Have you read Andy Grove’s magnificent essay on Silicon Valley’s ability to create jobs? A reaction to Tom Friedman’s column “Startups, Not Bailouts,” it’s much better than what we wrote on the same topic a few weeks ago.
Grove argues that Silicon Valley can’t create jobs because we out-source most of our manufacturing abroad. His startling political opinion is that the goal of our government’s economic policy should be to maximize profitable employment, not just total corporate profit.
But his perspective as an engineer is equally important: that the only way to make something better is to make it yourself, and then to remake it and remake it, over and over again.
Another way of saying this is that manufacturing and engineering are two sides of the same coin. As Grove explains, once we out-sourced battery manufacturing to Asia in the ’70′s, we lost the engineering ability to design better batteries, which later became important for computers, phones and now cars. In Grove’s view, it’s probably only a matter of time before the manufacturer of the iPhone decides that it doesn’t need Apple at all.
As Silicon Valley becomes more virtual and highly leveraged, the problem is much broader than just the hardware industry. Any operationally intensive business involving people and processes is hard to fund today, and unpopular among entrepreneurs. As we wrote several years ago:
Could Amazon’s Jeff Bezos show up on Sand Hill Road today to pitch a company that would lose money on software, on warehouses and distribution centers – for years? He might get his idea funded; he’d more likely get talked out of it.
Now, nobody wants to get his hands dirty. When an entrepreneur at Adeo Ressi’s Founder’s Institute was asked why he shifted away from a business involving people he said: “I wanted to make money while I was sleeping.” As the founders of a popular consumer website here in Seattle once advised me, “Don’t do anything unless it scales.”
What they meant was they never implemented a business idea, no matter how good, that required anyone to be hired. This is a good discipline for a startup. Any company that could generate $100 million in revenues with five employees would prefer that to 500. But sometimes we never find out how much money we could make because we never even consider a business of that scale. We’re so wary of the actual world that we limit our impact on it.
The opportunities we don’t consider are breathtaking. What if you combined the web geniuses of a media sensation like Yelp with Open Table’s smashingly successful transactional business model? The restaurant industry would be much more efficient than it is now, and you’d have a company worth billions.
This is the “enormous opportunity” that Fred Wilson discussed on his blog last week, of taking old-school businesses and “applying the lessons and benefits of the Internet technological revolution… [along with a dose of] good old-fashioned leadership.”
The problem with such an opportunity is that it takes time. Yelp is focused on beating Foursquare, not Open Table. It has neither the patience nor the interest to spend the 11 years it took Open Table to grow one market at a time, all while understanding how restaurants really work.
We’re seeing the same phenomenon in real estate: it’s hard to change home-buying on the ground when you mostly work in the cloud. Not many entrepreneurs want to spend ten years gaining access to the local real estate board’s database of listings, understanding how real estate contracts work in each state, figuring out which local agent can host a new customer on a home-tour. Almost every venture-funded website is a media site for traditional agents, who deliver the actual service to the customer.
This may be a good business decision, but it’s also a missed learning opportunity. A friend in software recently said it must be nice, since Redfin competes as a broker rather than as a media website, not having to compete with smart people. But competing brokers are plenty smart; and actually being in the industry alongside them makes us smarter too.
Just as Asia’s engineers learned how to design batteries by working in the factories that manufacture batteries, Redfin has benefited from having real estate agents work alongside software engineers. The people who write Redfin’s software have shadowed real estate agents throughout their days, and even become licensed as agents themselves. Our agents in turn have in turn become better by learning all about our technology.
And this is the true value of Redfin as an asset: our proprietary processes and technology for making real estate better, which, like an iceberg, mostly sit below the visible surface of our consumer website. The home-buying and -selling process is our version of Andy Grove’s battery, stubbornly difficult to improve and unglamorous. Yet we try improving on it in a hundred tiny ways every year; few competitors are able to copy this approach.
The point of this post isn’t to celebrate Redfin, which every reader of this blog already knows I love, despite all its problems and risks. The point is that Andy Grove’s observations about the hardware industry apply to a much broader universe than gizmos and gadgets. The world would be better if more entrepreneurs of all stripes took the red pill or noticed that the spinning top in our happy dream wasn’t wobbling. You’ll learn more, and have more fun, than you might realize.