Take the Friction Out

Earlier this week my partner, Brian Hirsch, and I had breakfast with Google's Advertising VP, Tim Armstrong.  This is the guy who spearheaded Google Adsense.   Meeting him reminded me my visits with Netscape execs in 1995 and Yahoo in 1996.   The ideas they espoused seemed at the time like man creating fire.  Ok, I am going overboard here.

But the coolest thing Tim said to us was something I have been thinking for a while, that I've had a hard time explaining to myself and others: to be really successful, startups need to take the friction out of their systems.  Even if they are growing at a nifty 50-120%/year, that ain't enough.  You'll get a great acquisition offer at some point if you keep growing at that pace, and a nice exit.  However, the real magic that few people talk about is what Google did to Yahoo and AOL.  Instead of continuing to compete with those 2 portals headon fighting for CPM based ads via an army of direct ad sale people, Google changed the game with AdSense.  The idea: how about automating the system and allowing both buyers and sellers to go online and bid on the space and searches they wanted.  Oh yeah, and then letting the entire website population do the same for their site.  Presto: no large direct ad force needed, and a frictionless profit machined like system a la Ebay was born. 

Smart startups have to think about how to take the friction out of their business model.  Primarily that means looking at your value stack, and figuring out a way to take human beings out of your process that slow things down.  The good news is that more and more customers hate dealing with people, as they are analog, slow, and imperfect.  Some other more mundane examples: Dell product ordering, Walmart procurement, Intel and Cisco fufillment, online travel services, grocery self-service lines, and on and on.  It will be painful.  It will hurt.  Jobs will be potentially be lost.  Management and board egos bruised because that's not what your competitors are doing or there is no market for that.  But the real lesson of Google's success is there is much to be gained from creating value and sharing it with your customer.   Instead of having the recurring nightmare of being run over by Google and acting like a deer in the headlights, you can do the running over.  Take the friction out of your system. 

Comments

[Texan Desi]

Mr.Brotman,

Your idea is perfect in its logic but does not take in consideration human imperfections. I have written a comment on it on my blog at
http://texandesi.blogspot.com/2004/12/take-human-out-of-finance-equation.html

[Steve]

I understand your reaction.

There is a great book about this macro economic subject that I recommend: The Future and Its Enemies: The Growing Conflict Over Creativity, Enterprise, and Progress by Virginia Postrel.

However, as a student of economics, I have to disagree with your analysis. Automation and destruction of jobs actually creates a larger economy and a net increase in the number of jobs. If the U.S. protected their farm industry from automation (like India does to many of it's own industries), and required that in 1900 all farmers would have to stay farmer, 40% of our workforce would be farmers today. Instead, less than 1% of the U.S. workforce is involved with farming, and produces a surplus of food to places like India, China and Russia. In addition, since 1900, that same 40% of the workforce now are employed with a higher standard of living in the information technology, health care, automotive and finance areas of our economy.

Automation and value creation do not destroy jobs they create them. The key issue is what does society do to help with that transition, and I'd agree with you it needs to do more than it does right now. But to stop progress is to destroy the very economic fabric you are trying to protect.

And it just so happens that VC backed companies are on the forefront of that change. My fund alone created 800 new jobs from a base of 100 jobs over the last four years-- and that was during an IT spending recession. I just wanted to remind entrepreneurs that they can use that macro economic knowledge to their own micro economic situation and improve their individual, corporate and national wealth. You can too, so think about it, but I understand and value your reaction and think we can do things to make that transition less painful.

[Texan Desi]

Dear Mr. Brotman,

I write a blog as Texan Desi and commented on your article yesterday.

First of all, thank you for being onstrained and gentlemanly in your comment. Looking back at my blog entry, it comes across as reactionary and a bit vitriolic. Just goes on to show feelings in though do not
translate equally in writing.

I have permanent residency in the US, am working in a good job, learning a six-figure salary and making a decent living. I am
definitely in the top 10% in the IT industry in my skill set and ironically, work in the field of call center automation where our
software makes jobs increasingly redundant. In addition, I am working on a (possibly) patentable idea which will further reduce the inefficiencies in the call center environment.

Having given that background, my blog does not make sense but it is a feeling that has been growing for a while, based on experience and observation.

I will definitely read the book you have mentioned and continue to read your blog for idea.

Most important, my future blog entries will tone down the language to the level of reason.

Rgds,
Texan Desi

PS - I am replying from my GMail address for credibility but CCing my personal email a/c for reference.

[Charlie Kemper]

Steve doesn't necessarily suggest that taking the human out of the picture is the sole opportunity, but rather simply taking friction out of the system, creating value, and sharing it with the customer.

Effectively, Steve is championing the idea that huge homeruns are created by (a) having very scalable business models that (b) don't require much (if anything) to complete an advantageous sale and/or (c) enable mass customization. Products or services that require hefty sales forces and lengthy sales lead times are simply an enormous impediment to certain explosive growth. In an established market space, such as the one that Google broke in to, market scale was created by automating sales and enabling SME's to buy the same products that were only really available to large enterprises.

With that in mind, we can put Google, Dell, Intuit, Yahoo, Cisco, Costco, Etc in the same category - disruptive business models. Isn't that what it really is?

[Seun Osewa]

Another way to think of it:
A gradual process of removing human beings from tasks that computers do better. Once you do this, you can generally buy enough computing power to run those tasks faster (perhaps instantaneously).