On the "sport" of startups

Unlocking Potential is a newsletter by me, Kiko Homem de Mello, CEO of Qulture.Rocks

You can read most of these posts from Unlocking Potential on the Qulture.Rocks blog.


To run a company as best as you can, it seems that you need to be very aware of what "sport" [1] you are playing.

Founding and running a startup is kind of a sport of its own when compared to founding and running other types of companies (e.g., "lifestyle businesses" [2], restaurants, etc.), just like running 100m sprints at the Olympics is a discipline of its own, when compared to, for example, running marathons competitively, running the half-marathon of half-Ironmans as a hobby, or jogging on weekends to lose weight.

The "sport" of startups [3]

Why is the sport of startups so specific? Or, what's really the sport of startups?

The game of startups is not just the game of starting new companies. Startups are special kinds of new companies designed to grow really fast. The sport of startups is the sport of building the biggest companies in the shortest time possible [4].

Startups and venture capital

Venture capital is tightly associated with the sport of startups but is not a requirement per se. One can totally play the sport of startups without it. It's just that in order to win, chances are one will have to use venture capital. It helps to think about Olympic swimming: fancy wetsuits are not a requirement per se of doing the freestyle 50m, but just about every swimmer uses them to some extent, just like just about every startup uses venture capital to some extent.

The sport changes as the company grows

One specificity about the greater game of building and running companies is that the player playing the sport usually changes sports as the "game" progresses.

From founding to pre-IPO, for example, the sport may be indeed to build as big a business as possible quickly; from pre-IPO to IPO and beyond, the focus of the sport changes slightly to building the most valuable business, even if that means sacrificing growth a bit; as time progresses, a founder may switch gears and play a sport of trying to make the company endure the test of time.

Seeking the best advice

Seeking (and giving) advice that's good requires one to understand what discipline they are seeking advice for, and as important, what disciplines the people you ask is qualified to give advice on.

Notes

[1] I think the sports metaphor is a good one. Bear with me.

[2] Whatever that means.

[3] Let's just recursively define "startups'' as the types of companies one tries to build when one plays the sport of startups.

[4] By the way, the sport of startups is not really to build the biggest companies in the shortest possible time but to build the most valuable companies in the shortest possible time. It's just that in the early stages of a company, size [5] is probably the best proxy for value.

[5] We could also discuss what "size" means. Usually, it's revenue, but sometimes some other thing will be measured, such as the number of users a service such as a social network has if the people playing the game think that users are a reliable indication of future revenue and then value.

A practical definition of “mission” for high-growth companies

A newsletter by me, Kiko Homem de Mello, CEO of Qulture.Rocks

Hello!

This is crazy. It's been more than 6 months since I last posted. Sorry about that - at least I hope you'd like me to write more :) -. Things have been really hectic. We've crossed the 100 Q.Player line at Qulture.Rocks, have been growing like crazy, launched our new brand (a tiny bit more below), and personally, I had a new baby just a few weeks ago, Eduardo! (This is me giving him my first bath last week.)

Anyway, a recurring theme of this blog(?) is me writing an article about a term or a subject that people keep mindlessly repeating out there without, I reckon, really knowing what it actually means. I've previously discussed “disruptive innovation”, “flywheels”, “moats”, and today's subject is one that's very relevant to what we do at Qulture.Rocks: "mission” and, practically, “mission statement”.

(I've previously written about the Qulture.Rocks mission (to unlock the potential of people and organizations) in the context of my falling in love - again - with our mission, but decided to take a step back and discuss what a mission really is.)

Part of the trigger for writing about “mission” was the launch of our new rebrand. The major motivator for our rebrand was us feeling that our brand wasn't representing our mission as it should. We're all about unlocking people's potential so that organizations can unlock theirs, and ultimately achieve their missions, but our brand looked like the brand of a silly little happiness-as-a-service company, not one with such a noble and important raison d’etre.

It looked like this:

And now it looks like this:

By the way, you must check out our manifesto, which, I'm conflicted to say, is amazing!

So on to the article.

The relationship between Mission and OKRs: an important intro

“If people do not internalize the organization’s mission and vision, they will not use them to make day-to-day decisions, and if they do not use them in their daily lives, all the effort will have been in vain.”

**Pete Babich** [1]

We’re big fans of OKRs (when done right) and believe that ultimately OKRs should come from an organization’s mission (that’s why, after all, we’ve named our OKRs book “OKRs: From Mission to Metrics” [2], which you can read for free on Amazon – and of which this article is an excerpt -). Therefore, we thought it would be important to spend some time properly defining the concept of mission (and a mission statement) and clarifying a very common mistake which is to confuse mission and vision, which is another important part of our OKR framework but that serves a different purpose.

OKRs are a strategy execution tool, that falls in a greater discipline in management that encompasses strategy formulation and strategy execution. Ideally, one shouldn’t exist without the other.

Strategy formulation always starts with the company’s mission statement. It should explain why the company exists, which is itself an interesting limiting factor that helps an organization figure out the boundaries of its footprint in the world. As we’ll see below, mission and vision are two sides of the same coin: whereas the mission describes why the organization exists (in a nutshell, a problem the organization wants to solve,) the vision describes a future world where the mission has been accomplished.

After the mission is considered, the next step is actually formulating the strategy of the company. Strategy is a very tricky term to define – we haven’t found a definitive answer we’re happy with – but a great way to think about it is as a series of decisions and tradeoffs that will maximize the chances of the company fulfilling its mission and achieving its vision. As we formulate the strategy, we can articulate a series of visions – future states of success – that are to be achieved along the journey. You may have heard, during the last decade, of companies’ 2020 Visions. These look different from a mission statement – it’s not so qualitative and inspirational, but more detailed and even quantitative where possible. An organization can have a 10-year vision, but also a 5-year vision, a 1-year vision, and even a vision for every quarter (we’ll talk about short cycles in a bit.) The important thing to consider about vision statements is that they articulate end states.

The visions and strategy go hand in hand: think about the strategy as the *why* behind the visions. For example, a Mexican company may have a 5-year vision of dominating its national market, a 10-year vision of dominating theNorth American market. In this context, strategy is an explanation of why the company chose to focus on the continent, and not expand to other emerging markets. Finally, there are OKRs, which help an organization articulate the gaps between its current state (let’s say, today) and its vision(s). OKRs are all about the critical few gaps that the company must close to get there, articulated as groupings of Objectives and their Key Results.
So to answer the question posed at the title of this chapter, an organization’s OKRs come from its mission, its strategy, and its visions/milestones.

Anyway, this is not an article about strategy formulation, nor about the broader discipline of strategy execution. It’s about the mission, and as you’ve probably noted at the start of this chapter, we think a mission has to do with why the organization or company exists. In the next lines, you’ll understand how we got there.

Towards a definition of organizational mission

At Qulture.Rocks we read many Silicon Valley pundits talking about mission statements and are amazed by how little clarity and how much confusion there is around what the term really means, why it exists, and how companies can leverage it the most.

Pundits (a general term for whoever thinks they know enough to try to define these terms) rarely agree on what mission is or what great specimens look like. As an example of how confusing it is, let’s look at what Jim Collins, the revered business author, says about the subject.

One of his most referred-to articles on the subject is “Building Your Company’s Vision,” which was published in the Harvard Business Review in 1996 and went on to become the core idea behind *Good to Great*, Collins’ very famous best-seller. In the first line of the article Collins and his co-author Jerry Porras write that “Companies that enjoy enduring success have a core purpose and core values that remain fixed while their strategies and practices endlessly adapt to a changing world.” I hope you can see why I’m citing this as an example of why it’s so hard to understand what mission and vision actually mean: in an article that’s about vision, Collins has a first-line talking about **core purpose**, which is something very close to the concept of a mission, and **core values**. Of course, they then try to clarify it a bit, and go on to say “[vision] has two principal parts: core ideology and envisioned future.” But hey, can we be a bit clearer?

To look a bit further, we Googled “how to build company vision.” On the first results page, we stumble upon an article on the Openview Venture Partners – a respected venture capital firm – website, written by portfolio CEO Firas Raouf. In the article, Raouf defines mission as “what a company is striving to be in the long term” and vision as “how it can get there,” asking “what things need to be executed to accomplish the mission?” This second excerpt is way worse, of course, and confuses more than only mission and vision, but also strategy and planning, but serves as a great example to further our point. Let’s move from pundits to the websites of large tech companies: Google and Amazon.

Google’s mission statement, for example, is “… to organize the world’s information and make it universally accessible and useful.” If we unpack it, there’s a first part that talks about how Google makes an impact on the world (organizing the world’s information and making it easier to retrieve), and a second part that talks about how Google wants the world to look (a world where information is organized and universally accessible and useful). By the way, the website (and the first results page for Google search for “Google vision”) has no mention of there being a vision. So it seems that what they call “mission” is actually a mix between a mission and a vision.

In talking about its mission, Amazon says “we aim to be Earth’s most customer-centric company. Our mission is to continually raise the bar of the customer experience by using the internet and technology to help consumers find, discover, and buy anything, and empower businesses and content creators to maximize their success.” Amazon doesn’t clearly define what is its actual mission statement, but when talking about it mixes what the company wants to become (“Earth’s most customer-centric company”) and why it exists (“to continually raise the bar of the customer experience…”).

It seems like these two giants don’t speak – at least to the outside – about their visions. They only talk about their missions. Now, if we read their missions, it’s still very hard to abstract a consistent pattern on what a mission should look like.

Now we go from the tech giants to the “old economy” for reference, and we get even more confused. Koch Industries, for example, defines its vision as: “Koch Industries is a trading, investment, and operating company that aggressively identifies and acquires companies in which it can leverage our strengths to generate superior earnings or market value.” Their mission is “Koch Industries seeks to maximize the present value of future profits. Doing so provides security and opportunity for stockholders and productive employees, while also benefiting customers and society….”

Now, unpacking Koch’s mission and vision is a trip. Their mission basically describes what business the company is in (buying out other companies for cheap, but companies where they have an edge). Their vision, on the other hand, describes what benefit the company wants to bring to its stakeholders (security and opportunity for stockholders and employees, and less explicit benefits to customers and society).
As you have probably inferred, after reading about how pundits, big tech, and the “old economy” talk about mission and vision, it’s impossible to deduce what these terms actually mean, and how a company should use them.

A startup-focused definition of mission

If you’re feeling more confused than when you started reading this article, that’s exactly how we felt when we tried to understand what an organization’s mission (and vision) statement looks like.

After this long journey, which included countless other references, we’ve settled upon the following definition:

The *mission* is the company’s purpose. It’s why it exists.

It helps to think, as Jim Collins suggests, “how would the world be negatively impacted if our company ceased to exist?” At Qulture.Rocks, for example, our mission is to “help people and organizations unlock their potential.” Google’s mission statement is almost there.

The *vision*, on the other hand, is how the world will look like if the company fulfills its purpose. Mission and vision statements are two sides of the same coin, and we think that this is a core reason why definitions are so confusing. Anyway, broad vision statements are pretty useless, so we recommend you stick with the vision for the purposes of defining what the organization is and what its boundaries are. More specific and time-bound visions, on the other hand, are very useful as a way to articulate what future end-states look like for the organization, and we’ll get into them in a bit.

Company x customer x shareholder-centric missions

Using broad strokes, the company’s mission can be company-centric or customer-centric. Google’s mission (or the part of it that looks like a mission by our definition) is customer-centric. If a customer reads it, she immediately relates the company’s impact on her own life. Koch’s mission, on the other hand, is company-centric. It basically talks about how the company makes money in very practical terms.

We believe missions should be as customer-centric as possible, and more abstract in nature. At Qulture.Rocks, for example, we’re not talking about anything other than the impact we were created to have on the world.

Another good guideline is to not mention your line of business in your mission statement. Paraphrasing Simon Sinek, it should be more about the *why*, and less about the *how* of your company’s impact. The how is more about strategy and tactics: how the company chooses, today, to bring that impact to the world. However, that can change if it ceases to be the most efficient way to do it.

For example, we don’t cite software or technology in our mission statement. That’s because we’re about cultures that rock, and not about software. Software is how we choose to pursue our mission, but it can change to another thing (content, consulting, wearables) if we think that would cause more impact.

Back to Google and Amazon

Now that we’ve – hopefully – agreed on the definition of a mission and vision statement, let’s go back to Amazon’s and Google’s mission statements and see how they pass our test.

Again, Google’s mission statement is “to organize the world’s information and make it universally accessible and useful.” It’s kind of a blend between a mission and a vision. The first part looks like a mission: Google exists to organize the world’s information and make it easy to access. However, it gradually blends into a vision, because it gives us a vivid description of what the world will look like if they’re successful: a world where all information is easy to access and useful. We’d give it a 7.

Amazon, on the other hand, has a worse mission statement. As we saw earlier, it reads “to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.” That looks much more like a vision statement to us, and quite a company-centric one, for that matter. It describes a future, but in terms of what the company will look like in the future, and not how the world will look.


Notes:

[1] I recently learned that this is called an epigraph.

[2] Drawing heavy inspiration from Ali Rowghani from Y Combinator in his “The Second Job of a Startup CEO“ [3]

[3] OKRs: From Mission to Metrics can be found in its latest version here and for free. Bear in mind that it's a work in constant progress. The good thing is that if you download it via Lean Pub, you'll be notified whenever I release a new iteration.

The never-ending cycle of disruptive innovation in enterprise software

Unlocking Potential is a newsletter by me, Francisco H. de Mello, CEO of Qulture.Rocks (YC W18)

This is the second update to a post published originally in 2019 (Substack won't allow me to update the publishing date nor send you the updated version). Here's the much-updated version.


“Disruptive” innovation

It doesn't mean what most people think it means.

Some people think about the creation of something new. About a new solution to a problem. Big product innovations come to mind, like the Oculus Rift, for example. The more radical the new thing is as compared to previous things, the more “disruptive” sounds like a good adjective for it.

Other people tie disruption less to innovation and more to whenever an incumbent firm - a big, well-established player in a given market - gets its lunch eaten by a new competitor, especially if said competitor is viewed as a “tech company.”

Disruptive innovation means neither.

The term - and the concept that gives substance to the term - was created by Clayton Christensen in his The Innovator’s Dilemma to mean the process in which an attacking company - usually a new entrant - enters a market with a smaller war chest, less technological prowess, and, most importantly, a simpler, cheaper offering of some incumbent's product or service, and ends up, after some time, totally displacing the incumbent's comfortable initial market position.

There's a lot to unpack here.

Incumbents and sustaining innovation

The first important ingredient for disruptive innovation to flourish is an incumbent (or incumbents) trying to outdo each other with incremental sustaining innovations. Sustaining innovations are those that “improve” a product along an established angle. According to Christensen himself,

Sustaining innovations are what move companies along established improvement trajectories. They are improvements to existing products on dimensions historically valued by customers. Airplanes that fly farther, computers that process faster, cellular phone batteries that last longer, and televisions with incrementally or dramatically clearer images are all sustaining innovations.

Faster or longer-range planes, faster computers, smaller phones, are all, et ceteris paribus, sustaining innovations that usually happen in an incremental fashion - small bits at a time.

In most markets, competitors will try to outdo each other in terms of incremental sustaining innovations in their never-ending quest for differentiation and pricing power which, when successful, lead to higher prices and better gross margins.

(It's important to note that some markets have even worse dynamics where products get better every year but prices go down every year. Think about flat-screen TVs, for example, that get thinner, smarter, more bright, higher resolution, but also much cheaper, or at least not more expensive. We'll ignore these markets for the purposes of disruptive innovation.)

Attackers and disruptive innovation

So on the one hand we have incumbents fighting each other by trying to improve their products around well-known product attributes. Products get ever more sophisticated and expensive.

What inevitably then happens is that some portion of the market's customers become overshot (a critical concept of the theory). For this portion of the market, products end up becoming too complex and too expensive. They don't really need all that functionality.

That's the opening a disruptive innovation needs to do its thing.

Disruptive innovators then enter this market by offering a cheaper, simpler product or service that is good enough (another key concept of the theory) for the overshot portion of the market.

What makes disruptive innovations so wicked is what comes next.

You might think “well, all pretty simple: why doesn't the incumbent build an offering to compete on the overshot segment of the market?” And the pernicious answer is “because it's not the ‘rational’ thing to do.” The ‘right’ thing for an incumbent to do given such a competitive setup is to give up this overshot segment because said customers don't value the stuff that's most dear to the incumbent: the innovative features it has worked so hard to introduce. Not only that but offering something simpler and cheaper will often cause a deterioration in margins and cannibalization of the incumbent's brand.

Therefore, most incumbents that are faced with disruptive innovation in their markets will usually ‘rationally’ retreat from the more overserved low-end of the market and double down on the less overserved high-end of the market. And that's their death kiss. The disruptive attacker enters the market by catering to formerly overshot customers but will start introducing sustaining innovations that will gradually eat its way up the market until the incumbent is totally displaced or relegated to a niche.

The fact that ‘rationality’ will almost always drive incumbents to their demise is what makes disruptive innovation theory so interesting. Again, Christensen in Seeing What's Next:

The theory holds that existing companies have a high probability of beating entrant attackers when the contest is about sustaining innovations. But established companies almost always lose to attackers armed with disruptive innovations.

Enterprise software: an incredibly fertile ground for disruption

Enterprise software is an incredibly fertile ground for disruptive innovation. Let’s take the example of Salesforce to illustrate that assertion.

Salesforce’s CRM offering goes much further than what a “simple” CRM is expected to do: aside from storing prospective customer information and allowing for a pipeline of deals to be managed, it has all sorts of bells and whistles, such as industry-specific reports, complex workflow automation, AI, an app store, and LOTS of flexibility that cater to all different sophisticated customer needs; it costs a lot and takes long to be implemented. And Salesforce keeps adding incremental sustaining innovations to the product every year and causing a bigger and bigger portion of the market to become overserved.

If we analyze Salesforce as the incumbent to be disrupted, one of the most obvious candidates for the role of the disruptive attacker would be Pipedrive: a simpler, cheaper version of Salesforce’s CRM offering that gets “the job” done just fine for a great number of customers, but for much less of a - time and money - hassle.

(Here, the concept of a “job” is important: a job, or job-to-be-done, is the actual progress a customer can make given a set of circumstances. Sales managers probably need more process, organization, and data so, therefore, they buy a software product and some services to do just that. And that product is usually a CRM system.)

If we take into account that Salesforce’s CRM is a multi-billion dollar business, there are opportunities for new entrants to build simpler, cheaper solutions that get the basic job done for half of the price, and half the time-to-value, and still, build huge companies in the process.

Watching a keynote by Stripe founder Patrick Collison the other day, I stumbled on the following passage:

This is really key a very important part of the stripe strategy is we're building for businesses of every size we're building for the highest potential graduates of accelerators around the world and we're building for some of the biggest companies in the world as you all know the sort of standards pattern in enterprise software for some innovative product to come along you get kind of pulled up market it gets a bit kind of longer the tooth a bit stagnant a bit a bit calcified and then in turn it's replaced by some you know nimbler and more agile upstart this is the software cycle of life this of course really bad for the customers who get stuck using the old version and so this is why we obsess over startups startup to some of those demanding customers in the world they can't tolerate complexity and they simply won't put up with outdated technology and so our strategy is very deliberately to serve both ends of the continuum and every point in between this ensures we can provide the most powerful functionality to the youngest companies in the world and that we can provide the most forward-thinking technology to the largest and the most established.

What Patrick is saying, essentially, is that by continuously focusing at least part of their efforts on the startup market, they will decrease their chances of being disrupted by a new entrant to their market.

Smart guy, isn't he?

Disruptive innovation in repeat mode

The most interesting thought experiment I've come to grapple with lately is that there seems to be no proper equilibrium in some more disruption-prone markets, such as enterprise software.

Even if no new technology paradigm comes into existence in a given application area, players will always innovate up-market until a portion of it is overshot and an up-and-coming disruptor arises. And said disruptor will go on to become the market “leader," only to predictably create a new wave of overshot customers and a wedge for a new disruptor. On and on and on and on. Am I crazy?

Of course, some factors may absorb this propensity. Most of what I can come up with seems to have to do with moats (a subject I explore extensively in this article). Salesforce, for example, doesn't seem to be undergoing a violent disruption, and I would guess a big reason for that is its brand, the (sort of) network effects that arise from its vast third-party developer ecosystem and its implementation partner network, and also the fact that most of the market's growth comes from the conversion of non-consumers into consumers, which gives players like Pipedrive (and Hubspot and RD Station and Base, only to name a few) a long runway to go until they start bumping into Salesforce.

My bearish stance on Slack and its acquisition by Salesforce

Unlocking Potential is a newsletter by me, Francisco H. de Mello, CEO of Qulture.Rocks

"It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows, in the end, the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat."

Theodore Roosevelt in The Man in the Arena


I have been fascinated by the Slack x Microsoft Team s competitive battle for some time. I felt like I was witnessing one of the great competition stories of the enterprise software market firsthand. This week's acquisition of Slack by Salesforce jerked me back into thinking about it, and I decided to write a follow-up note in part to brag about past predictions and in part to build on them.

My previous take on Slack's prospects as a long-term investment

I'm not sure if you'll remember, but in June 2019, I wrote on this very same blog that I wasn't really bullish on Slack stock as a long-term investment. I'm not one to brag, but I feel that this has been one of my good calls (there are plenty of bad ones I shall not discuss). Back then, I concluded my piece by saying:

"The Microsoft threat is so big that I wouldn't be willing to hold Slack stock on the long run. I wouldn't buy it if I were Warren Buffet anyway."

Looking back, I think my thesis could have been 10x more well developed. Anyway, my reasons for that conclusion were mainly based on the strength of Slack's main competitor: Microsoft and its Teams offering. The supporting arguments were pretty straightforward.

The first was Microsoft's unbeatable partner ecosystem that would help it gain scale at a much faster pace, both in large enterprises as in middle-market enterprises, which were critical segments for Slack's growth. I wrote:

"Selling to the enterprise is a pretty specific muscle, that's hard to train. Microsoft has nailed it by cultivating a direct sales force and a huge channel partner ecosystem that sells and implements their products worldwide. Slack, which until only months ago boasted not having any salespeople, is still a toddler on that front. Slack is still a company hoping to be a long term success with a killer product; Microsoft has already gotten the fact that it is the distribution channel that matters in the end."

The second was that Teams was natively integrated with Microsoft Office, a staple everywhere outside of tech. I wrote:

"The point is: Microsoft and its Teams product is an incredibly strong contender on this fight. It has a huge share of wallet on basically all relevant enterprises globally. So a very relevant question would be how much better is Slack vs. Teams so that a CIO (and this is a CIO type of purchase) will buy in instead of just plugging Teams in its stack? Alas, Teams has much better Office integrations, which are still a huge part of “where work happens” [1] on the enterprise."

Both of these points would be made a bit over a year later by Ben Thompson in his Stratechery article called "The Slack Social Network." I am reasonably proud of that, him being one of the most well-read and well-articulated tech and strategy writers out there, even though I'm not one to brag, as I said.

Ben Thompson called Microsoft's partner ecosystem "a gargantuan moat":

Microsoft’s partner network is a truly gargantuan moat. When it comes to enterprise, it is easy to focus on the biggest companies, where Microsoft will engage directly, and challengers like Slack can build up sales forces to compete. Underneath those companies, though, are tens of thousands of smaller businesses that, even if they have IT directors of their own, rely on outside vendors to build up their technical infrastructure.

And mentioned the Microsoft suite of products and its native integration with Teams as a huge reason for Microsoft's win over Slack (to be very honest, Thompson was basically saying that Teams had already beaten Slack, and not that it was likely to beat Slack.):

This is what Slack — and Silicon Valley, generally — failed to understand about Microsoft’s competitive advantage: the company doesn’t win just because it bundles, or because it has a superior ground game. By virtue of doing everything, even if mediocrely, the company is providing a whole that is greater than the sum of its parts, particularly for the non-tech workers that are in fact most of the market. Slack may have infused its chat client with love, but chatting is a means to an end, and Microsoft often seems like the only enterprise company that understands that.

Having Ben Thompson repeat my arguments a year later already felt good. But Slack's stock price also pointed my way, even though Mr. Market is clearly not a very trustworthy arbiter of truth. After its direct listing, at around $38 bucks, it was trading at $25(ish) a year later (and days before rumors about a Salesforce deal started to emerge).

Curiously, Slack's stock didn't benefit from the tailwinds of COVID-19 and the remote work push we all got. If we compare its performance against Zoom's, we get a really bleak image, or shall I say graph?

My take is that Mr. Market was putting more weight on Microsoft's competitive pressure than on the supposed tailwinds that a more remote world would bring to Slack's back. And I think it was right in doing so. Before the listing, and as I pointed in my earlier article, a lot of Slack's growth had come from enormous enterprises. But lately, as noted by Nathan Baschez, Slack's growth among huge companies (I am guessing (year-on-year (run-rate ARR) growth) from large customers) was falling a lot.

That means Slack was having trouble selling into larger companies, probably because, as I predicted, CIOs preferred the cheaper-for-MSFT-customers, better-integrated Teams (over Slack).

There is one final argument supporting, at least in part, my argument for Teams' success: the sharp growth in its user base, especially relative to Slack's. Check out this chart from Statista:

Twelve million DAUs was the last stat published by Slack before the pandemic. Teams had just released it had already blown past Slack and most recently published an even more whopping number of more than 100m DAUs, whereas Slack remained silent ever since.

Now, I'm totally aware of how bad this argument is in a vacuum. First, because Microsoft gives Teams away for free for a bunch of Office subscribers. Second, because it is rumored to install Teams even though the customer may not have consciously clicked "install," and even worse, it is rumored to be a *very* difficult app to remove from your computer. Third, because Teams has all the voice and video capabilities developed by the MSFT acquisition of Skype, it is just fundamentally hard to compare with Slack's chat proposition.

I'm also aware that even though it looks terrible, Slack's decision not to publish DAUs anymore makes sense. DAUs x DAUs were probably comparing apples to oranges (Slack's engagement was probably much higher), and it was a metric on which Microsoft would look better no matter what. So why pour more fuel on the fire pit?

On the other hand, as flawed as these data are, they do reinforce my main point: Microsoft's distribution can make Slack's life really tough. First, because everybody uses Office, so being natively integrated with that is a plus. Second, Microsoft's huge partner network allows worldwide penetration to the enterprise ex-Fortune 1000 (where a lot of Slack's growth came from, but as we saw most recently started to slow). And I think solid growth on the (global) enterprise market is what would justify Slack's pretty rich valuation at the time of the listing (not to mention a reasonably healthy performance going forward,) and its absence, apparently perceived by Mr. Market, is what hammered its price performance.

Revising my thesis

As I said, I didn't really like my previous piece on Slack's prospects. It could have been 10x better, even though it had some good arguments in it and a conclusion I still kind of believe in. The part that was reasonably well developed was the reason I believed Microsoft Teams would beat Slack. The part that was very poorly developed was at what game such a beating would happen. In other words, what was Slack pursuing, and why that pursuit would be unfruitful because of Teams.

Slack's vision

I'll never know for sure what was Slack's vision for its success, but I'd guess at some point, Stewart, his team, and his investors believed Slack could become something like an enterprise super app. By enterprise super app, I mean a front-end to everything that goes on inside an enterprise, such as business apps (CRM, HR stuff, marketing automation, ERP, et al.).

The reason for my belief is many-fold: whoever is going to become the enterprise super app has to be a high engagement, company-wide app to begin with. And communications, such as email and now chat for a growing number of companies, are probably the most horizontal, highest engagement apps, at least in the western world.

Also, because Slack was showing behavior that pointed in that direction. It was trying to be a hub of integrations, such that Google Apps, Office, even Qulture.Rocks, had widgets that allowed said other apps' workflows and even files to be manipulated and/or consulted from inside Slack.

Enterprise super app being a hugely aggressive ambition, Slack's drive to transform its app into a platform, on top of which developers could build proper apps (and a marketplace that went with it) made sense.

Finally, Slack was expanding a lot away from chat. It built voice messaging. It built Slack calls. I think at some point, it even built video calls, just like the ones we do on Zoom or Google Meets.

The most important point, though, is that to really become the global enterprise super app, Slack had to become the global enterprise communications standard. It couldn't be a niche player. It had to become a $100 billion-plus company. Not a decacorn. A fucking crazy story, like what-the-fuck-is-going-on-here story. And because the company's listing was done at $38 (i.e., that would be my entry point), that's a very probable type of outcome that an investor in Slack for the long run (something I wasn't willing to be) could have been chasing.

Enter Microsoft Teams. Why I think Teams would beat Slack was something I've already elaborated upon. Distribution and Office.

The bullish case: The social network argument

Even though Ben Thomson was bearish on Slack's competition against Teams overall, he was bullish in two aspects. He thought Slack had a chance to win by a) focusing specifically on chat and b) creating a cross-company network of Slack instances (something that Slack had introduced a bit earlier called Slack Connect. With Slack Connect, two companies can essentially create joint channels where people from both companies can talk. Even more, individuals from both companies can DM each other as well. I wasn't very convinced).

Thompson's argument wasn't that Slack could win head-on, but that Slack could win by focusing on chat and pursuing the multi-company angle, while Teams could keep focusing on being "the front-end of all your apps in the cloud." He said:

Slack Connect is about more than chat: not only can you have multiple companies in one channel, you can also manage the flow of data between different organizations; to put it another way, while Microsoft is busy building an operating system in the cloud, Slack has decided to build the enterprise social network.

Stewart Butterfield, CEO of Slack, echoed this strategic angle, in an interview he would later concede to the very same Stratechery. First, he exalted the importance of chat:

There are two things I think that are worth talking about that I’d push back on. One is just the word “chat” because it indicates that this stuff isn’t important. If you’re a manager, executive, leader, more or less, a hundred percent of your job is communication. If you average it out across the entire company, something like 50% of people’s time will go into really basic acts of communication and coordination, so I don’t mean like interesting strategic creative conversations. I mean daily standups and status reports and basically every bit of effort that goes into the creation of a presentation that’s going to be shown at a meeting because the point of the meeting is just to tell everyone the same information so everyone has access to the same information and it’s calibrated. So if that’s what people are spending their time on, it is important. I can’t remember the exact line, but something like, “if your job is to chat all day, then Slack would be a good choice.”

Second, I don't remember where it was, but I remember reading some quote about Stewart downplaying Teams as a competitor. Yes. The guy who took the whole page ad on the New York Times to "welcome" his new frightening competitor started to change the narrative and say Slack was just another thing. It was very focused on chat, whereas Teams was another thing.

I could agree with Thompson that a narrower chat focus could be a good thing for Slack. Qulture.Rocks uses Slack, and I don't see us moving anywhere else. BUT, I don't think our enterprise customers will use Slack for the time being.

Most importantly, I don't think the Slack Connect thing can reverse the trend of losing to Microsoft Teams in the global enterprise arena.

I still think that IF this enterprise super app becomes a network effects play, Microsoft's big distribution advantage (which is its biggest advantage, to begin with) will give it an even greater chance of building said network. A bit after the post, I commented on the Stratechery forum:

IMHO, if Slack succeeds in making the shared channel a thing in the category (which will make Microsoft further copy it with all its horses and men), it will probably (and inadvertently) make its own competitive position even weaker in the future, since as you said Microsoft will just become much bigger (free, the partner network, and so on), and thus a much better “social network.” If there’s one company that can win in a network effects play in the enterprise it’s Microsoft with its Office penetration. WDYT? What am I missing?

I'm not saying Slack Connect isn't an amazing experience. It is. I experienced it firsthand a little while ago when one of the funds that invest in Qulture.Rocks set up a shared channel between themselves, myself, and all other founders of all other portfolio companies. Pretty seamless shit. I can essentially hop in that channel without changing instances. I can even DM somebody that's on that channel as if this person worked at Qulture.Rocks. It's really, really good.

My point is that it doesn't really help Slack become a global standard. It probably generates network effects within specific sectors like the tech + VC intersection, I won't argue. But how much of a return on a $25 billion valuation can you get by being the chat app of choice of the tech + VC ecosystem? Not sure. At gunpoint, I'd bet not much.

Slack and Salesforce

Anyway, this week Salesforce announced it was acquiring Slack for $27 billion (or was it Slack announcing it was being acquired by Salesforce? Anyway...). You might argue that a $27 billion is not too shabby, but let's note that it was clearly not the outcome the company was looking towards as it listed its shares for more than that a year ago. It was clearly trying to become something HUGE (we've already touched on that).

But I guess a year later, Stewart Butterfield was tired.

There are many reasons why he could be tired.

For one, he could have become tired of the fight against Microsoft (not judging - I would probably do the same if it were me) for large enterprise company-wide deals (they talk about the wins but don't really talk about the losses).

He could also have been very discouraged by the stock price gap between Slack and Zoom.

He could have been bearish about how Slack's stock might perform in the short to mid-term and the potential effects of such price action on company morale and customer buying decisions.

The point is, he decided to sell. And to sell for less than what the company was worth when it was listed in the first place. That could mean many things, but being bullish on his company's prospects could not have been one of them.

And, he sold to Salesforce. At that size of a deal, you don't have many potential suitors. He could have sold to Oracle, Google, SAP, Zoom, Amazon, Salesforce, and maybe a handful of other companies. Not Microsoft, because of antitrust concerns. But my main point is that none of these companies is really a dream home for your baby. Benioff attends calls from Hawaii on top of an elliptical (as relayed to me not only by some bulge bracket publication I can't remember but also by an enterprise software CEO with many years at Success Factors.) Oracle would frighten the shit out of any Slack employee - too frat of a culture. SAP kind of the same, but less colorful. Zoom is weird. Amazon is in Seattle. Google is evil (but might have been the best fit - was it frightened by its own antitrust worries?). You get the picture.

I'm not really going to go into the discussion of what were Salesforce's motives were, but I'm trying to reinforce the point that selling Slack to such companies was probably not a dream come true to Stewart. To reinforce the point that his stance for Slack was probably not that bullish. To reinforce the point that I was probably right in the first place, almost a year and a half ago.

Cheers,

Kiko

Notes and bibliography

https://unlockingpotential.kikomello.com/p/would-you-be-a-slack-shareholder

https://sec.report/Document/0001628280-19-004786/

https://www.theinformation.com/articles/slack-ceo-downplays-microsoft-as-factor-in-salesforce-deal

https://www.theinformation.com/articles/slack-ceo-downplays-microsoft-as-factor-in-salesforce-deal?utm_content=article-5093&utm_campaign=article_email&utm_source=sg&utm_medium=email

https://stratechery.com/?s=slack

https://www.nytimes.com/2020/12/02/technology/marc-benioff-salesforce-slack-microsoft.html

On performance at work

Unlocking Potential is a newsletter by me, Francisco H. de Mello, CEO of Qulture.Rocks (YC W18)

Hello!

After a long hiatus, about which I pretend to talk about later, I wanted to write about a topic I've been thinking about a lot: performance, more specifically at work.

Every entrepreneur on earth wants her company to perform at its best, or at its fullest potential. In order to make that happen, each and every person in the company has to perform at their best.

But what is performance? How can we influence performance? What are its components and determinants?

That's what I want to discuss in this essay. I hope you come out on the other side with a better mental model of what is performance and how to drive it.

Performance = NPV of behavior(s)

Let's start with a working definition of what performance actually means.

The title above is not quite true but points to the truth [1]. Performance is the value of the behaviors of an employee in a given period of time. Let's break down the definition.

First, we talk about behaviors. Behaviors are the work. It's writing lines of text - or code -, calling customers, designing UIs, posting stuff on social media, running webinars… you get the picture.

Second, we talk about value. Here, it helps to think that each relevant behavior we take at work has a net present value, or produces a tilt in the company's future cash flows, even if minimal. We hope, of course, that the value is positive, or added, and not negative, or subtracted. But people work for organizations because they are able to offer value to the organization, ideally more value than they cost in terms of salaries and so on and so forth.

If we analyze all these relevant behaviors for a given period - let's say a year - we can theoretically add up their NPVs, compare said NPVs with the NPVs of previous periods, compare the NPVs of different employees, and so on.

Results: Abstracting performance

We frequently equate performance with results, but results are abstractions created to make our lives easier. One such abstraction we frequently call a “result” is improving KPIs like sales or profits. We could also say that for somebody as experienced as salesperson A, selling 100 dollars is about right, and therefore sales of 90 mean something about their performance.

But just like the map is not the terrain, results are not value-added per se. If I sell X dollars of product, the amount sold is not my performance. These are proxies, and we have to be very aware of that status and its potential limitations.

There are two problems with blindly equating (in the case of salespeople) sales dollars with performance. The first problem is that several other factors outside of the salesperson's control may have contributed to the number being 90 (and not 50 or 120). For example, a lead may have come referred by the CEO converted into a 20 dollar deal. The Government may have pushed a bill that created regulation in the industry covered by the salesperson in a way that her product became necessary - or obsolete -. The salesperson may have caught COVID-19, and therefore spent two weeks at home, unable to work because of the symptoms. You get the picture. The point here is that presuming 90 dollars is a good measure of how much value was added to the company, two salespeople with results of 90 dollars in sales in a given period may have very distinct performances because there may be different factors play influencing said result.

The second problem is that many factors may influence how much value the 90 dollar sales figure actually generates for the company. In other words, to presume that the 90 dollar figure is a good measure of how much value was added to the company is frequently dangerous. For example, the salesperson may have - even knowingly - sold a deal that is very likely to churn in the short-run; the majority of the deals sold by the salesperson may be into a low-growth industry, which is very unlikely to bring upsells in the lifetime of the contract; the pricing may just be off - too cheap, eating margins, or too expensive, causing reputational risk. The point here is: the 90-dollar figure produced by two different salespeople may mean a very different value-added to the organization.

Btw, people also use goals as proxies for performance. If my goal was to sell 100 dollars, and I sold 90 dollars, I hit 90% of my goal. That's abstracting performance a level further. We decide how much someone should bring in terms of results and measure “performance” against said expectations. So goals are also not performance per se.

I know you must be thinking I'm going too deep into the sales examples. The interesting thing is I wanted to take down the case where equating performance with a measure or the attainment of a goal (or quota, in industry parlance) is easiest.

If we move to other functions within a company, the gap becomes wider.

Let's think of what performance means in the reality of a developer. Based on our definition, performance would mean the developer's behaviors that produce positive value for the organization. For example, shipping code that then becomes a feature that customers use could be an example of a performance sample. Doing so with clean, understandable, reusable code is an even better example since the developer prevents problems that will happen in the future (and subtract from future cash flows). But would you feel comfortable equating the number of lines of code merged by the developer as value-added to the organization? How about if you threw in an additional measure of code health? Or the number of comments said code gets from code reviewers within the team? Even then, I think you wouldn't want to do that. It's just too crude an abstraction.

Even though I'd say 99% of top sales organizations mix the concepts of performance and quota attainment so much that there seems to be no distinction between the two, I think it's ok to do so in the case of sales: weighing costs and benefits, you'll be fine. I just wanted to point out how severe the limitations of doing so are, especially given that doing so for most other functions shows even more severe limitations.

The determinants of performance

How can we enhance performance? What does it take for someone to perform? Or even better asked, what makes, et ceteris paribus, one person perform better and another perform worse? That's the realm of performance determinants.

There are three determinants of performance: declarative knowledge, procedural knowledge, and motivation.

In a nutshell, these mean, respectively, knowing what to do, knowing how to do it, and wanting to do it.

Declarative knowledge, or knowing what to do, is a matter of education (I, for example, know what a DCF is, know how an income statement, cash flow statement, and balance sheet work, and so on and so forth. It is also knowing what I must do in the specific case at hand: I need to perform a valuation analysis of Acme Inc., by Friday, with the goal of helping my boss make the case of whether our firm should invest or not in Acme Inc.). According to Wikipedia (which has some great easy-to-grasp examples):

In epistemologydescriptive knowledge (also known as propositional knowledgeknowing-thatdeclarative knowledge,[1][2] or constative knowledge)[3][4] is knowledge that can be expressed in a declarative sentence or an indicative proposition.[5] "Knowing-that" can be contrasted with "knowing-how" (also known as "procedural knowledge"), which is knowing how to perform some task, including knowing how to perform it skillfully.[1] It can also be contrasted with "knowing of" (better known as "knowledge by acquaintance"), which is non-propositional knowledge of something which is constituted by familiarity with it or direct awareness of it. By definition, descriptive knowledge is knowledge of particular facts, as potentially expressed by our theories, concepts, principles, schemas, and ideas.[6] The descriptive knowledge that a person possesses constitute her understanding of the world and the way that it works.[6]

Procedural knowledge, or knowing how to do it, is knowing how to apply declarative knowledge. It's a bit fuzzier, but means I know how to actually go about doing the DCF, or, better, how to apply the declarative knowledge I have in practice. Wikipedia does a great job of describing procedural knowledge:

Procedural knowledge (also known as knowing-how, and sometimes referred to as practical knowledgeimperative knowledge, or performative knowledge)[1] is the knowledge exercised in the performance of some task. Unlike descriptive knowledge (also known as "declarative knowledge" or "propositional knowledge" or "knowing-that"), which involves knowledge of specific facts or propositions (e.g. "I know that snow is white"), procedural knowledge involves one's ability to do something (e.g. "I know how to change a flat tire"). A person doesn't need to be able to verbally articulate their procedural knowledge in order for it to count as knowledge, since procedural knowledge requires only knowing how to correctly perform an action or exercise a skill.

Motivation, to end our triad, means to want to do something. We can further break down motivation into three components. One is the choice to do something. I either want to do it or not. It's binary. Another is the level of effort I want to expend in doing it (if the choice was “yes”.) The final one is the duration of the effort I want to expend: for how long I'm willing to sustain the level of effort chosen. Another way to put it is direction, amplitude, and duration (Campbell 1993).

I want to run the marathon, I want to go hard, and I'm willing to go hard for the three or four hours necessary to complete the race [2].

Measuring performance

Now we get to an important consequence of our discussion of what performance actually is: measuring performance. Measuring performance is really important because it allows us to a) improve performance and b) reward performance.

One common way to measure performance is to measure what organizations believe are two different aspects of performance: behaviors, on the one hand, and results, on the other hand.

HR professionals usually think these are actually two different aspects or dimensions of performance. Results are “what” someone does. Behaviors are “how” someone does the “what.” But understanding what performance really is allowed me to have a better perspective on this [2].

When I started to think deeply about performance, I realized that behaviors and results are not “what” and “how,” or different aspects of performance, but actually different measures of the same thing.

Behaviors are what we should actually be focusing on. We should try to look at all the relevant behaviors someone had in a given period, and assess how much value these behaviors added and subtracted to the organization. And this is a really hard task. So hard that we've tried to find a shortcut, and that shortcut is results.

Results are proxies for the value said behaviors generated to the organization, but they are pretty flawed, even though they are much easier to analyze. It's much easier to not have to shadow a salesperson all year long and observe her behaviors, opting instead to just gauge how much she actually sold in dollar terms (or how much she sold against her quota) and triangulate some measure of performance.

But pairing both doesn't mean looking at the “what” and the “how.” It means looking at performance with two different tools that aim to measure the same thing. In the sales example, that even makes sense: since both tools are flawed, how about pairing them and getting the average?

In other functions, we don't even have reasonable results, so we may just look at behaviors. That would be useful for developers, designers, finance and accounting professionals, brand marketers, etc.

Improving performance: working “harder” or “smarter”

How does performance improve? Two ways: effort or development.

This is really interesting.

A salesperson (let's call her A, for consistency's sake) can improve her production by working 30 minutes more every day to do an additional call, resulting, given a constant conversion rate of calls to deals done, in an additional amount of dollars or logos sold.

Salesperson A has another way to improve her performance: tweak her sales pitch in order to improve her conversion rates and, given a constant commitment of hours, sell more.

We could call these two alternatives "working harder" and "working smarter," to be aggressively simplistic.

You can argue that improvements by "working smarter" are more durable because it's harder for them to recede. Once you do your better pitch, why would you revert to the old one? "Working harder", on the other hand, is more volatile. If you're not feeling well, lost a bit of motivation, etc., you can just work less and then produce less.

Takeaways

This was supposed to be an essay, in the sense of an unstructured exploration of a topic without a clear thesis or conclusion. But if you could take one thing with you, I'd urge you to take this: performance is the value that people's behaviors add to an organization. Results and goal attainment are not performance, but proxies for performance. In order to really assess performance, you'd have to shadow people around on all work-related situations and then add the value-added up.


[1] Most of what I discuss in this article can be traced back to Campbell (1993). It's a great piece of work [4].

[2] This example still isn't as crisp as I wanted it to be. It doesn't feel 100% right, especially the “duration of effort” part.

[3] I usually hate these “what” and “how” analogies. In the realm of OKRs, John Doerr explains that objectives are “what” we want to achieve, and key results are “how” we will achieve these objectives. So much trouble has been caused by this terrible explanation.

[4] Campbell, J. P., McCloy, R. A., Oppler, S. H., & Sager, C. E. (1993). A theory of performance. In N. Schmitt & W. C. Borman (Eds.), Personnel selection in organizations (pp. 35–70). San Francisco, CA: Jossey-Bass.

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