When I applied to MBA programs late last year, they asked me what my vision of the world was. Many candidates spoke about social equality, environmental sustainability, economic mobility, among other topics. I've been thinking about something different: a different kind of company.
The first recorded corporations were in China: merchants who profit-shared with investors, introducing the idea of corporations as a means to reduce risk. In the 1300's, Bazacle Milling Company developed the first tradable shares, decoupling the price of the share from the underlying profit to allow for speculation. Then in 1602, the Dutch East India Company issued publically tradable shares on the Amsterdam Stock Exchange, broadening the scope of potential investors to become the first public company.
Over the course of a thousand years, corporations have gained incremental improvements to broaden their ability to reduce risk and increase profits by raising capital. Since the Dutch East India Company, however, there hasn't been a huge amount of development. Generally, modern corporate structure follows quite closely to the models of these prototypical corporations.
Now, I'm not one to reinvent the wheel: this corporate structure works because it allows raising capital to build far more than any individual could ever build. But since the 1600's, we've learned a lot about how markets and humans behave. Indeed, modern behavioral economics has designed mechanisms to align incentives between individuals. Modern psychology has deepened insights into how decisions are made. Our understanding of human behavior is leaps and bounds better.
I believe the next big incremental improvement will be how corporations employ individuals.
Consider the following situation:
This sounds like a pretty standard business lifecycle, right? Interestingly, it also applies to hiring.
The insight is that businesses are fundamentally products. Companies need to market their appeal to candidates in the same way they market products. In this sense, corporations are products. A product that produces a product. In a slight nod to category theory, I call this "business product" the coproduct.
Corporations that can identify product-market fit are able to capture more of the market for the product. Similarly, corporations that can market to employees can capture more of the labor market for the coproduct. Without a coproduct there can be no product and vice versa. Significantly, both must exist by construction as modern corporations always have a governance structure and therefore always have a coproduct.
Why hasn't this been realized yet? I'm not completely sure. I haven't been able to find anyone who views companies through this lens. I think historically jobs were always in limited supply as the ratio of companies to people is always less than 1. Even now, among low and mid skill workers, companies typically have the advantage. Employee unions are developed to counteract this advantage.
However, when companies have the advantage, they don't need to "market" their position as heavily because demand is always there, so perhaps this lens was simply overlooked. It is only now that we see companies, especially in tech, looking at culture fit because the demand for engineering talent is very high compared to supply. It's no coincidence that culture fit and product-market fit are very similar.
For every product, there's a user of the product. Who are the users of the coproduct? From the above example, the employees. So we can take all of our insights from product development and apply them to employees.
Focus on the user and all else will follow. -- Google
Surprisingly, they're both applicable and romantic.
Getting product right means finding product/market fit. It does not mean launching the product. It means getting to the point where the market accepts your product and wants more of it. -- Fred Wilson
A coproduct is doing well when it has captured hiring. Some businesses, such as Google's early days, have been able to attract talent like this: by achieving fit with engineering culture they foster a strong desire to work there. But as companies grow, they often lose sight of the need to maintain this culture fit because they focus too much on the product and let the coproduct atrophy.
Without product-market fit, a company will never be able to sell its products. Without culture fit, a company will never be able to hire employees for its coproduct. Both are necessary (although not necessarily sufficient!) as growth is derived from the success of the combination, not just each individually. However, conventionally companies tend to hire based on their preconceived notions of culture. This is akin to selling a product independent of product-market fit. Real culture fit should be like product-market fit. It needs to be sought out, identified, and developed, not just asserted.
Concretely, this means that companies must care about their employees. They must work hard to retain talent and identify opportunities to improve employee relations. Employees must be incentivized to act in the benefit of the company much in the same way that users of a product shouldn't be able to exploit a company.
It’s really hard to design products by focus groups. A lot of times, people don’t know what they want until you show it to them. -- Steve Jobs
Where do investors fit in in this model? I liken the role of investors to a supply chain for the coproduct. Much in the way businesses interact with third-party supply chains to develop their product, businesses may interact with third-party investors to develop their coproduct. Therefore, it's important not just to find an investor, but also one that shares the same fundamental principles that the business embodies. Perhaps the business cares about supply chain sustainability. Does it care about its investor sustainability? It's up to each business to determine which supply chain is right for its product, therefore it's also important to determine which investor is right for its coproduct.
A nice consequence of this lens is also the implications it has on corporate officers. Someone once mentioned to me that the real job of top level leaders is to just approve decisions, not make them. The best leaders are the ones who delegate decisions. Under this new company lens, that type of delegation makes perfect sense: officers work on the coproduct, employees work on the product. It makes very little sense for officers to make decisions on the product when that's not even part of their organization!
In fact, the sole role of an officer is to ensure that the coproduct, the marketability of the business itself, is maximized. Otherwise, they are confounding their role with that of an employee.
A lot of investors say "we invest in teams" or similar. Through this lens it's also a little more clear why this works: they're not investing in teams, they're investing in products. They're investing in the coproduct.
When I think of conventional organizational charts, it's quite funny that officers sit at the top. In reality, officers don't sit at the top, they sit on a parallel tree. It's the high level and mid-level managers who are really at the top. Modern conglomerates have hinted at this structure, for example Alphabet has an independent management chain for the conglomeration over each of the independent entities.
Investors sometimes ask what our five to ten year vision is. In some sense, I don't really care. What I care about is building a lasting company: the best coproduct in the world. A product might change the world for the next five years until the next one comes along because most companies compete on product.
I want companies to compete on the coproduct. That might change the world forever.
Some have argued that productivity an innovation are slowing.
Here's labor productivity over the past 30 years. It's slowing down! Output per hour rose 36% from 1996 to 2007, only 15% from 2007 to 2018. If automation is replacing people, why aren't we producing more with fewer people? 4/ pic.twitter.com/BkA0BE5NZJ
— Paul Krugman (@paulkrugman) October 16, 2019
Marc Andreessen boldly asserted that it's time to build in an almost cathartic proclamation against this declining innovation.
Of course it's time to build. It always has been. But it's not just time to build. It's been four hundred years since the last big change in the way corporations work. By realizing the coproduct, I hypothesize that we'll see another leap in productivity the same way that early corporations facilitated massive growth through investment. Focusing on the coproduct can strengthen a new growth loop much like the growth loops of the product.
It's time for a paradigm shift.
As I mentioned behavioral economics has given us a wealth of research that can be incorporated into how businesses work. Much like product design, employees won't often tell us exactly what they want. It's up to us to figure out what that is.
I have ideas around hiring structure, team building, and compensation that fall out of this lens, but that's another blog post for another day. Instead, I'll end this essay on an open question: how might your company be different if it approached hiring and organization like product development? We have learned so much about building amazing products, it's about time we learn how to build amazing coproducts.
I didn't end up getting into any MBA programs. Perhaps my ideas at the time were too vague and abstract. I only had complaints about what didn't work, not ideas about what might work. I applied because I wanted to find out if these ideas made sense. But it's okay, since then I've instead cofounded my own company to see if these ideas work.
If they do, I don't think I'll need an MBA anymore.
Think I'm on to something? Want a sneak peak? We accept the standard SAFE, email your offer to dan@doahuddle.com.
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