RICH BARTON IS AN entrepreneur and investor. He started Expedia from within Microsoft in the mid-1990s, spun it out as a public company, and was CEO until 2003. Nick Hanauer, a Seattle venture capitalist who was an early investor in Amazon and is a close friend of Barton’s says, “You can name people who are richer than Rich, but you can’t name very many people who have his track record. You will find very few people in this country who have as many times created something from nothing.” Barton’s “power to the people” thesis is at the core of many of his investments. He believes that “giving consumers access to information and databases that they knew existed because they either saw or heard professionals over the phone clacking away on a keyboard accessing that information” can be the foundation of very valuable business. He is a cofounder and the chair of Zillow and Glassdoor and is a venture partner at Benchmark. He is also on the board of directors of Artsy, Avvo, Liberty Interactive, Netflix, Nextdoor, and RealSelf. He graduated from Stanford University in 1989 with a degree in engineering.
1. “ ‘Marketplace’ is an important word. It takes two sides to make a marketplace.”
User-generated content models are magic. And they are magic because the more reviews you have of hotels, for instance, the more it attracts users to the site. And the more users you have, of course, the more reviews you get. This is a very simple, elegant example of a positive feedback system. This flywheel spins faster and faster, and what happens is the competitive moat—the defense, the competitive differentiator or the moat around the castle—gets wider and deeper every day with every review that is done.
Barton is saying that a user-generated content system can be made to feed back on itself in a positive way to create more and more success. To illustrate, if Side A of a marketplace values the platform more if there are more customers on Side B, positive network effects are created. Marketplaces like Expedia, Glassdoor, and Zillow have multiple “sides,” which interact directly through a “platform,” which generates network effects, which can act as a barrier to entry for competitors as more and more user-generated content appears in the system. The venture capitalist Yuri Milner believes, “From a margin standpoint user-generated content is very magical.” A new media business that is able to get its users to create content will have far lower costs than a traditional media firm.
2. “If you do have a flywheel, it is OK to spend money to get it spinning. It is OK to do un-economic things to hand-crank stuff, so long as once it is spinning, you can take your hand away.”
The first step in getting to critical mass with a marketplace platform is sometimes called overcoming the “chicken and egg” problem. This challenge can be described simply: how to get one side interested in a platform before the other side exists, and vice versa. Part of the challenge is to get enough customers on both sides so that critical mass can be achieved. Critical mass is tricky to obtain, particularly if the two sides need to show up simultaneously. Businesses that are slow to get to critical mass can run out of cash and momentum. How do you get one side on board? Well, one crucial task is to acquire market participants in a cost-effective way. What you want is a low customer-acquisition cost. Barton is saying that investing money to get the flywheel spinning from a standing start is an important part of the process. But even if money is spent in the beginning to get the flywheel spinning, the goal is to be able to reduce spending once the positive feedback loop is operating. At that point, it is hoped that customers are being acquired organically at very low cost. Barton uses his experience at Zillow to illustrate:
We didn’t have much money and we couldn’t invest in advertising, but we knew the most important “P” of the marketing mix “five Ps” is “product.” So, we built a highly provocative product (with the Zestimate), and married that to a brilliant PR plan conceived by our head of communications, Amy Bohutinsky (now our COO). On day one, so many millions of users showed up that Zillow.com tipped over for a day and a half. For years after that, product and PR were our bread and butter. Only after we had fifty million users per month and a business model did we layer on traditional brand advertising, including TV.
3. “My tendency has been to focus on big vertical industry categories where there has historically been database information that’s been locked up behind walls by the industry. I want to empower users to access that info. I like those verticals that involve real people, real decisions, and real money because it is easier to monetize. It’s not a stretch to sell ads in the industry because they want to be there when people are making decisions.”
Expedia, Glassdoor, and Zillow are prime examples of Barton’s “power to the people” thesis. Simply put, this thesis states, “If we’re doing things for regular folks that make their lives better and save them money and give them transparency, we’re on the side of the angels.” Barton told a great story about this investment thesis in a Wired article:
I wanted to give consumers access to information and databases that they knew existed because they either saw or heard professionals over the phone clacking away on a keyboard accessing that information. I remember I wanted to jump through the phone and look at the screen myself, turn it towards me and just take control. And I knew that I would spend more time and do a better job searching than this person who was doing something on my behalf, and who didn’t know my preferences but was just trying to approximate them.
Part of Barton’s thesis is that certain vertical industries involve a lot of real-money transactions and often high customer-acquisition costs. Barton has shown that a user-generated content marketplace in a vertical market in which businesses pay significant amounts of cash for effective advertising can be an attractive business.
4. “What I tell people is, if it can be rated it will be rated. If it can be free it will be free, and if it can be known it will be known.”
Here, Barton is saying that digital information is increasingly not going to be located behind firewalls, inaccessible to the public. The model of giving away information to create a marketplace is so valuable in creating a platform business that it is likely that someone will decide to make it free. Similarly, the value of a user-generated content-based business model is so alluring that everything will also be rated since ratings can be used to sell advertising or to power other market-based business models.
5. “Find me a provocative topic, and I’ll show you something you don’t have to spend a lot of marketing dollars to launch. People like to be provoked, and if you are provoking with information that is on the side of the angels, on the side of the consumer, the louder the industry reacts. And they just can’t win. It’s the greatest way to market.”
We now see businesses that are transforming controversy (e.g., Uber) or valued information (e.g., Glassdoor, Zillow) into free brand impressions, which leads to more usage, which translates into more controversy or information (and on and on). Postive feedback loops are a hallmark of business today, and the best entrepreneurs know how to use them to create a sustainable advantage for their businesses.
6. “Ideas are cheap. Execution is dear.”
Great leaders need three key attributes to successfully execute: brains, courage, and heart.
Ideas are necessary but not sufficient for success with a startup. The idea itself will inevitably evolve as time passes and the environment changes. Barton is saying that executing is more difficult than generating a good idea. Establishing a team to build the product, finding the correct product–market fit, and scaling the business are all challenging tasks.
7. “It is much more powerful long-term to make up a new word than it is to use a literal word. I also like high-point Scrabble letters in my brands if I can work them in. They are high point because they are rarely used. A letter that is rarely used is very memorable. ‘Z’ and ‘Q’ are all worth ten points in Scrabble. ‘X’ is 8. They jump off the page when you read them, and they stick in your memory as interesting.”
When you successfully make up a new word and introduce it into everyday language, you own it. It becomes a major differentiating asset that cannot be confused with anything else or encroached upon by competitors. At the very best, you end up defining a whole new category: Kleenex, Levis, Polaroid, Nike, eBay. The downside to creating your brand is that it is hard, and most of the time, very expensive and time-consuming to hammer a new word into the consumer vocabulary.
People willing to make an effort to try to transform a made-up word into a powerful brand are thinking big, which is attractive to a venture capitalist since they need grand slams to make their business models work. That an entrepreneur thinks he or she can turn a startup into a verb is a “tell” that they have the right mindset and DNA for an entrepreneur who should be seeking venture capital.
8. “If you want to have a growing and vibrant organization, you want to have big, new opportunities opening in front of you.”
It is much more interesting to work on a team and for a business that is growing and vibrant. Barton was fortunate to work at Microsoft early in his career in an era when the company was growing incredibly quickly and the opportunities to advance and learn were unlimited. During this period, Microsoft was growing so fast that people’s responsibilities and opportunities were constantly expanding. The environment was far from a zero-sum game. During Barton’s tenure at Microsoft, there were many battlefield promotions. Barton has the same high-growth situation for employees at his portfolio companies, including Glassdoor and Zillow. This is in contrast to a business in decline where the employee count is shrinking. Shrinking opportunities mean employees face a less-than-zero-sum game, which too often creates toxic internal politics and a divisive culture.
9. “You can have a great team of people, but if they’re fishing in the wrong spot, they’re not going to catch any fish.”
Tech startups are not capital intensive. It takes money to build the first version of the software, but it’s very inexpensive to deliver that to millions of people. They’re high-margin businesses if you can get scale.
A big dream and a clear vision, and a little bit of nuttiness are required to take something from an idea stage all the way to creating something that realizes that dream.
Dreams are largely self-fulfilling. There is almost as much blood, sweat, and tears in building something small as there is in building something big.
Venture capitalists are focused on finding audacious entrepreneurs who are trying to create value in enormous markets. If the plan is not just a little bit nutty when the entrepreneur first starts working on it, competitors will inevitably be working on something similar. If you are devoting years of your life to this effort, why not try to accomplish something great? And if the founders’ goal is a genuine mission, that provides extra motivation beyond financial returns. If you can do great things for society and do well financially at the same time, that combination is a very powerful thing.
10. “It’s key to hire the best and sharpest folks in the beginning so that you can build an organizationally wise company.”
Surround yourself with superstars. And not just the people you choose to work with. That’s really important. But the people you raise money from as well. Surround yourself with superstars, and everything else takes care of itself. Whenever in my career I’ve compromised because I’ve had a short-term itch I needed to scratch—and I just had to hire somebody—it’s been a mistake. And I’ve regretted it. It’s hard to get rid of the (poor) performers. Surround yourself with superstars. They hire superstars.
Being around smart people who love to get things done makes you smarter and more able to get things done. Barton is making the point that the early hires are of particular importance as they are the core around which culture, values, and best practices are built. Fixing a bad hire is way more costly and time-consuming than most people imagine. In short, bad hires can be toxic. Smart people who are secure about themselves love to hire and be around other smart people. Individuals who are easily threatened hire nonthreatening individuals who add less value to the business as a result.
11. “Get the highest-octane fuel in the tank when choosing a venture capitalist.”
Rather than just raising cash as they grow their businesses, the smartest entrepreneurs select venture capitalists who can deliver valuable services. The best venture capitalists have access to the best networks, which further amplifies their value. Money is not the scarcest resource when you have an attractive business idea and a strong team in a huge market or potential market.
12. “The whole idea of building a career these days is much different from, say, when my dad did. My father graduated from Duke University with an engineering degree—I don’t know what the year was, it was probably like 1956 or something—and he went to work for a large chemical company, which was the computer company of his age. Plastics. Like in The Graduate. My dad always said, ‘What you are doing on the Internet, I was in plastics, and that was the thing.’ Anyway, he went to work for that company, and he retired from that company thirty-four years later. And he worked there the whole time, and that was his era’s idea of work. The company man. The gray suit, and the briefcase. And the martini on Friday and the hat and the whole thing. I love and admire my dad, and I love that he was always supportive and tickled by how I built my career and my views on the modern career path. From my perspective, making a career is trying something fascinating, getting some skills, putting tools into your toolkit, going to the next place and putting a few more tools in, until finally, you have all of the tools to build your own house.”
Here, Barton is making a point about the importance of accumulating skills over the course of a career and being opportunistic in acquiring those skills. In today’s world, this means taking a path that is often nonlinear. The “jungle gym” replaces the “ladder” as the metaphor for a career. A person’s actual skills, work product, and personal network have become more important than formal credentials. The ability to demonstrate one’s competence to a potential employer via a work product is replacing the traditional résumé.