Subject: FW: Motley Fool | How a startup evolves
From: Joe Boerjes <[email-masked]>
To: "[email-masked]'" <[email-masked]>, "[email-masked]'" <[email-masked]>
Date: Mon, 31 Jul 2000 17:00:02 -0400

I guess that's one way to look at what happened to Akamai...  

-----Original Message-----
From: Raj Shah
To: Internet Consulting News
Sent: 7/31/00 3:33 PM
Subject: Motley Fool | How a startup evolves

How a Start-up Evolves
By Rob Landley

Chapter 12 of Robert X. Cringely's Accidental Empires gives an excellent
analogy between the growth of a company and a military operation. He
talks about three waves of expansion, each with its own characteristics
and each one driven by people with very different sets of skills. 

The first wave to hit the beach when entering new territory consists of
commandos. These are people who, in Cringely's words, "Work hard, fast,
and cheap.... Their job is to do lots of damage with surprise and
teamwork, establishing a beachhead before the enemy is even aware that
they exist." Simply put, they create something out of nothing, turning
an idea into a product. A commando can literally do the work of a
hundred normal employees when they've got the right problems to work on.
A start-up without commandos has nothing to sell. 

The second wave consists of infantry, exploiting the opportunity created
by the commandos. These are the people who turn a promising start-up
into a profitable business with systematic development, manufacturing,
and sales efforts. They provide structure to the company that allows it
to grow beyond an activity shared by a half-dozen friends into a real
business. As Cringely says, "While the commandos make success possible,
it's the infantry that makes success happen." 

The third wave consists of police. Once the business has grown into its
market niche, the third wave is an occupying force intent on holding
territory. Author Eric Raymond describes middle managers as
"conservators of the stability of the organization," which makes the
presence of middle management a clear indicator that the third wave has
arrived. A middle manager's job is to say no to ideas that don't
originate from on high, somewhere near the CEO. This prevents the
enormous size of the company from tearing it apart. A mature third-wave
corporation is full of bureaucrats defending the empire, approximately
as interested in reducing expenses as growing sales. Third-wave gains
come from economies of scale, incremental growth, and by simply
remaining profitable quarter after quarter. 

Yahoo!'s (Nasdaq: YHOO - news) commandos were its founders, Jerry Yang
and David Filo. Venture capital funded Yahoo!'s transition to a
second-wave company with hundreds of employees, struggling toward
profitability. It's still a second-wave company. 

Earlier this year, VA Linux Systems (Nasdaq: LNUX - news) bought
Andover.net, primarily because Andover owned some interesting websites,
including one it had bought only months earlier: Slashdot.org. Slashdot
was also founded by two college students, Rob Malda and Jeff Bates. When
Andover acquired Slashdot, Rob and Jeff handed off the administrative
portion of their duties in order to concentrate on their creative work.
They were amused that the jobs they used to do as a part-time sideline
were now handled by more than a dozen full-time staff members at
Andover. This is the normal productivity difference between commandos
and infantry. The difference is you can hire more infantry fairly
easily, and order the ones you have to do specific tasks. Commandos just
don't work that way. 

Although infantry and commandos can work together, there is some natural
tension between the two groups. The founders of many companies leave
after the IPO, commandos looking for fresh challenges rather than
settling down to nurture old ideas. On the other hand, infantry can take
much of the non-creative load off of commandos, giving them a protected
environment in which to work free from distractions. 

The third wave is fairly exclusive. Agents of change and facilitators of
change don't mix with opponents of change. The only place second-wave
people can survive in a third-wave company is at the executive level.
The only way dynamic individuals can survive middle management is by
outranking it. The problem here is that the company cannot promote from
within easily. Middle management stifles visionaries, who leave the
company or give up their creative ambitions. The company must hire
executive talent from outside the company, or wind up as a paralyzed,
reactionary zombie. This fate nearly befell AT&T (NYSE: T - news), IBM
(NYSE: IBM - news), and many other large companies that gave middle
managers executive power to suppress ALL change within the company. 

Commandos categorically cannot STAND middle management. A third-wave
company cannot keep commandos around. Period. Commandos create change,
middle managers prevent change. When "the suits" take over, the
commandos are outta there. The bureaucrats often don't value commandos
during the brief times they have access to them (often in the brief
period of time between buying a promising start-up and killing it). The
commando's idiosyncratic nature, even outright unreliability, may be a
minor price to pay to receive the benefits of their brilliance, but the
unpredictability is all the bureaucrats can see, and it gives them
hives. 

Usually, commandos leave long before the third wave. When the second
wave becomes too prominent, and building upon existing successes becomes
more important to the company than creative new directions, the
commandos simply get bored, take their stock options, and leave. This
isn't a "lack of discipline" (a strange accusation to level at people
who work 90 hours a week), this is just the way creative people ARE.
Steve Wozniak of Apple (Nasdaq: AAPL - news), and Steve Jobs when he
couldn't be CEO of a second-wave company. Mitch Kapor at Lotus.
Netscape's Jamie Zawinski. The list is endless. 

An interesting business model Robert Cringely recently covered in his
PBS column is a private company founded by a couple of commandos with
the intent of spinning off a continuous stream of new second-wave
companies, each with its own IPO. The commandos come up with the new
products, assemble a team of infantry around each one, and then release
it into the wild. Meanwhile, the commandos are busy creating the next
new product. You can read about it here. 

Healthy companies need to mix the various waves. As they grow, they need
to survive the transition from first wave to second wave, and later from
second wave to third wave. At all costs, they need to isolate any
commandos they need to have on staff from middle management. The case of
the launch of IBM's PC is an instructive example of how a third-wave
company can do this. (This is covered both in Accidental Empires and The
Innovator's Dilemma -- both perspectives are valuable.) 

As investors, we tend to focus on second- and third-wave companies.
First-wave companies aren't publicly traded, and most start-ups fail
because their commandos can't handle the details of running and growing
a business yet don't hand it off to competent infantry. Second-wave
companies are Rule Breakers, most lucrative early in the second wave
with plenty of room left to grow along their current lines. Third-wave
companies with second-wave upper management are Rule Makers, stable and
profitable with the potential for steady growth. Third-wave companies
with third-wave executives are probably not a good investment. 

-------------
Raj Shah                 Sapient | Architects for the New Economy
[email-masked] 
V: +1.617.679.0413	M: +1.617.359.8995      
F: +1.617.621.1300 	Yahoo!: rajshah1
P: [email-masked]
PGP: B7B3 5377 78D7 CE46 8D28  C329 C077 3543 BD0C C249