Eric Schmidt talks about what worked and what didn’t while scaling up Google – Part I

Note: Since this is a long session, we have divided it into two blog posts. Link to the second post here.

A group of entrepreneurs taught a class at Stanford called “Technology-enabled Blitzscaling” and this is Freshteam’s attempt to present the key learnings/takeaways based on the lectures. 

In this class, Reid Hoffman, Executive Chairman and co-founder of LinkedIn, interviews Eric Schmidt, who was the CEO of Google from 2001 to 2011, its Executive Chairman from 2011 to 2015 and the Executive Chairman of Alphabet from 2015 to 2017. The interview is focused on Google’s scaling journey.

Eric’s pre-Google days

Reid: What did you learn from your stints at Sun Microsystems and Novell that was essential and helpful for you at Google?

Eric: I recently visited my old boss, Bob Taylor, whom I worked with at Xerox Park and asked him about how he founded ARPANET and conceived the modern personal computer. This is a reminder of the extraordinary things that have happened in our industry and also, of how old I am.

After working at Xerox PARC, I went to Sun Microsystems and as a first young manager, you absorb everything. Bob had a particular management style, which I now realize is similar to the way I approach things. My first impressions from being a Sun manager and the way Sun worked colored the next 30 years of development. The first few years of your careers are crucial because this is where you learn things that define your leadership style.

Sun was tumultuous, political and complicated and some of the negative things I learned is that companies can reorganize prematurely, they can become religious and that they don’t react to facts. The low point for me at Sun was when we had a meeting where we concluded that we could not bring down the manufacturing costs of Sun computers equal to that of PCs. 

That’s a signal that you should quit because I couldn’t answer the question that I advocate now, which is, “What does the next five years look like?” I learned this the hard way because for most of my life, the answers were given to me or were highly narrow. After 14 years at Sun, I joined Novell without doing any due diligence. Looking back, I wouldn’t have joined Google if I hadn’t joined Novell; so, maybe not doing due diligence was probably good!

The first week was the worst week ever – the books were cooked, the people were fraudulent and the customers weren’t paying among other issues – and our basic goal was to get out of this with our professional reputations intact. In hindsight, I realized you can overcome such things and the skills I developed at Novell came handy at Google.

Eric becomes Google’s CEO

Reid: What was the employee size when you joined Google?

Eric: About 150. At that time, its co-founders Larry Page and Sergey Brin had to take a funding of $25 from a couple of venture capitalists who said these two young men were brilliant, crazy and unreliable and that they needed a proper CEO. They agreed to hire a CEO as long as they could vet them by spending a weekend with them, which guaranteed that no one would get hired.

Eventually, I was called by John Doerr, investor and venture capitalist at Kleiner Perkins for the position. After an initial ‘no’ by me, we met and got along well. I made a list of things for them to fix and the rest happened.

Audience member 1: Do you remember some of the things that were on that list?

Eric: I have the list because I save everything. Remember this is Google. When you think of a small company, almost all of them have the property that they’re full of energy with no process. And they get to the point where Google was at by just sheer force of energy, hardwork and figuring stuff out.

My list was pretty straightforward: international expansion plans, sales plans, hiring plans, proper accounting, inventory, development plans and 18-month product plans which Google didn’t have at that point. 

My first meeting at Google was like being in a graduate school at a university – full of interesting conversations without deadlines or deliverables. Much of the Google culture was developed out of the graduate school at Stanford. 

The raw material was already there and it turned out that you just had to ask questions such as “What’s the plan?” and they’d give an answer. If you pushed them, they could develop a plan but it’s just that they didn’t think it was important.

After this, I showed up at Google, which was an interesting and innovative company. I understood the role of cash, given my experiences at Novell. So, we did everything we could to run the company for revenue and the rest is history.

Reid: If you could go back to your younger self, is there anything you would have told yourself to do differently during your pre-Google days?

Eric: In hindsight, I would have always made the right decision faster and committed fewer mistakes. I continue to have the problem of not making decisions quickly and I guess some people are quick decision-makers than others. 

Relationship between Founder and Outside Leaders

Reid: What are the key factors to consider while making a partnership between founders and outside leaders work well together?

Eric: I was well aware of the John Sculley-Steve Jobs story. But the matter of fact was that Steve needed someone to be the CEO. The board picked Sculley. Steve and Sculley had a fight. Sculley went to the board, which had to support the CEO because if they didn’t, he would quit. Eventually, Steve left and formed a company called Next, sold it to Apple and within a month or two, fired the CEO that acquired him and replaced the entire board.

That was a Steve Jobs’ moment and very hard for anyone to do what he did; that was an amazing achievement in and of itself. It produced the most valuable company in the world and in hindsight, the right choice. So, I was well aware of this issue of founders and outsiders. From the moment I started working at Google, I knew it was their company and didn’t get confused.

It meant I didn’t do any press. They enjoyed the limelight and right before Google went public, they did an interview (no pictures, just to be clear!), which was during the quiet period (a legally mandated embargo on promotional publicity) that put our IPO in jeopardy.

In August that year, I remember sitting with them where Larry and Sergey had these long faces and uncharacteristically asked if they had screwed up. The correct answer was – “Yes, you really screwed up”. But the even more correct answer was – “No problem. Easy mistake to make. I would have made this mistake”. From then on, Larry and Sergey have given no interviews.

If the founders wanted to do something, I wouldn’t interfere but once they didn’t want to do it, it was fine for me to do it.

I am the professional that was hired. They are the owners. They are the founders. It’s their company. If you get confused on this point, you’re not gonna win.

Few partnerships of founders and outside leaders such as those of Pierre Omidyar-Meg Whitman and Mark Zuckerberg-Sheryl Sandberg have worked well but there’s no one way of doing things.

Google’s Blitzscaling journey

Reid: You joined there were 150 employees and now it’s over 60,000 – a classic example of Blitzscaling. There was one year (2004-05) when you tripled the number of employees…

Eric: I have a saying about this: It’s easy to double. It’s very hard to quadruple every year. You can double by adding another person and expand into another country but to quadruple is almost impossible.

Reid: You had to invent some of these techniques such as the three of you reading every resume, keeping innovation going 20% time. What were the key hacks that worked or didn’t work?

Eric: Before I go into this, I want to offer a cautionary tale. If you don’t understand the subtlety here, you would conclude that the correct thing to do is to grow everything as fast as you possibly can everywhere. That does not work. No product will ship before it actually works.

The way you build great products is you have small teams with strong leaders who obsess over tradeoffs and they push things to say we have to get it done. They put a lot of pressure on the team, they work all night and they produce a product that barely works.

Look at the original iPod that barely worked and what it became later. The original iPhone had no apps. It barely worked but it was just the right combination to create an enormous franchise that’s now 70% of the revenue of the world’s most valuable company.

Travis Kalanick and I are major investors in Uber. His description of Uber was that he understood scaling but the product/app wasn’t ready. You sort of have to have judgment about when the product is ready to scale.

Larry and Sergey would play tricks on me. A typical example of that was when they said they wanted to work on an operating system and a browser. I said that we aren’t strong enough to take on Microsoft and that we’d get killed. So, they hired somebody to improve the performance of Firefox. Six months later, I was called to one office where that person had managed to invent Chrome.

It was shocking. I figured the team of around a dozen people had worked on it full-time and that Larry and Sergey had encouraged them. They went behind my back. Then I said we can’t do an operating system. So, they bought this company called Android and asked me not to worry as it was just software for smartphones.

Maybe the lesson to learn here is that I’m wrong all the time but you need to have judgment as to when products can be scaled. One of the negative examples was that of Wave, a complicated email product we launched with great fanfare. You cannot tell how successful a product is until the first six months because what happens is you get this adoption cycle and everyone loves the product when they test it.

Great products usually hit a bump but then their usage goes up. It took me 18 months to cancel the product due to a drop off in usage. If you have a product and business model that works, you can scale and go global pretty fast.

When I started at Google, I thought it was a sham. The company was using Quickbooks for its accounting and I was convinced there were errors. I asked to be shown the actual cash balance in the bank and there was cash, which was shocking to me. I found out this money was coming from selling ads. We investigated and found out that people were actually clicking on the ads. There was no revenue from outside of America though there was enough traffic.

I asked Omid Kordestani, who led the development and implementation of Google’s initial business model, to set up sales operations in Britain, the UK and France. The operations he set up contribute 60% of the profits of a $60-billion-dollar corporation. In hindsight, I should have done this a month earlier, given the value of compounding. When you hit the point of expansion, you grow very quickly. 

The right time to scale

Reid: Any heuristics for when the product is right for scaling?

Eric: If you think about the greatest products, they’ve almost always been designed for the benefit of people who are actually building them. The original Uber app was a private-sharing group and Larry and Sergey built Google for Stanford and in particular, for themselves.

The server was in Larry’s dorm room and they needed a second server but didn’t have enough power. So, they ran the cord over the room into the neighboring person’s dorm room. They opened up the server for the entire campus and the usage was phenomenal.

Andy Bechtolsheim, co-founder of Sun Microsystems, heard about it through Professor Billionaire David Cheriton, and wrote a $100,000 cheque. Larry and Sergey didn’t have a name for the company then. Sergey kept the cheque in his wallet for a month until they came up with the name ‘Google’.

They set up the servers in the garage in their house and they slowly took over the entire house.

Reid: So, is the heuristic you see is the impressive demand you see or is it simpler or different than that?

Eric: It’s tempting to believe that you have a product that works before it does. The error that’s made, especially by non-technical people, is they believe what the engineers tell them and they pre-scale for a product that doesn’t work very well.

In today’s market, once you have a product, I know I can hire a sales/marketing and evangelism team in a week and I can expand globally. Think of this process as a tight and long funnel. You know the timing is right if people use the product itself.

For example, nobody at Google used Wave but outsiders who were caught up in the hype did. It had a steady dropoff afterwards. There are hundreds of such failed examples at Google but we’ve forgotten all about them. 

Techniques used to scale Google

Reid: Once you have the product-market fit that works sufficiently, part of the thing we do here in the Silicon Valley (China also does but it’s relatively rare) is figuring out how to build really fast into the global opportunity. What are some of the techniques you guys invented for scaling the organization?

Eric: Jonathan Rosenberg and I wrote a book called “How Google Works”. A third of the book is on recruiting. I want to give the credit to Sheryl Sandberg because she set up a lot of this for us. There is a way to systematically hire better people than anybody else. I interviewed Bob Taylor for a new book I’m writing (The Future of Everything) and he said “Sell the dream”.

The way he funded ARPANET was he called up people and described what he wanted. Either they got it and got incredibly excited or they didn’t. If they didn’t, he just went to the next person. How difficult is that? If your idea is pretty good and if the person is sufficiently dull that they don’t get it, then they probably are not going to get it after some persuasion. You want somebody who is quick to understand.

One of the things that Reid talks about is hiring generalists. Larry and Sergey had strict rules. For instance, I would tell them we need some people who can program in Java and SQL and various sorts of XML protocols, which I was familiar with in my previous jobs. They would say that that’s the stupidest thing they’ve heard and that no one would ever want to use Java or any of those things. They did this partly to annoy me.

Then I would ask who they want to hire and they would say they wanted to hire incredibly intelligent people because they’d figure out that the stuff I was talking about was stupid and therefore I should work on the right thing. We would have all these debates, all in great fun, of course. By the way, today we have thousands of Java programmers, just in case you’re worried about it. 

However, they were actually making a different point – that I should hire people who would get the job done, that the industry over-values industry experience and under-values strategic and intellectual flexibility. I feel very strongly about that.

In all the issues we had at Google, I realized I had no idea what I had to do but as the CEO, I was supposed to know what to do. But I knew that I had by far the best team ever assembled to address those. The challenges included dealing with the then-competitors or the shift we did in our business from one way of selling to what is called the Vickrey or second-price auction.

There was this person named Salar Kamangar who announced one day that we were switching our entire revenue system from an as-sold model by the sales force, to an auction-based system. I was convinced that these ads were being oversold because our salespeople were incredibly good and that they actually weren’t worth anything. Larry and Sergey were backing him, anyway.

I got so worried about going bankrupt that I put in place something called the Cash Restriction Program where we would spend money only at 10 am on Fridays because I thought we could control the flow of money that way. On day one of the auction, our revenues triple. And, I realized our incredibly talented sales force was underpricing our product by a factor of 3.

I don’t know if that’s luck or scale but you need ideas that scale so fast. My pitch is to learn machine learning today, where you’ll get the multiplier. For the non-programmers, the way to understand this is that programmers like me were taught how to write algorithms that precisely specify the methodology and we got really good at it. 

A new set of programmers understand how to have a computer learn something and the learning method is applied to the problem. This is a very scalable model, which is going to produce immensely larger companies than the ones we’re talking about. The speed will be immense because once you figure something out, the scaling can occur globally in a matter of hours.

Google’s hiring strategy

Reid: Are there any factors you want to talk about on how you did hiring well?

Eric: We had a whole bunch of reasons. One of the rules was we didn’t want to hire the employees’ friends, which was always upsetting. We also didn’t want to hire anybody from what we considered to be lesser universities. We wanted our potential employees to have very high GPAs. 

The constant problem was that some good employee would know someone they had worked with who was loyal, hardworking, wasn’t from a great university or did not have a good GPA but we wouldn’t hire them. Since it was controversial, we’ve relaxed that a bit now. But the fact of the matter is it got us to where we are today because it produced high-IQ generalists from prestigious universities.

When I was at Novell, I learned that there are people who I call “glue people” – incredibly nice who sit at interstitial boundaries between groups and they assist in activity. They are very, very loyal, people love them and you don’t need them at all. I was trying to get rid of these people at Novell because they slowed everything down. Each time I got rid of them in one group, they’d reappear in another (get transferred and rehired). 

When I was talking about this to Larry and Sergey one day and Larry said we should review all the hiring. From that moment on, we reviewed literally every offer packet. We didn’t hire glue people nor those whose backgrounds Larry and Sergey thought I liked but they didn’t. Since we never fire anybody, the hiring decision is crucial. The people whom you hire define the culture, whether you like it or not.

When Larry and Sergey started the company, they wanted to hire really smart people because they figured they wanted normal people who had done something exceptional. They hired a rocket scientist, a medical doctor and a Stanford graduate who had been a professional football player. In my case, they thought I was good enough because the CEO has to have something besides being a CEO that makes them interesting.

I would go around asking everybody asking what’s special about them and an interesting story would always come up. Another lesson I learnt was you don’t hire generic people but those who have had some kind of stress or achievement. The best CFOs to hire are those who’ve gone bankrupt because they have been through the war. 

Google’s interview process

Reid: The interview process at Google, as I recall, was fairly involved. Was that a good thing because it was definitely deliberate.

Eric: Once we decided to review every offer packet, we had to figure out how to score everybody. We put in a scoring system where people would enter a number between 1 and 5. Sergey felt this was biased. So, we put in a statistical measure where we would look at the average weight of the scorers and correlate that with the future performance of their scoring.

A year later, we would look back to see how we have graded an employee versus the way you had rated them. We discovered that female employees’ scores were inversely correlated to her performance. It’s the most extreme evidence of male bias against female candidates. We didn’t have the term then but it was “hidden bias”. We changed the entire way in which we run recruiting for female candidates. 

Here’s an example of a company that was as liberal and analytical as ours but we didn’t realize what we were doing. Also, it shows well-meaning people can have such biases.

Then we had this problem of interviewing people. I still remember this packet where we interviewed this gentleman 16 times and the person who was running this process said we have to make a decision. And the recommendation was not to hire him. I said we can’t interview people more than eight times. They have since revised the statistical metaphor: they have five interviews for engineers and four for non-engineers.

Most companies are gray with drop ceilings and cubicles. You have to put your product in the building. People need to be immersed in the world they are working in.

 

Here you go for the second part of the post.