In Its Fall From Grace, Yahoo Gave Some Life-Saving Lessons To Startups

19/08/2016 1:12 PM IST | Updated 24/08/2016 8:34 AM IST
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Andrew Baker

On 25 July, Forbes headlined the Yahoo buyout as the "saddest $5 billion deal in tech history." This is heartbreaking indeed. Throughout my childhood in the 90s, Yahoo was the king of the net. In fact, when Yahoo went public in 1996, its shares soared by 154% in a single day and in just three years, its founders were worth $8 billion each. The company had a dream run until Google came along.

Is there something that we can learn as startups from this classic fall-from-grace story? I have looked at the discussions and perspectives around the topic and come up with the following analysis. Read on.

Know your customer

Yahoo began its journey in 1994 as "Jerry and David's Guide to the World Wide Web", a directory page created by two Stanford University students where they listed websites that they found useful. In the US then, dial-up internet was gaining popularity and people wanted a one-stop destination where they can access different facilities. Yahoo was at the right place at the right time. It became a portal and became extremely popular as it rode the dotcom bubble.

Yahoo did not do enough to keep its talent density intact. Instead, it filled in the gap with mediocre engineers.

By the turn of the century the advantage of the portal slowly dwindled. The world was more focused on social and search. And more and more people were turning to smartphones.

However, Yahoo essentially remained just that -- a portal where millions of people could come every day to do almost everything from searching to emailing and checking news to playing games and chatting. All these activities under one umbrella, though, were not particularly popular with the smartphone audience.

For startups, this is a good learning -- know your customers well. It is important to analyse the interests, demographics and other metrics of our target audience, and formulate strategies and services accordingly.

Keep your best team together

According to a Forbes article, at one time Yahoo had the best brains in Silicon Valley. But as the company gradually lost its importance, its best engineers started moving out to its competitors.

Yahoo, however, did not do enough to keep its talent density intact. Instead, it filled in the gap with mediocre engineers. One of the ex-managers of Yahoo famously confessed to a magazine that given a choice, he would like to fire at least 80% of the engineers in the organization.

This is a good learning for all companies, and more so for startups. A good team will see your company through all times -- good and bad. The key is to identify the key stakeholders and focus on maintaining the talent density.

Focus on your core product or service

Remember the time when Google appeared as a search option on the Yahoo portal? Google has long come out from the shadows and has eclipsed Yahoo completely in search. Facebook has taken over the excitement that we once experienced with the many Yahoo chat rooms. Apps in smartphones have weaned us away from the web. In short, Yahoo does not seem to have any specific focus when compared to such companies. To be brutally frank, even the home page looks cluttered and out of focus.

Look at the irony. The technology Hadoop was born at Yahoo, but other companies are generating billions of dollars around it now.

This should be an eye-opener for startups. Understand where your strength lies and give special focus to that product or service line. It is better to be specialist in one field and offer unique experiences to customers than to be a "Jack of all trades but master of none."

Be clear about your revenue model

In the late 90s, the internet was fast expanding and Yahoo's methodology of manually curating and indexing websites on its portal was becoming obsolete. But it did not really make an intense effort to come up with a technology to automate the process.

In fact, when the young founders of Google approached it then for investment, Yahoo said a flat no. Later, however, it understood its mistake and invited Google to put up its search bar on its portal. Ironically, this helped Google much more than it did Yahoo -- it positioned Google as a better option in search technology. In 2002, Yahoo offered to acquire Google for $5 billion, but this time, Google said no.

Again, Yahoo could not make the best use of Overture, its pay-per-click program. On the other hand, Google-based AdWords has become the search giant's biggest source of revenue.

And what is even more heartbreaking is that Yahoo could not properly capitalize on the millions of leads of an entire generation that came (and still do) to its portal.

When Marissa Mayer took over as CEO, she understood the importance of mobile experience for users. But maybe her efforts were too little too late. Critics point out that Yahoo did not have enough mobile experts and it was spread out on too many apps.

In short, with the rise of Google in search and Facebook in social media, and with no clear presence in web or mobile, the potential of Yahoo to generate revenue was gradually going downhill.

This analysis is a clear learning for startups. From the beginning, we should have definite understanding of our revenue model and how we plan to make it work.

Set a clear work culture

Yahoo always had an employee-friendly culture where people were happy, relaxed and had the freedom to pursue their passions. This is good, but the culture should also push employees to move fast, innovate and create real impact.

It is very important to set up an office culture where employee-friendliness and work expectations go hand in hand.

When Marissa Mayer became the CEO, she tried to do away with the work-from-home option which was abused universally. She also tried to bring in a strict appraisal system where an employee would fall in different buckets like "exceeds expectations", "meets expectations" or "below expectations". Did her initiatives bear fruit -- the jury is still out.

Look at the irony. The technology Hadoop was born at Yahoo, but other companies are generating billions of dollars around it now. There were other ideas which received many awards at conferences, but most were not implemented. So here is the question -- were the stakeholders not active or fast enough in the company to translate those ideas into business?

This is a wakeup call for startups. It is very important to set up an office culture where employee-friendliness and work expectations go hand in hand. The culture and values should be clearly mentioned on the company's page -- something that Google has done effectively and Yahoo has not.


Of course, all is not lost for Yahoo. It stills hold non-core patents and stakes at Alibaba and Yahoo Japan. It is worth only $36 billion now -- a mighty 75% fall from what it was in 2000, and definitely less than the $50 billion that Microsoft once offered to acquire it. But in its Greek tragedy, there are many gems of wisdom that startups need to take note of.

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