How a Successful Digital Business is Really Built
The digital world is fraught with myth. A common fable is of a visionary idea executed flawlessly and pursued with certainty by those with superhuman powers of insight. How things really work is considerably different. It is usually a tale of confusion, doubt and more than a little trial and error.
This shouldn’t come as a great surprise; many eminent companies had inauspicious beginnings. Hewlett and Packard started out with oddball ideas such as an automatic toilet flusher and a gizmo that would shock people into losing weight. Sony failed with its first product, a simple rice cooker. 3M was such a failure at one time that you could buy two shares of stock for one shot of cheap whiskey.
Great successes are often born out of failures. Today’s hypercompetitive digital world is no different, only things happen much faster so there is that much less room for hubris.
A great example of how a company can stumble through and beat the odds is PayPal. Their first product was a failure, they had entrenched competition from both eBay and conventional financial institutions and they made more than their fair share of mistakes.
“The PayPal Wars” as chronicled by Eric Jackson in his excellent book, tell us a lot about how a great digital success is born and then made. The lessons learned from the PayPal story not only ring true from my own experience, but I believe it can serve as a guide to anyone who wants to develop a digital business.
A Tale of Mistakes and Misteps
The amazing thing about the PayPal Story is not their enormous success, but how much they got wrong!
They didn’t have a clue what they were doing: The original vision of PayPal was to develop an application for the palm PDA. They expected to change the world by offering people a way to transfer money any time, anywhere, in any currency or denomination. Currency markets would be up-ended and the lives of countless millions would be changed forever.
Their plans were so big that they dubbed their user-counter “The World Domination Index”. They failed in all they initially set out to do. The online business was actually an afterthought and PayPal never became a successful currency exchange platform.
They were disorganized: When Eric Jackson showed up for his first day at work, nobody knew that he was hired or what he was supposed to do. He didn’t even have a desk! Coming from an established, buttoned up company such as Arthur Andersen (this was before the Enron scandal that bought down the firm), Jackson was appalled by the lack of organization.
They misread their market: PayPal initially targeted technophiles and shunned auction users. The feeling was that auction users were bargain shoppers and hence therefore had no money. However, there was a mandate early on to spend a lot of money on e-mail marketing and their early target of technophiles was soon exhausted. They had to find new people to market to.
With few other options they decided to market themselves to auctions, which eventually became their primary path to success. No grand plan, divine insight or brilliant strategy, their key path to success was actually almost accidental.
They had well-financed, entrenched competition: Not only did they have other people try to do the same thing as they were doing, but big banks were financing some of them as a defensive move. To make matters worse, their biggest source of business, eBay, actually bought one of their competitors, Billpoint.
Getting Important Things Right
Despite a series of misadventures, PayPal got the most important things right, and that made all the difference.
They were fast: While the process might have been ugly, PayPal ran circles around their competitors. They launched innovations faster and implemented them more effectively. Although they made mistakes, for the most part they were cheap ones which they were able to correct quickly.
Here, their lack of organization was an advantage. Low and mid level people could launch initiatives without a cumbersome approval process. If things didn’t work out, there were no senior executives married to the project and sunk costs were minimal. Changing course was easy.
They were smart: PayPal had its headquarters in Palo Alto, and had ready access to the best that Stanford University had to offer. They hired smart, ambitious people and gave them an enormous amount of autonomy. Very few executives at PayPal had significant business experience. For many, it was their first job.
They had a dream: While their dreams were somewhat misguided, everybody in the company believed in them; and that made a difference. It’s what made them work harder and push themselves beyond what anybody thought was possible.
Lessons We Can Learn From PayPal
In the digital world, the right people are more important than the right strategy: The Digital World moves so fast that it’s impossible to pick winners. Nobody can know what is actually going to be successful until something is actually tried. The more things you try the better your chances will be.
That’s why it’s important to have smart, motivated people and empower them to make decisions. When Eric Jackson took the initiative that launched the auction strategy and led to PayPal’s success, he had no mandate to do so, actually quite the contrary.
What PayPal had were smart, motivated people who were driven to make the company a success. Because staff were empowered, it was fairly easy to recruit – everybody felt responsible and encouraged their friends to join the effort. Smart begets smart.
Senior management can create the dream, but can’t dictate implementation: The senior management didn’t dictate what was to be done at PayPal; rather they laid out what could be achieved. They inspired their staff with lofty goals that had meaning. management guru Gary Hamel calls this a “community of purpose.” The extraordinarily capable team at PayPal bought in and strived to make the vision a reality.
Moreover as things heat up, too much is happening at once for senior management to control every process. If the big bosses have to know everything that’s going on, not much will.
Large companies may be better off waiting: Ironically, the villain of the story did quite well. eBay, acquired Billpoint and failed, then did somewhat better when they eventually bought PayPal. They remain a profit making organization to this day, despite their inability to manage a start-up culture.
They probably could have saved themselves a lot of time, effort and money by waiting for a leader to emerge and acquiring it rather than jumping into the fray. The end result would have been the same, but it would have been much cheaper.
How it All Ended
In the end, PayPal was bought out by eBay and the culture was altered considerably. Rapid innovation gave way to endless meetings and constant vetting. The decision-making process became slow and hierarchical. Key people became disillusioned and left to start companies such as LinkedIn, YouTube and Yelp.
While both eBay and PayPal continue to fare surprisingly well (the company as a whole has net profit margins of about 20% and maintains impressive growth), there continue to be missteps. They are expected to unload Skype, another startup they acquired, at an enormous loss.
Success can be an ugly business.
– Greg
Right on the money!
I add the following as conditions for success:
1) Determination and strength to persevere. Remember Einstein’s quote: Genius is 99% perspiration and 1% inspiration.
2) The courage to stick to the course despite everyone who tells you you’re nuts.
3) The old process mantra of: Think, Plan, Do, Repeat. An improvement on “if at first you don’t succeed, try and try again.”
All in all, it’s insane to think that anyone person (or team) can envisage something complex like a company-to-be-formed, and then implement it precisely as it was thought of, without getting some of it wrong. And when you find that you did not get it right, it’s what you do about it at that moment that dictates future success or failure. Give up, make excuses, blame someone else, and you’re dead. Think about it, analyze all of the facts, develop a strategy, take firm action, and then analyze it again to measure your correction, and you will win.
Eric,
Great points! Thanks.
– Greg
Having gone through this for the 18 months with our business, I can validate everything in here from experience!
Bill,
Thanks for your input. Good luck with http://www.kavacast.com
– Greg
I’m right in the thick of launching a site, and after reading this I wonder if there’s no avoiding the inevitable. I almost feel one needs be psychic to know what improvements actual usage will yield.
My site’s been public all of 12 hours, and I’m wondering what the public’s reaction will yield.
Russ
Per usual, par excellence.
Russ,
You’ll know soon enough. The great thing about the web is that you get feedback so fast and you can correct inevitable mistakes before they really do any damage.
Good luck!
– Greg
Solid post Greg!
Thanks, Bill.
Good luck with Nibea. It looks like an interesting project.
– Greg
Russ,
Thanks. Keep me updated how http://www.checkoutmygarage.net is doing.
– Greg
Hi Greg,
It was nice reading this article…it helps to know that you’re not the only one. I have recently started with The Elephant Head (www.theelephanthead.com) and every other day I feel I may not be going in the right direction. This is inspirational.
Thanks
Kshama
thanks
It’s always great to get a glimpse behind the curtain at these wizards at work and find them just as confused as the rest of us. I guess the lesson is simply, “There ain’t nothing to it but to do it… (and learn from your mistakes)”.
Thanks again, Greg.
Kshama,
Good luck with your digital agency at http://www.theelephanthead.com/
Keep the faith!
– Greg
James,
Thanks.
For everybody else, see the “Double Life” ad James did for Sony PlayStation ad here. It’s one of the most award winning spots in history and is in the Clio Hall of Fame.
Greg
Excellent post Greg. Although there are not enough strategic leaders in business today you should also never be fooled that success is a logical journey. Your comments are in tune with two things I have picked up recently:
1. This article in the Harvard Business Review titled, “Are Great Businesses Just Lucky?” by Professor Henderson at MIT’s Sloan School (http://hbr.harvardbusiness.org/2009/04/are-great-companies-just-lucky/ar/1)
2. Advice from my digital marketing coach Chris Cardell (www.cardellmedia.co.uk) who has emphasized that you do not need to take massive risks when setting up a new business. You just need to keep testing and experimenting with different methods of on-line marketing.
Keep up the good work!
Edmund,
Thanks for the sources. I’ll check them out.
Have a nice weekend.
– Greg
Thanks for the post Greg,
I don’t have a digital startup, but it is a startup nonetheless and as I was reading your post the smile on my face kept getting bigger and bigger. When I first started I had no idea what I was doing. I mean I wasn’t totally clueless, but looking back, where I started and where I am now. . .there was alot of trial, experimentation and lessons to be learned. But like you said I made cheap inexpensive missteps. And Eric has it right on the money with the old tried and true Edison quote and with think, plan, do, repeat. Right on the money. And you also mentioned luck (which can play a huge role), but what I’ll add to that is there is also a different kind of way to think about and look at luck. I actually came across a very interesting article written in 2003, by a British Psychologist named Richard Wiseman, on HOW to be lucky. I found it to be very, very interesting. I blogged about it here http://www.cnvrgnc.com/journal-old/2009/10/19/id-rather-be-lucky-than-good.html . This in one of my faves of your posts Greg. Have a great weekend my friend.
Rasul,
Thanks for the link to your site. It’s very interesting and I recommend it highy to anybody else who is reading this.
Coincidently, I also cam across an article about luck on the Harvard business review site. You can find it here.
– Greg
Hi Greg,
Thanks so much for the article! As someone who’s recently launched an online business (and literally had a naysayer tell me off just last night) it’s nice to have reassurance that I’m on the right track. Disneyland was obviously not an online business, but they had a lot of problems on opening day as well and look where Disney is today.
The other thing I liked is that the post touches on two of my core beliefs–“Good to Great” and the Boyd Cycle. “Get the right people [on the bus]” is right out of “Good to Great” and a lot of the rest is straight up Boyd.
Observe-Orient-Decide-Act (OODA)–if you push responsibility to all levels, try lots of things (actually that’s out of “Good to Great” as well), learn from your mistakes, and quickly iterate again, you cycle faster than your competitors and win the fight. OODA/Boyd Cycle was actually my first post at my blog, slyousten.com.
-Steve.
Thanks Steve. Good Luck!
– Greg
I’m another digital entrepreneur out here trying to find the magic sauce…Great post…I’m a huge believer in persistence and trying new things all the time. So many inexpensive ways to the test your market these days…Good luck to all of you.
Michael,
Thanks. Great site!
– Greg
Really enjoyed reading your article. I agree with what you are saying on so many levels, and will forward your link to a few people I know will pep up when they read it. Good on you!
Sandra,
Thanks. Much appreciated.
– Greg
Awesome and very inspiring. I keep everything I learned in this bulletin with me as I tediously and meticulously move forward in my endeavors. Thanks.
Jason,
Good luck with http://www.urbanaffairz.org
– Greg
It’s the fundamentals of innovation & creativity – confusion, chaos, what! who? but it does work, whether you are talking about a digital business or just people living. My best performance & happiness quota was achieved in start ups and/or small teams where the rule of the day was creative chaos. The trick to lead & manage in this environment is establishing what you really need to know as a leader/investor. You may be surprised how much you really need to know from what you think you want to know.
Heidi,
Good point. If top management has to know everything that’s going on, not much will. As a manager, I’ve always found that it’s important to filter information effectively. You can only keep track of so much.
– Greg
As I have said before Greg, you are one of the few bloggers who I read that make me want to respond.
Absolutely right about the need to constantly re-evaluate and update your plan. We started the e-commerce web thing in 2002 when I decided the city I lived in (Vancouver) needed a shopping directory of cool and trendy stores. We wrote an app so data entry staff could enter the store’s data and products, we even had a professional photographer going to the various shops to take gorgeous pictures. We did a subscription based thing and therefore needed sales staff. Because it was local we advertised at great cost in the local hip papers and even on the radio – once. We uploaded all the data entry work to the web app.
A few years into it we were running out of money and realized that if we were to continue we had to decrease the expenses. That meant re-writing the app so retailers could enter the data and products themselves (forget the subscription model) and pay a small fee for the add. This model got rid of the sales staff, the data entry, the photographer and even the local advertising as we decided to go global. And the entire app was now a web-app.
Without a presence however, no retailers knew about us so only a few signed up. Then we discovered affiliate marketing – the simple concept of representing online stores as publishers – leading to commissions for every sale that occurs. We choose the stores, based on our own criteria, adding them and their products.
The next problem was getting enough data in – we couldn’t do it one product at a time anymore – so we wrote a datafeed app. Then we found that most of the stores don’t categorize their data properly, so we wrote a categorization app so we could try to do a better job of that.
Each solution bringing a new challenge.
And of course there is the constant seo, networking, getting yourself out there, every day. It is relentless and never ending. And there is just way too much work to do everyday.
Your family will not believe in you and you have to stomach the reality that they think you are incredibly stupid to be doing what you are doing. They will likely not help you with funding and you will feel really alone.
I guess what Nietsche said, “what doesn’t kill you makes you stronger” applies here.
But there is progress, lots of progress and in the end you just have to get up every day and do your thing and keep focused. Be ready to make changes at the drop of a hat and keep going.
Karen,
What a great story! Thanks.
Good luck with http://www.marketplacestories.com
– Greg
Bill,
You said ir just like it it! It is so easy to look at the big guys like the Googles, CBS’s, ESPN’s, NBC’s and the likes and think they got that big overnight~ they didn’t!!
It is truely a day to day fight to grow and to get to where you need to be in order to be even perceived as having any value much less be viewed as a valid player and worth brands puting money out for you.
Hard work, alot of faith and a positive attitude…..plus alot of long hours, hard work and perserverance is what it takes to get there. And even then, the real work is only just beginning!
Susan
Hi Greg,
As always, I enjoy reading your articles and have learned from you.
This one is very helpful because it is nice to know mistakes bring you closer to your goal to be successful – and my attitude has always been “giving up is not an option”.
Hope all is well “way over there”….and hope you have a very Happy Thanksgiving!
Bye,
Lisa
Lisa,
Thanks. You have nice holidays too:-)
– Greg
You provide some excellent points to consider and implement. A real motivation. Th main point is to stay focused no matter what others say and as mentioned, your strategy may change along the way but it is that change which can make a significant difference to your growth strategy. Suzanne
Good reading for everybody trying to make their start up take off. It is encouraging to know that even successful businesses may have not done it smoothly.
Suzanne,
Thanks, I’m glad you found it useful. I think a significant point is that great companies don’t come from great strategies, they find the right strategy along the way.
– Greg
Stan,
Thanks. How is your business going?
– Greg
Hi Greg,
My business is like a growing child. We are building a market for our first mature products. I have been through running a start up and can relate some of my experience from our first years to the story in your post. I think it would be encouraging for all who are going to start a business to read such stories.
Stan
Stan,
Good luck! Let me know how it goes.
– Greg
Unhappy people communicate problems and happy people write checks.
What else is there to know? haha
With websites, as soon as someone communicates problems, we can change the code(or pay someone) for usability, navigation, speed, whatever. Those changes expand as you grow relationships. All of this with minimum investment. Plus if you fail, no one will notice, were all too busy looking for something new. Start over, the market is that Big.
And that is why technology and websites are awesome cool businesses… Wait, what is the question again?
All we need to do is move fast, make sharp turns, and change out parts when needed. I would like to see a big company move like a race car. They can’t, it costs too much. Sucks to be them!
A successful digital business is Built like a race car!
Chris,
There’s a lot of truth in that. You have to move fast and cheap! Big companies often plan and spend too much.
Lately though, I’ve been noticing some small changes, especially with magazine companies. Conde Nast seems to be moving in the right direction (they were just appallingly bad – getting good) and The Atlantic is doing some interesting things…
– Greg
This is a great read. I learned a lot. I agree with you that in the digital world the right people is more important than the right strategy. So in the case of Pay Pal, because the founders are no longer play important role in the strategy and decision making processes, did that make Pay Pal less successful than it was before? Would this mean that the role and vision of the founders is important in creating a sustainable and successful Internet business?
Batiah,
This is a very good question, because as the scale of a business grows, so does the level of organization needed to manage it. Companies like eBay, although they seem stifling to the start ups they require, seem to do fairly well with their acquisitions (or at least better than average). On the other hand, they don’t seem to be able to build successful start ups themselves.
So, in the end, I think the answer lies in creating just the right amount of organization to manage the scale of the business. Too much and you squash innovation, too little and you have chaos.
– Greg
Great article. You summed it up right.
Thanks, Paul.
– Greg
excellent article and you hit the nail on the head!
look forward to more motivating articles!
🙂
Nice article, good sources.
Andrew,
I’m glad you liked it.
– Greg
Great article. I really enjoyed it. Added that book to my Amazon wish list 😉
The ability to do quick iterations is priceless.