CHAPTER 2

THE RISE OF THE UNICORNS

In 2013, Aileen Lee invented the term “Unicorn” to refer to start-up organizations with investor valuations of over $1 billion. Lee, a founder and managing partner of Cowboy Ventures, and formerly of famed venture capital firm Kleiner Perkins Caufield & Byers, was preparing an internal report when she came up with the moniker. A summary of the report was published by TechCrunch, and Unicorn was borne into everyday business lexicon.

At the time only 39 companies were considered Unicorns.¹ Seven years later the number had ballooned to well over 400. During presentations, I often use a chart showing the proliferation of Unicorns and ask audiences this question:

“What is the one thing that all of these Unicorns have in common besides a value of over $1 billion?”

The answer is they are all disrupting staid businesses and industries. Whether through technology, a new business model, or both, Unicorns are typically focused on disruption, and their valuations reflect the business opportunity that disruption promises. Most companies intellectually understand this, but it’s remarkable how slow they are to change. History is littered with companies that rested on their laurels, resisted change, and were too slow to evolve. One of the most famous is Blockbuster Video.

In December of 2004, I had the chance to visit Blockbuster’s headquarters in Dallas. Like Apple, its offices were beautiful, but maybe too beautiful. There certainly was an air of pretentiousness to it all—a visible tribute to Blockbuster’s market domination and brand recognition.

December of 2004, it turned out, was near a high point for Blockbuster: at that time, it employed over 84,000 people in over 9,000 stores globally² and boasted 20 million customers.³ It had just been spun out from Viacom, and its market cap at the time was near $5 billion.⁴ Less than six years later, Blockbuster filed for bankruptcy. As of this writing, there is one Blockbuster store left in the world. Located in Bend, Oregon, it makes money selling apparel emblazoned with the slogan, “The Last Blockbuster on the Planet,” and is available to rent for nostalgic slumber parties.

At the time of my Blockbuster visit, I was the president of a publicly traded software company I helped form that year called SumTotal Systems. The company was created by the merger of two previously public companies: Click2learn and Docent. I had been the CEO of Click2learn, the first company Paul Allen founded after Microsoft (the original name was Asymetrix). Paul—may he rest in peace—purchased my company in 1997 with the idea that we would IPO the new, larger entity. We did that a little over a year later, and I quickly became CEO and chairman.

The whole experience for me was trial by fire. I had very rapidly gone from a young entrepreneur who had never raised a round of financing (I bootstrapped my first company with loads of help from my father) to running a public company founded by a software icon. With Paul on our board of directors, meetings were always a tad intimidating, but working with Paul had plenty of perks. Going to lavish parties on his estate with plenty of celebrities in attendance, flying on his custom 757 to sit courtside at Portland Trail Blazers games, and watching the Seattle Seahawks from the owner’s suite are indelible memories.

But it wasn’t always fun. We garnered more than our fair share of attention for a small company because anything Paul was involved with was covered intensely by institutional analysts and the press. The analysis of our business was extreme—and that only intensified with the sudden dot-com crash of 2000 (and at the time with “dot-com” in our name). Our stock price was often significantly challenged, and we sweated out the threat of being kicked off NASDAQ more than once. We also were one of the first to be affected by the new Sarbanes-Oxley Act and spent a small fortune with consultants who helped us comply with the new reporting requirements. We persevered and pulled through, but the entire experience certainly tested my—and the company’s—agility.

Complacency Breeds Failure

Agility is certainly not a word most would associate with Blockbuster.

There’s a now infamous story of how Netflix CEO Reed Hastings approached Blockbuster in 2000 to buy his company. This story was told by Netflix co-founder Marc Randolph in his book That Will Never Work, which is beautifully summarized by Inc. magazine:⁵

Netflix, which was only a DVD rental-by-mail service in 2000, was struggling. Two years earlier, Netflix executives turned down a buyout offer from Amazon. Although its business model was catching on with consumers, it was far from profitable. An acquisition by Blockbuster would solve its immediate financial problems and would position the company for further growth and eventual profitability.

Netflix executives had been requesting a meeting with Blockbuster’s leaders for several months. Suddenly, they received a message that Blockbuster wanted to meet them the following morning, which was less than 12 hours away. With no commercial flights available, Netflix executives chartered a plane—Vanna White’s plane, oddly enough—and arrived in Dallas at the appointed time.

Netflix CEO Reed Hastings was up front about his agenda: “We should join forces,” he is quoted as saying in the book. “We will run the online part of the combined business. You will focus on the stores. We will find the synergies that come from the combination, and it will truly be a case of the whole being greater than the sum of its parts.”

In response, Blockbuster general counsel Ed Stead asserted that Netflix and many other online businesses would never make a profit. Netflix executives argued the point, until Stead suddenly interjected: “If we were to buy you, what were you thinking? I mean, a number.”

“Fifty million,” Hastings responded.

At that moment, Randolph wrote that he noticed an odd expression cross Blockbuster CEO’s John Antioco’s face. “As soon as I saw it, I knew what was happening: John Antioco was struggling not to laugh.”

Unsurprisingly, Blockbuster turned down Netflix’s offer. It was long ride back to airport for the Netflix team.

Blockbuster’s lack of interest turned out to be a blessing. Netflix became a Fortune 500 company, with a market capitalization approaching $200 billion. While it’s laughable now to think Blockbuster passed up the opportunity to buy the company for $50 million, a big part of the reason is the arrogance and comfort the entire company possessed—not just Antioco—as it rested on its laurels. I’ve heard several times that lack of diversity in the senior ranks and board of directors at Blockbuster also played a role. Basically, being so homogenous at the top, the company was unable to see that streaming media would quickly make the DVD rental business obsolete. To Blockbuster’s credit it did enter the streaming market; but with an infrastructure and culture that was built around physical stores and physical media, it was clearly too late.

Blockbuster, like many other companies, probably would have benefited by internalizing the observations of the late Andy Grove, president and CEO of Intel: “Success breeds complacency. Complacency breeds failure.”

Every successful organization needs to prioritize the ability to spot trends that will change the marketplace and disrupt the way it operates. Truly agile organizations can identify the opportunities that will arise from new technologies, regulatory changes, shifts in customer demographics, and other market developments. And they use those opportunities to innovate in anticipation of future market opportunities.

“The hallmarks of agile organizations are being externally oriented and outcome-driven,” says Deb Bubb, an HR executive at IBM. “Agile organizations take insights from their customers and use them to adjust their approach in order to achieve better outcomes.”

The 3 A’s of Agility

In research we conducted for a study titled The Three A’s of Organizational Agility: Reinvention Through Disruption, we discovered that high-performance organizations are twice as likely to share and discuss external information about customers, the market, technology, data, and trends with midlevel managers and frontline leaders, as shown in Figure 2.1. And it isn’t sporadic with the best companies—they discuss these developments regularly, at least quarterly. I don’t know this for certain, but I’d be willing to bet that is not something Blockbuster did on a regular basis.

FIGURE 2.1 External Focus of High-Performance Organizations
Source: i4cp

In fact, I often suggest to companies that they should create a “kill the company” committee internally. By assembling a cross-functional, diverse yet small group whose motive is to brainstorm ways to disrupt the current company, organizations can stay ahead of the Unicorns lying in the weeds and be better prepared for the future. This is one way organizations can create a change-ready culture, and is a strategy that can be employed in the first step of our 3 A’s of Agility, which are:

1. Anticipate. View change not only as expected and manageable, but as a chance to disrupt both within the organization and in the industry.

2. Adapt. Break down rigid silos and hierarchies to enable knowledge sharing, continuous learning, and teamwork, and purposefully instill an inclusive, collaborative spirit in the workforce.

3. Act. Determine specific areas within the organization that must become more agile. Restructure to minimize hierarchy and bureaucracy as well as empower individuals and diverse, self-directed teams—no matter their proximity—to make decisions and get things done.

How your organization perceives change is a big part of being agile. Would your employees describe change as overwhelming, wearing them down, or destabilizing to what they do normally? If so, you are likely inside a low-performance organization. High-performance organizations are more likely to say change is normal, and in fact part of the business model, as depicted in Figure 2.2. They typically view change as an opportunity to “shake things up” in a positive way on a regular basis. Many organizations feel that regular change actually boosts productivity.

FIGURE 2.2 How Organizations Perceive Change
Source: i4cp

The idea of never letting anything in the organization stay stable for too long to increase productivity was made famous through a research project that dates back almost 100 years. Dubbed the “Hawthorne Effect,” it is one of the best-known and most controversial studies ever conducted on workforce productivity. It was named after a series of experiments that took place at the Western Electric factory in Hawthorne, a suburb of Chicago, in the 1920s and ’30s. The Hawthorne plant employed about 35,000 people and supplied telephone equipment to AT&T.

While what actually happened remains debated, the lore of the study is interesting. Conducted for the most part under the supervision of Elton Mayo, an Australian-born sociologist who eventually became a professor of industrial research at Harvard, the experiments were intended to study the effects that lighting levels had on employee output. One day, the lighting in the work area for one group was turned up and made much brighter, while another group’s lighting remained unchanged. The result was that the productivity of the more highly illuminated workers increased much more than that of the control group.

The researchers began to make other changes to select groups (working hours, breaks, etc.), and in most cases productivity improved when a change was made, even when the lights were dimmed. Supposedly, by the time everything had been returned to normal, productivity was at its highest level, and even absenteeism had plummeted.

The studies didn’t actually gain notoriety until the 1950s when different researchers concluded that it wasn’t the changes in lighting or other physical conditions that affected workforce productivity. Instead, it was because employees felt for the first time that someone was paying attention to the work environment and the workers themselves.

The philosophy that constant change can improve productivity is a fact that is backed up by a great deal of research. Whether workforces like change or not, they need to get used to it. The corporate landscape is under constant change. Almost 90 percent of the companies listed in the 1955 Fortune 500 are nowhere to be found on the same list today.⁶ In fact, the life expectancy of a company in the Fortune 500 was originally around 75 years. It has plummeted to less than 15 years.⁷

If you review the market caps of the top five companies over just the first two decades of the twenty-first century, it’s fascinating to see the dramatic shift in corporate valuation in a relatively short period of time. At the beginning and through the middle of the 2000s, General Electric had the highest market capitalization of any company. GE’s fall since those days has been precipitous. From its peak, the stock price has been cut in half, cut in half again, and then cut in half again. The 80 percent plummet in that time has been historic (Figure 2.3).

FIGURE 2.3 Top Five Companies by Market Capitalization
Source: Microsoft

The last original member of the Dow Jones Industrial Average, GE, was dropped from the blue-chip index in June of 2018 and replaced by the Walgreens Boots Alliance drugstore chain. Now if I had predicted in 2004 that in less than 15 years GE would be replaced on the Dow by Walgreens, I would have been the laughingstock of the business community. But in the two decades since the dot-com crash, there has been tremendous movement in valuations, and the list is now dominated by technology companies. Only one company has managed to keep its hold in this most-valuable pantheon: Microsoft. When it comes to agility, resilience, and ability to change the culture, Microsoft is a remarkable story. But it hasn’t been an easy path, even for one of the world’s best-known organizations. Of all culture change initiatives in modern history, Microsoft is probably the best example of how to successfully renovate your culture. But as outlined in the next chapter, we need to go back several years to truly appreciate the impact of the company’s turnaround.