By Ivan Hlavanda
As we are going through some reorganization, reinvention as Huawei is looking for new directions, some voices are rising and saying that we should adopt start Up culture. After studying current Tech trends and Start Up culture, I came to definite conclusion that entire Start-up revolution is next financial bubble and start-up companies are just serving as financial instrument to enrich view elected, instead of making valuable inputs into progress of humankind. One of the book that I can recommend for this topic is from Dan Lyons, book called Disrupted. Let me use few fragments and quotes from Dan, as he was witnessing this fraud from inside of Silicon Valley:
Start of Quote:
It turns out I’ve been naïve. I’ve spent twenty-five years writing about technology companies, and I thought I understood this industry. But at HubSpot I’m discovering that a lot of what I believed was wrong. I thought, for example, that tech companies began with great inventions—an amazing gadget, a brilliant piece of software. At Apple Steve Jobs and Steve Wozniak built a personal computer; at Microsoft Bill Gates and Paul Allen developed programming languages and then an operating system; Sergey Brin and Larry Page created the Google search engine. Engineering came first, and sales came later. That’s how I thought things worked. But HubSpot did the opposite. HubSpot’s first hires included a head of sales and a head of marketing. Halligan and Dharmesh filled these positions even though they had no product to sell and didn’t even know what product they were going to make. HubSpot started out as a sales operation in search of a product. Another thing I’m learning in my new job is that while people still refer to this business as “the tech industry,” in truth it is no longer really about technology at all. “You don’t get rewarded for creating great technology, not anymore,” says a friend of mine who has worked in tech since the 1980s, a former investment banker who now advises start-ups. “It’s all about the business model. The market pays you to have a company that scales quickly. It’s all about getting big fast. Don’t be profitable, just get big.” That’s what HubSpot is doing. Its technology isn’t very impressive, but look at that revenue growth! That’s why venture capitalists have sunk so much money into HubSpot, and why they believe HubSpot will have a successful IPO. That’s also why HubSpot hires so many young people. That’s what investors want to see: a bunch of young people, having a blast, talking about changing the world. It sells. Another reason to hire young people is that they’re cheap. HubSpot runs at a loss, but it is labor-intensive. How can you get hundreds of people to work in sales and marketing for the lowest possible wages? One way is to hire people who are right out of college and make work seem fun. You give them free beer and foosball tables. You decorate the place like a cross between a kindergarten and a frat house. You throw parties. Do that, and you can find an endless supply of bros who will toil away in the spider monkey room, under constant, tremendous psychological pressure, for $35,000 a year. You can save even more money by packing these people into cavernous rooms, shoulder to shoulder, as densely as you can. You tell them that you’re doing this not because you want to save money on office space but because this is how their generation likes to work." Old-guard tech CEOs seem baffled by the phenomenon of companies that operate for years in the red. “They make no money! In my world you’re not a real business until you make some money,” Steve Ballmer, the former CEO of Microsoft, said about Amazon in 2014, a year when the company lost $241 million yet saw its market value climb to $160 billion. Oracle CEO Mark Hurd, another old-guard business guy, expressed similar astonishment about Salesforce.com. “There’s no cash flow,” he said about that company in April 2015. “What are they worth right now? $35 billion?… It’s crazy, just crazy.” That was nothing. A few months later Salesforce.com was worth more than $50 billion. One consequence of not making profits is that companies don’t last as long. In 1960, the average lifespan of a company on the S&P 500 index was just over sixty years, while today it is less than twenty years, according to Innosight, a research and consulting organization. Another consequence is that the spoils are distributed less evenly than in the past. The disparity between CEO pay and the pay of the average worker has been widening since 1965, but the huge leap occurred during the dotcom boom, according to the Economic Policy Institute. In 1965, the average CEO made 20 times as much as the average worker. By 1989 that ratio had edged upward to about 60. But in 1995 things went nuts. The average CEO was making 122 times as much as the average worker. By 2000, the CEO-to-worker compensation ratio reached 383, according to EPI. The ratio now stands at about 300. People at the top are taking more of the pie. That’s irksome enough, but even more so when you realize that some of the founders who are raking in so much money for themselves are doing so while running companies that don’t make a profit and that treat employees in ways that would have been unthinkable only two decades ago. “Our most important assets walk out the door every night,” was the mantra I heard from tech CEOs when I covered technology companies in the 1980s and 1990s. At Microsoft, “everybody made money, including secretaries,” my friend Mike, the former Microsoft employee, recalls. “Microsoft made tens of thousands of millionaires. The company was incredibly supportive of people facing personal issues. If you had cancer they would keep you on payroll and not expect you to ever come in, while still paying for all of your medical costs.” In that era the big obsession among tech CEOs was how to retain talent. No company told employees to think of their jobs as short-term “tour of duty” engagements.
Someone has to get left holding the bag. In summer 2015 I speak with Pat, a well-known Silicon Valley serial entrepreneur who is both the CEO of a privately held company and an angel investor. We’re talking about the soaring valuations being placed on privately held companies. Suddenly the Valley is filled with so-called unicorns, privately held corporations that supposedly are worth billions, even tens of billions, of dollars. Fortune says there are now 145 unicorns, nearly twice as many as existed only seven months before. “You realize who’s going to get hurt, right?” Pat says. “I don’t know. The VCs?” I ask. “No! The investors are protected.” Pat explains: The funds investing in late-stage start-ups and paying ridiculous valuations are demanding, and receiving, a kind of guarantee called a ratchet. That is a promise that if the company goes public at a valuation lower than what the private investors have paid, the company will grant them enough extra shares to make them whole. Some investors are guaranteed to make at least 20 percent on their investment. Unless there’s an apocalyptic meltdown, the investors cannot lose money on these deals. They are taking pretty much no risk. Founders are cashing out too. Groupon raised $1.1 billion in its last private round of venture funding before its IPO, but relatively little of the money actually went to the company. Most of it—$946 million—reportedly went into the pockets of insiders who sold their personal shares to venture capital investors. “So the founders are safe. They’re selling their personal shares in these private rounds at these high valuations,” Pat says. “They’re taking money off the table now, instead of waiting for the IPO. So who does that leave to get hurt?” I say I’m not sure. “Jesus, dumbass. The employees!” Pat explains: The employees are paid in part with stock options. The strike price on the options is calculated based on the valuation of the company at the time the options are granted. If you joined the company late, you probably have a high strike price. If the company goes public at a lower valuation—if it suffers a “cramdown,” as it’s called—then your options might be underwater
End of Quote.
I do hope that our leaders and management are wise and smart to lead this company avoiding current fraudulent culture of Silicon Valley. Recently I was watching Documentary from Wired magazine about Shenzhen City development. One of the reason that Shenzhen economical zone has been created was to fight poverty and provide ordinary people with basics like education, healthcare and bread. And I feel that Huawei is having a mission to focus on this and that’s why I am proud part of it. Silicon Valley Start-up fraud is tempting, and I do hope that Huawei leadership will recognize it and avoid trap to entering it.
Entire story of Dan working in start-up environment can be found here: https://books.google.co.uk/books/about/Disrupted.html?id=w-nECwAAQBAJ&source=kp_cover&redir_esc=y
Innovation is not for everybody.
Silicon Valley is the innovation engine of the world, they have been consistently doing this for decades.
You can try to copy what they do or scratch your head trying to understand how they do it.
I wish it was a perfect, clean and fair process. It is quite far from it.
The risk - reward equation is extremely complex to solve, the more risk you take the higher the reward 'might' be, impossible to know. Tiering of rewards and exit strategies are surely cruel and unfair.
The guy is a journalist, he does not do much himself, he just writes about what others do. And this is fine, but the value of his judgement has also to be taken with a ton of salt.
There is a lot of value on what Silicon Valley is doing, I see my kids living today in a totally different world I lived when I was a boy. And many of these differences come strait out from a tiny place, with courageous entrepeneurs trying new business models and technology all the time.
Certainly true for some companies, but even this journalist, was collecting opinions of others. And it is not single source for my opinion that Start up model business wise and financially wise, is not healthy and its toxic as real estate derivate has been toxic. It is speculative bubble, once it will blast many will pay for that dearly. Internet was great invention too, but dot com bubble in Year 2000 was true as well. Is blockchain technology good innovation? Yes, but bitcoin leveraging on it is speculative financial fraud, working as Ponzi scheme, for example. Few decades ago, company without profit can hardly aspire for IPO, which is not valid anymore. I don't care about innovation if it is ruining economical principles.
There is nothing new under the sun, Schumpeter coined the term of 'creative destruction'. It fully applies to innovative companies from the days of the railway in the 1800's. One can stay on the hedge and see what others are doing and judge. One can plunge in the fray and play. It is up to each one of us. For sure there are excesses which are undeniable. But innovation has been always speculative and revolutionary, technically financially and economically.
First of all I know Dan and his goal of the book was not to bash the way things are done in Silicon valley but to warn large corporations that their Business models will be disrupted by the innovation in Silicon Valley. I also worked in start ups in Silicon valley, the young people coming on board know the risk but want the challenge and the excitement of possibly changing an industry or the world more than they care about money. It might seem unfair but the employees of these start-ups know the risk and they know that the investors will get rich of this. Real innovation takes time and money and investors willing to allow the long term investment to innovate like Amazon did. Also the investors in Silicon Valley are not stupid, they know innovation when they see it otherwise they wouldn't take such risk. Huawei could actually due with a little start-up mentality to attract young talent, deliver the innovation technology that will drive the future business, and take more risk based on instinct and not financial modeling. Also what do you think is driving the open source market. It is a by product of these start-ups who may or may not be successful.
Robert, I am glad that this post triggers discussion, as Our company need to careful think through each step in grow and strategy. And as a loyal Huawei employee I do care. Quote from Dan is just one source out of many. I am not questioning enthusiasm of innovators (even most of innovations are coming from solid and incumbent companies willing to innovate as demonstrated in Christensen books and HBR researches), nor questioning positive impact of technology on society if it is well defined. What I insist is that entire start up valuation model and principles are speculative, and are breaking economic laws, following interests of few and society will pay for it dearly. VCs are betting on ideas not based on potential innovation benefit but as enrichment hoping for IPO as its pay off and redemption. That is all. Follow the money. As I used in bitcoin example above, is anybody asking where these dollars from bitcoin trade are ending up? Nobody. Therefore I am glad that China recognised that and banned that. This is just one example. Elon Musk is another example of breaking economic laws and so on. I don't believe that start up VC slogan: "Spray & Pray" is good for humankind development as Silicon Valley is Casino, as it was during dot com bubble. Unfortunatelly, humans are very slow to learn from past mistakes.
I think the real issue is how innovation can affect us rather that what we think how innovative companies finance themselves. That happens anyway, there is nothing we can do.
What is the game we like to play? Huawei is a company that given an agreed standard, it is very likely to make the best product/solution in the market. That is why we thrive in telecoms, a market that rotates around standards.
Innovation has led IT to be very relevant in the market. IT tends to be based more on proprietary intellectual property and there we may struggle. Open source, white boxes and open systems are certainly a thorn in the back for the telecom vendors and may become an issue for telecom operators unless they do not get strong at R&D/SI to do their own applications and integration and avoid vendor lock in, the key objective behind 'open' initiatives.
Returning to the start up mentality, do we really need it?
Huawei is a solid business able to finance itself from profits, banks, etc. It is not even listed in the public stock exchange. Financing, the main problem for any business, has been solved by management from the beginnings of the company.
We are strongly customer focused, have high quality products and can sell cheap. This is the secret of the success of the company.
On the other side, it makes us followers of what our customers want technically and commercially.
We often are not capable to influencing our customers, our customers are influenced by the more innovative companies, even if they have less sophisticated/stable products than us.
I think to grow sustainably we need to solve this dilemma.
My initial thoughts is that we should try to become more influential in the market as thought/technology/problem solver leaders rather than as cost cutters.
A bit of start up mentality, as long as it is tiny, will not hurt.
The key is to leverage the excellence of our products as much as possible in the market.
Agree. What is so disturbing about dilemma that You described is this. According Nielsen, between 2012 and 2016, over twenty thousand new product launches and just ninety-two (0.46 %) sold more than $50 million and sustained sales in Year two after its launch. So hype or innovation to Product ratio is very low. Therefore each investment need to be carefully designed as we are not operating on VC capital. But, we cannot be late to market as well. There is endless discussion between cost benefit ratio between innovation and replica, but I think that golden rule is to attach value to real need not to artificial (hype) needs. Needs are same in all humankind history, technologies are just fulfilling them in different way.