Sunday, May 27, 2012

What Kind of Company is Splunk? Categories and Organizations

Let me begin by answering the question in the title. Splunk ( describes itself as a company founded to "make machine data accessible, usable and valuable to everyone." With machine data they mean not just any data on a computer, but rather the data generated by machines rather than humans; by accessible they mean that they are making programs to analyze data that would normally be in an unstructured form, so not in a database. Their software deals with system configuration and monitoring, security logs, servers, virtual machines, and so on. The name comes from spelunking, or cave exploration, because supervising machine data is like cave exploration when the software tools are poor.

To someone outside the computer industry, like me, most of this description is hard to follow. For those inside the industry, each function and piece of software may be easy to understand, but it is not necessary clear why a single company would be founded to take care of these services and not others. What would we call such a company, and who are its competitors? That is the question of categorization. Customers care about categories because they want to know which firms to approach for bids when there is a need for new software. Investors care about categories because they want to understand the strategy of a firm they want to back.

Usually when I look at a problem of categorization I want a clear answer. Green tea ice cream bothers me because a non-dairy product that is usually served hot is frozen and milky. There is something fundamentally wrong with three-wheel cars and four-wheel motor scooters. And, as Elizabeth Pontikes has found in recent research, I seem to be a typical consumer in that respect. If a firm is difficult to categorize because it belongs to a category that is hard to delineate or has significant overlap with other categories, then they assign a lower value to it.

The surprise came in how venture capitalists made the same judgment: they took the exact opposite tack and thought such companies were more valuable, not less. Why is that? The key seems to be that (potential) customers don't have any control over the firm, and are facing with a possibly unclear product or service that they have to take or leave. Venture capitalists, on the other hand, will invest in a firm and take a role in setting its strategy, and for them the unclear labeling may indicate novelty and opportunities to maneuver. So, it is not just the category that matters in how one reacts, but also the degree of control over it. For consumers, that still means staying with four-wheel cars. For entrepreneurs it means that the radical but still half-baked idea might be more interesting to investors than they imagine. Oh, by the way: When I looked today, Splunk was worth approximately 3 billion USD. 

Pontikes, E. G. 2012. Two Sides of the Same Coin: How Ambiguous Classification Affects Multiple Audiences' Evaluations. Administrative Science Quarterly, 57(1): 81-118.