This should sound pretty obvious, but it isn't. And I think a lot of people have been violating this rule, particularly on wall street and in big corporations and the economic mess we are in is at least partly because of this problem.
One of my favorite investors on wall street is a guy I've known for almost ten years who has been in and around the hedge fund business for more than twenty-five years. Whenever he talks about his business or the funds he is invested in, he always cites how much of his own money in in his fund and how much of the fund managers he invests with have in their funds. The numbers are impressive. Often 25-50% of the funds he invests in are comprised of the manager's own money. His business was affected in 2008 like everyone else, but I have a lot of confidence that he'll come out of this mess way ahead of most others.
In our business, we have put a significant amount of our own net worth into our funds. It's often difficult to have a lot of your net worth tied up in illiquid assets like venture capital funds, but when you are writing a check every time you make an investment, it has a way of clarifying the mind.
This is particularly important when you are facing the decision to support or walk away from an old and difficult/troubled investment. Most of the time, these kinds of financings are highly dilutive and very punitive if you don't participate. It's really tempting to put more money in because if you don't, you'll get wiped out. But if you do put money in, and the investment still fails, then you've lost even more of your own money and your partners money. The bigger personal check you have to write, the more likely you'll make the right decision. If you don't have to write any checks and all the money you are investing is other people's money, then it's incredibly tempting to "pour good money after bad."
If I think about all the issues we've had on wall street over the past year (see Michael Lewis and David Einhorn's two partcolumn for a great description of them), I think most of these issues have been caused by investors playing with other people's money without enough of their own net worth at stake. Financial leverage is a good example of playing with other people's money. You put up a tiny amount of your own money and you borrow the rest. If things don't go your way, you write off the little you put up and the lender takes the bath. That's been going on in the financial markets and the housing markets for the better part of ten years and we are now seeing the cost of that approach.
Why is it that most of the best managed companies are operated by their owners? Think about Apple, Google, News Corp, etc. All of these companies are run by owners who have a huge amount of their net worth tied up in the business. The same is true of Microsoft until recently when Gates left the business for the most part. But even Gates still has a lot of money tied up in Microsoft. When these leaders make decisions, they are risking their own capital/net worth, not just the capital and net worth of shareholders who they supposedly work for, but really don't.
We don't like to overfund the companies we invest in for a lot of reasons, but there are two big ones. First, the less we invest, the more the founders and managers own and that makes them operate like the company is theirs, not ours. And I also like the discipline that managers have when they are operating with small balance sheets. It causes them to look at every expenditure carefully and act as if the money is their own. As I've said, that generally leads to better decisions.
It is true that entrepreneurs and managers often are too conservative when all the money they are working with is their own. And that's a good reason to bring in other capital, ideally sophisticated investors who understand the business and can add value. But even when you do that, you should treat the investors capital as if it was your own. It's a mindset, and an important one. We've seen all too frequently what can happen when people stop operating that way.
I’m writing this on a cross Atlantic flight from Paris to New York City. When we left NYC 16 days ago, I was burnt out, tired, and cranky. Year-end always does that to me. It’s not that I mind the specific year-end tasks but the totality of them does weigh on me. And in general, this fall has been a difficult period for a host of reasons, some obvious like the market meltdown, some that I’ve not blogged about and don’t plan to.
In the past 16 days, we visited Milan, Munich, Berlin, and Paris. Only Milan was totally new territory for me. But my kids had only been to Paris before so most of the trip was new sights, sounds, and smells for them. That was great to see. They are now totally sold on Berlin, which joins Paris, Sydney, Melbourne, Cape Town, Rome and Florence on their list of top cities outside of the US.
One of the bummers of the fall of 2008 was the terrorist attack in Mumbai which led us to postpone our trip to India until winter break 2009. We’ve got to get our family to Asia. The only part of Asia they’ve been to is Thailand (and Australia if you can call that Asia). It’s time for us to explore India, China, Korea, Singapore, and Japan. I hope and expect we’ll start that in 2009.
The other big milestone coming in 2009 is the departure of our oldest child for college. The college application process was certainly one of the sources of stress in our family in the fall and I am sure it contributed to my burnt out state of mind. We left the application process to our daughter and tried to stay out of the way but her hell is our hell, that’s just how it is with teenagers. Now she has all of her applications in and the chips will fall where they may. I hope she gets into the right place for her. And it’s going to be a different family dynamic starting this fall. I’m counting on these year end trips to keep our family coming back together for a couple weeks every year for at least a few more years (hopefully enough to get Asia done and the rest of our kids in college).
As our kids have gotten older, travelling with them has changed. They are more self-sufficient and can explore cities themselves. They certainly did that in Paris this summer and again this past week. They also did a bit of that in Berlin. But travelling with three teens is always a balancing act. They know what they want and they know what they don’t want. We’ve taken to having our kids help plan the trip and build the itinerary. That helps a lot because the activities we do have been chosen by them as well as us. Even with that technique, I’d say that travelling with teenage kids has taught me a lot about patience, biting my tongue, and handing over the keys to the car. For example, I used to be the navigator in the family. When we needed to get somewhere, everyone would turn to me and I’d show the way. That ended sometime in the past couple years and both my girls are much better at it than me now. So I’ve given up trying to figure what metro to get on and which direction to walk in when we get off. It’s a bit humbling (since I was always the navigator in my family growing up) but I’ve come to terms with it. Better to fall in line than get upset about it.
I used to post a lot about the places we travelled to and what I thought about them. I’ve stopped doing that for several reasons. First, the Gotham Gal does that on her blog and she’s good at it. I think her posts on this trip have been excellent and if you are planning on being in Milan, Munich, Berlin, or Paris anytime soon, you should give them a read. Second, I now prefer to shoot a photo on my blackberry and twitter it (via the flickr to twitter service) than to wait until I’m back at the hotel to post about the activity. And I’ve also been posting a bit of our travel experiences on tumblr at fredwilson.vc (usually by emailing in the post which works great in tumblr).
On this trip, my family never really got off of NYC time. They’d all go to sleep around 2-3am and get up around noon. I made the shift pretty quickly to a midnight to 8:30/9am sleeptime and so I had a lot of free time in the mornings. I’d generally go to the gym for an hour and then hang out in the hotel lobby reading all the English language papers (FT is my favorite, then Int’l Herald Tribune) and checking email, twitter, blogs, and blogging on my blackberry.
I’ve written a lot about this already, but the blogging I did on this trip was some of the most enjoyable blogging I’ve done in a long time. First, I had the time and was relaxed and eased into it. When I’m at home, certainly during the week, I generally post between 5am and 6am so I can get to the gym and home in time to wake the family at 7am. That puts a certain time crunch on my blogging and I often will bang out my daily post in 15-20 minutes once I decide what it is I want to write about.
I’ve learned this trip that having more free time, getting more sleep, and a relaxed morning schedule has a very positive effect on me. I am going to try to figure out how to carry that forward into my daily routine. If I made my first appointments every day at 11am, that could really work out well for me. I’d sleep later, go to the gym later, and have a more relaxed breakfast routine in which I could blog on my blackberry with an espresso and a yogurt in front of me.
That would mean eliminating breakfast meetings, which are a big part of my weekly schedule. It would also mean taking less meetings generally which is something I’ve been wanting to do for a while but is hard to reconcile with the “always available” mode of engagement I want to take with entrepreneurs. But I think I’m going to give it a try and see how it goes. I can always break the 11am start time rule when necessary but having it in place could be very good for my productivity and state of mind. I said I wasn’t going to have a new year’s resolution this year and I meant it, but at dinner on New Years Eve, everyone in my family went around the table and made one goal for 2009. Mine is to “say no more often”. My mom always lamented that she had a hard time saying no and I do too. It’s not that I don’t say no all the time. It feels like I do it 20 times a day with entrepreneurs who send their proposals to me. But I am going to do it more. No to meetings. No to interviews. No to conferences. No to returning every email. No to investments. I think it’s something I need to do more of and will do more of this year.
But I don’t want to end this post on a negative tone. If you’ve been following this blog over the past two weeks that I’ve been away, I think you’ve picked up a very hopeful tone. I am with the majority who think that 2009 will be a difficult year on many levels. But I am optimistic because I believe in the work that I do and I believe in the people I work with and the people we’ve backed and the people that we will back this year. Starting companies, particularly technology-based companies is something we need even more of today in our country and our world and I am proud to be an active participant in the venture capital/startup ecosystem that makes this happen. And I’m happy to be re-entering that world in 2009 with a clear head and a positive outlook.
One of the great things about being in business with serial entrepreneurs is that they have a wealth of talented people they've worked with in past startups to tap into as the company grows.
Some founding teams stick together from startup to startup and its always great to get the chance to back a whole team of successful serial entrepreneurs. But that doesn't happen very often.
Success creates wealth and wealth and ambition generally lead talented startup people to try their own startups. Its like when the Beatles broke up and John, Paul, and George each went on to solo careers.
But sometimes a startup is so exciting and full of potential that it pulls the dream team back together. Everyone in startup land likes to work on a big winner and so many entrepreneurs are willing to give up on their own startup dreams (at least temporarily) and get the band back together for a while.
We are seeing this play out in a number of our portfolio companies right now and its a very encouraging sign. It may also be true that as times get tougher, the best teams are coming together and consolidating around the best opportunities.
Whatever the reason for it, it's very exciting to see. Teams that have worked together successfully before know the strenghts and weaknesses of each other and they know how to get along, make hard decisions, and move the ball forward each and every day.
One thing that's really hard in putting the band back together is equity stakes. When you have a team that was together in a prior company, they have the knowledge and history of their respective value and ownership stakes hard wired in their mind.
When some come back to join the band well after the company has been formed, the equity stakes that can be offered are often much less and certainly in a different balance. I've seen this problem delay and even prevent putting the band back together.
One thing I generally advise is to be more generous with equity being offered to a former colleague or partner than the market might dictate. For one thing, you know the value of the person much better. And also, you can argue that even though the stake being offered is lower than they might want or expect, its higher than market. That often does the trick.
The one area I think this approach is the most effective is with engineering talent and engineering management. Its so hard to build a technical team that can deliver the right product in the right timeframe and works well with the rest of the company.
I once flew from SF to NYC seated next to Steve Chen, co-founder of YouTube. When I asked him about their ability to scale the service without many issues he said 'I never worried about scaling issues. Whenever we needed more engineering talent, we'd just tap into our network of former colleagues from PayPal and eBay'. It didn't hurt that eBay/PayPal had become a big company by then and talented people were vested and chomping at the bit for a new challenge.
Putting the band back together is a key reason why places like silicon valley have a competitive advantage over other startup regions. But locations like New York City, Boston, Seattle and a few other regions around the world certainly have enough history of startup success now that they benefit from the same effects.
So when you are growing fast and trying to find the right talent to match the opportunity, you should always try to put the band back together if you can.
I've been reading a "pre-galley" of Jeff Jarvis' new book What Would Google Do? It comes out on January 27th. It's a good read, perfect for a flight. It's not too dense, full of great quotes and insights. I'm enjoying it. One of my favorite take-aways from the book is the value of public interaction.
Early in the book, Jeff quotes Caterina Fake, co-founder of Flickr, saying that early on they made an important decision when each photo uploaded to Flickr "defaulted to public". The ensuing interaction around the photos gave life to the service and helped it become what it is today.
But my favorite story on this topic from Jeff's book is about Mark Zuckerberg while he was still a student at Harvard. It goes like this:
At Davos, Mark told the story of an art class he took at Harvard. He was busy starting Facebook and didn't have time to attend the class or study. The final exam was a week away and he was worried about flunking. So he went to the Internet and downloaded images of all the art that he knew would be on the exam (not sure how he knew that - Jeff leaves that part out). He puts them all up on a web page and adds blank boxes under each of them. Then he emails the web page to all of his classmates and tells them he just put up a study guide. The class responds by marking up the page, editing each other, and getting it perfect. Zuckerberg aces the exam, of course, but also the professor told him that the entire class had done much better than usual on the exam.
I like this story because it shows the value of public interaction. Yes, Mark in classic Tom Sawyer fashion got them to do his work for him, but they also got better as a group. They did it together.
When I was an engineering TA about a decade ago, I made a rule: I would
not provide homework help over email, but only provide it in the class
forum. My initial reason was that, with 150 students, I didn't have
time for so much email and I wanted all my hints to be available to all
the students, equally. The students weren't happy about this, until I
proved that any question asked in the forum was answered by me within a
couple of hours (and generally, minutes).
But what was cool was
that once the discussions became public, the answers kept getting
better, because rather than me interacting with one student at a time,
I was continuously challenged by all my students at the same time! And
students were helping students.
Unfortunately university policy
was to delete the forums after a class was over, to prevent cheating,
or some such petty reason.
But to summarize, many to many
communication still does not have the respect it deserves, but it is a
very powerful communications medium.
That's an equally powerful story with a bad ending. Deleting public forums is wrong in my view. This is knowledge we're talking about folks. And deleting knowledge is a bad idea, period.
I encourage all of our companies and all the companies that I meet with to "default to public" as much as they possibly can. Sure, there are some things that should remain private, but not nearly as many things as people initially think. The value of public discourse and enagement around content/information/knowledge vastly outweighs most of the privacy concerns most of the time.
As we walked through the lower level which houses the Walter-Guillaume collection, I was struck by how many amazing paintings are in this collection. Its a tour de force and easily worth hundreds of millions of dollars, if not more.
And yet every single one of these paintings started with a blank canvas and some paint. And of course the mind and hands of a master painter.
So much of what we come to value in life starts this way. Google started this way as did Microsoft and Facebook.
People ask me all the time whether the venture capital business is affected by the market meltdown. And for sure it is. Its probably less affected by the capital markets themselves and more by the bad economy that we've ended up in. But surely this mess we are in will impact venture capital and the startup economy.
But I also remind the same people that venture capital doesn't make money buying an asset that's worth one price and then selling it at another. Venture capital, and the entrepreneurs who fuel it with their ideas and hard work, makes money going from nothing to something.
That's a fundamental difference and we cannot ever lose sight of this fact. Nothing costs nothing. We don't have to pay for our ideas, imagination, and hard work we put into turning nothing into something. Well to be exact, the entrepreneur doesn't have to pay for any of those things. The VC does pay for those things and gets a piece of the ride from nothing to something as a result.
Yes, if price/earnings ratios go from 20 to 5, VC returns will go down. But we can still make money going from zero earnings to tens of millions of dollars of earnings. There's a return in that value creation in all markets, good and bad. And always will be.
I am going to spend a good part of this new year's day at my favorite art museum in the world, the Pompidou, which houses amazing works of modern art, many of which have been created in the past decade.
And I am going to think about how that art was concieved of, created, and realized from basically nothing. Its inspiring and I want to go into this new year inspired so that I can participate in the nothing to something company creation process with enhtusiam and zeal.
No predictions for me. I'm done with that thanks to Brad Feld.
And I am also done with resolutions. I resolved to get off of Microsoft products in 2007 and failed miserably.
But I am looking forward to 2009 on this new year's eve and so I am going to list some things I am hopeful for in 2009. These are in no particular order, they are listed as they came to me.
1) A gas tax - Tom Evslin made the case for a $1.50/gallon gas tax the other day and I totally agree with him. His proposal would be to immediately refund the gas tax in the form of a lower payroll tax so that it doesn't actually take money out of the economy and people's pockets. That's a really good idea. But one way or another we are going to have to make using carbon energy more expensive so that alternative forms of energy and conservation can take hold.
2) An iTouch - I blogged about the iTouch recently. It's funny because it's now the number one search term driving traffic from google to this blog (other than my name and the name of this blog). I don't want to get caught up in whether it can play music or not or whether it has a 9" screen or not. I just want Apple to come out with an agressively priced touch screen mobile computer that can be used to read books, blogs, watch movies, listen to music, and work as a home remote too. This is a huge opportunity for them and others too.
3) A cultural shift from cars to mobile devices - It's already happening in Japan. Cars are no longer cool. Bikes, skateboards, scooters, trains, and subways are cooler and the coolest thing is mobile communication devices:
"Young people’s interest is shifting from cars to
communication tools like personal computers, mobile phones and
services,” said Yoichiro Ichimaru, who oversees domestic sales at
Toyota.
We need to follow suit in america. I realize we have a large suburban and rural population and not everyone can make the shift from a car to a bike or train. But even a 10-20% shift in the US would be huge.
OK, those first three are really the same thing. But this is a big deal. The world is changing. We must get on the train before it leaves the station.
4) The development of a real functioning secondary market for private companies - This is another thing I've written a lot about. The IPO market is dead. The M&A market is on hiatus for the most part and even when it works, many companies get bought and then slowly die inside the parent company. We need a way for founders, employees, and investors to get liquid on their investments or the whole startup ecosystem is going to get messed up. I am not talking about dumping our shares on widows and orphans. I am talking about a marketplace where seasoned, savvy, and qualified investors can transact in private company shares. The good news is that there's already one well financed company operating in this space, called Second Market, of course. I am rooting hard for their success and also for anyone else who gets into this business. We need it.
5) An end to the housing slump - House prices are going to drop until they get to a sustainable price level. That price level will be determined by affordability levels (generally 30% of income), a rent vs buy analysis, the availability of credit for investors and/or homeowners, and the amount of foreclosures coming onto the market. It may well be that house prices in the aggregate need to drop another 15-20% before hitting bottom. And it's also true that some markets are closer to bottom than others. But it's the housing mess that got us into this economic crisis and I don't think we can start getting out of it until housing bottoms. So I'd just like to see prices drop to sustainable levels quickly and be done with it.
6) Facebook gets profitable and cash generating - This is not a prediction, as I said, I'm done with that. This is a wish. I think Facebook is a great company and I witness my teenage children using it as I use outlook/exchange/blog/twitter/etc. They run their world on Facebook and I don't see that changing anytime soon. Facebook now has 200mm unique visitors per month worldwide and it's growth has picked up again in the US after being flat most of this year. They've launched a compelling new service in Facebook Connect. And there are a number of examples of significant new businesses being built on top of its platform. It's accomplished most of what we'd agree that only the best internet businesses can accomplish. But it has one big dig against it. It's not profitable and self sustaining. And so it taints the whole social media/social networking sector to some degree. I am hoping that 2009 is the year that Facebook gets serious about revenue, cost control, profitability, and ultimately cash generation. Once they do, I think the whole sector will benefit (and the whole sector should be doing the exact same things for the same reasons).
7) Google starts cutting products and services - This is a bit of the same wish as the last one. But very different in some other ways. Google can do almost anything they put their mind to because they have the engineering resources, the infrastructure, the balance sheet, and the huge revenue stream to support it. But that doesn't mean they should try to do everything. As a shareholder, as a VC active in the internet market sector, and as a fan of the company, I think Google needs to "rationalize" their business in 2009. I don't know how much cost they could cut if they really tried to get serious about a Jack Welch/GE style business unit analysis, but I know it would be significant. I wish they'd pick five to ten businesses they want to be number one or two in and invest heavily in them and forget about everything else.
8) Obama turns out to be a closet conservative - This one is fantasy of course. But Nixon went to china, LBJ brought us civil rights, Clinton eliminated welfare as we knew it, and FDR betrayed his "upbringing" and became the champion of the common man. Hell Sharon was close to bringing peace to the middle east when he was stricken. Anything can happen when someone realizes they work for everyone and everybody and have the world riding on their shoulders. In the case of Obama, I hope he realizes that the world is changing and not every company and industry can be saved, not every worker can keep their old job, and not every problem can be solved with money (money we don't really have).
9) We all figure out how to do more with less - As I see it, about 40-50% of the world's wealth was vaporized this year. It's not even clear that we ever had that wealth. That's the lesson I learned in 2000/2001 when the gotham gal and I saw 90% of our wealth vaporized. But the fact remains that most of us are a lot less wealthy than we were at the start of 2008. So we'll just have to figure out how to do more with less. That will mean different strategies for different people, different countries, different regions. But I think that's where we are a world right now. And I don't think it's a bad thing. We'll adapt, change our ways, and move on. The important thing is we cannot dwell on the loss. You can't change what you had for breakfast. So don't try.
That's it. I stopped at nine to be different. Happy new year everyone. 2008 was kind of sucky with a few notable exceptions. Let's hope for a better 2009.
I blogged the other day about how much I enjoy writing on my blackberry.
I may continue to post this way when I get back from europe because it allows me to sit back and think instead of lean forward and write.
But in the few days that have passed since I wrote that 'quill pen' post, I've had a number of interactions that lead me to believe that reading on the mobile device is a much bigger deal.
Of course mobile reading is a bigger deal because for every writer, there are tens or hundreds or thousands of readers. Writing is still something not everyone is predisposed to do. But reading is something everyone does.
And reading in lean back mode on the couch or in the coffee shop, on the train or in the plane, is more enjoyable and relaxing than the lean forward mode required by the computer.
I find myself reading more and more on my blackberry and its not even well designed for that experience. The iPhone is much better for that and the Kindle is another step beyond the iPhone. And we are just getting started with this whole mobile internet connected reading device thing. I expect we'll see a ton of innovation in this area in the next couple years.
A reader named Scott commented the other day than "commenting on mobile devices" is an area that needs some focus. I agree with that and hope our portfolio company disqus can innovate in that area in 2009.
Its becoming more natural for readers to want to interact with the content they are reading. Computers have allowed this to happen and mobile devices need to support it. Its not just commenting, its tagging, sharing, reblogging, and a host of other interactions that make consuming content online a better experience than offline consumption.
It's gotten to the point that if I can't interact with content, I don't want to consume it. When I read books, I underline certain passages so I can blog about them later. If I were reading on a connected device, I'd simply reblog on tumblr and be done. I don't think I'm unusual in this regard but I do think I'm in the leading edge of behavior and that more and more people will feel this way.
In any case, this is an area where entrepreneurs should focus on. Reading on mobile devices is a big trend and reading is just the start of the content consumption paradigm in a connected world. There's a lot to be done and its going to be done. So let's get on with it.
I have never spent much time trying to obtain perfect grammar, spelling, and wording. I write as I speak, for the most part. The words flow from the mind to the keyboard (in this case my bberry curve) and I leave them alone. I do go back over the post once I am done and read it and fix it a bit. But I focus mostly on the flow and readability. I'm not a perfect speller by any means. And I mess up/mix up its and it's all the time. I went to an engineering school not a liberal arts school and it shows at times.
I've been offered editing services for this blog from time to time and have always refused. I like the immediacy of write/publish. I don't want to wait for someone else to clean things up. And, honestly, I don't want another person's mind messing with my words. How will they know what I really want to convey?
But I also know that some of you find the mispellings, typos, and bad grammar off putting. I get comments to that effect on a regular basis. Some people can't even take me seriously when I don't capitalize and punctuate properly. They laugh at me and think I'm an idiot.
That's fine with me. You can't please everyone and you'll go crazy trying.
But there is a solution that I'd love someone to build. If anyone could make basic edits to this post that don't change the meaning, I'd love that. I don't want an editor, but I am quite taken with the idea of audience powered editing. I get comments like 'you said for when you meant from" and I cringe. It would be so much easier for the person who sees that error to just fix it. And fix the mispellings, bad grammar, and missed punctuations too while they are at it.
Its a tricky problem to solve because I would not want audience powered editing to impact the meaning of the words. I'd only want it to clean up and correct things. So any tool that attempted to do this would need to be able to determine the difference and mediate that.
Its tricky for another reason. Content management systems like blog publishing systems don't allow anyone other than the author to mess with the content creation service. If such a tool were created, I'd have to permission the tool to have access to my content creation account. That's a dicey proposition for sure. Security and hacking concerns are high for anything like that.
If anyone is tackling this problem, let me know. I'd love to be a beta tester of it. But short of allowing all of you to clean these posts up for me, I'm going to stick with my current approach. I hope you are OK with it.
My son Josh and I made a trip to the Chaos Communications Congress today (aka 25C3). It's a hacker conference that takes place in Berlin in late December every year. Here's the schedule of today's talks. We had our choice of hearing about hacking rich internet apps, flying in unpowered aircraft, and exploiting the Symbian operating system. Josh was curious if he could hack into Facebook but we quickly realized that the hacking rich internet apps talk was way above both of us. The unpowered aircraft talk was easier to take in but it was mobbed and we couldn't get a seat.
There were some cool things to play with. People were hacking locks in the cafeteria, there was a huge lego project in the back of the cafeteria, and a bunch of electronics projects to look at.
Josh was into the rotary phone that was connected to an old mechanical switch. When you dialed the phone, you could see how the old mechanical phone sytem worked. That was an eye opener for him.
Mostly, however, the conference was about hanging out with other hackers and working on stuff. I've never seen so many laptops opened at a conference before. I think Josh and I were the only ones there without one.
I was hoping to hang around long enough to see my friend Christophe who had suggested we go to 25C3 in the first place. But wihtout our laptops and some real hacking to do, we lost interest after about an hour and hopped onto the subway and to the Gendarmarkt for some lunch.
I'm a huge fan of hacking and hackers and it warms my heart to see so much passion and energy for "breaking and rebuilding things" as one of the presenters described the hacking phenomenon. I hope some of that rubbed off on Josh today.
I was thinking of making a broader point in my "quill pen" post yesterday but ran out of time so I decided to do that with today's post.
Before the telephone came along, correspondence mostly consisted of letter writing, like the Adams/Jefferson letters I mentioned in yesterday's post.
The telephone changed all that and by the time I was born, in 1961, most people relied on the phone for their regular conversations. And in the process, we lost a bit of the art and pleasure of the written word. Writing became something authors, journalists and academics did and the average person didn't do.
We also lost the ability to record these conversations for posterity. Being able to read Adams and Jefferson's words almost 200 years after they wrote them is an invaluable resource for society.
The internet changed that, starting with email and chat. People started writing again. And the practice of everyman writing has picked up with texting, social networking, twittering, and most of all blogging and blog commenting.
I am excited about the power of blog commenting to bring 'intellectual discussions' back to the mainstream. We've had forums on the internet for as long as I remember but they've been largely for a niche audience.
Blogging has brought a more mainstream audience to the idea of 'discussions' but the friction in the system is still too large.
Much of the friction is just inertia. I get so many comments that start out "long time reader, first time commenter". I try to reply to every single one of those because when they realize that leaving a comment is like starting an email discussion with me (and hopefully others), there's a good chance they'll be leaving more comments in the future.
The recent addition of facebook and hopefully other profile systems (google's system, linkedin, myspace, yahoo, etc) to disqus and other commenting systems will help. Nobody likes having to create a new profile just to leave a comment. But when you can leverage your indentity that you've already created elsewhere to quickly and easily leave a comment, that's going to bring more people into the discussion.
I was going through the comments to the 'Bits Of Destruction' post this morning and there's this great back and forth between two frequent commenters about the bank panic of 1907 and JP Morgan's role in it. That's the kind of conversation that just didn't exist for most people pre-Internet. You could get it in college dorms, bars and coffee shops in the right towns and cities to some degree, but certainly not late at night in your pajamas in your studio apartment.
I think we are becoming a more literate and conversational society because of the internet. And the tools aren't there to fully leverage this activity. But they are coming fast. It is something I am passionate about and invested in. I hope you are too.
As I was reading Steven Johnson's Invention Of Air, I became fascinated with the art of letter writing that existed during the time Steven chronicles in that book (mid 18th century to early 19th century). The legendary conversation conducted by Adams and Jefferson in their final years was conducted entirely via letters sent back and forth. And, of course, they were written with a quill pen.
The other day, as we were walking thru one museum (I can't recall which right now), my daughter Emily saw an antique ink fountain for a quill pen and said 'I love these things, I want one". I guess she shares a fondness with me for the long gone art of writing with ink on paper.
Yesterday's post, Bits Of Destruction, generated quite a few comments and many of you were surprised that I could compose such a long post on my blackberry. To one such comment, I replied that my blackberry is "my quill pen". I was only half joking. Though I like to write on a computer and mostly do, I really enjoy writing on my blackberry.
For the past several days, I've been getting up before everyone else (as usual - but at 8 or 9 am instead of 5am), going to the gym, and then getting a cup of coffee in the hotel lobby and posting with my blackberry.
I'm quite happy with the result. I've written longer and more thoughtful posts this week than has been normal and they've tackled a variety of subjects.
I don't really know why writing on a blackberry brings out this side of me but it does. It could be the lack of distraction (hard to multi-task on a blackberry), it could be that I can't link out so I don't bother to be referential, or it could be something else entirely.
All I know is I feel very comfortable writing with blackberry in hand. Its my quill pen.
The news is full of stories this year end about the impending bankruptcies of retailers, newspapers, auto manufacturers, banks, and a host of other businesses that have been the mainstay of corporate america for the past 100 years or more.
Clearly the economic downturn is the direct cause of most of these failures but I believe it is the straw that broke the camel's back in most cases.
The internet, now closing in on 15 years old in its mainstream incarnation as the world wide web, is in many cases the underlying cause of these business failures.
Bits of information flowing over a wire (or through the air) are just more efficient than physical infrastructure.
I'm typing this on my blackberry in a hotel lobby in berlin, I'll hit send, and it will be published and read by roughly 5,000 people today. Compare that to what it takes to get the Tom Friedman column 'Time To Reboot America' which is sitting in front of me in the International Herald Tribune newspaper printed and delivered to me. Printing and distribution infrastructure cannot compete with bits on a wire and we are going to see that infrastructure end up in in bankruptcy a lot in the next 12 months.
Let's look at banking. Money is information too and is increasingly flowing as bits. I can't think of the last time I walked into a bank branch. I use a debit card wherever I can and I can't wait until I can tap my blackberry when checking out like many people in Japan and Korea already do. These bank failures have more to do with risky lending and owning securities that are toxic than anything else but we also know that a bank today is very different than a bank 20 years ago and I am positive that we'll see entrepreneurs reinvent what banking is in the coming decade and it won't look a thing like Bank Of America or JP Morgan Chase.
And what about retailing? I had breakfast last week with a person who has been in retailing for more than 30 years and has been operating at the highest levels of the industry. He said that he expects every category to be winnowed down to one dominant retailer with all the others going by the wayside. This too has the internet as an underlying cause. comScore says that online holiday shopping this year has been flat with the year before and I've seen reports that offline retail is down 6-10pcnt. The fact is that consumers have finally come to the realization that shopping online is easier, cheaper, and often a better experience. Physical retail will survive, but it will be a smaller industry in the next decade and those that do survive will need to give consumers a very strong rationale to get in the car and come to their store.
The internet has also made the auto dealer model of distribution a questionable approach in this day and age. Consumers can research a car, use auto lead gen services to work one dealer against another, and totally commoditize the dealer channel. I remember back in 1998, ten years ago, the Gotham Gal and I bought a car that way over the internet and had it delivered to our house. We never even went to the dealer. I'm not active in the auto market and barely drive a car these days, but I have to believe the dealer based distribution system is not the most efficient model for getting cars into consumers hands any more. I hope that any restructuring of the auto industry that happens takes advantage of a newer more efficient distribution model.
I could go on and on but will stop here. If you want to get a longer riff on these ideas, get Jeff Jarvis' book, What Would Google Do?, where he imagines Google operating in many different industries and thinks about how they would approach them.
This downturn will be marked in history as the time where many of the business models built in the industrial era finally collapsed as a result of being undermined by the information age. Its creative destruction at work. It's painful and many jobs will be lost permanently. But let's also remember that its inevitable and we can't fight it. Technology and information forces are unstoppable and they will reshape the world as we know it regardless of whether or not we want them to.
I stopped celebrating christmas a few years ago. My kids grew up and stopped enjoying it. We are raising our family in the jewish faith and christmas was always a bit of a 'dad thing' anyway
We've been doing these big two week trips to other parts of the world over the christmas/new years break and I haven't been home for christmas in seven years. For a while we timeshifted christmas to early December and that worked well but probably led us down the path that ultimately got us to where we are now
I don't miss christmas much to be honest. I certainly don't miss the materialistic parts of it. I've been getting gifts that I don't want or need since high school and it always bothered me. I am so much happier to be done with that. I don't like material gifts very much anyway. And I hate shopping.
I do miss getting the tree, putting it up, and decorating it. I don't miss taking it down and cleaning up the mess it made.
I miss the big family dinner and the excitement on the little kids' faces. We don't have any little kids in our family right now but when we do again, I'll want to figure out how to get that back. Its the best thing about christmas in my mind
I also miss going to church on christmas. A few years back we were in Siena and I went to the Duomo for christmas mass. That was great. I don't subscribe to any religion invented by man (which is all of them), but I do enjoy the sounds and smells of church on christmas. And it was better for me to go to church in a foriegn country where I didn't understand a word the priest said. I got to sit back and enjoy the spectacle of it all.
Even though I've given up celebrating Christmas, it still means something to me. Its a time of year when we stop doing what we do, take a break, spend time with our family, think about others, and give them gifts. That's a pretty special list right there.
I've been very fortunate in life. I'm only 47 but have obtained most of what I've wanted out of life; a wonderful family and a work life that has been financially and intellectually rewarding. We've done this in our own way and on our own. We've been incredibly lucky and we've also worked hard at it.
I get gifts all the time like the bottle of wine sitting on my desk in the office or the box of chocolates. I honestly could care less about that stuff and getting it sort of annoys me. I'd love it if people stopped giving me stuff like that.
The gifts that matter to me are the emails I get from people sharing a personal story with me, or the comments on this blog and others that make me laugh, think, or cry. Or the contributions to Donors Choose you all made in October. Or the ideas you share with me about how we can work together to fix this broken world and make it better.
I'm going to spend this christmas with my family in Berlin, seeing art and history and then we'll go to the Nutcraker this evening and finish with a family dinner. So I guess I've not given up celebrating Christmas entirely after all.
Merry Christmas everyone, including all Jews, Muslims, Hindus, Buddhists, and other faiths out there. Have a wonderful holiday and let's share some gifts with each other that really matter this year.
Disqus, the company that provides the comment system on this blog (and a Union Square Ventures portfolio company) has added Facebook Connect support. What this means is if you have not created a disqus profile but do have a Facebook profile, you can leave a comment using your Facebook profile and you do not need to register with Disqus.
I am sure for most of you this isn't going to matter much since most of the commenters on this blog have already set up disqus profiles. But for new visitors, this is a nice feature. And it is the start of more Facebook integration for sure. The obvious next step would be to allow people who leave a comment with their Facebook profile to have that show up in the Facebook news feed. Daniel, the CEO of Disqus, as much announced that with this twitter reply last night.
I logged out of disqus and left a comment on an earlier post with my Facebook profile and it works great. If you want to add Facebook connect to your disqus comment system, this blog post tells you how to do it.
I saw a chart in the european WSJ today on my flight to Berlin that showed housing sales are now lower than they were 20 years ago and with the recession in full swing, it appears they will go even lower.
That begs the question 'when does it end?'
I've always liked to look at rent vs buy analysis to tell me when real estate is fairly valued. Rents can and will go up and down (likely down in this market) but its been my experience that rents, particulalry residential rents, are more stable than residential sale prices.
People need to have a place to live. They can make the choice of rent vs buy, but they have to do one or the other (I know that in tough times there are other scenarios for some on the lower end of the economic spectrum).
If its costs $2000 per month to rent a home for your family and the same home can be bought for $200,000, then it might cost less to purchase the home than rent it.
And even if the bad economy is forcing families to sit on the sidelines because they can't come up with a down payment, they can't get a loan, or they think prices will go even lower, there are real estate investors who will step in at some point and buy.
Let's look at that home you can buy for $200,000 and rent for $2000 per month. If you assume carrying costs (real estate taxes and maintenance) are $6,000 per year, then you can get a net rental income of $18,000 per year on the rental. If you pay $200,000, that's a 9pcnt yield. But if you can borrow (and that's an if in the current credit market) $160,000 at 5pcnt per year interest only, then your net rental income is $10,000 per year on an investment of $40,000. That's a 25pcnt yield.
I think that's the next leg of the housing market. Smart investors will step in and buy homes and rent them. They'll probably start in the distressed/foreclosure market so the impact of these buyers coming into the market will not be felt in the traditional real estate market for a while.
But there's a price where the market clears and I think we may have already reached it in parts of the housing market. A rent vs buy analysis will tell you a lot. When its cheaper to buy than rent by a meaningful amount, then you know the market has overshot and a bottom is near.
I wrote this on my blackberry on the flight to Berlin and I've just added a link to the WSJ story (sorry they didn't put the chart on the web). I apologize for any typos or math errors and if you find any, please point them out in the comments.
I don't think we did Milan justice. Josh and I missed the opportunity to see AC Milan play Udinese because we didn't plan ahead and the girls would probably have preferred a fashion week to the pre-christmas weekend we spent in Milan.
But there's a lot to recommend about Milan. The Duomo is beautiful and the christmas markets that filled up the Via Dante and the surrounding streets were colorful and fun.
The food was hit or miss. The hits include panninis at De Santis and a dinner at Bebels. I want to thank everyone who twittered Milan restaurant suggestions to me. We ended up sticking with the reservations we had when we arrived. If we had stayed longer, I would have liked to try a bunch of them.
We stayed at the Four Seasons and enjoyed fantastic service and comfort. It turns out Posh and Beckham were staying there as well but we did not get a sighting. That would have been fun.
I don't think Milan can compete with Florence, Rome, or Venice in terms of things to do and see, but it has plenty of the classic italian charm. I'm glad we stopped by for a long weekend and I suspect we'll be back. If so, I'll make sure to add San Siro to the itinerary.
He also mentioned in a reply in the comments section of the same blog post that the windows version will be available in alpha in early 2009 starting with thousands of invites per week.
You can still get an invite from me by leaving your email at this page.
A few weeks ago at Le Web, I participated on a panel made up of VC investors. There was a really good discussion about what next year holds for venture investing.
The moderator Ouriel asked if we would be cutting back our investing in 2009 and I replied that we did not plan on doing that
I went on to explain that the venture business is very cyclical and that I've seen at least three and possibly four cycles in the 22 years I've been in the venture business. But I don't feel that its possible, or wise, or prudent to attempt to time these cycles
Our approach is to manage a modest amount of capital (in our case less than $300 million across two active funds) and deploy it at roughly $40 million per year, year in and year out no matter what part of the cycle we are in
That way we'll be putting out money at the top of the market but also at the bottom of the market and also on the way up and the way down. The valuations we pay will average themselves out and this averaging allows us to invest in the underlying value creation process and not in the market per se
Eric Archambeau of Wellington Partners was on the panel and he described some research work he and some associates did a while back. They went back to the 1970s and charted for each year through the late 1990s the number of venture backed companies started that year and the number of $1bn revenue companies and $500mm to $1bn revenue companies that emerged in each 'vintage year'. The result of that work, he explained, was that the number in each category was relatively constant year after year with no discernable pattern and certainly not correlated with or against market or economic cycles. Interestingly, the data was not correlated with innovation and technology cycles either
This says to me that, like the lottery, "you got to be in it to win it" and staying on the sidelines is not a wise approach in any market environment
"We've always invested through thick and thin. In fact, we prefer to invest in thin"
It is easier to invest in thin times. The difficult business climate starts to separate the wheat from the chaff and the strong companies are revealed. With many investors on the sidelines (particularly corporate buyers/investors and 'momentum' investors like hedge funds and the like), there is less competition to invest in these 'winners' and the prevailing valuation environment means you get more equity for your dollar invested. That's quite a recipe for success.
But its not a lot of fun to be operating in the 'thin times' even as an investor. Most good firms have a portfolio full of companies that will be struggling to stay afloat and the VCs will spend more time working with their companies in this environment. And when we get an opportunity to put more capital to work in a portfolio company we know and love in this kind of market, well that is often the best investment of all. Note that SF Gate piece mentions that Sequoia just led a big new round in AdMob which if I am not mistaken is an existing Sequoia portfolio company that is a top mobile ad company. Look for more of that sort of thing in this market.
As I've written here recently, I see no signs that the venture market is drying up. Its changing, for sure, and if you aren't running a company that's emerging as a clear winner, its going to be tough to raise money in 2009 from anyone other than your existing investors. And look for them to be more cautious, more diligent, and less generous than they may have been in the past few years.
There's money out there in venture land and its going to get invested in 2009 and its going to get invested wisely for the most part. At least that's our plan and I'm confident we can execute on it.
I've started reading Disrupting Class, a book by Clayton Christensen, Michael Horn, and Curtis Johnson. It's a look at what's wrong with the education system in this country and what we can do about it
I've just started the book but was quite interested by the assertion the authors make in the introduction that a big part of the problem is the motivation (or lack thereof) of the students.
Here's a quote from the book that makes an interesting point:
When Japanese companies were developing their world-class manufacturing clout and passing American companies in the 1970s and 1980s, a common explanation was that four times as many Japanese college students were studying math, science, and engineering than were US students - despite the fact that Japan had only 40 percent of the population of the US. ....
As Japan reached prosperity, an interesting thing happened, however. The percentage of students who graduated with science and engineering students declined. Why did this happen? ... Prosperity was the culprit. ....
The same downward trend is now beginning in Singapore and Korea.
The basic point the authors are making is that students will only tackle difficult subjects when they are motivated by economic reasons (upward mobility) or by a passion for the topic.
That makes sense to me. But what doesn't make sense to me is that parts of our country are in serious economic decline and I am not aware of an uptick in engineering and science students in those regions. It may exist and if it does, I would love to know about it
But in any case, we can also work on developing the passion for science and engineering in children at an early age. We've been doing that with our son by supplementing his schoolwork with afterschool work on programming videogames which is his passion (and the passion of most 12 year old boys that I know).
I blogged earlier this year that 39 out of 40 kids in a college comp sci class said they developed their passion for programming playing video games.
That's what I am talking about. We could use a similar dynamic in bioengineering, energy technology, and other important new technologies.
Infecting our kids with passion for learning is key and we must do a better job of it.
I’ve heard people say, “If you want to know about a company, all you need to do is look at the leader” and it certainly is true that companies exhibit the traits of their leaders. But it’s also true that companies exhibit the traits of their founders. In fact, I’d argue that founders leave a longer and more indelible imprint on the DNA of companies than the person who is currently running them.
There are a host of reasons for why that is. To start, the business that the company is in is more often than not determined by the founder. And companies can move into different businesses over time, but most stay fairly rooted in the initial business that they started in. It’s also true that the culture of a company is defined early on and it’s hard to change it. Some companies are technology driven, some are product driven, others are marketing driven, and others are sales driven. That most often comes from the founder and it’s hard for a new leader to change that mindset. Another important reason that the founders often have the greatest impact on the DNA of a company is the entire initial management team is most often built by the founder. That initial selection of people is a critical determinant in the way companies evolve and behave and new management will always struggle to change the behaviors a company exhibits.
And it is also true of countries and nation states. I finished Steven Johnson’s The Invention of Air on the flight to Milan and the last chapter is about Joseph Priestley’s impact on Adams and Jefferson. From 1812 until their deaths on the same day in 1826, John Adams and Thomas Jefferson engaged in a continuous debate over the lessons of the American revolution via an exchange of letters back and forth. And central to that debate was the role of science and the explorations of “natural philosophy” in the core beliefs of the new nation. During Adams’ administration, there was a panic about spies and seditious behavior which resulted in the infamous Alien and Sedition acts. Priestley, the discoverer of oxygen and the father of modern chemistry who had moved to the US to escape his enemies in England, was among the people who were suspected of seditious acts. Adams ultimately protected Priestley from those who wanted him silenced but that didn’t spare Adams from Priestley’s attacks. Jefferson, on the other hand, was an ally of Priestley’s in the debate and when Jefferson followed Adams into the White House, Priestley went from an enemy of the state to one of its most celebrated members. And the meaning of that whole drama was debated by Adams and Jefferson to their very end.
The fact is the United States was founded by an amazing set of men that included Franklin and Jefferson, two of the greatest friends of science and innovation that have ever lived. And our country has benefited from that fact immensely. The DNA of the United States comes directly from our founding fathers; Franklin, Jefferson, Adams, Washington, and the rest of them. And their desire to make the big experiments, to push the envelope of what a nation could be is firmly implanted in our psyche a full 233 years after the Declaration of Independence.
Jefferson wrote to Priestley the following words shortly after he became President:
As the storm is now subsiding, and the horizon becoming serene, it is pleasant to consider the phenomenon with attention. We can no longer say there is nothing new under the sun. For this whole chapter in the history of man is new. The great extent of our Republic is new. Its sparse habitation is new. The mighty wave of public opinion which has rolled over it new. But the most pleasing novelty is, its so quietly subsiding over such an extent of surface to its true level again. The order and good sense displayed in this recovery from delusion, and in the momentous crisis which lately arose, really bespeak a strength of character in our nation which augurs well for the duration of our Republic, and I am much better satisfied now of its stability than I was before it was tried.
It’s hard for me to read those words, which were written about the alien and sedition acts and the ensuing crisis, without thinking about 9/11, our country’s reaction to 9/11, and the “recovery from delusion” that it appears we have now made in our election of Barack Obama. Now it’s very high praise (and not yet earned) to compare Obama to Jefferson, my favorite founding father and President, but I am also “much better satisfied of our nation’s stability” and I believe that our nation’s commitment to science, innovation, and what is “new” will pull us out of the serious mess we are in. It’s in our DNA and I am so thankful that it is.
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