The Hard Thing About Hard Things: Building a Business

When There are No Easy Answers by Ben Horowitz

Either this book or Andy's Grove's book, Only the Paranoid Survive, is my favorite business book on management. Both are written by great CEOs who have a lot of great experiences in navigating the uncertainty of the competitive business world that they share in their books. I think Ben in this book did a great service to the business community by writing this because so many people like to talk about their successes and what comes easy in business but the easy stuff takes care of itself; it's the hard stuff that takes work. There are a lot of stuff that Ben talks about in this book that is helpful but I divided up this summary into only three parts: 1. Advice for CEOs, 2. The Mental Struggle of Being a CEO and 3. Business Stories. All three parts below have a lot of good wisdom worth reading. 

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Advice for CEOs:

No training as a manger, general manager, or in any other job actually prepares you to run a company. The only thing that prepares you to run a company is running a company. This means that you will face a broad set of things that you don’t know how to do that require skills you don’t have. Nevertheless, everybody will expect you to know how to do them, because, well, you are the CEO. I remember when I first became CEO, an investor asked me to send him the “cap table”. I had a vague idea of what he meant, but I didn’t actually know what the format was supposed to look like or what should be included or excluded. It was a silly little thing and I had much bigger things to worry about, but everything is hard when you don’t actually know what you are doing. I wasted quite a bit of time sweating over that stupid spreadsheet.

The experience from page 3 of this book taught Ben not to judge things by their surfaces. Until you make the effort to get to know someone or something, you don’t know anything. There are no shortcuts to knowledge, especially knowledge gained from personal experience. Following conventional wisdom and relying on shortcuts can be worse than knowing nothing at all.

The experience on page 3 taught Ben not to judge things by their surfaces.  Until you make the effort to get to know someone or something, you don’t know anything.  There are no shortcuts to knowledge, especially knowledge gained from personal experience.  Following conventional wisdom and relying on shortcuts can be worse than knowing nothing at all.

Colin Powell says that leadership is the ability to get someone to follow you even if only out of curiosity.

Some things are much easier to see in others than in yourself.

When people in my company would complain about one thing or another being broken, such as the expense reporting process, I would joke that it was all my fault.  The joke was funny, because it wasn’t really a joke.  Every problem in the company was indeed my fault.

An early lesson I learned in my career was that whenever a large organization attempts to do anything, it always comes down to a single person who can delay the entire project. An engineer might get stuck waiting for a decision or a manager may think she doesn’t have authority to make a critical purchase. These small, seemingly minor hesitations can cause fatal delays.

Figuring out the right product is the innovators job, not the customer’s.

However, if I’d learned anything it was that conventional wisdom had nothing to do with the truth and the efficient market hypothesis was deceptive.  How else could one explain Opsware trading at half of the cash we had in the bank when we had a $20 million a year contract and fifty of the smartest engineers in the world.  No markets weren’t “efficient” at finding the truth; they were just very efficient at converging on a conclusion – often the wrong conclusion.

The struggle is not failure, but it causes failure. Especially if you are weak. Always if you are weak. Most people are not strong enough.

The struggle is where greatness comes from.

One of the three key reasons why being transparent about your company’s problems makes sense is trust. Without trust, communication breaks. In any human interaction, the required amount of communication is inversely proportional to the level of trust.

A good culture is like the old rip routing protocol: Bad news travels fast; good news travels slow. If you investigate companies that have failed, you will find that many employees knew about the fatal issues long before those issues killed the company. If the employees knew about the deadly problems, why didn’t they say something? Too often the answer is that the company culture discouraged the spread of bad news, so the knowledge lay dormant until it was too late to act. A healthy company culture encourages people to share bad news.

There comes a time in every company’s life where it must fight for its life. If you find yourself running when you should be fighting, you need to ask yourself, “If our company isn’t good enough to win, then do we need to exist at all?”

A Final Thought: If you run a company, you will experience overwhelming psychological pressure to be overly positive. Stand up to the pressure, face your fear, and tell it like it is.

Great CEOs face the pain. They deal with the sleepless nights, the cold sweats, and what my friend the great Alfred Chuang (legendary co-founder and CEO of BEA Systems) calls the “torture”. Whenever I meet a successful CEO, I ask them how they did it. Mediocre CEO’s point to their brilliant strategic moves or their intuitive business sense or a variety of other self-congratulatory explanations. The great CEO’s tend to be remarkably consistent in their answers. They all say, “I didn’t quit.”

When my partners and I meet with entrepreneurs, the two key characteristics that we look for are brilliance and courage. In my experience as CEO, I found that the most important decisions tested my courage far more than my intelligence.

Being CEO requires lots of unnatural motion. From an evolutionary standpoint, it is natural to do things that make people like you. It enhances your chances for survival. Yet to be a good CEO, in order to be liked in the long run you must do many things that will upset people in the short run. Unnatural things.

By far the most difficult skill I learned as CEO was the ability to manage my own psychology.

The first problem is that everybody learns to be a CEO by being a CEO.

Watered down feedback can be worse than no feedback at all because it’s deceptive and confusing to the recipient.

People who watch you judge you on what you do, not how you feel. – Cus D’Amato, legendary boxing trainer.

Pg 207 How to deal with the psychology as a CEO: make some friends, get it out of your head and onto paper, and focus on the road, not the wall.

Great CEOs face the pain.  They deal with the sleepless nights, the cold sweats, and what my friend the great Alfred Chuang (legendary cofounder and CEO of BEA Systems) calls the “torture”.  Whenever I meet a successful CEO, I ask them how they did it.  Mediocre CEOs point to their brilliant strategic moves or their intuitive business sense or a variety of other self-congratulatory  explanations.  The great CEOS tend to be remarkably consistent in their answers.  They all say, “I didn’t quit.”

As CEO, you should have an opinion on absolutely everything. You should have an opinion on every forecast, every product plan, every presentation and even every comment. Let people know what you think. If you like someone’s comment, give her the feedback. If you disagree, give her the feedback. Say what you think. Express yourself.

The Mental Struggles of Being A CEO:

By far the most difficult skill I learned as CEO was the ability to manage my own psychology.

The first problem is that everybody learns to be a CEO by being a CEO.

When people in my company would complain about one thing or another being broken, such as the expense reporting process, I would joke that it was all my fault. The joke was funny, because it wasn’t really a joke. Every problem in the company was indeed my fault.

How to deal with the psychology as CEO: make some friends, get it out of your head and onto paper, and focus on the road, not the wall.

If you are a founder CEO and you feel awkward or incompetent when doing some of these things and believe there is no way that you will be able to do it when your company is one hundred or one thousand people, welcome to the club. That’s exactly how I felt. So did every CEO I’ve met. This is the process. This is how you get made.

At Loudcloud, when the dot com bubble burst and subsequently sent most of our customers into bankruptcy, it crippled our business and devastated our balance sheet. Or rather, that was one interpretation, another interpretation, and necessarily the official story for the company, was that we still had plenty of money in the bank and were signing up traditional enterprise customers at an impressive rate. Which interpretation was closer to the truth? In the absence of someone to talk to, that is a question that I asked myself about three thousand times.

Business Stories:

The NASDAQ peaked at 5,048.62 on March 10, 2000- more than double its value from the year before-and then fell by 10 percent ten days later. A Barron’s cover story titled “Burning Up” predicted what was to come. By April, after the government declared Microsoft a monopoly, the index plummeted even further. Startups lost massive value, investors lost massive wealth, and dot-coms, once heralded as the harbinger of a new economy, went out of business almost overnight and became known as dot-bombs. The NASDAQ eventually fell below 1200, an 80% drop from its peak.

Back in those bad old days at Loudcloud, I often thought to myself: How could I have possibly prepared for this? How could I know that half our customers would go out of business? How could I know that it would become impossible to raise money in the private markets? How could I have figured out that there would be 221 IPOs in 2000 and 19 in 2001? Could anybody expect me to achieve a reasonable outcome given those circumstances? When things go wrong in your company nobody cares. The media don’t care, your investors don’t care, your board doesn’t care, your employees don’t care, and even your mama doesn’t care. NOBODY CARES!… All the mental energy you use to elaborate your misery would be far better used trying to find the one seemingly impossible way out of your current mess.

The valuation and the size of the funding were signs of the times and created an imperative to get big and capture the market before similarly well-funded competitors could.  Andy said to me, “Ben, think about how you might run the business if capital were free.” Two months later, we would raise an additional $45 million from Morgan Stanley in debt with no covenants and no payments for three years, so Andy’s questions was more reality-based than you might think.  Nonetheless, “What would you do if capital were free?” is a danger question to ask an entrepreneur.  It’s kind of like asking a fat person, “What would you do if ice cream had the same exact nutritional value as broccoli?”  The thinking this question lead to can be extremely dangerous.

Pg 26-27 Ben got a call from his father in law because his wife was in the hospital and stopped breathing.  Ben spoke to his wife on the phone who assured him that she was ok and that he needed to get the IPO done so he shouldn’t see her.  Ben stayed.  This passage also describes some very hard moments his father in law had to live through as a child.  It also talks about Ben wearing a mismatching jacket with the suit pants which he didn’t realize until Marc pointed out.  This showed how out of if Ben was.

Pg 44 The CEO of EDS –the company that accounted for 90% of Ben’s revenues – wanted the longest lay over possible in between flights from EDC headquarters to Ben’s company.  Ben discovered that this was because he enjoyed hanging out in airport bars in between flights because he hated his family and job.   Ben realized that Frank – the CEO of EDS – expected Ben to fail because he has been screwed in his personal and working life.  Ben says, “We needed to be associated with the airport bar, not with his job or his family.” Ben’s ability to emphasize with Frank ended up creating being successful for both and surprising Frank.

Pg 47 [My note: This is probably one of the most altruistic acts and toughest decisions that I read about in Ben’s journey as a CEO so far.  I’m paraphrasing, “I feel that the toughest decisions I made in business never tested my intelligence but tested my courage.”   Ben fired the CFO of the company he just acquired, Tangram, but during the signing the CFO started to get severe headaches.  He had brain cancer and it would cost him $200,000 to insure him under COBRA.  He was running a company with an inadequate margin of safety to cover these health costs but he insured him anyway because he knew what desperation felt like.  The CFO ended up dying not too long later but his wife wrote Ben a nice letter about how shocked she was that he would cover his health costs since they were complete strangers.  The letter also revealed that his act enabled her to continue living and was eternally grateful.]

When Opsware was trading at half of cash in the bank or 35 cents a share, NASDAQ sent him a letter saying he had to get the stock price above $1 or they will be delisted to the penny stocks.  Ben had three options.  1) Reverse split 2) Give in and just become a penny stock or 3) Hit the road and raise funding.  Ben got advice from a friend to see Herb Allen at Allen & Company.  Allen & company was famous for running the best business conference in the world.  The conference is invitation-only and consistently attracts guests whom you never find at any other conference.  Some of the attendees include: Rupert Murdoch, Warren Buffett, and Bill Gates.  After meeting with Herb Allen, Ben later on discovered that Herb had invested money in his company.  The following passage is the reason why:  Years later I asked Herb why he believed in our company at a time when nobody else did.  I pointed out that, at the time, Allen & Company wasn’t very involved in technology, let alone data center automation.  Herb replied, “I didn’t understand anything about your business and I understood very little about your industry.  What I saw was two guys come visit me when every other public company CEO and chairman was hiding under their desk.  Not only did you come see me, but you were more determined and convinced you would succeed than guys running giant businesses.  Investing in courage and determination was an easy decision for me.”

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