Rich Barton started Expedia inside of Microsoft in the mid-90’s, then spun it out into EXPE in 1999 and was CEO until 2003. He is a co-founder of Zillow, Glassdoor and Trover, an investor in a range of startups and a Venture Partner at Benchmark Capital. He is also on the board of directors of Netflix, Avvo, Realself and Nextdoor.
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.”
The demand-side economies of scale (network effects) and associated supply-side economies of scale that are associated with certain systems are the magic that Rich Barton is referring to. Success with a user generated content business model feeds back on itself in a positive way to create more and more success (as in a flywheel). For example, if Side A values the platform more if there are more customers on Side B, there are positive network effects which are an attractive way for a technology company to create barriers to entry (sometimes called a “moat”). If the right marketplace-based flywheel is operating, the only real limit to success is the size of the addressable market. Marketplaces like Expedia, Zillow, and Glassdoor have multiple “sides” which interact directly through a “platform” which generates barrier to entry as more user generated content appears in the system.
2. “If you really 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.”
Getting to critical mass with a marketplace platform is sometimes called overcoming the “chicken and egg” problem. This problem can be described simply: How do you get one side to be interested in a platform until the other side exists, and vice versa. Part of the challenge is to get enough customers on both sides so there is critical mass. 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 critical task is to acquire market participants in a cost effective way. What you want is low customer acquisition cost (CAC). Rich Barton is saying that investing money to get the flywheel spinning from a standing start is a natural part of the process. But the goal is to be able at some point to ramp down the spending once the positive feedback loop is operating. One way to acquire customers in a cost effective way is with a great brand and a method of creating low-cost impressions.
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, Zillow and Glassdoor are prime examples that fit into Rich Barton’s “power to the people” thesis. Simply put, the thesis is: “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.”
Rich Barton tells a great story about power to the people in a Wired Magazine 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 really didn’t know my preferences but was just trying to approximate them.”
Rich Barton is also saying that certain vertical industries involve a lot of real money transactions and often high customer acquisition costs. If you can create a user-generated content marketplace in a vertical market in which businesses pay significant amounts of cash for effective advertising, it is an attractive segment. Convincing people to pay for things that they have traditionally received for free is a genuinely hard problem. Startups are hard and challenging enough already that taking on addition very hard challenges that are not central to the creation of the core customer value delivered by the startup is unwise.
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.”
Information that can be made digital is what economists call “a public good.” These sorts of goods are called non-rival (you having it does not mean others can’t have it) and non-excludable (you can’t prevent others from having it without paying you). Rich Barton is saying that information like this that is digital is increasingly not going to be sitting behind firewalls in a way that is not accessible by the public. The model of giving away information to create a marketplace is so strong that it is unlikely that someone won’t decide to make it free. Similarly, the power of a user-generated content business model is so powerful that everything will also be rated.
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, pick a fight with somebody who can’t win.”
What we see in the market today are businesses which are transforming controversy (e.g., Uber) or valued information (e.g., Zillow; Glassdoor) into free brand impressions, which lead to more usage which translates into more controversy or information (i.e., a positive feedback loop which can result in a moat).
6. “Ideas are cheap. Execution is dear.”
“Great leaders need three key attributes to successfully execute — brains, courage and heart [pointing to The Wizard of Oz as inspiration].”
Ideas are necessary but not sufficient for success with a startup. And the idea itself will inevitably evolve as time passes and the environment changes. Execution is a harder problem than generating a good idea. Finding a team to build the product, finding product market fit and scaling the business are the biggest tasks. I sat on the board of a startup once and it eventually was a very profitable category. The explanation is long, but the net result was that they always shipped late because they were always building more into the product than the market wanted, which made them late to market. The result was a 2X which is essentially a failure.
7. “It is much more powerful long-term to make up a new word (e.g., Expedia, Zillow, or recently Glassdoor, three words that my teams have created) 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 10 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 own 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.”
Creating a brand that is eventually a verb is an amazing accomplishment. People who make the 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 tape measure home runs to make the venture capital business model work. That an entrepreneur is thinking they can turn their startup into a verb is a tell that they have the right mindset and DNA of an entrepreneur who should be seeking venture capital. But it is hard. Sometimes it is too hard. For example, Buuteeq eventually changed its name to Booking Suite.
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 in an organization that is growing and vibrant. Rich Barton was fortunate to work at Microsoft in an era when it was growing quickly and the opportunities to advance and learn were unlimited. When Microsoft was growing quickly, people’s responsibilities and opportunities were constantly growing. The environment is far from a zero sum game. During Rich Barton’s tenure at Microsoft there were many battlefield promotions. The situation is the same at Zillow and Glassdoor. This is in contrast to a business that is in decline and the employee count is shrinking. Shrinking opportunities mean employees face a less than a zero sum game which can too often create politics and a divisive culture.
9. “You can have a great team of people, but if they’re fishing in the wrong spot, you know, they’re fishing in a little puddle in the backyard, they’re not going to catch any fish. So, a big market, is like a proxy for (Total Addressable Market).”
“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 is 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.”
“Look, you have an at bat, and it takes just as much energy to swing for the fences as it does to bunt. OK. So, why bunt? Why bunt? Why not swing for the fences?”
Venture capitalists are very focused on finding audacious entrepreneurs who are trying to create value in very large markets. An entrepreneur simply can’t generate the necessary financial returns at scale if the market is small. If you have a small downside (not capital intensive to try) and if it is a big pond (a massive potential upside) you have optionality. It is rare to find a capable entrepreneur with a sufficiently clear, audacious, (and slightly nutty) mission to make venture capital financing work by delivering the necessary tape measure home run. The number of entrepreneurs with these qualities is one reason why cities like Silicon Valley and Seattle are so successful.
The plan must be audacious to deliver 10X to 1,000X returns. The plan must be a little bit nutty or others (particularly large companies) will be working on something similar. He is also saying that as long as you are devoting years of your life to this effort: why not try to accomplish something truly great? And if the goal is genuinely a “mission”, that provides extra motive beyond just financial returns. If you can do great things for society and do well financially at the same time, the 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 really 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. Rich Barton is making the point that the early hires are particularly important as they are the kernel around which culture, value, and best practices are built. He also believes that fixing a bad hire is way more costly and time consuming than people even imagine. People who are easily threatened hire people who are non-threatening and add less value to the business as a result. In short, bad hires can be toxic. And, of course, smart people love to hire and be around other smart people.
11. “Get the highest octane fuel in the tank [when choosing a venture capitalist].”
The founders of a fundable startup have lots of options to raise money. Rather than just raising money the smartest entrepreneurs select the VCs who deliver far more than just money. What the great venture capitalists realize is that they are in a service business. A venture capitalist who does not help with recruiting and other aspects of the business is underperforming. As just one example, the world is increasing driven by the power of networks and the best venture capitalists have access to the best networks. As an example, Rich and I are big fans of “Bill [Gurley], the rare wicked smart guy who can also communicate his analyses and opinions through compelling analogies and in a ‘hat in hand’ Texan’s drawl.” Bill Gurley and his partners have forgotten more than I know about venture capital. Despite that fact, much what I know about the venture capital business is attributable to them. Benchmark is lucky to be working with Rich Barton and vice versa.
12. “The whole idea of building a career these days is much different from say when my dad did. My dad 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 like 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 34 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 brief case. And the martini on Friday and the hat and whole thing. I love and admire my dad, and I love that he was always supportive and sort of tickled by how I built my career and my views on the modern career path. From my perspective, building a career is trying something really interesting, getting some skills, putting tools into your tool kit, going to the next place and putting a few more tools in, until finally you have all of the tools that you can build your own house.”
Rich Barton is making a point here about the importance of accumulating skills in an iterative fashion, and that means in today’s world a path that is not a linear march in a single company. The metaphor of a career ladder has been replaced with a jungle gym. What is most remarkable about Rich is his success rate. Very few entrepreneurs have had so many different successes. Nick Hanauer, a Seattle entrepreneur and venture capitalist points out: “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.”