In San Francisco, we meet the founder of Technorati, Dave Sifry. He shares how the current business model of Technorati works, as well as great advice in area of organizational management for young entrepreneurs.

The transcript of the interview is provided below.

INTRODUCTION

Martin: Hi, today we are in San Francisco with Dave from Technorati. Dave, who are you and what do you do?

Dave: My name is Dave Sifry and I am the founder and I have done a bunch of different jobs over at Technorati.

Martin: Okay.

BUSINESS MODEL

Martin: Can you tell us a little bit more about the business model, so how was the old business model of Technorati? How is the new business model of Technorati working and why did you pick it?

Dave: That’s a great question. So we experimented for quite a while. I would say the naïve business model was: ‘Gee, it’s search, we’ll put a bunch of ads on there, we’ll sell ads like Google Adwords and we’ll make tons of money.’ And what was interesting about that—and we did do that for a while but we never found that people were clicking strongly on the ads. It is that Technorati was a very different kind of beast than Google was, whether Yahoo or.., that people were not using Technorati as sort of the big librarian that they wanted. Sometimes you want to find out about the news, and sometimes you want to find out about a product, and sometimes you want to find out about a place. So all of those things could have some kind of an advertisement next to it, but things were on products or places that’s really lucrative. We just want to find out what’s going on right now, it’s not quite as interesting and what we realized was that because we were focusing so much on the internet as this enormous conversation as opposed to the internet as this huge library. That the people who were interested in the conversation were coming to us and they were addicted, they were using it all the time as long the service was running, we had some technical challenges along that front too. But the advertising model of just selling product ads wasn’t going to work.

So then what we realized was that what we really were building was relationships with people who were creators. That the people who actually were coming to Technorati all the time were people who were bloggers, who were reporters, people who were interested in what’s going on in the conversation around the world and very often they were also people who were creating that conversation as well. And so at that point we realized, ‘Oh what if we could be a conduit to help them make money’. And that was when that first business model really took off, when we realized that – I mean classically you would call that an advertising network. We were doing a lot more that just Ad network stuff. But even at its simplest, we were trying to help these publishers be able to not only learn more about who they were and where they sat in the top 100 and what have you but also how they could make money off of what they were doing. And we did it in a very automated way. So that went very very well for a while, so that was sort of the first pivot. And then what happened there was that as a programmatic – I mean the whole world of internet advertising has changed over the last 5 to 6 years, I mean just enormously. Now I stepped away from Technorati from an active role in 2008 but I have been sitting on the board ever since the first day. So it’s been wonderful really to kind of just watch as how the older model of direct advertizing and building display ads and stuff like that, that model was really fading on everything except for the biggest and biggest of site, but there was still an enormous opportunity around this growing programmatic trend. And because we had so many deep relationships both with these publishers and with the demand sources we were able to see a lot in the market place that wasn’t being seen by other people. And so that then caused us to really go into a new technology world where it was less about search and now it was more about helping demand find supply and helping supply find demand. And that’s much less of a public woo-hoo kind of ‘make the world economic forum’ kind of headline but it’s actually a really really strong stable business. So we’ve been doing that now for a while and that has just been taking off like crazy. And so it’s really exciting to be a part of – you think the company is going to be one thing when you are starting it and you’re running it and it is that for some time and then you realize but in order for it to be sustainable you really have to go where the revenue is and transitioning your team, transitioning your company without changing the core values that you believe in. And that’s one of those things that I feel just incredibly proud about that it’s a business that looks very different today than it did in 2004 and 2005, but I feel very comfortable that the way we do business, the kinds of people who work there and the kind of service that we are providing still fits those values very very deeply.

Martin: Great.

ADVICE TO ENTREPRENEURS

Martin: Dave we always try to share some advice and you already shared some of your lessons. Are there any other lessons that you would like to share with our readers?

Dave: Hmmm, good question. There are so many things that we could be talking about.

So I think one of the things that I have always found really interesting is organizational development. And I think that start ups—whether it’s even inside of a bigger company or if it’s a brand new start-up that there are some real challenges that happen and having now building 6 companies and some of them have gotten 500 people or so. Some of them were still really small when we sold them but I have learned a few things about people and organizations. So I’ll share a little bit about some of the things that I have learnt, maybe this will apply to you maybe it won’t, I don’t know. So the single biggest thing to be looking for is communications cost compared to revenue or shall we just say efficiency in overhead. Every single new person that you add, there is going to be some increase in communications overhead.

The first one is literally when you from, it’s just me and I am just transferring between the two sides of my brain to now there is another person, we need to talk to each other. That’s a huge amount of communications overhead but you get nearly a doubling in productivity, it’s really worth it. When you go from 2-3 you’re actually—not that much more communications cost but you are getting another increase by 66% in your productivity. And that tends to work until you get to somewhere around 8 or 10 people and there is this really obvious, very very natural place where it’s super highly efficient, you don’t really need a lot of meetings, everybody just sort of works together it’s very very tightly coupled. Yet productivity is still, significantly increasing for every single new person that you add.

Then you start to switch, there’s a phase that happens somewhere between 8-10 people and about 18-20 people where you have to start using some kind of departmentalization. You need to start saying, ‘Well, I am going to focus a little bit more in engineering, you’re a little bit more on marketing, you’re going to focus more on sales’, and you start to see these organizational elements pop up. But by no means is it formal, it’s still maybe you got the marketing guy but everybody talks to everybody, you are all in a big office space like this. But what you notice is that, a couple of decisions made just by two guys having pizza late at night could have repercussions on the rest of the company. So there is a communications overhead that has to happen. So now you have to start having all hands meeting and you have to, ‘Oh, let me bring you in on what the other parts of the company are doing’ and you want to have cross department or sort of executive staff meetings, these kinds of things. So these are what you want to watch out for.

And then here’s the most interesting part, so when you get from somewhere around 20 people up to about to 60 is what I call the death zone. So what happens is, as soon as you start getting somewhere around the realm of the early 20s the overall productivity of a new employee is actually offset by the communications overhead. So even though you get some small increase there is so much communication overhead in general that it actually costs you more money to bring in that employee. So this is the classic mistake that a lot of young startups, and I know I’ve personally made is – you are sort of at the 60th stage and you’re like, ‘We can just do one thing, but to do it really well, we need to do two things, let me hire five or six more people and we’ll get that second thing done’, never happens. What happens is you hire those 5 or 6 more people and it just adds more chaos. So at that point, this is actually important we’re having a really good CFO, we are having somebody who is a really good finance person, maybe that’s you the CEO but you really need to sit down and say, ‘Do I have enough revenues? This new person that I am bringing in, employee number 22, what’s the revenue impact that I am going to get from this person?’ If it’s more than their annual salary, hire them, if it’s not, don’t hire them and you’ve got to wait until you have enough of what you are doing to be able to grow. And that’s the only way that I found to get through that death zone. And it’s just a slog, every single new employee has to be justified by the additional amount of revenue that you are bringing in. And then you are literally paying for them.

Now, once you get to 60, another magical thing happens, which is all of a sudden, you can start doing three or four things at once, you have a layer of middle management and process that just naturally falls into place. And now all of a sudden, you get super efficient again. So from 60 to about 120, golden zone. You’re doing great because you are making enough money, your revenues are growing, they are predictable, you can start going back and saying to—that’s actually where the spreadsheets really really matter. When you are at 15 or 20 people and you don’t where you revenue model is really, you kind of sort of do but you are not sure, all of those yearly projections they are all BS. When you get to 60, now you can start to forecast out a quarter or two quarters out and you’re like, ‘Wow, now I understand how to do some planning’. And that’s a fabulous time to be able to grow into new markets or grow, expand internationally.

Now there is this next thing that happens at 120, so 120 is the Dunbar number. Have you ever heard of the Dunbar number?

Martin: No, never.

Dave: So he was a scientist, his first name slips my mind at the moment. But he basically studied, he was an anthropologist studying tribes and what he found was that when tribes get to be about 120 people there is something in the human brain, I mean we’ve somehow found this out that actually you start believing that some of those people are no longer in your tribe.

Martin: So they split somehow.

Dave: Exactly and so they actually have civil wars, they’ll naturally start to split, they’ll have this dichotomy. And so in fact, in places like 3M, ‘Good to great’ Jim Collins wrote about this, what 3M actually does is that as soon as you get to somewhere around 100, 110 people is they literally split the department into two 60 person departments, where again they are now at the golden size again and now they each do separate things. And that’s another one of those where I remember at Linux Care when we had grown beyond 120 people and I remember I was the co-founder of the company and I remember walking down our halls one day and people were like, ‘Hey Dave, how are you doing?’ and I remember looking at my co-founder—

Martin: Who is that?

Dave: I’m like, ‘who is that?’

Martin: Yes.

Dave: Exactly and it’s like ‘Oh my God, they work here’, clearly, they have a badge, it says Linux Care and I don’t even know, I’ve never seen them before, I don’t know who they work for, I don’t know how they got hired. It’s freaky and so you want to avoid that. So when you get to 120 is the time to organizationally to start looking and saying, ‘Okay how do we now split this up into semi autonomous or autonomous sub organizations as well’. So that’s would be my short little freebies on organizational theory, just some things I have learned in the field.

Martin: Dave, thank you very much for time and your thoughts and your sharing of knowledge.

Dave: Sure Martin. It’s great to meet you and thanks so much for coming.

Martin: Thanks.

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