startups that became immensely successful is, put simply in one word, luck. If you want two words, you can take Good Karma. I’m talking about the likes of Facebook, Skype, Dropbox, SalesForce, Google and others. This luck usually manifests itself in the form of amazing timing between the market and the company, usually around some technological or psychological inflection point.

For Google the inflection point was related to a change in advertisers’ perception of the web as a viable channel for ad communication, combined with a growing number of consumers searching for stuff on the web. For Skype the inflection point was related to the width of the “Internet Pipes” globally. For SalesForce it was a combination of more and more businesses understanding the benefits of CRM, combined with a growing completexity and cost of “on premise” CRM solutions. For all the companies I mentioned you’ll be able to find other companies who did practically the same thing a couple of years earlier but never reached massive scale, and another bunch of companies who tried to do the same a year or two later, but again weren’t able to reach massive scale. A short disclaimer - some companies succeed without riding such an inflection point, but those are usually moderate successes (give me one example of a tech company that reached >$50B value without it).

So I think luck, usually in the form of timing, is the main differentiator for growing huge. However, there are several points to make here. Luck is certainly not enough, and most of those companies who reached massive scale had:

1. A strong product that solved a huge market problem.

2. The ability to listen to the market and maneuver accordingly.

3. Great ability to execute - build stuff fast enough and at a sufficient level of quality.

4. A technological solution that is far from trivial, especially at scale.

The list above is what I thought before Eric’s question. But Mr Schmidt added another, fifth point: 5. An inherent property of the service that pushes it to scale.

Let’s try to analyze the this point for the companies I previously mentioned:

- Google: I’m not familiar with the details of Google’s original search algorithm, but I believe one of The initial important factors was user-clicks on search result pages. In other words, the more people used Google, the better the results got, which led to happier users, which led then to tell their friends, which meant more people used Google, etc..

- Facebook & Skype: those are easy. Whenever you can detect a “network effect” you have such an interest scale property.

- Dropbox: many people believe that Dropbox’s massive scale was caused by its brilliantly executed referral plan, designed by Sean Ellis. But still, what underlies that? Maybe people’s willingness to go to lengths in order to get more free storage? What is so special in storage? Can this be replicated everywhere? Probably not. So I’m not sure here, I’ll invite Sean to answer…

The key insight for startups here is -

Think about your own product/service. Does it have an inherent property that’ll push it to scale? If not, are you ok with it? Or should you go searching for such a property?