Why startups shouldn't fear operations

By Bryan Schreier , written on October 2, 2013

From The News Desk

Until recently, a great way to end a meeting with a VC prematurely was to say your startup would be operational.  The phrase triggered the pass reflex: Operations meant lots of people and with it low margins, workforce challenges, and worst of all a governor on growth.

At Sequoia, we feel that’s no longer the case. The original dotcom boom was fueled by the belief that the Internet would reinvent every industry. While it gave birth to online shopping and many new services that are accessed online, that boom ultimately came up short because, at the time, people could really only access the Internet from a computer at a desk. Most industries were too complex to be disrupted that easily.

Now, people have smartphones with high-speed Internet connections, and all kinds of sensors, notably GPS. And the transformation many of us foresaw 15 years ago is finally attainable.

But it’s taking a new generation of startups with operations at their core.

Many industries have complicated distribution chains with one or more middlemen. Until recently, these middlemen were necessary to manage logistics. The unfortunate downside of these middlemen is that they take a cut of the transaction -- often an outsized one -- eroding the economics for both producers and consumers. They also tend to lower the quality of experience.

When Uber automated dispatch service for taxis, it improved the economics for drivers and the experience for passengers, who knew exactly when their car would arrive. Uber required heavy operational bootstrapping to get going. Early on, the company paid drivers to be available, booked manually on SMS and did other things to achieve a critical mass.  But in an industry defined by the flow of a physical good -- a car -- that’s what it took.

Recently, we’ve partnered with companies that are transforming their industries through software-powered operations. We officially announced one of them last week. Good Eggs uses software, the Internet, mobile and a smarter ops staff to reinvent the way food gets distributed. [Disclosure: Sequoia Capital is an investor in Good Eggs.]

Over the past few decades, the grocery business has evolved to depend on enormous distribution companies that aggregate food from farms and then deliver them to grocery stores. The average distance a piece of food travels to get to your grocery store is up to 2,000 miles -- in some cases, food will leave a local farm, get delivered to a distribution center hundred of miles away and then get sent to a supermarket near that same farm.

There’s no efficient or cost-effective way to get locally-grown food to interested consumers. (The local-food industry has still managed to become a $10 billion a year market.)

The Good Eggs team identified an opportunity to change that. They’ve written software that makes it easy for producers to list their inventory and created a web-based marketplace that replaces the supermarket. But it’s also taking an incredible amount of operational investment. They’ve spent thousands of hours with farmers and producers to help them to participate in a software-powered market, and hired a wonderful team of people who literally help move the food from farm to fridge.  Mobile apps are the key to scaling delivery and other logistics.

Doing so has allowed them to bypass distributors so people can buy food from a network of local producers. This is a really good thing for consumers. Because it’s fresher, local food tends to be healthier and taste better. Buying from local producers is also better for our planet and helps small businesses, two worthy causes.

Another example of an operational startup we partnered with recently is Thumbtack, which is taking on local services, where the entrenched middlemen are essentially lists like the Yellow Pages and their online equivalents. [Disclosure: Sequoia Capital is an investor in Thumbtack.] These lists are self-service – leaving the frustrating process of actually connecting and booking a service provider to the consumer.

Thumbtack's software routes job requests to qualified professionals, who bid on the work if they’re available. This saves customers a lot of effort. Because service professionals are usually out in the field and almost never at a desk, the setup required powerful and easy-to-use mobile devices to work.

But that’s not all it requires. In order to make sure there are enough professionals for each job, Thumbtack employs a large operations staff that is constantly vetting and onboarding new service professionals. Importantly, this team leverages powerful software, which makes the setup a differentiator, not a cost center. After three years, Thumbtack offers the most liquid market for connecting consumers and service professionals thanks to its Internet and mobile powered operations network.

It’s still very early in the lives of both Thumbtack and Good Eggs. But both companies are experiencing rates of growth more representative of hot Internet companies than slow-moving offline operations. We hope their early success and backing inspires more entrepreneurs to reinvent industries to make them better for all involved.

[Image via Thinkstock]