1. “The only way to get ahead is to find errors in conventional wisdom.” “Because conventional wisdom was in error, this gave us tremendous advantage: we were the only ones trying to do it.” “When you innovate, you’ve got to be prepared for everyone telling you you’re nuts.” “When you’re the first person whose beliefs are different from what everyone else believes, you’re basically saying, ‘I’m right, and everyone else is wrong.’ That’s a very unpleasant position to be in. It’s at once exhilarating and at the same time an invitation to be attacked.” If you have been reading the profiles of successful investors and entrepreneurs on this blog there is probably no other point made so consistently than this: to outperform the market, you must sometimes be contrarian. Of course, you must also be right when being contrarian in enough of those cases that you outperform the market. It is a mathematically provable fact that you can’t beat the crowd if you are the crowd. Breaking at least one aspect of conventional wisdom is the only way to achieve something truly great. Breaking conventional rules or rejecting conventional assumptions for its own sake is unwise (and as an aside, even though being a someone being contrarian and someone being counterintuitive are different concepts, some people recently have improperly treated them as interchangeable).
Reid Hoffman has pointed out that if you are contrarian you ideally want being correct about that to cause a daisy chain of success. You also want the outcome of your contrarian view coming true to have positive optionality (small downside and a big upside). You also don’t want to be in a situation where multiple contrarian predictions must happen for your business to become very profitable. Finally, the contrarian bet should be substantially mispriced in your favor (e.g., because you have superior domain expertise or others have lost control of their emotions).
Bill Gurley puts it perfectly here: “a lot of the [bets] that become the breakouts, break any rule set that you have created…” The question is: “Which of these rules am I going to break. What is the new truth going to be?” In other words, make your rule-breaking contrarian prediction count by only making it against an outcome that has huge positive optionality. Don’t compound your odds of failure by requiring that you “bowl multiple strikes” in a row on contrarian bets to win.
2. “Software is not a capital‑intensive business. You can do it with on a shoestring. And all the great software companies started that way.” “The larger you are, the more profitable you are. If we sell twice as much software, it doesn’t cost us twice as much to build that software. So the more customers you have, the more scale you have.” Many people today have either (1) lost track of key aspects of how beautiful the traditional software business model that developed in the 1980s and 1990s can be or (2) are too young to know that this golden era of gushing up front free cash flow even exists. In the traditional software business model, you write software and people buy it. They pay in cash up front. After the software developer pays back its development expenses, incremental revenue is almost pure profit. Fees are often based on peak usage not actual usage.
Some people advocating software as a service (SaaS) today like to say: “recurring revenue is the greatest thing since sliced bread.” Recurring revenue can indeed be nifty, but there is this thing called customer churn in a “lifetime customer value” based business model which means that what may seem to be recurring revenue, does not always recur. Someone can pretend that customer churn does not exist, just like someone can believe in Santa Claus. Recurring revenue does help avoid a situation where a customer licenses version X of the software and upgrades only after many years and in that way SaaS shares elements with yearly maintenance fees so beloved by Oracle. But the tradeoff with SaaS is that customers can churn more easily and buy only what they need instead of paying for peak capacity.
A dollar of almost pure profit paid up front is better for a provider than a dollar of revenue coming in later that may or may not generate any profit margins. Do customers love a business model where the provider supplies all the capex and supplies the services as SaaS? Yes! That’s new consumer surplus (i.e., what the customer gets). That’s the future! I’m “all in” on the cloud and SaaS because it is better for many consumers.
Is SaaS also a great way to compete against incumbents in established markets since the means of competition is asymmetric and harder to defend against? Yes! If I started a new business today it would de SaaS? Yes. But in terms of producer surplus (what the software company gets), SaaS is neither good or bad in and of itself. Larry Ellison is a billionaire who owns things like nearly all of the island of Lanai for a reason, and that reason isn’t that SaaS revenue is more predictable than Oracle’s traditional business model which includes things like cash paid up front by the customer, the customer being responsible for capex, and a yearly 20 percent plus maintenance fee payable to Oracle.
Again, I want to be perfectly clear that SaaS is great for consumers. It is the future. But is not an easy model to execute on (e.g., has less attractive cash low, can have high customer acquisition costs (CAC), has higher customer churn to manage, etc.) as compared to the traditional model. As an analogy, I liked it when I had no joint pain after exercise too, but I can’t go back, just like you can’t go back from offering pay-as-you-go SaaS to the traditional licensed business model for software.
3. “From the day we started the company, over the 17 years, we have had only one quarter [in which we lost money]. And, boy, even that was one too many.” Creating and selling software in the pre-SaaS days was magical if you established the right sort of business driven by network effects. People paid up front in the software business and cash flowed like water at Niagara falls if you got it right. Is a SaaS market potentially vastly bigger today in terms of revenue? Yes! Is revenue the same things as profit? No. Is it fantastic that everyone has a connected super computer in their pocket? Yes! Is the rise of SaaS inevitable? Yes! Is the shift to the new SaaS business model an unmitigated blessing for software producers? No.
4. “It’s like Woody’s Allen’s great line about relationships. A relationship is like a shark, it either has to move forward or it dies. And that’s true about your company.” Businesses that can adapt to change can thrive. Businesses that don’t adapt, die. The average lifespan of a business on the S&P 500 in 1960s was 60 years. Today, that average age is 10 years. As I said in my comments on the past three quotations, SaaS based business models are part of the future. If you don’t accept that change, you are toast.
5. “The computer industry is the only industry that is more fashion-driven than women’s fashion.” When you have been in the technology business as long as I have you have seen many concepts come and go. Information highway, e-business, clipper chip, Dodgeball, Clippy, Lively, etc. The list is endless. Both software and venture capital firms and investors love to chase a trend. As Bill Gurley said once: “Venture capital is a cyclical business.” The great venture capitalists are mostly done with new investments in a sector before the mob moves in and makes it a trend. The great venture capitalists also have money to invest in startups when the cycle is at its bottom (when it is out of fashion).
6. “To model yourself after Steve Jobs is like saying, ‘I’d like to paint like Picasso, what should I do? Should I use more red?” You are not going to be Steve Jobs, Larry Ellison or Bill Gates. Get over it, if that’s your goal. But you can look at qualities they have and chose some you would like to try to emulate, as you would in looking at a menu on a Chinese restaurant. I knew someone once who thought he needed to treat people like Steve Jobs treated people early in his career to be successful in a startup. That is a full load of rubbish.
7. “When I started Oracle, what I wanted to do was to create an environment where I would enjoy working. That was my primary goal.” “We used to have a rule at Oracle to never hire anybody you wouldn’t enjoy having lunch with three times a week. Actually, we are getting back to some of our original ideals these days.” Working with people you enjoy is highly underrated. Working with people you don’t enjoy is, well, odious. The great news is that working with people you enjoy is more likely to lead to success. You will end up with less loss from friction since you can benefit from a seamless web of deserved trust. Will you enjoy everyone you work with? No. But with a little work can you find a way to work with most people? Yes.
8. “I think I was interested in math and science because I was good at it. And people tend to like what they’re good at and not like very much what they’re not good at.” “I’ve never really run operations. I’ve never had the endurance to run sales. The whole idea of selling to the customer just isn’t my personality. I’m an engineer– tell me why something isn’t working or is, and I’m curious.” Larry Ellison is probably capable of doing what Mark Hurd does or even Safra Katz does. But he is saying he does not enjoy doing those things. Doing what you enjoy is underrated.
9. “Great achievers are driven, not so much by the pursuit of success, but by the fear of failure.” I am not a fan of using failure as a motivational tool. But there is a little of this in everyone and a lot in others. Larry Ellison is obviously competitive. Going up against him in any competitive activity is an adrenaline rush.
10. “I think about the business all the time. Well, I shouldn’t say all the time. I don’t think about it when I’m wakeboarding. But even when I’m on vacation, or on my boat, I’m on e-mail every day. I’m always prowling around the Internet looking at what our competitors are doing.” I have heard this joke for many years: The difference between God and Larry Ellison is that God Doesn’t Think He’s Larry Ellison. This joke widely misses the mark. If Larry Ellison really thought this way he would not be “always prowling around the Internet looking at what our competitors are doing.” He would not be driven by a “fear of failure.”
11. “All you can do is every day, try to solve a problem and make your company better. You can’t worry about it, you can’t panic when you look at the stock market’s decline.” If you execute well and focus on great strategy, the stock price will take care of itself. The price of a stock is not the same thing as the value of a proportional share in a business. This point is fundamentally important to investing which is fundamentally about understanding business. A share of stock in a proportional ownership interest in a business and is not a piece of paper to be traded on popularity like a baseball card. Ignore short term noise and shorty term price fluctuations cause by the bi-polar Mr. Market and you will be a better businessperson and investor. Only occasionally will the price and value of a business be the same. Knowing the difference between price and value is a critical part of successful investing.
12. “In some ways, getting away from headquarters and having a little time to reflect allows you to find errors in your strategy. You get to rethink things. Often, that helps me correct a mistake that I made or someone else is about to make. I’d rather be wrong than do something wrong.” Waking up before you make a mistake is a very good thing. The experience of actually peeing on the electric fence can sometimes be avoided if you think things through before you pee. Taking a break with something as simple as a walk or as complex as an America’s cup race is wise. Admitting you are wrong, especially before you are wrong in actually doing something, is a very good thing.
*p.s., There is a great related post from Nick Mehta that includes this sentence: “So have a stiff drink, open your eyes and accept that [the new world of SaaS] is harder. This is the new world, and as long as we live in it, we need to embrace it. And, as Lorde would say, we can keep driving Larry Ellison’s yacht in our dreams.”