Lessons from Silicon Valley

By Peter Day Presenter, BBC Radio 4 and BBC World Service

Joe Kraus could have been as big as Sergey Brin and Larry Page, the Stanford University students who invented the search engine Google in 1998.

Having learnt from failure, Mr Kraus is moving on

But while Mr Brin and Mr Page have become the wealthy owners of a big chunk of what has become the most valuable media company in America, Mr Kraus has been less fortunate.

Don't feel too sorry for him, though: Mr Kraus is only 34 and he's certainly not poor.

But his story is perhaps more revealing than Google's, because of the lessons he's learnt.

Paper millionaires

Mr Kraus and four of his friends invented a search engine at a time when most of us - including Bill Gates - had hardly woken up to the power of the internet.

Being early is the same as being wrong Joe Kraus

They called it Excite, and it was pretty exciting; when I first met him and his friends back in 1996, they were still sharing a rundown bungalow close to Stanford University which they had occupied when they were still students; before, that is, they become multimillionaires at the age of around 24.

"Where shall we do the interview," they asked as I got out the microphone. "On the dumpster sofa or the five dollar one?"

Excite had just had an initial public offering, selling shares in the company to alert investors, and making the five ex-student directors each worth on paper $12m or so each.

Bursting bubble

Excite ballooned, like so many of the dot com companies.

In 1999 it merged with At Home, and the combined corporation had for a brief moment a stock market value of more than $7bn.

The internet requires new business models, Mr Kraus says

Excite At Home employed 2,500 people and you could not miss its HQ as you crawled up and down San Francisco Bay on Highway 101.

Well, when the dot com bubble burst, so did Excite At Home; the founders got out with some of their money intact, though Mr Kraus stayed on until almost the end.

By then he had bought an expensive house in Palo Alto, travelled the world and started a family.

Lessons to be learned

Mr Kraus, who is back in business as chief executive of application-wiki company JotSpot, has become an exceptionally thoughtful entrepreneur who has already been through the sort of business experience that most people don't achieve until they're near retirement.

The 20th Century mass production world was about dozens of markets of millions of people. The 21st Century is all about millions of markets of dozens of people Joe Kraus

Together with his friend Graham Spencer, technical director at Excite, he has got involved in campaigning for digital rights, a potent debate in the USA as conventional copyright holders see their property under attack from the new media (and vice versa).

And, quite naturally, he has started thinking about where Excite went wrong.

I drop in on him from time to time, and this is what he told me in a recent encounter.

Lesson number one from Excite is about timing in a technology business.

"Being early is the same as being wrong," says Mr Kraus.

Lesson number two is all about the power of the internet, and it wasn't at all obvious to the people who rushed to exploit the new medium when they discovered it, which sort of tells us that innovators normally get only some of it right.

Lesson two says: the internet is a new sort of market place that needs new business plans to make it work.

Look at the online store Amazon.com, says Mr Kraus.

Only 40% of Amazon's revenue comes from the 125,000 books stocked in an average Barnes and Noble shopping mall store.

The other 60% of cashflow comes from the now famous "long tail" - hundreds of thousands more books that Amazon has found a way of distributing economically to customers who seek not the best sellers but a very precise title probably very obscure to most people and most shops.

(Of course Amazon's genius was to produce a business fitted round picky book buyers who were prepared to do a lot of searching to find and then order the one title of out of millions that was what they wanted.)

Millions of markets

Now apply that insight to the search engine business.

Both Excite and Google are free to use; both business plans needed the support of advertisers.

But Excite took the conventional view that the ads would come from the top 100 companies in the USA, the people who buy huge amount of TV time and blanket the newspapers and the magazines.

Google did not go for the big spenders. Google's squads of PhDs wrote algorithms that would make it viable for the company to take hundreds of thousands of ads from hundreds of thousands of small (or big) companies, and pop the ads up in highly relevant spaces close to the search lists.

So lesson number two is about the new markets created by the internet, the ones making big profits for Google quarter by quarter.

"The 20th Century mass production world was about dozens of markets of millions of people. The 21st Century is all about millions of markets of dozens of people," observes Mr Kraus.

That is, I think, just about the most important business observation I've heard for decades.

Not many conventional corporations are set up to serve millions of markets of dozens, let alone make money out of them.

But that's the way the world is tilting in the 21st Century, and this column is an attempt to chart the way businesses may have to go.

That's why it's called Work in Progress.

Work in Progress is the title of this new exploration of the big trends upheaving the world of work as we steam further into the twenty-first century; and it is a work in progress, influenced and defined by my encounters as I report on trends in business and organisations all over the world.