This is session 8 of Technology-enabled Blitzscaling, a Stanford University class taught by Reid Hoffman, John Lilly, Allen Blue, and Chris Yeh. This class features Reid Hoffman interviewing Eric Schmidt, the Executive Chairman of Alphabet Inc. (formerly Google).

It is my great privilege that we have Eric Schmidt here with us today.

Actually on the topic of blitzscaling, there is nobody higher in the world that I would like to talk to about this subject than Eric.

He has literally done it in the most serious ways possible.

He thinks about these things in theoretical and deep ways and actually teaches his own class on entrepreneurship and everything else.

So, I don't know if Everyone knows that you had a, you know, kind of a substantive career before Google, since they all know about your career at Google.

First at Sun, doing very hardcore tech stuff, and then Novell.

What did you learn from those 2 gigs that you took with you to Google that was really helpful and essential for Google?

So, first, thank you for having me, and obviously I support what you're trying to do at Stanford, and in fact, all of your activities, and there's nobody I work with who's more clever and insightful on most of these issues than Reid Hoffman.

It's interesting that yesterday I went to visit my old boss when I worked at Xerox PARC, whose name is Bob Taylor, and to talk to somebody who is the person who funded the ARPANET, and ask him how did he do that, and the person who conceived the personal computer and who did he work with, gives you a reminder of both the extraordinary and the awesome things that have happened in our industry and also frankly how old I am.

So my history is I'm a computer scientist, a PhD from Berkeley, but I've been around here for almost 40 years, and working at Xerox PARC, I went to Sun, and 1 of my sort of rules as a sort of first-year, first young manager is that as a young manager, you absorb everything.

So my manager at Xerox, Bob Taylor, had a particular management style, which I now realize 40 years later is kind of like mine, the way I approach things.

And my first impressions of being a Sun manager and the way Sun worked, I think colored the next 30 years of development.

And so 1 of the things to remember is that the next 5 or 10 years of your careers are in fact crucial because that's when you learn all this shit, right?

And that all, sort of where you are and the people you, the sort of, the little subtle things that make leadership happen are learned during that period, which is a surprise to me.

So at Sun, we had, Sun was both very tumultuous, very political, and very complicated.

There were many, many good things that I learned and I also learned some real negatives.

1 of the things that I learned negatively is that companies can reorganize prematurely, companies can become religious, companies can not react to actual facts.

The low point in my time at Sun was we had a meeting where we were looking at sun computers versus PCs, and we concluded we could not get our manufacturing costs equal to that of PCs.

Now, by the way, that's a signal that you should quit.

Because I failed to answer the question that I advocate now, which is, what does the next 5 years look like?

So 1 of the sort of things we talk about in my other class in the MBA school is ask the 5 year question.

Right, and I learned that sort of the hard way, because for most of my life, the answers were given to me or they were highly narrow.

So now I ask, what's gonna happen in the next 5 years, what's gonna happen next, and I learned that.

So anyway, after 14 years of Sun, lots of politics and so forth, I did the Java maneuver, which we can talk about if you're interested in.

I went to Novell under the mistaken idea that I wanted to be a CEO, and I failed to do any due diligence.

So had I done the due diligence, I wouldn't have taken the job and therefore I would not have gone to Google, so it was probably good I didn't do the due diligence.

But at Novell, there was a week which we remember, my colleague and I who joined me with him said, was the worst week ever where our basic goal was to get out of this with our professional reputations intact and not in jail.

And that's after you join a company and you discover the books are cooked and the people are frauds and the customers aren't paying and so forth and so on.

But in hindsight, what I learned, something which is that you can actually overcome that, and the skills that I developed in Novell, in fact, allowed us to do things at Google, and so what happened when I showed up at Google, make a long story short there, was that company's very interesting, very innovative, but because I'd had such a tough time at Novell, I understood the role of cash.

And so we did everything we could to run the company for revenue, and the rest is history.

And Is there anything other than maybe telling yourself to not 1 time not do due diligence, but other times do it for the obvious thing of getting to Google.

If you go back to your younger self, is there anything you would have told yourself to do differently pre-Google?

I think all answers of that category in our industry are to do things that you did sooner and to make fewer mistakes.

So in hindsight, I would always have made the right decision faster and I would have made fewer mistakes.

And I wonder, what is it that causes me to not make the decisions quickly?

And by the way, I continue to have this problem.

So it may just be that some people are quicker decision makers than others.

And it's not obvious that you have to make all the decisions quickly, but in hindsight, you would judge them all that way.

And every executive in every business class and every management class will say the same thing, which is, I should have fixed this earlier, I should have fired this person sooner, I should have cleaned that up earlier, and so forth.

And that's why businesses are not like the government, where none of that ever

So you, what was the employee size when you joined Google?

And what I should tell you the story of Google is that Larry and Sergey had taken funding $25 million from 2 venture capitalists who, oh, thank you very much, Peter.

This, by the way, delivering the Diet Coke is Peter Wendel, my co-professor.

Thank you very much, Peter, in my business school class, who's joining us for a minute.

And we hope to steal all of your best ideas for our class, Reed, so we're clear.

That's why we're here, just so we're clear.

The, so what happened was the venture guys had said, these 2 young men are brilliant, crazy, and unreliable, and they need a proper CEO.

So the 2 young men agreed to hire a CEO as long as they could vet them.

And so their vetting algorithm was they had to spend a weekend with the 2 of them.

So each candidate would do something for the weekend.

So they took some of them skiing, some of them boating, some of them had to go to the various farms.

They went to New York once with somebody and so forth.

This guaranteed no 1 was gonna get hired.

So I was eventually called by John Doar and I said, well, I'm really not gonna do that.

But it turns out we met and it was pretty obvious we agreed.

They had to fix them and the rest happened.

What's interesting about Larry and Sergey is that they had both been here, and they'd had the same professor 18 years later.

So we're far more similar than we would like to admit.

I was wondering if you could remember some of

I have the list, because I save everything.

You know, when you think about a small company, almost all of them have the property that they're full of energy and no process.

And they get to the point that Google was at by just sheer force of energy, hard work, and figuring stuff out.

International expansion plans, sales plans, hiring plans.

Do you understand where your inventory is?

Development plans, 18-month product plans, none of which existed.

The first meeting I was in at Google, it was like being in graduate school in a university, full of very interesting conversations without deadlines or deliverables, right?

And much of the Google culture was developed out of the graduate school of Stanford.

In other words, the offices had 4 people in it because that was the office that Larry and Sergey had in.

And it turns out, when that kind of raw material, what I figured out is all you have to do is ask questions.

And it's not that they don't, it's not that they haven't thought it, well, it is that if you push them, they can develop a plan.

They didn't think it was important, it was more interesting to talk about this.

Actually, just as an elaboration on that, what advice would you give, so how does the partnership between young, ambitious, highly talented, super smart founders and new people coming in.

What were the key things to make that work really well?

Well, I was well aware of this John Sculley, Steve Jobs story.

And you all are too young to have lived through it, but the fact of the matter is that Jobs needed somebody to be the CEO, the board picked Scully, the 2 had a fight, Scully went to the board, the board had to support the CEO, because if they don't, the CEO quits.

Eventually, Steve left, formed a company called Next, and then as you know, he very cleverly, ultimately got himself acquired, and then within a month or 2, got the CEO acquired, him fired, and replaced the entire board.

That's very hard to do, certainly for you and I.

That's like an amazing achievement in and of itself.

And it produced the most valuable company in the world, so it's clearly the right choice in hindsight.

Well, I was very, very aware of this issue of founders and the outsider, and I understood I was the outsider.

So from the moment I started, I knew it was their company and I didn't get confused.

It's their company, It's their company, it's their company.

And so as young executives and all sorts of press, they really enjoyed it, they had all these pictures, they went cover on time and so forth and so on.

And then they, right before the IPO, they did an interview with Playboy.

And the interview with Playboy was on roughly February 20th or April 20th of that year.

And it turns out that the interview was at the wrong time in the cycle of being quiet period.

So I still remember in August of that year sitting with them and saying, These are my closest friends, my colleagues, I really care deeply for them.

And they have those long faces that people get on them and they say, uncharacteristically they said, well did we screw up?

And The correct answer is, yes, you really screwed up.

But the even more correct answer is, no problem, easy mistake to make, I would have made this mistake, and we papered it over in a legally correct way.

From that moment on, they've given no interviews.

And so what's interesting about that psychology is it's somehow, as young executives, they wanted it, but Once they didn't want it, it was fine for me to do it.

They're the owners, they're the founders, it's their company.

And if you get confused on this point, you're not gonna win.

Nowadays, the founders are much less likely to offer control the way, say, Pierre Omidar offered it to Meg Whitman.

There's an increasing sort of view of their own ability, and that's fine too.

If you look at Facebook, it's worked really quite well with Mark, who's brilliant and young, by bringing in someone who is much more experienced in many, many things, Sheryl Sandberg, that partnership worked extremely well.

So joined 100, it's now over 50, 000 people.

Matter of fact, there was 1 year, I think it was 2004 to 2005, you over tripled the number of employees in that year.

It's easy to double, it's very hard to quadruple every year.

You can kind of, okay, I can add another person here, and I can add another person, and then I can expand in this country, and so

So what were the kind of, because you had to invent a lot of these techniques, right, these hacks.

I mean everything from the 3 of you reading every resume to keeping innovation going with 20% time, other kinds of things.

What were the key hacks that worked and the key hacks that didn't work?

So I want to offer a cautionary tale, and again, having both read your book and also the notes that you kindly sent me before this.

If you don't understand the subtlety here, you would conclude that the correct thing to do is to grow everything as fast as you possibly can everywhere.

So let's just make as many engineers, as many sales people, as many products, and so on and so on.

And it doesn't work because No product shall ship before it actually works.

And the way you build great products is you have small teams with strong leaders who obsess over trade-offs and they push things off and they say we've got to get it done, and they put a lot of pressure on the team, and they work all night, and they produce a product that just barely works.

Okay, the original, I'll use non-Google examples, the original iPod, just barely worked.

Try, people, remember the original iPhone.

Just barely worked, but it was just the right combination to create an enormous franchise that's now 70% of the revenue of the world's most valuable company.

I was talking to Travis Kalanick, we are major investors inside of Uber, so we have good relations with Uber.

And his description of Uber was that he understood scaling, but the product, the app wasn't ready.

So you have to sort of have judgment about when the product is ready to scale against it.

And so we would debate this over and over again.

And so Larry and Sergey would play tricks on me.

So a typical example would be, I would say, we're not strong enough to take on Microsoft.

And they wanted to do an operating system and a browser.

And I said, there's no scenario where we'll ever do an operating system and a browser.

And because Microsoft will kill us, and I don't want to get killed.

We're a small company, and yes, yes, you're very smart.

And yes, yes, we're full of smart people.

And yes, yes, we have lots of revenue, these guys can kill us, because I've been previously killed in the previous jobs.

And so they hired somebody to improve the performance of Firefox.

6 months later, I'm called down to 1 office, and this person who was supposed to improve the performance of Firefox has managed to invent Chrome.

And I say, well, how long have you been doing this?

No, you haven't, you've done it full time.

Well, yeah, you know, I had 3 other people.

Okay, well, how many more people do you have?

Well, did Larry and Sergey know about this?

So, And then I said, well, we can't do an operating system.

So they bought this company called Android and they said, yeah, yeah, it's just for smartphones.

It's software for smartphones, don't worry, Eric.

billion plus operating systems used, largest number of operating systems in the world.

Chrome is the largest and most successful browser.

So, maybe the lesson to learn in management is I'm just wrong all the time.

But the secret was, You have to have judgment as to when these things can scale.

And I can give you plenty of negative examples.

was a complicated email product that we launched to great fanfare and We watched its adoption rate.

Marissa had this rule, which is a good rule, that you cannot, at Google, you cannot tell how successful a product is until the first 6 months, because what happens is you get this adoption cycle, and everyone loves the product, because everyone tests it, and then you watch what happens.

And the great products, they're bumpy, but they go up.

Well, this is what it looked like like this.

So it took Eric, your friendly CEO, 18 months of going down, straight down, before that project was canceled, right?

So the reason I'm answering your question in the blitz growth argument by saying you've got to have the products that you can scale.

If you have the products that can scale, the thing that's new is you can scale very quickly.

Once you have an app and a business model that more or less works, there's no reason why you shouldn't go global and wide.

When I started at Google, my first concern with Google was I thought the whole thing was a sham.

The company was using QuickBooks for its accounting and I was convinced that there were errors.

So I asked to be shown the actual cash balance in the bank.

There was in fact cash in the bank, which was shocking to me.

So then the sales guy, his name was Omid, who's now just gone off to Twitter, I said, okay, well, where's this money coming from?

He said, well, we have Salesforce, we sell these ads.

Well, okay, whatever, this must be some fake thing.

So we investigated, we decided people really were clicking on these ads, so I said, well, how many clicks do you get outside of America?

I said, well, no, you have lots of traffic.

So I said, leave and go to Europe, and don't come back until you have sales operations in Britain, the UK, and France.

Which is a strange thing to say to somebody.

So he left, and he came back in 3 weeks having set up those operations.

Today, the operations he's set up contribute 60% of the profits of a $60 billion corporation.

So in hindsight, I should have done it a month earlier.

Think about the compound value of that decision.

So there's a point when you keep it small, and there's a point where you expand.

When you expand, you grow very, very quickly.

Always the favorite example, because everybody understands Uber, as I said.

Do you believe that the Uber model scales well outside the United States?

The French love it, but the government hates it, right?

They need a scalable app, and they need a scalable negotiation strategy with the governments, right?

So now you can guess how far they'll be, right?

Google had the same problem with China, and we lost.

So what, any heuristics for when the product is right for scaling?

Well, I have another opinion about this, and if you think about the greatest products, they've almost always been designed for the benefit of the people who actually are building them.

And so, the Uber story, they built this to share apps.

In fact, the original Uber was a private sharing group.

Larry and Sergey built Google for Stanford and particular for themselves.

The server was in Larry's dorm room and they needed a second server.

They didn't have enough power, so they ran the cord over the room into the gentleman next door's dorm room.

They opened up the server for the entire campus here, and the usage was phenomenal.

Andy Bechtolsheim heard about it through David Cheriton.

Sergey put it in his wallet without a name on it for $100, 000 and left it in his wallet for a month until they had the name Google invented.

They moved into Sergei's girlfriend's sister at the time, then wife, ex-wife, long history of life there, house which we now own, where they set up these servers in the garage.

And they slowly took over each of the bedrooms.

And this poor woman, who I think was pregnant at the time, kept saying, the baby's coming, the baby's coming.

They put Google World headquarters in the baby's room.

But then as the heuristic, you already see such impressive demand, you know you have to keep up with it, or sometimes your heuristics simply, or different than that?

In order, it's easier if I give you a latch.

It is tempting to believe that you have a product that works before it works.

And the error that's made, especially by non-technical people, is they believe what the engineers tell them, and then they pre-scale for a product that doesn't work very well.

Think of it as, I'm going to raise money from you, because of course you're a very famous venture capitalist.

I'm gonna take your money and I'm gonna do everything I can to build a great product.

Where's your international strategy, where's your sales strategy?

Because I know in today's market, the moment I have that product, I know I can hire a sales and marketing and evangelism team in a week.

So think of it not as the measure that I described here, but rather as a funnel, which is very tight, and then there's a global expansion period.

And I think that's the essence of what you're trying to say in your book, which is there's a point where the sum of all of this, it's like this huge push, right?

Let me give you, lots of failures in my case.

They were, and by the way, they were really nice and really energetic.

They were just like caught up in the hype.

How many people do you see walking around Stanford using Google Glass?

Let's keep going through the list, right?

Again, maybe it's just we're at version 1, and we need version 1.1.

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Blitzscaling 08: Eric Schmidt on Structuring Teams and Scaling Google