Ever wondered how some of the most successful Internet start-ups of recent years, such as, for example, Instagram (est. 2010; net worth $1bn*), Quora (est. 2009; net worth $300m), Kickstarter (est. 2009; net worth $725m) and Tumblr (est. 2007; net worth $800m) evolved within just a few years into multimillion-dollar cash cows and are still going? What does it really take to outpace your competitor and to maintain triple-digit growth rates—year for year—in a market that has become relentless with no margin of error?
*Net worth valued prior Facebook’s acquisition in 2012. In 2015 the company’s net worth has estimated at a staggering $35bn.
On the one hand, Management Theory argues that corporate success, or so to speak, expected growth, comes by offering the right product which is both rare and difficult to imitate. You gotta have that Unique Selling Proposition (USP), remember? And frankly, it makes sense. If your competitor can effortlessly offer the very same product or service, you effectively share the market and thus profits.
Now, under closer inspection of our aforementioned specimen start-ups, Instagram allow users to take pictures and share these (instantly) on your favourite social networking platform; Quora is a Q&A forum with an embedded voting mechanism to determine the best answer; Kickstarter is a crowd-funding platform for promoting new projects; and Tumblr allows blogging with an emphasis on multimedia content. Rings a bell, no? Arguably, their USP sounds neither original nor very difficult to imitate. All it takes is a (fair) bit of HTML as taught at university of a typical undergraduate degree in computer science.
We can also look at these marvellous success stories from an economic perspective. Mathematical (general equilibrium) models, such as, for example, developed by economist and Nobel Laureate Robert Lucas, predict that a company’s optimum size is a function of output, managerial talent and ‘span of control’. Indeed, thanks to Lucas, all those hours you spent at night at the library cramming for your Business Strategy 101 exams have finally a mathematically prescribed payoff! What’s more, the ‘span of control’ here broadly refers to the hierarchical structure of a company or, in other words, how many subordinates you have won as loyal allies that effectively translate your corporate vision and keen concepts.
The latter point is particularly intriguing and leaves some room for interpretation. Control is generally exerted by either threat or by conviction. Unsurprisingly, top economist Andrei Shleifer finds that trust —a belief in the reliability, truth or ability of someone without prior knowledge—promotes corporation in large organisations. Moreover, trust between employees and their managers is key for boosting corporate performance. For example, research show that franchise restaurants, which offer the same product in similar settings, will have significantly higher sales and net profits if they also have general managers who garner a higher level of trust from their employees.
The mechanisms, however, by which corporate trust is fostered in a company are still on the forefront of socio-economic research. My own intuition tells me that for aspiring Internet companies it possibly boils down to a combination of both interpersonal skill and maintaining a corporate culture that is embedded within a relatively flat hierarchy.
A few years ago at a job interview as a code developer for booking.com at their headquarters in Amsterdam, I put on the usual black business suit and tie, true to the motto, to never under-dress your interviewer. Boy, I was wrong! I was cross-examined by a couple of geeks wearing shorts and (of what I could identify at that time) star-wars t-shirts while offering me pizza remnants in a box. I failed the moment I stepped into the room. With my suit I felt that I was an intruding alien element that had contaminated their corporate heart and betrayed their core principles.
They were looking for someone just like them. If employees share a similar culture, they will be naturally more trusting and therefore, your company will more likely keep an upper hand over your competitors in a market in where rarity is scarcity. In fact, look at the current behemoths of the Internet. Google, Apple and Twitter are all paragons of a superior corporate culture that had been fostered right in its cradle. To compete on their level takes not only ability and a bit of luck, but to establish trust among your employees from the very beginning. Perhaps it is a good idea now to brush up on your LinkedIn contacts—another former Internet wunderkind (est. 2003; net worth $4.5bn) worth remembering.
By Jack Witkowski – GSM London Lecturer in Economics