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Learning from Legacy Mistakes

Lonne Jaffe | January 19, 2018| 1 min. read

Lonne Jaffe is a Managing Director at Insight Venture Partners, and joined the firm in 2017. He was previously the CEO of Insight portfolio company Syncsort, which he joined in 2013 after serving as the senior vice president for corporate strategy at CA Technologies. Prior to CA, Lonne spent over a decade at IBM, where he led a number of sizable software acquisitions and held various technology strategy and operating executive roles.

In this blog post, Lonne highlights what growth-stage startups can learn from the storytelling mistakes of legacy technology companies.  

Traditional enterprise technology behemoths have for many years leveraged their brands as a form of market power to defend against competition. Their brands represented a story about innovation, trust, quality, and security, and helped them to attract customers, partners, investors, and talent. The barriers to entry created by their story allowed them to dominate their respective markets.

In the last several years, we saw this narrative start to erode. Tech behemoths, just like retail and media companies, watched revenue and earnings crumble in the face of competition from juggernauts such as Amazon and Google, and growth-stage startups. Nurturing a brand is a form of storytelling, and these new entrants simply told better, more compelling stories. 

In 2018, a new generation of growth-stage startups have the opportunity to learn from the storytelling mistakes of legacy technology companies, and to craft brands that that will grant them long-term, sustainable economic power. Here are three of those mistakes.    

Storytelling Mistake 1: The Talent Story

Before professional networks, it was hard for startup technology companies to identify top talent, with much of it locked away within traditional technology firms. Now, detailed resumes on sites like LinkedIn make everyone more discoverable. This has accelerated a mass exodus of top talent from legacy firms to faster-growing companies who boast interesting work, important missions, and amazing colleagues.  

One familiar storyline follows the entrepreneur who builds a successful startup and makes enormous amounts of money. Yet, within a legacy company, the story for a successful business builder often ends differently—with a lackluster bonus, perhaps, or an uneventful promotion.  

Legacy firms typically give business unit managers mushy operating metrics, targeting goals like operating income or revenue growth, which at best shifts the focus away from long-term results, and at worst incentivizes general managers to destroy shareholder value to optimize metrics. Sometimes they offer managers and employees equity in the large parent company—equity that an employee has a limited ability to impact. Growth stage companies, by contrast, can incentivize employees with equity targeted to a specific business.

The employee story doesn’t have to become uninspiring as a company gains scale, however. As Google has matured, for example, it has maintained an unusual talent philosophy of “paying unfairly” and is unafraid to compensate employees who make entrepreneur-caliber contributions. Google also developed a well-designed corporate structure (inspired in some ways by Berkshire Hathaway), with its Alphabet parent company, and multiple sub-companies such as Nest, Calico, Waymo, and Google, each with their own CEO. This structure makes it easier to craft highly-focused incentives. Measurements tell a story, and you get what you measure. 

Storytelling Mistake 2: The Product Story

Legacy firms historically benefited from marketing supply-side economies of scale: more customers yielded more profits, which in turn paid for larger scale ad campaigns. The most respected technology brands today, however, are companies that produce consistently high quality, innovative, and secure products. A company’s brand power increasingly follows from its product story, and less from its advertising budget. 

The ability for growth-stage companies to go direct to customers has also weakened the economic moat legacy companies have enjoyed as a result of their distribution networks, consulting organizations, and global enterprise sales forces. Brand value is driven more and more by product quality, not by the global footprint of the business. 

Compounding this, there has recently been a renaissance in the value of product demand-side economies of scale, sometimes referred to as network effects. These are advantages that increase the value of a product as it gains more customers and partners; for example, the power that accrues to a winning software platform like Salesforce that has a vibrant partner ecosystem, or the advantages that companies like Google have available to them by virtue of having more data that serves as fuel for their machine learning systems.  

In the startup world, Darktrace, a fast-growing cybersecurity software company which uses machine learning to build an “enterprise immune system” that protects enterprises from unknown threats, operates with a similar strategy. As it attracts customers, its product improves by developing “antibodies” that can be used to defend its user network.

These products get better as growth-stage companies achieve more adoption. Employees, investors, customers, and partners all find this storyline to be compelling, and this contributes to a powerful bottoms-up brand.  

Storytelling Mistake 3: The Investor Story

Without an investor story, the customer, partner, and employee stories will typically fall apart. Customers and employees need to feel as though a company is well-resourced for the long-term before they're willing to bet on it. 

Well before Amazon was the dominant force it is today, Jeff Bezos focused on curating an investor base that would be supportive of investing the company's profits in new initiatives. He then explained that many of Amazon's new initiatives would fail. This gave the company permission to invest with conviction into new initiatives and also to bring down its cost of long-term equity capital, which has been a huge competitive advantage.  

Many traditional technology companies have curated a very different investor base by telling a story along these lines: “We won’t be making bets on the future of the technology industry with your money; we will just raise prices on customers, lower employee headcount, generate cash, and return that cash to you.” While returning cash to shareholders is an important aspect of responsible capital allocation, in many cases customers, partners, and employees don’t like this wind-down-the-business-and-return-capital investor story—since customers experience rising prices and slowly improving products, and employees experience more job risk and an uninviting culture.  

At the same time, it has never been easier for growth-stage startups to tell a compelling investor story. Venture capital and growth equity funds have made the power of long-term capital and other infrastructure available to fast-growing companies. And, as Amazon and Google have shown, a compelling story doesn’t need to erode as a company achieves scale—it can keep evolving.