Cheap Thoughts

Today marks two years since I started working at Employee Navigator.  It’s been an exciting journey so far and I am looking forward to seeing what the next two years hold in store for us.  I wanted to take a few minutes to jot down some of the lessons I’ve learned over the past two years.  Some of them we’ve done well at, others we have room for improvement, but I certainly think we’re on the right track.  My hope is that I can look back decades from now and still believe in the importance of these lessons.

• Engineer your team with the same focus and commitment you place on engineering a great product.  Friction in your organization leads to friction in your product, which leads to unhappy users.  In short, the team you build is the product you build.  
• Stay focused on  creating a great product for a niche market.  Don’t try to be all things to everyone, you’ll end up with an incomplete product.
• Be a customer centric organization.  Make sure they know their feedback is crucial to your success.
• There is no way to improve what you aren’t measuring.  Identify a few key metrics, communicate them to your entire staff, and report on them on a regular basis.
• No one ever accomplished anything without going through the ringer.  Don’t let naysayers and non-believers discourage you from building the future you envision.

The experiences and perspectives I’ve gained while living in San Francisco will certainly constitute a formative experience in my life.  One of the most fascinating aspects of the city at this moment in time is the issue of rising rents in San Francisco, which some blame on the migration of highly paid technologists who are driving up rent for the “ordinary citizen.”  There are certain social, political and economic trends which are deeply rooted in this great city’s history, and I would never profess to have the answers to such a complex issue (especially considering I have only lived here for four months).  I do want to zero in on one of of the economic principles behind high rent, which I believe is being ignored by a majority of people today.

At the end of the day we are dealing with a  classic supply and demand issue.  Anyone who has studied basic economics understands supply and demand and has probably studied it as it relates to rent control as well.  Demand for living space is increasing rapidly in San Francisco, and who can blame anyone for wanting to live in this beautiful city?  Furthermore, urbanization is a global trend, which has been occurring for decades, and is not in any way limited to the Bay Area.  Basic economics suggests that unless supply increases to meet the demand, prices for homes will rise.  I believe that is the fundamental issue at hand, a supply issue.  The purpose of this post is not to address the zoning strict laws found in San Francisco and Silicon Valley or the prevailing social or political trends, but rather to speak on the issue of rent control.   

This post is as much for anyone who will ever read it as it is for me, to sort out the policy of rent control for myself and maybe to clear things up for you too.  

For those of you who aren’t familiar with rent control it is a government imposed ceiling (or price control) on how much landlords can charge for rent.  What this really means is the government gets to dictate rent.  It means the government feels they can better estimate the true cost of a property than the free market can. This is a huge point of contention for me because I fundamentally disagree with the premise that government knows something that the rest of us don’t.  That city council member understand the real estate market better than developers, landlords, realtors and the like is simply false.  Unfortunately, it is the ordinary citizen who is left dealing with the consequences.

What are some of the consequences of rent control…   

1. Landlords can’t charge the going market rate for their properties, which means…
1. They don’t have the money to reinvest in upkeep of current properties leading to deterioration of housing units.  
2. There is less money to invest in new housing projects.
3. There is little incentive to keep tenants happy because they know 1. They won’t leave a rent controlled apartment and 2. If they do leave there is a long line of people right behind them looking to take their place.
2. Developers have little incentive to build new buildings if they know they won’t be able to charge market rates for the new properties.
1. This means new buildings will be higher end buildings, targeting people who can afford to pay above market rent for apartments or for people who can buy their apartments outright.
3. It creates a disincentive to move.  New families don’t want to move to larger apartments because their current rent is so low, and empty nesters don’t want to downsize because they would end up paying more for a smaller space.  This leaves the next generation of new families and empty nesters bidding for a smaller number of desirable places to live.     

Clearly there are some significant adverse consequences resulting from rent control.  So why don't politicians speak up?

1. Nobody likes landlords and they become an easy target for politicians looking to place blame.
2. There are a lot of people (voters) who benefit from rent control, namely the people living in underpriced homes.
3. It is a very emotional issue.  Imagine a news report very showing an elderly citizen who could not afford to live in their apartment if it was not rent controlled.

If none of this convinces you that rent control is not a smart policy I implore you to ask yourselves a simple question.  What US cities use rent control extensively?  LA?  New York?  San Francisco?  Curiously enough it is those same cities that have the highest rent in the country.  

The proof is in the pudding.

Coming out of college I was fascinated by the goings on of Silicon Valley.  As I started to read more about the companies and CEO’s coming out of the valley I became captivated with how these small organizations we able to grow from a few lines of code in a Stanford dorm room into million dollar enterprises in such a short period of time.  It all seemed so glamorous.  

Following graduation I was fortunate to join a small but rapidly growing software company (albeit not from the Bay Area).  The prospect of joining a company that was seeing both user growth and revenue growth in the 100’s of % was just what I was looking for and it has been an awesome experience to this point.  I have had the opportunity to see what it takes to run startup and have hopefully made some worthwhile contributions to the organization along the way.  In so many ways the last two years have exceeded my wildest dreams and put me in an incredible position for a 24 year old.  But thats not the point of the post.  The point is to talk about how excruciatingly painful it is to build a great company.

The narrative portrayed in the media: come up with a cool idea while still in college, get an initial product out there, move to the valley, get some venture capitalists behind your idea, grow like hell, and exit with a nice payout all seems so simple.  The life of a startup CEO is much more painful than any movie,TV show  or journalist can possibly convey.  Elon Musk once said running a company is “like staring into the abyss while chewing glass.”  The level of uncertainty about your companies future and you and your employees livelihood is enough to make even the most polished leaders a bit squeamish.  As the CEO, you not only have to deal with that heavy burden but with a constant onslaught of urgent problems that threaten your companies very existence.  Why would he spend any time on the things going well?  It’s his responsibility to deal with the steady flow of new issues that need his attention.  Furthermore, so much of his time is consumed with seemingly insignificant tasks that, if neglected, will almost certainly put them out of business.  Opening bank accounts, accounting procedures, communication with shareholders and board members, leases, bills, you could go on and on.  All of these things require the CEO’s attention but take away from actually developing the product and talking with customers.  

It's all of small mundane tasks that fall on the CEO's shoulders that make running a startup so painful.  Thats what gets overlooked by so many of us when we think about running our own company.  There is no way to avoid the inconveniences that direct attention away from the product.  If you're not prepared to dedicate the time that is necessary to take care of the little things you're not ready to run your own company.  

If the past two years have taught me anything it’s that not everyone is fit to lead a startup.  It takes a special breed of leader to want to put himself through all that pain for the dim prospect of affecting change in their industry.  The great CEO is not concerned with the payout, thats just a way to rationalize the insanity of his occupation to friends and family.  He wants to leave his mark, he wants to change the way business in conducted, he wants to be remembered for his contributions, not for the company's exit valuation.

Our work at Employee Navigator from a sales perspective has been significantly harder over the past few years because our product represents a discontinuous innovation.  We are asking our customers to use the platform in completely new ways than they have been accustomed to and on an entirely new scale than has every been accomplished up tot this point in the insurance industry.  

That means that we really have to have a clear vision of what the future of the insurance industry will look like from our client perspective and we have to make sure that everyone we speak with understand that vision and is on board with our goals.  I’ve learned that not every sale is a good sale, in that if you have thousands of users who all expect entirely different things form your software it become increasingly difficult to stay focused from a development standpoint and to keep your customers happy on the support side  

As a result the sales process has become much more educational in nature.  Everybody understands what our software does in theory, but explaining why its important in the long run to pragmatic and conservative buyers is no easy conversation.  Furthermore, because our product is discontinuous we also have to be upfront with our customers that there will be a steeper learning curve with us, all the while convincing them that our path is the ultimate path to long term success.

Some of my takeaways form the past two years include:

• Have a clear & compelling vision for your company’s future that can be easily communicated to your customers.
• Hire sales staff with domain expertise.
• Make sure your entire organization understands the problems your attempting to solve for the customers.
• The sales staff should be a huge drive of product roadmaps.  Listen to your clients and the problems they’re facing.  This might mean finding solutions that they weren’t expecting, but as Henry ford once said, “If I had asked people what they wanted, they would have said faster horses.” 
• Iterate, iterate, iterate

We had our first users conference last week in Washington DC, with over 100 people attending from 28 states.  For some, they spent more to travel & attend the conference than they do to use our system each year.  A few things I learned:

• Team camaraderie matters.  I was astounded by how many people came up to me over the course of the two day conference just to comment on how impressed they were with our team.  One person said it looked like “one big family.”  These people can now sleep easy knowing they can trust their business partners to move in the right direction.  Furthermore, friction within a company ultimately injects friction into the end product and puts us at a competitive disadvantage.  My takeaway, engineer your team with the same dedication that you engineer your product.
• Transparency matters.  Make sure your customers understand your product roadmap, financial situation, and business plan (at least at a 30,000 foot level).  Once they get where you’re going you can actually enlist their help to get you there, assuming they believe in what your doing.  
• Listen for themes.  It’s easy to get distracted by 100 people telling you what the would like to see your product do.  The key is to look for themes, and remember that it’s also your job to build the things your users don’t know they need yet.  Our themes included; better training, flexibility, scalability and speed of deployment. 
• Find out what you’re doing wrong.  This is the best opportunity possible to talk face to face with users about where your product is coming up short.  

My advice, as soon as you think you’re ready for your first users conference, do it.  The last two days we’re some of the most productive for everyone on our team, especially the engineers who aren’t in front of customers and prospects every day.   

Much like the current saga between American auto dealerships and Tesla, I believe that taxi companies throughout the United States are using arcane regulations as a defensive tactic to protect their interests against innovative competitors, namely companies like Uber and Lyft.  Unfortunately, the American consumer is left to deal with the negative consequences of such defensive mechanisms.  The taxi companies, concerned about their own well being, have put their self-interests ahead of their customers, which if history is any indication, will contribute to the continued erosion of their entrenched business model.  

The benefits of the Uber model to the consumer are clear.  Increased competition in the marketplace has led to a new level of innovation including higher quality and more diversified services as well as increased price competition, all of which have been absent in the cab industry for decades.  They eliminated the frustration of standing on street corners hoping an available cab drives by and have made the payment process frictionless, this at a time when many cities are just now beginning to require their drivers to accept credit cards.  Additionally, they have increased the supply of taxi’s in a given city, which has up to this point been very difficult and costly to do.  And while this type of creative destruction will force both the taxi and insurance industries to adapt in a number of ways I believe they will, because at the end of the day America is still a consumer driven society.

This is not to say that all of the issues surrounding the Uber model have been solved.  It is not just the cab companies that are being forced to adapt but the insurance industry as well, who have to determine how to insure this new class of driver.  Furthermore, we are likely to see continued regulation at the local level as city and state governments struggle with how to classify and regulate these new companies.   

For their part I personally have very little sympathy for the taxi industry.  The technology powering these new services has been around for years, but as a result of a lack of competition they were never forced to innovate in a meaningful way.  Sitting in a taxi in San Francisco, it almost appears that technology has added complexity to their business.  Look no further than the array of devices used by traditional taxi drivers on their dashboard, up to six by my count.  As smartphones have lead to a consolidation of devices for most, the taxi companies have seen a proliferation of the devices necessary to run their business.

How long should the consumer have to foot the bill for their inefficiencies? 

A quick search on Amazon for “books on leadership” returns over 112,000 results.  What qualities constitute great leadership will be an ongoing debate for for generations to come, because great leadership takes on many shapes and sizes.  In many ways it’s like being asked, what’s the best move in chess?  There is no best move, there is only the best move in a a given situation.   With that said I want to share with you a story about corporate leadership that I experienced not too long ago, which highlights what types of decisions a great leader should be expected to make.  

I work at a startup attempting to navigate the chaos that is the United States healthcare industry, and am fortunate enough to be working with one of the most morally outstanding CEO’s out there.  Obviously as a young company every bit of revenue counts, not to mention a long term commitment from one of the most successful insurance brokers in Washington DC .  When one of our existing clients got wind that their competitor was to being working with us our CEO received a call letting him know about some questionable business practices and alerted him to the fact that this large potential client regularly used very unsavory sales tactics.  

It would have been very easy to for our CEO to overlook these expressed concerns as competitively motivated, but that’s not how he operates.  He quickly made a call to the President of this new potential client and was very clear with our expectations for anyone he gets into bed with.  If he ever got wind they they were leveraging our platform in a predatory manner against any of our clients we would terminate their license on the spot.  Obviously, they we not thrilled to learn we added an immediate termination clause into their license, and would have been well within their rights to decide not to enter into a long term relationship with a young company, who clearly had a conflicting value systems.  That didn't happen.

I happy to report that in the months since this episode there have been no complaints from either side of the isle and all parties loving our software.  Our CEO knew that the potential revenue from one customer would not make or break the company’s future but having clients who believe you don’t have their best interests in mind would.  That is true leadership.  It means looking past short term gains because as Warren Buffett puts it, “it takes 20 years to build a reputation and five minutes to ruin it.”

I am currently reading a book about the legendary private equity firm, KKR, titled The New Financial Capitalists.  I highly recommend it for anyone interested in learning about the industry that got so much negative press during the 2012 presidential election.  From my perspective one of the really interesting facets of PE is how a firm comes to the conclusion to invest in a specific company.  As a history major in college, I’ve always enjoyed detailed research projects and thats what due diligence is to me.  The four areas I understand to be important are:

• Market Attractiveness
• Market grown/profitability/size, substitutes, key market trends
• Company Attractiveness
• Relative market share, profitability, strength of key people, cost position
• Competitive Environment
• Market fragmentation, new entrants, barriers to entry, key market trends, threats
• Exit
• Exit barriers, multiples, and presences of strategic and financial buyers

While I expect the general public at large to remain skeptical of the private equity industry I can certainly being to see its positive effects and consequences.  There seems to be a general misconception that LBO’s work best when a firm exploits its investments and focuses on short term gains rather than long term value creation, however the reality cannot be further from the truth.  In general most of the companies that got into bed with KKR saw increased employment in the long run as well as increased aggregate capital and R&D spending. For the average person like myself they position what a private equity firm does in this way: 

They juxtapose an LBO to the typical consumer buying a house in the US.  The consumer puts 10%-20% down, paying a premium up front because it's a beautiful house, much like a private equity firm does for an attractive business.  This means they are involved in a very levered transaction (like an LBO).  To create long term value in their home the consumer makes improvements and upgrades throughout the life of their investment hoping that in doing so they will see a reasonable ROI when they choose to sell their house.  That scenario is private equity in a nutshell.