Toyota Way or Sand Hill Road – what's the best path for a software business?

I’m reading "The Toyota Way" by Jeffrey K. Liker at the moment. Although it’s nominally about the car company, I’ve yet to find anything I disagree with and that can’t be applied to running a software company. One salient point is Toyota’s long term philosophy. They make decisions based not on short-term financial benefits, but on what is the long term right thing to do. Financial success is a by-product of long-term thinking, not a goal in itself.

The Toyota attitude appeals to me, and is the antithesis of much high profile conventional wisdom in the software industry. Recently, I’ve seen behaviour close to a parody of the standard practice. These may be isolated anecdotes, symptoms of a wider trend, or simply signs of provincial Cambridge catching up with the US West Coast: I don’t know. Recently I’ve stumbled across a few people whose business model isn’t to build something sustainable that provides customers with something they need, but rather to rapidly construct something for a quick sale, preferably to Google. Never mind that their product will never satisfy a single customer nor make a single dollar. That it glints enough to attract Google’s eye is all that matters.

I find this model hollow and, well, slightly distasteful. Companies judge their success by how much money they raise in various rounds of angel and investor funding, and then by how much their fledgling companies are bought for. CEOs stand up and boast about how much cash they have raised – and subsequently hosed – rather than the value they have created, the customers they have satisfied or how they have made the world a better place.

A lot of of money changes hands, and some people get very rich, but not much value, or wealth, is created. Most acquisitions subsequently fail, so all that has happened is that money has been transferred from the many (the shareholders of the acquiring companies) to the few (the original investors). This redistribution of money from the poor to the rich is not the same as creating wealth. The hungry give their portions of pie to the sated, but the pie does not get bigger.

To me, this smells like a Ponzi scheme. But I find it hard to reconcile my instincts (prejudices, arguably) with the success of the model over the past 40 years. Maybe this is because there are still some people – entrepreneurs, companies and investors alike – who take the long term view. Maybe this long term view is historically what has worked, but now people are trying to copy its form but ignoring the substance and ending up with a shallow caricature. Maybe I’m criticising this shallow layer of media-friendly froth while there is still a solid, bedrock of substance. Or maybe I’m just wrong and – although it jars with my instincts – this is the better route.

Faced with the two paths, I’d choose Toyota Way over Sand Hill Road any day. What about you?

5 responses to “Toyota Way or Sand Hill Road – what's the best path for a software business?”

  1. Robert says:

    I’d agree with your observations there – indeed, the University of Cambridge Computer Science “Business Studies” module focusses almost exclusively on generating companies that have value not in the product, but in the sale of the company in a couple of years time.
    Again, maybe this is a biased view I got, given the course was lectured by someone heavily involved in that market, but it left me feeling there was something very wrong.
    However, there’s also the more positive side to acquisitions – I think some software can be written more efficiently by a smaller number of people, since you don’t get the necessary overhead of running a large company. Where actual product exists, I can see it making sense for larger companies to buy it in rather than develop it themselves.

  2. Raza Imam says:

    The “get rich quick” mentality is really going to bite people in the tail sooner or later. It’s actually a manifestation of the poverty mentality.
    Rather than building something solid and valuable, you try to get rich with minimal effort. In our own business we’ve had to make some very tough decisions. I own a Chicago-based offshore software engineering firm with a development center in Pakistan. As you know, the Pakistani government is riddled with corruption. This leads to frequent power outages throughout the country.
    We’re trying to build a sustainable, reputable business and are now being forced to look at options to secure electricity. We’re seriously thinking about buying solar panels. Think about it, solar panels in a 3rd world country? Silicon Vally, maybe… Islamabad, unheard of. It’s going to cost us an estimated $30,000 US (and every dollar spent will be painful to our bootstrapped, jack-legged operation) But we know it’s the right decision and we have to do it.
    And you know what, it’s tough decisions like these that show our customers that we’re the real deal. Not impostors or money hungry simpletons.
    You can’t put a price tag on a solid reputation…
    Raza Imam

  3. William says:

    Welcome to the dot-com boom!
    a) Find an inventor with a “clever idea”
    b) Create company with inventor at 1c. Take 49% based on your “ability to raise funds” and bring “commercial expertise”
    c) Dilute inventor’s share by bringing in your mates (aka Angels) at 5c
    d) Dilute share again with more mates (aka VCs) at 20c
    e) Stack board and give yourself lots of options. Squeeze out inventor.
    f) Organise IPO with sales to your banking mates at 50c
    g) Who flog them the public later that day for $1-
    h) Claim you’ve improved shareholder value by 100x
    i) Resign, and sell at $1.20 – to avoid conflict of interest with your future plans to be a visionary.
    k) Watch the share price tank to 2c – the inventor left and the cash is gone. Blame everyone else.
    About all that has changed is step (g). These days you flog the company to Google or Microsoft.
    The problem then (and now) is that too many of the supposed regulators were making too much money out of the “system” to look too closely at what was actually going on.
    That shares from “experienced VCs” were consistently doubling the week of IPO should have had alarm bells ringing. But if they were, they were drowned out by the cheering.

  4. TeeQ says:

    Better route? I think not.
    From Paul Graham’s Guide to Investors: “Venture investors like companies that could go public. That’s where the big returns are. They know the odds of any individual startup going public are small, but they want to invest in those that at least have a chance of going public.
    Currently the way VCs seem to operate is to invest in a bunch of companies, most of which fail, and one of which is Google. Those few big wins compensate for losses on their other investments. What this means is that most VCs will only invest in you if you’re a potential Google. They don’t care about companies that are a safe bet to be acquired for $20 million. There needs to be a chance, however small, of the company becoming really big.”
    In this case, I’m extending the term “becoming really big” to include “success by acquisition”.
    I’m wondering how much of the behavior you describe here is an attempt at actual success (by acquisition). Instead it seems likely this is a grab at VC monies.

  5. Jeff Widman says:

    Toyota Way–great, great read!
    I’m getting a degree in manufacturing, and used to see it as an obstacle given my interest in software, particularly the social media stuff.
    Now, I see it as a tremendous opportunity because manufacturing folks care about real value–pie-in-the-sky ideas don’t fly on the operations floor!
    Lean, 6 Sigma, Theory of Constraints, etc… all great ideas transferable from manufacturing to software.