Law & Order, Special Victims Unit: How To Get “The Man” On Your Side When Starting a Company

Just before I joined Redfin, I’d wanted to start a company but my brother got sick and I fell in love and soon I was in Seattle. What I never forgot was the lawyer who was going to help us incorporate that business, Ilan Lovinsky, a partner at Gunderson Dettmer, and brother of the great Noam Lovinsky.

Ilan may be the savviest mofo I’ve ever met, and yet he’s got soul too, which is just another way of saying he’s not a lawyer so much as the consigliere every CEO hopes her lawyer will be. He’s also a Redfin hound-dog, casing the site daily for listings.

And now today at noon Ilan’s giving a talk at Redfin in San Francisco, as part of a series we’re hosting for Redfin employees on how to run your own startup. Our goal is to attract the kind of people who will one day found a business, to keep them as long as we can, then to launch them into careers of rap-star wealth and profligacy.

You’re invited, to come in person or to dial in.

So far, the series has been one hit after another.

We’ve had Roy Gilbert — former nuclear submarine officer and head of Gmail, Google India and Grockit  – come by to talk about management best practices; he explained how a Twinkie once out-rowed an NCAA Division-I oarsman.

And James Slavet from Greylock gave a five-step tutorial for dazzling a venture partners’ meeting. I went over everything you’d ever need to know about financial statements, in 45 minutes flat. And TellApart’s Mark Ayzenshtat took us deep into the science of customer profiling and re-targeting.

Now Ilan is going to hit the legal ins and outs. This may sound dry to you. But I’ve heard this talk before. In a Sand Hill-road parking lot Ilan once gave me his 15-minute guide on “how not to get f—-ed” and it was like the Businessman’s Book of Revelations.

You can come by in person, to 88 Kearny, 13^th floor, in downtown San Francisco. Or you can just dial-in to a web conference:

Web: https://redfin.webex.com/redfin/onstage/g.php?t=a&d=662069306
Password: redfin

Call: 1.866.625.9936
Code: 6223346

If you’re coming by in person, please sign up here by 10:30 a.m. today so we can order lunch for you. I’ll be there with a Music-Man baton and a top-hat to introduce Ilan and slurp from his boob of wisdom. If you have a great idea for Redfin, we can chat before or after.

A New Phoenicia

At last Thursday’s SIC conference, Tricia Duryee asked why online real estate companies have prospered in Seattle. One panelist cited low home prices, which let young entrepreneurs buy homes they could never afford in Silicon Valley, and from there begin to wonder how real estate could be better. Another suggestion was that HouseValues’ roaring 2004 IPO drew the rest of us into the game.

I said one factor had to be that Redfin invented map-based listing search, which rocked Seattle for a few years before we raised capital to expand. Another panelist cited the theory that industries clump together because the industry’s craftspeople clump together. Even though this panelist himself recognized that building an online real estate website requires nothing more specialized than general website-building skills, it got me thinking about the skills Seattle has that no one else does.

What great companies have been built here? Any list would have to include Amazon, Starbucks, Costco and Nordstrom. All are still run by their founders or founding families. And all of those people are great merchants, with a fanatical commitment to perfecting the customer experience in every last detail. This is a very specialized skill indeed.

It’s amazing, when you think about it, how many of the world’s greatest merchants live within two miles of where I’m typing this note. Jim Sinegal is notorious for stalking the Costco floor, correcting his staff on the price history and sales volume for a key lime pie, dismissing banners and other marketing sass with the refrain, “we don’t need that sh** here.” This mentality has made Costco grow revenues faster even than Microsoft, but whom do Seattleites talk about more?

The Nordstrom family is famous for happily accepting a customer’s return of car-tire snow chains when the store doesn’t even sell chains. This is the reason that Nordstrom is perhaps the only great retailer to remain relevant and revered during the e-commerce revolution.

And then there is Howard Schultz, who was the first to figure out that the reason a mom would load three kids into the car for a coffee-shop trip wasn’t just the coffee, but how the shop made her feel when she met her friends there. To this day, whenever Starbucks executives go into the field they carefully inventory every detail about each store: its parking lot, its sign, its bathrooms.

I don’t even have time to talk about Mark Vadon, the co-founder of Blue Nile, who is a beautiful beast of a merchant. But we have to account for Jeff Bezos, the “giant-brained alien” with “a tangential interest in human affairs” who runs Amazon. No one has been more relentlessly focused on perfecting a website or an entire operation than Bezos, the Captain Ahab of customer experience. The result is an army of engineers with an unusual passion for understanding the customer themselves, who could start their own Amazons if there weren’t making so much money at Amazon itself.

I have learned from chance encounters with folks at all of these companies; a lunch with a Nordstrom bra salesperson gave me a way to think about field bonus plans that put the customer first.  An hour with Costco’s CFO convinced me to focus on maximizing customers and profits, not profits per customer.

Thirty minutes each with Blue Nile’s two co-founders were what first woke me up to the idea that even a website-company should answer the phone on the first ring. Coffee with Starbucks’ COO reminded me to focus on how the experience felt, not just what the company did. None of these meetings would have occurred outside of Seattle.

Consider the common attributes of these businesses, and ask yourself if this could become the DNA of 100 new Seattle-based startups:

• culture-based service, where everyone from engineers to accountants takes the customer’s point of view
• value-driven, where disruptive economics, relentless cost-discipline and scale save consumers money
• commerce-oriented, with an instinct for getting consumers to whip out their wallet, not just spend time on a website
• operationally-intensive: unafraid to have cars, call centers, distribution points, employees in many cities

The reason this can be our thing, the thing that we put into the water from which everyone here drinks — is that many places don’t even want it to be their thing. A new vogue for customer-service notwithstanding, Silicon Valley has long preferred high-margin media businesses that scale as easily as you can spin up new servers. Manhattan and LA are even less likely to get down and dirty with the customer.

And yet we still wonder how Seattle can become more like Silicon Valley. Having started a Silicon Valley company, I can promise you it will be a long struggle to keep up with the hyper-kinetic restlessness, the elaborate network of ideas that draw companies like Box.net from Seattle to the Valley.

But the Valley will never have the blue-collar commitment to customer service that Seattle does, or our best companies’ niggling attention to detail. If you don’t believe me, just ask Tony Hsieh, who had to move Zappos from the Bay Area to create the service-driven culture that made Zappos famous. “Anyone in San Francisco who took a job in customer service,” he once explained to me, “just saw it as a stop-gap until he could find something supposedly ‘better.’” It isn’t a coincidence that many Zappos folks now work in Seattle too; it is a law of gravity.

As commerce becomes popular again in mobile and web-based businesses, my hope is that more Seattle startups will follow in these great merchants’ foot-steps. Every region has to be true to itself. LA startups aren’t going to build new databases or web infrastructure; they’re going to build new entertainment companies like Hulu. Finance will probably be re-invented in Manhattan, not Menlo Park. And customer-service companies belong in Seattle. It isn’t our only heritage, but it’s certainly one we can recognize and embrace.

The Shitake Hits the Fan

There has been over the past 18 months a Cambrian explosion of startup life, many incubated by angels and seed funds. And now the process of natural selection is beginning again.

I got back from the Valley Thursday and what I gathered from the people there is the same as what I’ve heard here: that many seed companies are having a hard time raising money.

Yes, second rounds are always hard, after you’ve built the product but before it has made much money. The difference is that today’s first-round investors are angels and seed funds, which sometimes aren’t even set up to participate in many follow-on rounds.

What’s made that worse is the market is becoming more cautious around post-seed deals. Everyone criticized the Wall Street Journal’s Pui-Wing Tam for being the first to notice a cash-crunch for seed-stage companies seeking follow-on rounds, but I think she nailed it.

Some early-stage entrepreneurs are now clawing at the walls, begging supporters for money and time. Many investors never promised more money or much time. The premise of some seed investments, especially from larger funds, is “optionality.”

Rather than making a serious commitment to a handful of seed-stage companies, larger funds are buying the right from many startups to lead a later round in the hope that one or two of them catches on with consumers.

One reason for this is that consumer internet investing has become a hit-driven business. Who could pick the next Twitter? When the question is one of tickling consumers’ fickle fancy, rather than a rational process of evaluating technology, it’s a crapshoot. So some investors play at the dollar tables, and roll the dice all night long.

This approach has led to the creation of more new businesses over the past 24 months than the Valley has likely ever seen. It has given entrepreneurs a shot at success many never would have otherwise gotten.

And some don’t need any more capital or advice beyond a seed round of financing. But I did, especially when I was first starting out.

I co-founded a company, Plumtree, that raised seed capital from Sequoia. Kirill, Joe and I closed the round, walked out to an ATM to check our balance, and began laughing hysterically.

Things went downhill from there. A co-founder left. Nobody bought the product. And we ran out of money. I felt like I was digging deeper and deeper into a hopelessly dark mine, looking for gold.

Then Pierre Lamond, the Sequoia partner on the deal, began working out of our office, acting as the virtual CEO.  Pierre made a point of being there the day one of his other companies went public. We looked at a news photo of all the smiling people, who seemed to be living in a gated community, on a planet I would never visit. Then Pierre said “that company was once even more screwed up than you are.”

I clung to that statement through Plumtree’s early days, and returned to it again when Dave and I were working out of an apartment trying to figure out how to make Redfin work .

To find a new lead investor to join Sequoia on Plumtree’s board, Pierre drove me all over Palo Alto and Menlo Park in his car. It was the first time I’d visited the Promised Land of the Valley itself, and it was nice to see it through his windshield.

I cherished the conversations we had on those trips: about how Pierre founded National Semiconductor, or built the Cray supercomputer. He asked me what I enjoyed doing outside of Plumtree and I said “reading.” He saw what a little stress-monkey I was and said I should spend a few minutes reading a book every night; it’s advice I still try to follow.

At each stop, Pierre promised he would work closely with the new investor on Plumtree, and possibly on other deals too. I was then released by my nervous handler to perform in the conference room like a zoo animal on The Tonight Show.

You may think it wasn’t really a fiasco, but one detail should suffice to convince you it was: at one point, I lugged a full-sized server around because we couldn’t get the product to work on a laptop, or over the web. I tried to get the server going under the table before the partner came into the room but sooner or later he  always asked, “What is that humming?” It was the sound of a thousand memory leaks spinning up the disk drive and every other internal gizmo into a panic.

That anyone gave us money was a miracle. But once we get the money, we prospered, eventually becoming one of only two technology companies to go public in 2002. I wondered why Sequoia went to such great lengths to get Plumtree funded when it would have been easier to write off the few hundred thousand dollars invested in our company.

And the simple answer was that Sequoia cared about its reputation and stood by its companies. Someone later told me that a Sequoia partner liked to say, “We don’t want you staggering around, with your fly down and a drink in your hand, telling the whole world ‘We’re a Sequoia company.’”

If Sequoia hadn’t saved us, I would have decided that my startup fling was folly. Plumtree would have just disappeared, and everyone would have thought it was a terrible idea. Redfin wouldn’t have the executives it has now, and neither would AdMob, Xoom, Atlassian, Zendesk, Piazza, The Climate Corporation or any of the other companies now being led, in part or in total, by Plumtree people.

It seems a shame to me that few of today’s seed-stage entrepreneurs will get the same support we did. I promise you, we were even more screwed up than you are.

A Changing of the Guard

Quick! Name the top 10 publicly traded consumer internet businesses in the US. When you woke up Thursday morning, the list was:

1. Google: $171 billion market capitalization (26% annual revenue growth)
2. Amazon: $90 billion (38% growth)
3. eBay: $43 billion (14% growth)
4. Priceline: $26 billion (38% growth)
5. Yahoo!: $21 billion (-24% growth)
6. Netflix: $13 billion (45% growth)
7. Expedia: $7 billion (14% growth)
8. WebMD: $3 billion (21% growth)
9. Open Table: $2 billion (57% growth)
10. AOL: $2 billion (-17% growth)

The next one down would have been Ancestry.com, and there wouldn’t have been many more with a valuation over $1 billion. Sixteen years after Netscape’s IPO, the most amazing fact about the Internet is how few large-scale public companies it has created, and how irrelevant some of them already seem to our daily lives.

That’s all about to change, because most of the companies on that list are about to change. One telling sign: it’s a lot easier to come up with a top-10 list of private Internet companies. If you’re a consumer under 40, you’re far more likely to have used their services today than those of WebMD, Priceline, AOL or even eBay:

1. Facebook
2. Groupon
3. Zynga
4. LinkedIn
5. Twitter
6. Gilt
7. Living Social
8. Pandora
9. Yelp
10. Foursquare

The first of those companies to graduate from the ranks of private to public ownership is LinkedIn. Worth $9 billion, or 36 times 2010 revenues and 520 times 2010 earnings, it debuted today at #7 in public-company market capitalization. With the possible exception of Foursquare, it seems very likely that each of the other private companies will be publicly traded in two years. Most will be worth as much or more than LinkedIn.

The technology community brought this about almost despite itself. Only a few years ago, the two most prominent thinkers in venture capital said that even their portfolio’s most ambitious companies shouldn’t necessarily go public.

One said that no one wants to run a public company; the other reported that his hand shook every time he had to sign off on a public company’s financial statements. Yet today the two are investors in nearly half of the remaining private companies on the list.

Back then, the investors cited regulations as the main problem. But what has changed since is revenues, not regulations. More importantly, the ambitions of entrepreneurs and investors have changed, in just the way we once hoped they would. As we wrote in 2008:

This quarter was the first since 1978 that a venture-financed company didn’t go public. But the real headline isn’t the dearth itself, but the fact that some of the smartest people in venture capital are fine with it. It’s like the PGA moved the Masters to a pitch-and-putt, and Tiger Woods applauded the decision.

…We have to keep building businesses to be businesses, not just to get bought. There are plenty of entrepreneurs who, if they could grow a business to $100 million and beyond, would prefer to keep building it rather than get acquired. The hard part for us isn’t the regulations, it’s getting past $100 million, which takes patience, big thinking, and a huge appetite for risk.

Fortunately, everyone heard the VCs’ warnings but almost no one listened. All except one of the companies on that list were around when investors declared that the public markets were no longer such a desirable goal, and all of them could easily have sold for life-changing amounts of money. None did.

And after years of caution, fortune now favors the bold. Wall Street bid LinkedIn up 109% on its first day of trading for all sorts of irrational reasons, but also because investors are starved for high-growth businesses. Growth is what new Internet businesses do best. If we as Internet entrepreneurs aren’t going for broke, no one else will.

And without a new wave of businesses, the whole Internet sector would become the domain of value investors, eager for Google to pay its first dividend. Already, eight of the top-10 public companies grew revenues by less than 40% last year, and analysts are much less optimistic about their growth over the next two years.

Everyone is debating whether LinkedIn’s stock ended today overpriced, but this isn’t the important debate.  What matters more than the day-of-IPO frenzy is that LinkedIn and all the other soon-to-be public Internet companies are going to grow much more over the next decade than the current top-10 will. And that means the Internet segment of the economy will grow much larger, too.

In Praise of The Middle Finger

The United States is becoming a startup factory. It’s a very good trend for the U.S. and for entrepreneurs. But this post is how it must feel different than it once did, when startups were hand-crafted in a basement or a garage, and stayed there much longer than they now do.

First, a few numbers. Michael Arrington reported today that Y Combinator is accepting 60+ startups for its summer 2011 class. With two – four founders per startup, this is the equivalent to the entering class at some liberal arts colleges, with a more selective application process and a similar regimen of lectures, discussions, and graduation. The kinds of people who progress in life by applying to one increasingly elite institution after another are naturally attracted to this approach; it’s just like getting into Harvard!

And Y Combinator is just the tip of the iceberg. Despite the popular sentiment in Seattle that our main problem is “we don’t do nearly enough to connect with one another,” the local startups calendar lists 29 public events from Monday to Friday. Here among some of Redfin’s up-and-comers, we have our own little startup forum that meets twice a month, too.

The success of these programs and the energy they create is staggering. I contribute to some and benefit from many others. I feel a touch of envy when sizing up the participants, because they seem so talented, and they have so many resources. But I also want to impart a different message to the participants, to take my advice if they want but mostly to take their own.

A startup needs mentors, structure,  guidance but the main thing we had at the company I co-founded was a lot of smart people and what Jay-Z would call a middle-finger-to-the-Man mentality. We were all heads-down and screw-you. What I first loved about a startup, especially in the early days, was that I could finally stop listening to people tell me what to do.

Incubators, I thought, were for babies not men. No one needed training more than I did, and no one was less interested it. Only the product mattered, and networking was baloney. In my own life, and at a shameful 11th hour, I chose starting a company over medical school only in part because I would have been a bad doctor. The emotional reason was I couldn’t bear the thought of attending Columbia’s orientation pizza party.

The first time my partners and I were alone in our own little office, it felt like finally getting the keys to the family car. We were shocked that neither the police nor anyone else ever stopped us to ask for a license. Our first thought was We should have been doing this years ago. You want to run over a garbage can for the heck of it.

The best entrepreneurs have a touch of that impetuousness. One of my co-founders at Plumtree, Kirill Sheynkman, wrote a parting message to his previous employer on the whiteboard of his vacated office: FAYMF, in huge block letters. The acronym is untranslatable, except that the A stands for All, the Y for Y’All, the M for Mother and the F’s for you-know-what. It was completely obnoxious and anti-social, but the main thing Kirill taught me was to please no one if not yourself.

We’ve come a long way from that brashness. A year ago in a post for TechCrunch, I worried that entrepreneurship was becoming a profession, when it had always felt to me like a lightning strike or a jail-break:

There were 2,500 self-help books on entrepreneurialism published last year… Business schools and conferences have institutionalized entrepreneurialism as an avocation like law or medicine when it is more often a streak of temperament, luck and inspiration. Far from a program taught by somebody else, entrepreneurialism has always been for me my only shot at being myself.

Some days entrepreneurship seems like a lifestyle. Some days it feels like the result of a carefully crafted process. But what you also need to change the world no one can teach you: brains, ambition, computer science and the occasional middle finger.

The Age of Revenues

I was talking to a friend in Silicon Valley last night who told me about a consumer Internet startup that is generating tens of millions of dollars in revenue, with eye-popping year-over-year growth. What was striking about the conversation wasn’t the revenue itself, but that I’d never heard of the company it came from. This has happened half a dozen times in the past month.

What that means is that there are more Internet startups with massive revenue growth than I can keep track of, and I can keep track of quite a few. It means that when TechCrunch’s Sarah Lacy argues that high-revenue startups like Zynga and Facebook operate in a completely different universe than the rest of Silicon Valley, she isn’t completely right.

We heard the same argument from plenty of folks when we wondered what Mint would be worth now: that the increase in valuations of Zynga and Facebook are totally unrelated to those of earlier-stage startups, because only a few venture-backed Internet companies are generating serious revenues.

What I’m seeing instead is different: yes Zynga and Facebook are in the major leagues, but there is a very healthy farm system with plenty of prospects moving up through the ranks. This is why the broad-based increase in valuations isn’t just  inflation, but the result of Internet startups’ getting much, much better at generating revenue.

What happened? First, at the end of 2008 startups finally stopped listening to the most misinterpreted — and sometimes just wrong — advice in the Internet’s history: Chris Anderson’s insistence, just as Apple opened the iTunes store to software and venture funding hit the skids, that everything on the Internet be free.

To be sure, the idea of a free trial application is a good one, but many entrepreneurs became squeamish about ever asking consumers to get out their wallets. Music was Mr. Anderson’s primary example of a good that consumers would stop buying, but now Pandora, the company with the temerity to charge for music, is going public.

As we’ve argued many, many times before, as early as 2008, a whole new generation of entrepreneurs has learned from Steve Jobs to ask consumers to pay, early and often, for mobile applications like Angry Birds, or virtual goods in Farmville, or actual goods like clothes, textbooks and baby gear:

Startups have turned to the most direct way to get money: from their users. And consumers are ready to buy, buying software fast-food style on the iPhone, and shelling out for premium subscriptions on sites like Picnik and Animoto.

The change has been good, for startups and for the consumers buying their software, the quality of which has improved immeasurably over the past few years. Now, most of the companies that got serious about generating revenues are growing like crazy. It isn’t too stuck-up to call this change a new Internet era.

The first era was the 1990′s Age of Eyeballs, when every website sought to get as many visitors as possible, without regard for the cost of gaining each visitor or the revenues each generated.  The second was the mid-2000′s Age of Acquisition, when Paul Graham encouraged most entrepreneurs to build websites as features of a larger product, and the goal was to get bought by Google or some lesser light. Since big, unsustainable startups had failed in 1990s, small became  beautiful.

Now we are in The Age of Revenues, in which many Internet startups are maturing into big companies with big revenues. We’ll see more companies invest in large tele-sales operations — the whale-hunting salesmen are mostly relics, as small transactions have flourished like plankton — and we’ll see more companies grow, with more accretive acquisitions at much higher prices. And though there will undoubtedly be more ups and downs, we’ll see more public offerings too.

With great revenues come great power: a new generation of Internet titans. After years of insisting that the Internet had matured, nobody now believes that in two years the only Web behemoths will be Microsoft, Google and Yahoo. In fact, folks have begun to doubt that any of those three will rule the Internet the way they once did.

It’s an amazing turn-about. 2008 year wasn’t, as Sequoia claimed, the death of good times, but the birth of a new, long-lived era of broad and massive revenue growth. The new school of financiers at Sequoia were right about the global economy, which is still a disaster zone outside of Silicon Valley. They were just wrong about how entrepreneurs would react to it.

How Much Would Mint Be Worth Now?

It has almost been 18 months since Intuit acquired Mint for $170 million, so long ago that we can hardly remember how vigorously venture investors defended the deal, even as Redfin and Jason Fried suggested that Mint would have been fine going it alone, too.

The Valley’s digerati were unanimous in praising Mint for taking the safe money. “Young entrepreneurs should sell out early,” one investor memorably wrote, “for the same reason that dogs lick their balls: because they can.”

Since then, the market has sent a different message to entrepreneurs: fortune favors the bold. In the last 18 months or so, Facebook’s valuation has increased from 6.5 billion to $67.5 billion; Twitter’s rumored valuation has also increased by an order of magnitude, from a hotly disputed $1 billion to a hotly disputed $10 billion. Likewise Zynga’s rumored value has increased from $1 billion to $10 billion.

And it’s not just the Internet titans. The market has rewarded mid-sized companies, too. LinkedIn and Pandora are lining up to go public at high valuations despite relatively modest annual revenues of around $215 million and $120 million, respectively. All, like Mint, created and led their market.

What about Mint’s parent, Intuit? After being nearly dismissed for its failure to bring its flagship product, Quicken, to the web, Intuit is now adored by Wall Street for delivering software as an online service, courtesy of Mint. Since acquiring Mint, Intuit  has almost doubled, increasing its market value by $8 billion.  Intuit will keep this gain for itself; Intuit paid for Mint in cash, not stock.

It doesn’t seem unreasonable to conclude that Mint, had it remained independent, would have been worth a significant fraction of that $8 billion. Maybe it wouldn’t have experienced a ten-fold increase in its value the way Twitter, Zynga and Facebook have. But even if it had grown by a factor of five, that would have been $850 million.

This is not to second-guess Mint’s CEO, Aaron Patzer, who knows more than any of us do about Mint’s prospects. He may have worried about Mint’s ability to generate massive revenues from a free service. And he probably feels that it is hard to regret the money already in the bank from Mint’s sale. I doubt Mr. Patzer has thought of anything he’d buy with hundreds of millions of dollars that he can’t buy with the tens of millions he already made from the Intuit deal.

But my guess is that a person of Mr. Patzer’s considerable talents would have found a way to generate plenty of revenue from the millions of people using Mint to make daily financial decisions, and that it would have been more fun to beat Intuit than it has been to join Intuit.

This is not to say that all entrepreneurs have to be macho about building their business, only that they shouldn’t feel like they have to be meek either. The only time you have to sell is when you’re mostly done solving the problem you set out to solve, or when you’re no longer having fun.

Could things have turned out differently than they have, with web-company valuations suddenly plunging instead of rising? Yes but I tend to disagree with the whole premise of this anxiety: that long-term the Internet is another sock-puppet-led investor scam, and we should all cash out before the music stops.

As Chris Dixon pointed out Sunday, the price-earnings ratios of major Internet stocks is still in a normal range of 10 to 25, so the only reason Internet company valuations are increasing is because their profits are increasing.

And the reason consumers and businesses are lining up to pay for web software is that we want more of it. The valuations of some private companies are probably a bit too high right now, but the fundamental reality is that there is a massive shortage of web software in the world. If software engineers were a commodity like oil or pork bellies, the futures market would bid their value to stratospheric levels.

Since there isn’t a futures market, you have to wait for the future to arrive. Which means if there’s still a company that you want to build, keep building it.

One in Five Facebook Employees Has No Imagination Whatsoever

Whoa! Shocking news, guys. An engineer left Google for Facebook. The great Lars Rasmussen, creator of Google Maps and Google Wave, quit Google Thursday to join Facebook. This has, admittedly, happened before. In June, Matthew Papakipos defected from Google’s Chrome team. In May, it was mobile guru Erick Tseng. Even Facebook’s chef, Josef Desimone, was recruited from Google.

In fact, someone over at Google must feel like the coach of Cuba’s national baseball team. Of the 2,174 current Facebook employees with a LinkedIn profile, 378 cited Google in their work history, or nearly 1 in 5.  What’s remarkable about their decision isn’t the aplomb of Facebook recruiting, but the lack of imagination of Facebook’s Google recruits.

What’s the point of leaving one unassailable Internet platform where all your friends work for another unassailable Internet platform where all your friends work? It’s like getting a divorce to marry your wife’s sister.

I know, because I’ve been the wife in that situation before. When a colleague at a startup joined a competitor, my old partner Kirill Sheynkman had a very different reaction from mine. The colleague’s defection seemed shockingly traitorous to me but to Kirill, it was much worse: it was boring.

“You spend years working on database query tools, only to say ‘I’m sick of it, I quit’ and join a database query tools company,” Kirill said. “Where’s the imagination?” Forget the banality of evil, what galled Kirill was the evil of banality.

To someone at Google, perhaps the choice doesn’t seem banal because the two companies seem different: Google has its own dance studio, whereas Facebook only washes employee’s clothes. Google wants to become a dominant social network, and Facebook already is a dominant social network.  But to someone at a true startup, the two kind of look the same. Both will succeed without you.

Of course, Facebook is one of the few truly great Internet companies, and it’s easy to understand why anyone would want to work there. But if you’re going to leave the security of the world’s greatest software company, why not leave to try something hard, something raw, something completely different? A successful run at Google is the Silicon Valley equivalent of diplomatic immunity in Lethal Weapon 2:  every venture capitalist wants to give you money and any startup wants to hire you.

You could help someone who actually needs it, you could do something that hasn’t been done before. If you fail, you won’t be poor, and you won’t be unemployed long. I’ve heard Facebook is hiring.

(Update: some folks at Facebook have taken me to task for the tongue-in-cheek headline calling out their creativity. I’m sorry. I hadn’t meant that seriously. The people moving between Google and Facebook are obviously the gods of Silicon Valley, people who belong on bubble-gum trading cards. And just judging by its product you can tell that Facebook is a stunningly creative company.

I really, really love Facebook, and love Google, too. I just always hope that the best engineers at both places, when it’s their time to leave, do so to work at a tiny startup or to start their own company. Deciding otherwise is understandable of course: the pay at a newer company is speculative, the hours are maybe worse than Facebook’s, but it’s a different kind of fun, feeling like the whole place would keel over if you didn’t do your part.)

What the Government Could Really Do to Support Entrepreneurs

Innovation and entrepreneurship are becoming my two least-favorite words, mostly because they are being appropriated in ways that are neither innovative nor entrepreneurial. Like in today’s New York Times essay by Tom Friedman.

Friedman used to be one of my favorite writers. In Beirut to Jerusalem, when he talked about two sheiks on a flight to the Middle-East tossing bricks of gold back and forth, he was compulsively interesting.

But now that Friedman is back in the U.S., he occasionally seems less like a world-wise foreign correspondent than a credulous, honey-didja-see-that tourist. This article on entrepreneurs is just a bad example. First, he doesn’t bother to talk to actual entrepreneurs. As he himself admits, his essay mostly comes from two academics at non-profit institutions:

I asked two of the best people on this subject, Robert Litan, vice president of research and policy at the Kauffman Foundation, which specializes in innovation, and Curtis Carlson, the chief executive of SRI International, the Silicon Valley-based innovation specialists.

What’s odd about Friedman choice of sources is that he opened the essay by criticizing the Obama administration for being too “heavily staffed by academics, lawyers and political types.” Yet his first source, Robert Litan — a great thinker and writer — is three for three: he worked as an academic, studied law at Yale, and often writes government reports (incidentally, Litan also wrote an essay in the New York Times that prompted us to testify before Congress). The other source, Curtis Carlson, lists his primary avocation as the violin.

True to form, these folks have proposed a new government department of entrepreneurialism, headed by a cabinet-level minister called “Secretary Newco.” Like low-salt Chinese cooking, this sad phrase is a contradiction in terms: what government minister is an entrepreneur?

Friedman briefly mentions an entrepreneur’s visa, which is a worthy goal, but then suggests we offer a visa to any foreign student who graduates from a U.S. college. Regardless of how I may feel about immigration, this is an overly broad, unrealistic suggestion: someone who studies hotel management at UNLV isn’t likely to start a company just because she’s from the Congo or Italy.

Friedman then proposes “cut[ting] the capital gains tax for any profit-making venture start-up from 15 percent to 1 percent.” This is nonsense: a venture-funded startup usually isn’t “profit-making,” and in any event a startup doesn’t pay capital gains taxes. Employees and investors pay capital gains taxes when selling the stock of a company that was, at some point in the past, a startup.

Moreover, the capital gains tax as it stands is not a problem: the most tax-efficient way to become a millionaire is by selling stock in your own company. You pay a lower tax rate on that money than most middle-class Americans. Friedman also calls for lower rates of corporate income tax on startups, even though a startup would only pay taxes once it began making profits. In four years, Redfin has barely paid any corporate income taxes, and now that we sometimes earn money, we don’t mind the tax.

The errors continue, with Friedman riding the old battle-horse to repeal “Sarbanes-Oxley reporting for new companies.” But new companies don’t have a Sarbanes-Oxley reporting requirement. Sarbanes-Oxley only applies to publicly traded businesses, which are usually at least five years old.

Even if Friedman is talking about lifting Sarbanes-Oxley requirements for companies in their first few years as a publicly traded stock, I think he is missing the point. As we’ve argued before, the reason for the dearth of IPOs hasn’t been due to Sarbanes-Oxley laws but because, a few years ago, so few startups were generating consistent profits, and so few entrepreneurs were interested in the long haul.

Finally, Friedman talks about policies that “encourage private investment.” He seems oblivious to the fact that too much money is what’s breaking venture capital right now. We don’t have a shortage of capital, or even a shortage of ideas. We have a shortage of engineers.

And this is precisely where government can help. My alma mater, U.C. Berkeley, has long been one of the principal sources of engineering talent in Silicon Valley. Last year, Berkeley was forced to cut its budget by $813 million, or 20%. Top-flight professors are leaving the nation’s leading public university in droves. The same scene is replaying itself across the U.S., including here in Seattle at the University of Washington.

You would think the whole Valley would be up in arms over such a calamity. I for one wish Friedman would have mentioned undergraduate education somewhere in his essay. Within the technology community, we all know that the reason America is #1 in technology isn’t because of our regulations, cabinet ministers or tax code; it’s because we have had the best universities in the world, which produce the best thinkers, scientists and engineers. We have only recently come to realize how delicate those universities are.

This is why I just can’t bear to hear folks talk about Secretary Newco, cutting the capital gains taxes for millionaires and billionaires, or eliminating the Sarbanes-Oxley regulations that emerged after Enron struck the first of many blows against our faith in public markets. Our once-proud research institutions are struggling to fulfill their mission in society. They need the government’s support. They need Tom Friedman’s support. They need your support.

If we’re going to rally behind a cause, we don’t have to look further than that.

The Best Blog Post I’ve Read in a Long Time

Anyone who reads this blog even casually knows that Union Square Venture’s Fred Wilson is one of my favorite bloggers. He somehow writes every day, in an effortless style, and always expresses a clear idea. Yesterday he wrote an essay that was still with me when I woke up this morning, and with me on the whole journey down from Capitol Hill to the office.

His topic was companies that choose to grow from the hopes-and-dreams phase when they first launch their product into a sustainable business. What I liked best about Fred’s post is that it addressed the emotional reasons that got many of us into this racket in the first place, to build something lasting and meaningful:

There is a big chasm between hopes and dreams and the real thing. Companies need to grow up and go through the ugly adolescent phase. They start to doubt themselves, they start to churn employees, they may even go through a management change or two. Getting across this chasm is hard, it takes tenacity, both from the entrepreneur and team and from the investors. Everyone has to stay the course, buy into the plan, and execute it.

Crossing the chasm to the real thing is not nearly as fun as the hopes and dreams phase. It is hard work and it happens after the gushing media has left your company for the shiny new thing. Your company will take a morale hit and you will have to lead it through this phase.

But getting to the other side is worth all of it. There is nothing as satisfying in entrepreneur land than having a profitable growing sustainable business that doesn’t need another dime of anyone else’s capital. I have watched entrepreneurs stand up in front of their teams and tell them that they’ve reached that point. I get chills every time I see it.

I am not here to say that selling early is a bad choice. It depends on the entrepreneur and, especially, on the company. And I’m not here to say that just because growing a business is fulfilling that we can forget our fiduciary obligation to drive shareholder value — though I would probably quibble with many people about the time-frame over which value is measured.

But I have long felt that those who do choose to take their shot often struggle to find partners, investors and supporters willing to go that long hard way with them.That’s changing, in part because of Fred’s leadership; it will probably change more if Glam, Facebook or LinkedIn go public.

We noticed the change when we raised money last fall; for our previous round of financing, everyone asked who would buy us. This time around, everyone asked how big our business could be .

Redfin is in our awkward adolescent phase now, and I’m thankful that we have a team and a board with the patience to help us find our way. When I think about what we’re trying to achieve, I always come back to what America’s potato king told the author of Fast Food Nation about his business:

Though he is a multibillionaire, J.R. Simplot has few pretensions. He wears cowboy boots and bluejeans, holds business meetings at Elmer’s Pancake House in Boise and drives his own car, a Lincoln Continental with license plates that say “mr. spud.” He seems to have little patience for abstractions, describing his empire with a mixture of pride and awe: “It’s big, and it’s real –it ain’t bullshit.” 

Of course, other people make other choices. Before I was born, my father co-founded a NASA subcontractor. It was taken over by a New York investor who brought salamis down to Florida because he didn’t trust the local restaurants; the investor also tried to sell fake Rolexes to government procurement officers out of the trunk of his rental car. Later, the company somehow became independent again and one day a few years ago, on a drive down to Ft. Lauderdale to go skin-diving, my dad and I saw his co-founder walking his dog along the side of the road.

The guy was in his mid-70s. He was still working on spacecraft avionics at the company they started. He talked about his work with great pride, and also a tinge of founder’s anxiety, about all the things he hadn’t got done yet. My dad, who had sold his stake a long time ago and bought a boat with it (and then traded it in for the boat that was on the trailer-hitch behind us), listened carefully. When the conversation ended, I asked my father — he often goes weeks at a time without putting on a pair of shoes and wrote in a 1st-grade paper that his favorite thing to do “was nothing at all” — if he would rather still be at his old company.

“No,” he said, looking at his old partner in the rear-view mirror as we pulled away, and then looking at me as if I were a little obtuse. “I’d rather be skin diving.”