8 Warnings That Your Company is Toast

Last month I reminded you that no big-brand company lasts forever, and few of today’s technology phenoms last long at all. One of my readers emailed to ask if I might dare to note some of the warning signs that suggest company extinction might be zeroing in on your own workplace.

Of course if I knew the full answer to that, I would spend the rest of my career shorting all those imminent losers traded in the public markets. Creative destruction is difficult to see in its earliest phases because it often begins simmering silently in the background when your company is riding a wave of enormous good fortune. Funny how that infecting vulnerability sneaks its nose under the tent precisely when a business seems to be at its healthiest peak.

While the corrosion can be deceptively invisible at first, there are usually festering symptoms we can observe, watching the makings of a crash in slow motion long before opposing forces collide. Here are eight thumbnail questions to help diagnose the severity of your company’s illness and whether it’s likely to be terminal.

What is the company’s R&D budget as a percentage of sales?

If research-and-development spending is declining as your company matures, it’s possible that company is being harvested by its owners as a cash cow. While strong cash flow is an indicator of company health, take notice of how much of your business is being driven by recent successes vs. legacy brands. If new products aren’t breaking, sniff around and see how much of that cash is being invested in next-generation ideas. If increasingly more cash is going to ownership and less to building your company’s future, you may have reason to worry.

Is your CEO surrounded by people who hold the same views of the company’s excellence?

Without gadflies who question everything, you’re likely to keep doing the same things. That could make you a cash cow, a one-hit wonder, or any number of limited-thinking results. Great senior leadership in a company encourages constructive conflict, because no single viewpoint in management can possibly see around every corner or predict a competitive threat. If lots of ideas are flowing, you have a much better chance to reinvent yourselves. Where dialogue is limited and funneling to a singular point of view, trouble is coming.

Does senior management actually use the product or service you produce?

This is the old argument for eating your own dog food. If the people who make and sell something only talk about why it’s great rather than obsess over what will make it even better, it’s likely to stay the same. If there is cynicism around your success and products become passionless widgets, customers will see that soon enough. Your customers can’t reinvent your products, just reject them. If you’re not a fan of what you’re doing, why should they be?

Does senior management regularly sample, investigate, and dissect competitive products?

If you think what you’ve got is the best and don’t even bother to see what could soon be eating your lunch, your lunch will soon be eaten. Be paranoid, be aware of everything competitive, commission and dissect research, never be comfortable that your moat is impenetrable. It’s okay not to use your competitor’s products day-to-day. It’s not okay to ignore them. If you happen to like them better than your own, wake up, the nightmare is about to become real.

In your company’s last earnings crunch, was marketing expense an early and severe casualty?

Marketing is an investment spend. If the money you are spending on marketing doesn’t add value to profitable sales, it should be cut now. If it’s driving profitable sales, it’s downright irresponsible to cut it. Marketing should be seen as a profit center, not a cost center. If there is no measurable return on your marketing spend, you’re already killing the company from within. If the return can be quantified, cutting it in bad times is senseless and irresponsible.

Is great marketing intended to help a mediocre product perform better than it deserves?

Said another way: outstanding marketing helps a bad product fail faster. If the product is garbage, all marketing can do is get it in the hands of early adopters. Once these market influencers trash the product, all is lost. If the product needs refinement before you invest to take it to market, take the extra time to get it right. If the product stinks and can’t be saved, kill it without a dollar of marketing spend.

Does your company culture resist rather than embrace change?

Also earlier this year I suggested that you keep your ears open for the phrase “But we’ve always…” whether it’s uttered in the break room or a key milestone review meeting. If your colleagues have unending excuses as to why you should stick with tried-and-true ways to fail because your company has always utilized a set of urban legends in your planning, you’re going to find it hard to carve a new path into the future. Doing what you’ve always done simply because you’ve always done it that way is a great way to succeed in any business that isn’t dynamic. Go make a list of businesses today that aren’t dynamic and tell me you should remain set in your ways.

Are you patching your platform or re-envisioning a new one?

Never confuse maintenance with progress. Think about just how fast industries are moving. I recently had the pleasure of watching the movie First Man. One of my favorites lines reminded me that it was a mere 66 years from the Wright Brothers first motorized biplane flight at Kitty Hawk (1903) to Neil Armstrong walking on the moon (1969). If you’re anywhere in the vicinity of 60 years old, that doesn’t seem like much time at all. If you’re fixing your biplane while your competitor is building a Saturn V rocket, it doesn’t matter that you’ve happened upon some world-class glue. When the rocket launches, you’re toast.

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Image: Pixabay

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What’s Eating Brother Elon?

Let’s start with what needs to be said before all else: I am an enormous fan of Elon Musk. I think he is quite likely the most important and visionary entrepreneur today leading the way in technology, business, and innovation. He walks in the American continuum of Edison, Disney, Gates, and Jobs.  I wrote as much in a post dating back to 2014.

So when a guy as brilliant as Musk goes sideways, I start to ask myself some questions. Like, what’s up with all the weirdness?

Clearly I have no ability to understand what’s going on in this amazing individual’s life, other than to observe the monumental toll that stress can take on even the mightiest of titans. To guess at what might be at the root of Musk’s recent unpleasant run in the headlines would seem a fool’s errand.

While I am unable to fashion an informed evaluation of why Musk appears in many ways to be undermining his own success of late, I am thinking about the learning that might be had from observing his stress. I am reasonably certain he will have no interest in my reflections of what his behavior could be telling us, but perhaps this will provide a mirror for others on what some of this means and how it possibly could be addressed.

Here are five thoughts on that.

Focus Is No Small Trick

Can one person really be an effective CEO at more than one company? It’s hard enough to be a decent CEO period. Now add longevity to the CEO run and enormous competitive forces, and you start to wonder if running both Tesla (after integrating SolarCity) and SpaceX is remotely possible. Let’s also not forget that Musk is additionally CEO of Neuralink and The Boring Company. If you have ever been CEO of a high-growth company or even know one, you are aware that the job requires super-human energy, and even then the clock is always ticking against the corner office. Musk is beyond super-human, not only as a leader but as a founder who tackles some of the most difficult problems of our day. Will he succeed at all of his goals? I am sure a lot of investors and customers are counting on that, but wouldn’t the odds be more in his favor if he narrowed the scope of his personal agenda and delegated authority with a much broader brush?

A Competitive Advantage Is Not Forever

Tesla has created leading-edge, clean-exhaust automobiles. These electric vehicles are as beautiful and luxurious as anyone could have imagined. Most Tesla owners are evangelists for the company and fiercely loyal to the brand. There is no question that Tesla has been an inspired market leader, but all it takes is one visit to the showrooms of other luxury car companies and you start to see that high-end electric cars are on a fast path to becoming commodities under many brands. BMW and Jaguar already are introducing competitive product lines. Others are on the way. Staying ahead of the pack is its own form of madness and a lot less fun than introducing first-of-a-kind category killers. Can playing king of the hill without a summit in sight have a troubling impact on the psyche? How can it not?

Production Efficiency Is as Difficult as Innovation

Why hasn’t a new auto manufacturer in the U.S. survived at scale beyond the Big Three? The bulk of car buyers want cheap—most consumers don’t have an option to spend more, so the entrenched behemoths take small margins to achieve broad sales and then make money in other ways like service and financing. When you are playing with other people’s money, the demands of Wall Street can be insanely demanding. It’s hard to make big bucks selling very few cars. While Model S and Model X are both category-defining luxury cars, they remain low-volume production units with difficult margin economics given their scale. Model 3, the low-cost mass-market entry, is supposed to change the scale of Tesla, but realizing the dream of high-volume, low-cost, low-margin automobile economics seems precisely what is eating away at our hero. Is the problem perhaps not solvable with the reality of capital constraints all businesses face? Is there another business model beyond manufacturing that Tesla might want to explore with respect to the investment burden they carry?

Health Matters

A lot of people at the upper echelons of business take pride in working themselves to death, or at least appearing to do so. I will admit I am personally not beyond this criticism, and have winced more than once when listening to colleagues celebrate the notion of work-life balance even in the most competitive environments. Many leaders demonstrate manic obsession in their devotion to their enterprises, and it is hard to argue a company can be at the top of its game with a standard forty-hour work week. That said, no matter how much we wish to argue the contrary, we are human, our bodies have limits, and when we cross our own lines of practicality, we can become counterproductive. Sleep matters. Nutrition matters. Some relief from stress is necessary to be consistent in exercising good judgment and productive reasoning. When our vitality breaks down, it is only a matter of time before we collapse or the responsibilities we own become compromised.

Authenticity Does Not Require Unrestrained Drama

The modern workforce is not put off when a boss exhibits some vulnerability. Relationships defined by org charts actually can be strengthened when a manager exhibits humility toward his or her own limitations. Leaders who acknowledge that emotions and potential exhaustion set them on a level playing field with peers and subordinates can foster a dynamic environment of trust and support. That doesn’t mean employees and other stakeholders want executives to ramble, wander, or become media fodder. Remember that old saying, “When you’re in a hole, stop digging.” Random proclamations to shareholders and needlessly quirky public appearances can leave deep craters on the social graph. All organizations want some form of predictability in the leaders they choose to follow. When they lose confidence in top management because of repeated, silly, and unnecessary antics that can demoralize their aspirations, they can make another choice. They vote with their feet.

I am rooting for Elon Musk to win, for SpaceX even more than Tesla, because he has proven that not only government bureaucracies can build dependable rockets. That is forcing innovation around reusability in space exploration and keeping admirable government spending on otherworldly travel in check. While I probably can’t put a dent in Musk’s corrective arc (which I want to believe is on the horizon), perhaps I can open the eyes of a few mere mortals to the underlying tension of his story. Perhaps your story of stress and self-expectation has similar subplots of immovable market forces. What could you be doing to course-correct that might give Musk reason to pay attention?

Do You Want My Opinion?

dilbert-feedbackIt’s a new year. With another trip around the sun completed and ahead, we mortals often go to our cabinets to withdraw the long-procrastinated projects we someday hope to deploy. In that revitalized spirit of invention, people often ask me for my opinion on this or that idea. Often it’s a start-up business idea. Sometimes it’s an investment opportunity. Occasionally it’s a request for feedback on a manuscript. I’m sure you’ve been asked to be a sounding board for similar notions and found yourself in a similarly awkward situation.

“Hey, mind if I bounce something off you?”

I usually respond, “Why do you ask?”

You may ask yourself, Why does he ask the question “Why do you ask?”

My question to your question is born of its own overarching question: Do you really want feedback, or do you just want me to tell you that what you are pitching is wonderful?

Yeah, you’ve been there. It’s a tough place to be, because it’s impossible to be sure what the other person is actually seeking. Is the seeker in need of a boost of self-esteem, where anything critical you offer is likely to triple that person’s therapy bills and end a rebound before it finds form? Is the pitch-person stealth-seeking your financial commitment, where any positive response on your behalf will be followed by a deal memo solicitation at a valuation that would make the Uber people blush? Is the ask truly heartfelt but the work so early and unedited that it could be more harmed than helped by a random response?

It’s not easy to offer an opinion on someone else’s work. Way more can go wrong than can go right.

I tend to find that most people who ask for my opinion don’t really want feedback. They want validation. If you’ve partaken in-depth of the creative process, you know they aren’t the same. Validation is net neutral. Feedback can save your ass.

What do I mean by that?

Validation is a bifurcated switch. If I say the work is good, you’ve heard all you need to hear. If I say I don’t think it’s good, you’ve heard exactly what you didn’t want to hear. The effect is net neutral because either way I have added no value to your project. If I say it’s good, so what? You already thought it was good or you wouldn’t have shown it to me, so I’ve done nothing but increased your standing bias. That takes you nowhere you couldn’t have gone without me. If I say it’s bad, we may no longer be friends, not because I don’t want to be friends but by being honest (even if diplomatic) I have likely hurt your feelings. There isn’t much positive energy that can follow.

If feedback is what you seek and I have any grounded expertise to offer, then perhaps we have a place to go together. That feedback is almost certainly going to be nuanced (“this part makes some sense, that part not so much”) but it has to come your way without consequence to me or expectation of a secondary agenda that involves me. If I want to get involved, I promise I will let you know, but the act of giving you feedback should be reward in itself. That means you have to enter into the feedback discussion with an openness to critique solely because you want your idea to improve, or perhaps decide instead you don’t want to waste any more time on it. There can be no ulterior motives or it’s not feedback, it’s evaluation. I don’t want to evaluate your work. That’s your job, not mine.

As an author, I seek feedback constantly. When I draft something, I always go out for feedback from a broad sample of demographics. When I get good feedback it can be life-changing, because anything that I have missed and you found I can fix. Is it painful? It’s horribly painful. Yet even worse than negative feedback is the silence of no feedback from someone who said they would offer it. That tells me with uncanny certainty that I have failed to connect with their voice. Do I regret asking? Never for a moment.

As much as we dread feedback, we actually should cherish it, because it is the only path from mediocrity to something that matters. The creative process is laden with setbacks, but each time we find a nugget of corrective action, we can improve. That’s what makes the creative process both daunting and healing. It is the reality of success quantified one fix at a time. It’s never fun to edit away what doesn’t work, but that’s how innovation at its finest evolves. There are no shortcuts. If you ask, be sure you want to listen for the answer. It may not be pleasant, like medicine, but hopefully it makes us better one way or another, if it’s the right medicine.

Most people don’t know how to give useful feedback, especially tough feedback that can help us improve our thinking or channel it to more productive ends. Words of validation or invalidation are relatively easy to render and equally useless. Offering consistently constructive feedback is an art. Be careful whom you ask to help you, or you can really go astray.

If you don’t want feedback, don’t ask for it. If you ask for it, don’t be defensive when you get it. If you don’t ask for it, you probably will never reach your potential. If you do embrace it, you can make a small idea become a big idea. A big idea becomes something tangible when we add the necessary recourses and fight past the objections readily available from amateurs. Those who embrace feedback are resilient by nature. There is power in vulnerability. Embrace it, and the sky is the limit.

Do you still want my opinion? I don’t mind if you say no, but if you ask carefully, I’ll try to answer in the same honest spirit.

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Author’s End Note: It’s been hard to write about anything other than Trump the past year. I am still aghast at what has happened, but I am forcing myself back into more diverse subject matter as sanity demands. With my third book now in first draft and about to go into the editing process, I find my love of words never more pronounced, but never more conflicted. It’s hard to write about normal subjects in a world where nothing I once considered normal ever will be again. It is impossible to think about characters more outrageous than the strange ones emerging on the stage of reality. Regardless, I am committed to diversifying my output in continuing this creative journey we began together. I’ll still write about Trump when I must, but I promise you I will pursue more interesting material, if only to prove that he hasn’t won. Stay with me, and I’ll stay with you.

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This article originally appeared on The Good Men Project.

Image: Dilbert.com ©Scott Adams

Piercing the Bubble

Almost daily now I’m asked my opinion of whether we are in a stock market bubble. It’s a curious line of inquiry, and inevitably leads to any number of further ponderous meditations that follow:

“What do you think of that King Digital IPO; did Candy Crush get crushed for good?”

“Is Bitcoin for real, and is now the time to get in?”

“Does it look like Zynga is on the mend? Did they hit bottom and create a buying opportunity?”

“What happens to Yahoo’s price post Alibaba?”

“Box or Dropbox, which do I want to own?”

GodotI can almost imagine Didi and Gogo having this conversation in a contemporary reworking of Waiting for Godot. They’d go back and forth on each headline for a few minutes, and the resolving cadence would always be the same: “Nothing to be done.”

They’d probably be right. And wise. And existential. And of course they would be ignored, two bums with nothing but holes in their shoes, playing insufferable word games beside a dying tree.

And I’m probably the wrong person to ask. Crystal-ball predictions of dicey, professionally picked over offerings seem as wacky to me as hardworking people forking over portions of their paychecks to the state government for lottery tickets.

Speaking of which, there’s something even stranger afoot of late, a new pattern of dialogue running through the frenetic networking schmooze scene. It goes something like this:

“WhatsApp wasn’t worth $19 billion.”

“Agreed.”

“It was worth more.”

“You’re kidding. How do you figure?”

“Well, look at what Snapchat turned down at $3 billion. That app had 36 million users and would have gone for $92 per user.”

“Oh, I get it. And WhatsApp had 450 million users, so at $19 billion, that’s a mere $42 per user.”

“You’re right, what a steal. Facebook should have paid more. I bet they would have if WhatsApp had played coy.”

“What about Instagram?”

“I don’t know, what’s Instagram?”

In most discussions of relative valuation based on anything more complicated than revenue, EBITDA, growth rate, and some basic ratios like price/earnings, my head starts to hurt. Ignore all fundamentals, project abstract strategy on modeling unknown monetization value, and you lose me.

That doesn’t mean I’m right, it just means I know when it’s the right time for me to sit out a dance. It’s kind of like someone asking me which is the surer thing in Vegas: poker, blackjack, craps, or roulette. My answer: If you can’t afford to lose, don’t play; and if you can, what does it matter—pick the game that’s the most fun for you and knock yourself out. Someone will take home a mountain of cash every day, because a casino only works if there are winners. Most people will leave their bounty behind, not only to pay the winners but to pay the house for brokering the trade and serving subsidized cocktails—plus the gigantic water fountain out front of the brightly lit, air-conditioned cement tower in the middle of the desert.

Don’t get me wrong, I believe in investing. Most everything I have earned working over the years has more than doubled in value over time because of investing—really boring diversified asset allocation in various index-like vehicles, bolstered consistently over time through saving and dollar-cost averaging. Yes, I have speculated on occasion, and I have even had a winner or two, but even then I looked at the core financial analysis when I bet, and those numbers always had growing dollar signs in front of them.

Now I’m hearing young entrepreneurs echoing the exit lingo. “If we can just get 500 million users of our app, how can we not get bought for $20 billion? That’s a massive discount! And we only need to raise another $65K to make it through beta with a minimum viable product. For another $20K we can stress test the server, too. That’s less than $100K investment for a decent front end and the return of a lifetime. Do you prefer the term sheet via email or text?”

This is a different kind of Gold Rush, with its own beguiling logic and normalized ethos, plus many sideline winners selling new-age picks and axes. Should the notion of Built to Last cross your lips in any public gathering, you are likely to be met with curious stares at best, and more often ostracising scorn. Free salty snacks will not be replenished in the small paper bowl you hold. This is not a discussion of how value is created by serving customer needs with wondrous products scaling in gross margin and the brand extensions that follow. This is a discussion of filling the strategic needs of an acquirer that has slipped into low organic gear and is sitting atop a stockpile of cash, the war chest itself a creation of optimism, inflated promises, and dare I say it, Irrational Exuberance. It’s a party and a playground. Fundamentals are for losers. Job experience is the enemy. Don’t be a downer.

As the JOBS Act begins to open the doors democratically to a new set of speculation-based investors—equity crowdfunding is the freshly cleared frontier—I hope they will do the hard work of learning to assess valuation before they write checks equal to 5% of their net worth or annual income. You’ll hear lots of stories about the next killer app, or the next levitating brick, and you may be lucky enough to be in the room with the next undiscovered wunderkind. But if the story that wunderkind is telling you has lots of math but no defensible revenue and profit realization, ask yourself, Where did he or she learn this math? Is it sustainable? Why hasn’t someone else with a lot more disposable income or risk capital taken this deal off the table if it is so good you can’t say no to it?

There’s always a bubble, and there’s always a bottom. The good news is that once you get past the moonshots, no one has yet figured out where the sky ends in its entirety. Boom and bust. Bust and boom. If you draw a trend line through a lifetime’s worth of data, pacing the erratic market highs and lows, the slope is still northbound.

I like that line a lot. That line protects me from worrying too much about a bubble.

Don’t Fear the Fad

As an investor, can you ever know for certain if that newfangled gizmo come to market is the real deal or a fad?

Let’s try it a different way—perhaps everything is a fad, until it’s proven otherwise.

Bread, most likely not a fad. But organic fair-market nine-grain soft crust, probably a fad.

Cars, probably not a fad. But eight-cylinder 130 mph muscle mobiles with no back seats could be a fad.

AM radio, possibly a fad, but one that has enjoyed a long shelf life—and now with news and sports retransmitted over the internet to mobile devices, probably a decent bit of runway left in the broadcast machine.

Farmville, Mafia Wars, and their brethren? You tell me.

Our attention spans are surely fickle, but just because something is a fad does not necessarily make it a bad investment. I am not certain internet keyword search will last forever, but the last decade and a half have proven pretty rewarding, at least for one company that currently commands better than 70% market share. Games? That’s where they come and go in a coughing breath—if you are going to bet at that crap table, come with a lot of chips and a jug of Pepto-Bismol.

The question of whether it makes sense to bet on a fad in a commercial, accelerated, low-loyalty, short-attention-span, vastly diverse, market-driven global economy seems moot. People have bet against railroads, phones, airlines, television, personal computers, and even guitar bands as fads—and that was before they had customers! Even after these “fads” had momentum, there were endless naysayers who said they were on their way out as fast as they’d found their way in. With that kind of outlook, eventually you have to be right, but you may be staring up at daisy roots when you finally win your bet.

There is tremendous Monday morning quarterbacking now about the dive in Web 2.0 companies, from Facebook to Zynga to Groupon to Pandora. Maybe they are all fads, but let’s separate the fad of stock market performance from the fad of consumer adoption as two separate issues. The shine may be off the stock, or the shine may be off the company’s products, but those are very different things. High-growth speculative stocks like these are most often valued on future earnings potential, not current performance, so if the stock is out of favor, that does not de facto mean the product or service has gone out of favor. Plenty of people are enjoying these consumables at the moment, though it is safe to say that they won’t all be in vogue for eternity. Styles change, tastes change, brand loyalties change. We know that to be Creative Destruction, an ever-present cycle, so when we criticize either an equity or a product as being a fad, let’s be careful to make the distinction, and even more careful not to level broad sweeping judgment that could lead to missed opportunity.

Can a company make money riding the wave of a fad? Seems to me that is more norm than anomaly. Can an investor make money owning the stock of a company that rides the wave of a fad without volatile exposure to market timing? Again this seems perfectly reasonable, depending on the window. Think Intel with micro-processing chips during the PC revolution, Electronic Arts with the rise of sports-based video games led by Madden NFL, and today’s True King of All Media, Apple. Equity markets in the long run reward smart risk and punish reckless risk, just as commercial markets reward desirable consumer offerings and reject cynical ones. There has to be risk for there to be reward or no one would invest, so the question is not whether something is a fad, but whether that fad represents some potential form of continuity recognized by visionary management as one in a string of ventures that together comprise opportunity.

Intel’s legendary former CEO Andy Grove clearly taught us, “Only the Paranoid Survive.” He knew at any strategic inflection point the difference between a fad and a trend was largely the expanse of the product life cycle. More importantly, he worried about management culture as the path to product culture, where innovation means never-ending creativity, not tossing the dice and getting lucky on a good roll. I don’t worry whether a company is profiting from a fad, I expect companies to be opportunistic. I worry whether the company is a one-trick pony, whether it has created a learning culture where success and failure are both studied. A company that has learned to learn, that can read data and understand how fads are perpetuated as trends that constitute periodically sustained disruptions—that is a company that can extract true shareholder value from a fad, foremost by surprising and delighting customers repeatedly with that which they never expected was possible.

I have a lot of criticism about this year’s poor performing new entries in the NASDAQ, but that criticism has nothing to do with whether those companies were beneficiaries of identified fads now assessed by pundits to be in decline. My own career has been the beneficiary of any number of fads that came and went—computer games that sold millions and now barely qualify as second round questions on Jeopardy, once immensely cool websites that scored millions of visits that no longer can be found, virtual communities that ranked with the best in loyalty and now would be lucky to make the card draw on Trivial Pursuit. Does that mean they weren’t good businesses that added significant value to their owners? To the contrary, in their useful lives they added exceptional shareholder value in earnings and lifetime contribution. We worked the brand promises as long as we could, but when their time was done, we moved on.

That’s why a sweeping statement like “don’t invest in fads” makes little sense, because if virtually everything is a fad with varying sustainability, there is no choice but to invest in fads. What I worry about is management vision, how the brand stewards of a company are migrating from one fad to the next, how maneuvering through Creative Destruction is an art and science unto itself. Edison did it over a very long period of time. So did Steve Jobs. The folks who run television networks have to do it, because no show lasts forever and formats are cyclical; yesterday’s Variety Shows are today’s Reality Shows, half-hour comedy goes in and out of style, so does one-hour drama. Walt Disney famously bet the ranch on 2D feature animation, clearly a fad, although one he created and that lasted more than 50 years—but that wasn’t the only trick he had in the magic shop, not even close. To invest wisely in the likelihood that originators can capitalize on a string of fads through creativity and experimentation is very different from investing in one hot rocket that goes straight up with full knowledge that gravity will send it back down with equal and opposite thrust.

As the contemplative George Harrison reminds us, All Things Must Pass. That doesn’t mean windows of opportunity aren’t always in abundance. Watch the fad-makers, not the fads themselves, and the game changes significantly. While even the best fad-makers can’t call winners forever, those longer windows leave plenty of room for upside, especially when you bet the full spectrum of an index rather than trying to call the hits in isolation. If you bet on a one-trick pony and lose your bait, that was most likely your mistake, not that you bet on a fad.

Built to Launch?

I aspire in this post to be among the elite—one of the few business bloggers on the planet currently not commenting on Marissa Mayer becoming CEO of Yahoo. I have never met Marissa, but her reputation speaks strongly for her. I wish her well because I always want good people to succeed, and in this case I also want to see Yahoo succeed. I hope she reads my article about Yahoo from last year that predated her last two predecessors and figures out a way to restore much-needed competition to the landscape of search. Hmm, seems I’m writing about her. Okay, enough said. Got get ’em, Yahoo! Stop.

Now my real topic for the week—not surprisingly, also about succession.

Venture investors Marc Andreessen and Ben Horowitz have been steadfast in their support for keeping Founder/CEOs at the helm of the companies they back, from early blog posts on their site that state their philosophy to more recent comments in the Wall Street Journal that reinforce their sometimes contrarian assertions. Not only do they believe most deeply in the Founder/CEO success model, they have championed multiple class shares that keep CEOs in authority with majority control even without majority ownership. Their point of view is clear, consistent, and well-argued—and thus far their financial returns in aggregate have been extraordinary. They want vision, they want independence and long-term creative thinking, and they want continuity.

I am not sure I have an absolute opinion yet on absolute power for a start-up CEO; we’ll have to see how those play out over the next ten or twenty years. I do worry that without senior team loyalty and continuity, it may not matter whether a CEO stays or goes. Teamwork is what matters in today’s intellectual property centric companies, and if your team is not stable, I wonder if your company can remain so. Surely new blood is a great infusion when parsed appropriately, but it needs to be in balance, at equilibrium with a set of players we can count on.

What about the top-tier executives, perhaps a level down, who seem to jump freely from ship to ship, following their own personal muses, particularly after liquidity gives them the ability to set themselves free? Is this good for companies and long-term shareholder value, for companies with massive capitalization that are taking on investment—public or private—ostensibly with some hope of being Built to Last?

Clearly within our pressured and fragile economy, the bonding relationships between employers and employees have become increasingly tenuous. “At-will employment” is not just boilerplate in an offer letter, it means what it says, that jobs are temporal. Employees not under contract may depart a gig when they wish without much obligation, and employers may equally freely dismiss them (to the extent those decisions are not discriminatory) without much warning or explanation. Companies are predisposed to protect earnings and cost-cutting can be a tactic to achieve those goals, the favor of which gives employees good reason to always be in the market. Although there are any number of topics I can extract from that thread and will do so in the future, that is not my key focus here. This is not about everyday turnover and the anxiety it creates, it is about senior level turnover as a litmus test for investors.

Reality is, a lot of high-profile employees in high-profile start-ups seem to jump ship early these days. I am not so sure that they are cashing in as much as their attention spans or personal desires lead them from one thing to the next. Some examples:

• Two of Twitter’s co-founders who served as CEO left the job and their day-to-day roles, although one returned, not as CEO, but as head of product. The third co-Founder also left day-to-day responsibilities.

• Facebook’s most recent CTO, who joined the company in 2008, departed voluntarily almost immediately following the IPO. Facebook also lost an extremely high-profile CFO in 2009, and a number of other prominent C-level executives have churned through in the years leading up to the IPO.

• Groupon’s former COO, a Silicon Valley veteran brought in to steady the ship, spent about a year on the job day-to-day before moving to an advisory role.

• Yahoo continues to make headlines with five CEOs in five years, although the situation here is different. The last one to leave on his own timeline was media veteran Terry Semel, who preceded the five. Perhaps more curious at Yahoo is the level below CEO, where the turnover has been even more active, voluntary or otherwise.

• Google is now being celebrated as iCEO University, for which it has reason to be proud with strong executives like Sheryl Sandberg, Tim Armstrong, Dick Costolo, and now Marissa Mayer all willingly accepting significant challenges. My sense is this is sustainable as long as founders Larry Page and Sergey Brin stay on the job (guided by the advice of Eric Schmidt), but at some point the spinning off of entrepreneurs may take a toll as it did at once great legendary giants like Sun and Silicon Graphics (also keep an eye on HP).

It is hard to fault someone with talent and wealth for leaving a position with an “old company” to tackle a brand new start-up concept. They have the creativity, they have the yearning, and they can absorb the personal risk. Yet these aren’t exactly old, mature companies they are leaving, even in internet time. If talent retention is critical to continuity and leadership is demonstrated by example, what does it say about loyalty to the “rank and file” millionaires of Silicon Valley hungry to pursue their dreams when so many of the top dogs or near top dogs are endemically antsy?

Can you build a company that is Built to Last when many of your brightest employees—especially those made wealthy with capital they can reinvest—are thinking Built to Jump? Should shareholders in emerging high-valuation private and public companies be concerned with the New World of high turnover that is largely viewed as the way things are? There is already risk enough in holding stakes at the high valuations these companies will need to grow into, but if these are essentially knowledge-based companies where the key assets go home to their families each night, how much should owners worry whether they come back tomorrow or start a new company that’s more fun? Are these companies Built to Last or Built to Launch—launch themselves to early prominence, and launch the careers of the stars who emerge from their ranks?

Retention and the war for talent are surely talked about a lot, but I wonder if these are just buzzwords now, if key stakeholders really are losing sleep over the next spun-off employee or just prepared to roll with the punches. For anyone who has ever led a company, the notion of culture is no small issue, and companies where the culture is strong have a heritage of continuity that gives them a shot at longevity. Do we now assume Creative Destruction is such a powerful force that short-lived companies are a norm, regardless of culture and continuity? I wonder, and look forward to checking the Fortune 500 again for a few more decades to see how this plays out—not to mention the long-term trend on aggregate net job creation we so desperately need for our economy to go the distance.

I am not suggesting that employees should stay past their welcome or interest level, and in no way would I ever want (or tolerate as a manager) any form of stagnation in the form of tenure-based retention or retention for continuity’s sake. The case I am trying to make is for a tiny bit of balance in an Old World concept known as loyalty—which has been very good to me on both sides of the desk for most of my years on the job. It has been said that in today’s world loyalty is between individuals, not within companies, and there is every reason to understand how that has come to be. Yet if companies are not loyal to employees and employees are not loyal to companies, can these kind of companies really be long-term investments for shareholders? Said another way, if the system and talent are not demonstrating loyalty and commitment, should investors?

The Ultimate Broker

“Uncovering hidden supply to meet pent-up demand is the magic behind some of today’s most exciting start-ups.”

I read that opening phrase in a Heard on the Street WSJ Article by Rolfe Winkler last week and it stuck with me. It’s not a particularly new idea, but it is elegant, simply stated, and true.

At its core, the internet in many ways is a giant marketplace—a shared global space for socializing, exchanging ideas, buying and selling goods and services, hanging out, observing human behavior—occasionally offering spectacle, always stimulating interactive exchange.

Uncle PennybagsIn the simplest terms, a broker brings together buyers and sellers. A broker can be a person or it can be a facility. It is a go-between function for give and take—introductions, descriptive information, negotiation, resolution. The act of brokering can be formal and compensated with paid commissions or informal and somewhat ephemeral.

It was anything but coincidental that discount stock brokerages like Charles Schwab and TD Ameritrade made a beeline to the commercial web in its earliest days, circa the mid 1990s. Some observers eventually came to blame much of the dot-com bubble on too easy access to day-trading by non-professionals. A good many individuals who prior to loading their first browser never met a stock broker found themselves easily comfortable with entering their own trades at hugely reduced transaction fees where professional labor costs were eliminated. We all know that didn’t turn out well for a lot of folks and the overall economy, but the point remains that the excitement of the internet’s adoption was fueled by people using the internet to buy and sell a whole line-up of newly created internet stocks. Marshall McLuhan deja vu, eh? Not sure we will see a self-referential kaboom quite like that again in our lifetime, though the public’s hunger for IPOs built on entirely new business paradigms (proven or not) still seems rather insatiable.

One of the things the internet does well is bring efficiency to the brokering process. Success stories are a virtual Who’s Who of celebrated internet brands—eBay, Priceline, Expedia, Travelocity, Craig’s List, Etsy, Airbnb—any number of much embraced marketplaces where the site of exchange never takes possession of physical inventory on its balance sheet, but instead acts as an agent to connect what is for sale with both new and loyal customers. A myriad of innovative payment models has been developed to compensate these broker-marketplaces for the service they provide, but in almost all instances they have lowered transaction costs, passed those savings along to customers, and increased total sales volume in the categories tackled. This mostly customer-friendly way of doing business is now every bit as normal for us as sitting on the back side of a travel agent’s CRT monitor waiting for him to input an airline seat query into Sabre not even a full generation ago (like, when I was in college). What others used to do for us we now do for ourselves, happily in most cases, and because of the savings and easy access, we do it a lot more frequently.

I have been spending a reasonable amount of time of late helping a number of start-ups get off the ground—formally and informally, no shameless plugs today, but I do mention them often in my tweets—and one of the constants in determining my excitement level is how thoroughly an emerging visionary has thought through a problem of reinvention. If we take it on faith that basic human needs and behaviors don’t change that much—we sleep, we eat, we learn, we love, we move, we fight, we heal, we protect, we shop—then the march of progress marked by improvements in technology finds reward when disruptors help us do those things better.

Returning to the quote that kicked off this post, when an entrepreneur is able to identify an abundance of largely unknown supply and connect it with a steady stream of curiously hidden demand, new business can boom. In the realm of the marketplace, anytime a business can innovate around streamlining the availability and visibility of products and services in need of buyers—and buyers motivated to use these new tools are driven to discover otherwise opaque inventories—a new brokerage is born. This can bring to bear a cruel process of creative destruction on entrenched competitors without the willingness or vision to change, but in our current economic landscape, it can offer a steady flow of more efficient business endeavors that inspire imagination and eliminate unnecessarily inflated costs. Pooled information, often in the form of personal opinions and reviews, is a freely traded currency, a form of entertainment in itself. Add social sharing playfulness along with clever experiments in curation and the fun really begins.

The innovation I am seeing both as an insider and an outsider suggests we are nowhere near maturity in reinventing how sellers find buyers and vice-versa—through digital channels and whatever awaits us beyond mobile, social, and local electronic communities. That should be good news as the availability of previously gated inventory finds its way into the supply chain and into the hands of delighted customers. Each new successful brokering start-up comes with its own spin. Some are truly wacky, some are obvious in hindsight, some too quickly migrate from wacky to obvious. I have little fear that all the people functions of brokering will be replaced—there will always be demand for great customer service and high touch assistance that adds value—but I do know that increasingly over time we will stop paying high fees for anything that doesn’t add much value. That’s the way of efficiency, and a great use of connective technology, where I’m pretty sure we ain’t see nothing yet.