One of the best aspects of America's high-tech startup machine is its ability to attract talent to the best ideas. And if that machine is working well, the turnover of that talent will be efficient: Good ideas that have peaked will lose their talent to better ones that are just taking off. And when those ascending ideas start to lose altitude, new startups will take their place.
That sort of talent drain is a great early-warning indicator for investors in publicly traded tech companies. Admittedly, just because a company is losing some of its best people doesn't mean it will go out of business. After all, Microsoft (MSFT) has survived the loss of all sorts of talented employees in the ten years since Bill Gates stepped down as CEO. But the lousy performance of Microsoft's stock over the last decade attests to the way talent drain can hit investors where it hurts
And during the last couple of years, talent has been draining out of a more recent Silicon Valley icon: Google (GOOG). For many years, Google was able to hire great people and pay them less than the competition. That worked when Google was the new "new thing."
But now, Facebook is a hotter property, and Google isn't adapting well to that change. Thanks to its dominance in search advertising -- it controls over 65% of that roughly $12 billion market (which is 47% of the estimated $25 billion in 2010 U.S. Internet advertising) -- it has thought of itself as the king of the hill. That mindset has enabled it to attract great people whose talent it too often squanders. Indeed, complaints from Google employees about poor management and lack of opportunities for advancement read like those of any other company.
This weekend, I was developing an analysis of Google's Value Quotient (VQ) -- a measure I developed in my book, Value Leadership: The 7 Principles That Drive Corporate Value in Any Economy. The VQ scores companies on 24 attributes within the seven principles. I gave it a very good 88 out of 100 because I found that Google was strong in experimenting frugally, but relatively weak when it comes to valuing human relationships and fostering teamwork.
How so? According to a January 2009 TechCrunch post, there were plenty of 2008 emails from former employees that suggest some pretty serious management problems at Google. Google's HR department set up a Google Group to find out why people left. According to the TechCrunch post -- which includes many emails from that group -- the top complaints include: "low pay relative to what they could earn elsewhere, disappearing fringe benefits, too much bureaucracy, poor management, poor mentoring, and a hiring process that took months."
The Frustrations of Freedom
Since Google sells itself as an employee Nirvana, the reality that it is in many respects just like other companies has to be a let-down to those who make it through the hiring process. And given the level of startup activity in Silicon Valley, many of those great people won't be motivated to stay in a work environment that frustrates them, even for a bit more money. So Google's recent announcement that it will boost pay 10% is unlikely to keep its best talent on the payroll.
What those entrepreneurial engineers really want is to be working on the cutting edge of technology, developing products that millions of people will use. And no doubt they'd also like a chance to get really rich by owning shares of stock before a boffo public offering. No surprise, the IPO people are most interested in getting a piece of is Facebook's. As The New York Times reports, no fewer than 142 of Facebook's employees came from Google.
Almost paradoxically, another reason people are leaving Google is because of its policy of allowing employees to spend 20% of their time on self-directed projects. It sounds great for creative programmers in principle, but in practice, it leads to more innovative ideas than Google can commercialize. People spend huge amounts of time on these projects because Google doesn't have a system for killing mediocre ideas and promoting the best ones, which leads to equally huge amounts of frustration. As one peeved Google product manager told The New York Times, "There's a lot of these cool features that are very hidden, and a lot of people worked very hard on them and they were kind of sad that they spent a year of their life on something that gets 0.1% usage."
Until Google rethinks its entire approach to managing people, it is going to keep losing its top talent. And some of those who leave could out-innovate Google and attack it.
Meanwhile, Google's inability to come up with big new sources of revenues is putting its stock value at risk. Google's price/earnings to growth ratio (PEG) is a high 1.5 -- in my opinion, a PEG of less than 1 denotes a reasonably valued stock. In Google's case, that 1.5 PEG based on a price/earnings ratio of 24 with earnings expected to grow 16.1% in 2011.
The good news for investors is that Google has a habit of beating analysts' earnings estimates. But unless it can reverse its talent drain, it's not going to be a great place for investors to search for profits over the long term.
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