Eric Schmidt was the CEO of Google for 10 years. He also sat on the board of directors of Apple Inc.
These product lessons are curated from my friend Chris McCann’s interview notes. You can read his full interview notes here.
Lesson 1: No Great Product Scales Before it Works
I have seen the same cycle again and again — great products are created through small teams, with great leaders, who eliminate all non-critical features, while working under extreme pressure, and produce a product that just barely works.
Look at the original iPod and see what it has become. Many people don’t remember that the original iPhone didn’t have any apps, there was no app store. The first version barely worked but it had the right combination to be interesting.
Travis Kalanick of Uber (who Eric Schmidt has a good relationship with through their investment in Uber) understand scaling very well. The first version of Uber was interesting but wasn’t ready to scale yet, you have to have good judgement on when something is ready to scale.
We debated this all of the time at Google and Larry & Sergei would play tricks on me. Once they said they wanted to build an OS in the browser — but I said that we weren’t ready to take on Microsoft. Instead they hired someone to “improve Firefox”. On nights and weekends a small team created what would become Chrome. When I saw the first version, I was shocked. I asked the team if Larry & Sergei knew about the project, and he said they encouraged it. Larry & Sergei basically went around me.
Larry & Sergei said they wouldn’t do an operating system, then we bought Android. I was told Android wasn’t an OS, and look at Android now. Maybe the lesson is I am always wrong but it takes precise judgement to know when these things are ready to scale.
An example of when not to scale was Google Wave. We launched this product to great fanfare and a base of passionate users. The difficult part is you can’t tell if something is successful until 6 months after the initial wave of excitement. Great products have this big fanfare, big drop off, then small bump back upwards, and steady usage upwards. Google Wave on the other hand had a wave of excitement and then a steady drop off downwards.
Once you have an app and business model that works — you can scale and go global fast.
Lesson 2: The Greatest Products are Typically Designed for the Benefit of the People Who are Building Them
In Uber’s case, the original product was a private car sharing for a small set of people. Google was built for Stanford but mainly for Larry and Sergei themselves. The first Google server was in their bedroom. Once they outgrew this, they put several servers in their home, the garage, then took over the whole house, etc.
It is tempting to believe you have a product that works before it works.
This is an error especially made by non-technical people. They listen to the technical people who say it works and start to scale the organization before the product is working.
It’s best to think of this process as a very long and tight funnel. It takes a long time to get the product right, then once you get it right you scale up the team as quickly as possible, then go off to a global expansion strategy.
Another way you know a product is ready is when you and your team can’t stop using it. With Wave, no one at Google used Wave, only outside people did. They were nice, but they didn’t continue to use the product, they were just bought into the hype.
Lesson 3: Products with High Profit Margins Will Beat Products with Low Profit Margins
The fact that we fell into a very high gross margin business very early — gave us the ability to take risk. So when I talk to founders I ask — how much gross margin do you have? how much flexibility do you have? I’ve been so lucky I forget there are other businesses with low margins out there.
So you want to be careful on how much margin you have. The ideal business is to have a business like Microsoft — a monopoly software business with hardware competitors — who are competing for good treatment by you — in a growing industry.
Another example is Uber — they spend a lot of time talking about how the drivers don’t work for them. There is a reason for this — it’s not the legal reason. It’s because if you think of them as a software infrastructure company, they have very different economics than a cab company. In that sense it’s a modern version of the franchisee.
Why do hotels (like the Four Seasons) not own the buildings? It’s better to be an operator with a fixed revenue share — and let other people ride the real estate up and downs.
Let these lesson sink in.