Time to Get Our Hands Dirty

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.

Discussion

  • Philip Gvinter

    Glenn,

    I have a slightly different take on our societal lack of appropriate focus. I love your point about resources shying away from businesses which are operationally intensive but feel like the real underlying trend is something else entirely. We as a society have continued to reward excellence. This is a great a thing and has lead to a tremendous technological boom which has changed the way we do almost everything in a short period of time. At the same time while rewarding excellence we have failed to continue to reward diligence. Excellence, by its very definition is exclusive and limited to the few who are able to excel. Diligence on the other hand is something that everyone, regardless of how great, ordinary, or even sub par their abilities may be, is capable of. As a society we have place increasing cultural and financial emphasis on achieving excellence. Regardless of what an individual's talent may be it is fairly safe to say that if that individual is truly outstanding at their field and dedicates efforts to maximizing that talent the given individual will earn tremendous recognition and financial rewards. We are seeing this with increasing pay for top income earners across most segments of society. Corporate executives, star athletes, top entertainers, gifted scientists and entrepreneurs are all handsomely rewarded for their outstanding achievements. At the same time the gap between these individuals capable of excellence and the median wage, or even the wages of low to mid skill professionals and tradesmen continues to widen. A select few are capable of achieving greatness but every individual is capable of doing their best. Yet as a society we continue to herald and celebrate the accomplishments of the extraordinary few while doing little to reinforce the values of maximizing the potential of those who cannot meet the standard of excellence. We are seeing many examples of this not only in the business world but also withing our educational system. Policies like social promotion in public school as well as the declining standards necessary to graduate from highschool, earn an Associates degree or a Bachelors degree are also perpetuating this phenomenon. These trends are not happening in a vacuum but are in my opinion an unfortunate offshoot of a focus on the best and an abandonment of the unglamorous yet extremely important focus on diligence by those not capable of greatness.

    • http://blog.redfin.com GlennKelman

      What a great comment Philip. I think we're all capable of greatness, albeit through diligence and decency if not LeBron-James levels of talent. The tragedy is that our society needs to reward diligence better or soon no one will be working very hard.

  • Davin Hanlon

    Great post Glenn. I guess the majority businesses need incentives in order to create jobs in a local economy rather than going overseas to take advantage of cheaper labour – that appears to the key issue here, especially for manufacturing. Perhaps greater employment protection for low and mid paid jobs is necessary, while at the same time providing ongoing incentives to businesses for creating jobs in the local economy. It must be a bit sickening for a large percentage of society to see corporations posting healthy profits at the moment when unemployment remains so high. It's the same over here in Europe – economies are all singing about returning to growth, but the queues at the benefits offices are still huge. Without incentives it's difficult to see businesses changing, especially if there's a cheaper option that will take away a lot of the hassle and investment of employing people, creating and improving processes.

    Keep up the good work! Can't wait for you guys to get to Europe!

    • http://blog.redfin.com GlennKelman

      Great comment Davin. It wasn't until I read Grove's essay that I realized corporations are always trying to minimize employment…

  • http://anuragmjain.com Anurag

    Great post Glenn.

    Speaking strictly from a web 2.0 startup perspective, the industry values 'serial entrepreneurs' very highly, which creates an illusion to build the company to scale (i.e. hire less people and get more revenues), as opposed to building the scale by locking down the opportunity and patiently and diligently working through the business. It just seems that the overarching trend is really about designing something useful for a smaller group, and then growing it from there, as opposed to having the grand vision in building a business. 'Change the world' has just become a catch phrase, and most so-called-entrepreneurs (including myself) are happy to flip their business and move on to designing a newer one, as opposed to sticking it out. I also wonder if the threat of newer businesses (or features) is a big reason why this is so.

  • http://blog.redfin.com GlennKelman

    I agree with everything you say Anurag, except that people's decision to stick it out is situational. With some businesses, anybody would flip 'em…

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