The False Comfort of Regulation

The US Government's typical response to man-made and natural disasters is to leap into a frenzy of creating new regulations.  The idea is that with stronger regulation, future disasters will be prevented and the nation as a whole will be made sounder.  The logic makes perfect sense - let's close loopholes, oversights, systemic problems that create pain and suffering.


Unfortunately, we need to only look at how current regulators are performing in order to understand the efficiency and efficacy of future regulations.  Let's start with Bernie Madoff - under the nose of the regulatory body designed to protect investors, the SEC, Bernie Madoff staged a $50 billion fraud.  The SEC received frequent warnings regarding the implausibility of his returns, however, Madoff was not caught until his own sons turned him in.


Regulations create codes of conduct that are supervised by a regulatory body charged with ensuring compliance.  The regulations are only as sound and as effective as the regulators themselves - regulators, moreover, are often ideology aligned with the very people they are tasked with regulating.  They are very poorly compensated relative to the businesses they regulate. Finally, they do not attract the same caliber of talent.


The myopia of regulators can be seen in dramatic fashion looking back at what they missed, however, it is not surprising that brilliant people can cheat the system in ways impossible to police or prevent.


What's the point - the point is that we should all recognize the fallibility of regulation to protect us.  There is a huge amount of legislative effort invested in creating regulations that will almost certainly fail to prevent future disaster.


We can, however, think through incentives.  The cost of moral hazard is very real - if banks, oil companies, car companies, Madoff's investors, can expect the Federal government to backstop their losses then the potential "costs" of their decisions do not factor in their calculations.  I understand that after the Exxon Valdez spill, Congress passed a law limiting future oil-spill related losses to $75m.  This paltry "cost" of a spill creates a huge lack of incentive for oil companies to prevent spills.  Similarly, large companies in the US today know that the Federal government is much more likely to bail them out than to let them fail.


Allowing companies to bear the true costs of their actions is most likely a more effective measure to prevent future pain.  We need to create incentives such that malfeasance and misfeasance is borne by the shareholders of companies responsible.


Simply passing laws does not make it so.

Google, AdMob, and the FTC

The FTC is now considering moving to block the Google-AdMob deal.  The post below lays out my logic on why this is an insane position to even consider and further evidence of government run amok.


As I noted in an earlier blog post, free markets are the most efficient and equitable organizing principle for economic activity. Moreover, government monopolies, command and control resource allocation, and top-down/centralized decision making limit our freedom and destroy value in society. 


Silicon Valley is perhaps the best example of free markets in this country - groups of individuals, free of any government subsidies, direction, or policy, are able to come together, free of labor laws that limit hiring or firing, and pursue their individual utility.  The ideas and the allocation of resources are highly decentralized and the net result is an incredible wealth and productivity machine.  No one orders that we invest in search engines, new chemical entities, iPhone apps - and yet the market somehow magically delivers innovation and value year after year.


I believe that it is better for a million people to make one decision than for one person to make a million decisions - the logic of such a premise is undeniable and yet we routinely expect government decision makers to solve complex issues fairly and optimally. Markets move so quickly - think mobile over the last 24 months - that it is insane to think that the government can truly understand the issues and make a sound decision. Think APPL vs Flash, HTML5, iAd, iPad, Android - the market is moving a billion miles an hour and yet government bureaucrats are expected to understand the pace of change, market dynamics, and decide who can buy whom.


The recent news that the FTC is considering blocking Google's acquisition of AdMob is a powerful example of government regulation run amok.  Let's consider the premise of the FTC's position - because Google is THE player in paid-search, the government is considering blocking their acquisition of AdMob, a leading player in mobile advertising.  This "concern" flies in the face of logic - for one, Apple not Google dominates the mobile Internet, Apple not Google runs a closed system, Apple not Google decides what content can execute on the market leading devices, Apple not Google is working to kill Flash, 3rd party analytics services, non-iAd ad units....


When we consider health care reform, financial industry reform, merger activity - it behooves us to remember that regulators cannot possibly understand - no one can - the complexities at work.


Market competition is the best remedy - think MSFT over the last five years - Apple is kicking their butts....


All of us in Silicon Valley should be ALARMED at the value destroying role government plays when they step into the legislate or litigate in hopes of preserving competition, fairness, or some other impossible to define and measure goal.


We are all the beneficiaries of free markets - let's remember that when we vote and let's all let the government know they should not play God in markets that move at a speed and complexity that no one person, let alone a group of smart people, can fathom, understand, or benignly influence!

Mentors

One of life's pleasant surprises is how we continue to keep learning as we age. I am sure my kids think that I know everything and have all the answers.

Each year, I realize how little I do in fact know and how much there is to learn.  We grow via experiences or people who stretch us and help us better understand ourselves, the world at large, and what really matters.

As an executive, I am constantly looking to learn and to expand my understanding of best practices, problem solving, leadership styles, etc. 

Earlier in my career, I could look within my employer's organization to find mentor, role models, and people who could help me improve, stretch, learn.

Now as a start- up CEO, it is harder to rely on internal resources to keep the learning curve steep.

Recently, I asked a long-time CEO and very successful software entrepreneur to serve as a mentor to me.  We meet once every 6-8 weeks and spend time talking about the market, life, in addition to focused conversations around areas of personal growth or challenge.  It is well-known that the world's top athletes use coaches to improve, stretch, and develop.  It is not as common, however, for business people to invest the time and energy in improving through outside mentoring and coaching.

I am very glad that my mentor agreed to spend time with me - it is a gift I plan to repay in years to come both to my mentor and to those who are like me now - self-aware enough to ask for help and hungry enough to use it to improve their game.

Fear and Mindfulness

Omar Hamoui, AdMob's CEO, is featured in this week's Sunday NY Times' Corner Office Segment.

The Corner Office is a weekly segment that interviews CEOs on management techniques, lessons learned, and pearls of wisdom borne from the pressures, trials, and triumphs of CEO-dom.

Omar, in explaining his leadership philosophy and lessons learned, notes

" One was that insecurity is incredibly damaging in a corporate environment. You end up making really poor decisions, a lot of things you do are based on fear, and eventually it will fail. When people are playing defense and they’re primarily focused on their own jobs, it ultimately ends up being a sort of losing strategy....Don’t be afraid. What I mean by that is lots and lots of decisions are made by fear and they’re made by people who think they have more to lose than they actually have to lose."

To Omar, fear is a great inhibitor of potential, leads to poor decision making, and is in some sense self-fulfilling.  

When we are scared, we are overly cautious, tense, defensive, paranoid... the list goes on.  Athletes talk about "playing tight" or "hearing footsteps."  When we are afraid, we begin to doubt ourselves and the stories going on in our head, which are in no way true, become true as our inhibiting behavior and actions prevent us from reaching our goals.

"Manny being Manny" is a pejorative joke, however, it is precisely because Manny Ramirez plays without fear and a seeming indifference to the world that he is so clutch.

There have been many times at Widgetbox when I have been afraid - afraid of not knowing where we were going, how we were going to build a great business, how the board would react to this or that piece of news, how my team was doing, what our competition was doing....I have learned that fear, doubt, and worry are incredibly corrosive to one's self, the harmony of a team, and the energy force that is necessary to achieve.

I have worked very hard to realize that too often I let environmental factors impact by sense of self, mood, energy, etc. For example, think how you react when someone who you don't know smiles at you....ok, now think how you feel when a stranger frowns at you or worse yells at you.  Tiny examples of how we are literally programmed by external and environmental inputs.  Now imagine the market frowning our your product, the board dumping on your product strategy...a bad traffic jam or a delayed flight.

What mindfulness allows is the cognitive ability to intercept external inputs, to consider them, and to avoid the unconscious triggering of each input into a hard wired reaction. Frown = sense of concern. Smile = feeling friendly to someone.

I am working to build a buffer between the environmental inputs I receive all day long and how I react to them - an ability to recognize them for what they are...random inputs that should in no way dominate my reactions to events, people, meetings, etc.  Rather, by building a sense of mindfulness and awareness, the events can be processed for what they are and I can choose how to react to them, how to learn from them, and maintain an ability to project myself to the world at large rather than simply react to the world and let it dictate how I feel.

As Omar notes, fear is an inhibitor - both personally and institutionally.  Tennis players, golfers, CEOs...all share this common view that staying present is vital to success - anxiety related to past mistakes or fear about an imagined future derived from past mistakes can dominate the mind and cripple performance.

Omar's comments spoke to me and the journey I have walked in trying to be mindful, to stay present, and to not let fear and inputs program my outputs.

This I Believe: Part 1

This post is the first in a series where I try to lay out what I believe and why. 

The project, This I Believe, inspired me as did the really complex issues being debated today. What do I believe? And why?

The This I Believe project collects essays that capture the core beliefs that guide peoples' daily lives. As an earlier post noted, writing allows one to step back, consider the world at large, and formally draft a position that captures what we believe and why. 

"Faulkner said, "I don't know what I think until I read what I said." That's not just a joke. You learn what you think by codifying your thinking in some way. Codifying one's thinking is an important step in inventing oneself. The most difficult way to do it is by thinking about thinking  - it helps to speak or write your thoughts. Writing is the most profound way of codifying your thoughts, the best way of learning from yourself who you are and what you believe."

Given the highly divisive nature of today's political environment and the big issues facing the country, our state (CA), and our communities, I wanted to take some time to think through what I believe to be true and to develop a set of first principles that can help navigate "big" decisions.

What do I think of the government's healthcare plan, the financial regulation bill, deficit spending?  How should I think about these issues and what first principles may help to develop a position?  Too often it seems that peoples' positions are driven more by their party affiliation and the personalities of the politicians involved than by the merits of a given bill or policy.

I hope that this post will be the first in a series of posts that lay out my thoughts.

This I Believe, free markets are the most efficient and equitable organizing principle for economic activity. Moreover, government monopolies, command and control resource allocation, and top-down/centralized decision making limit our freedom and destroy value in society.  I believe that pro-business policies -subsidies, quotas, bailouts, no bid contracts - are equally damning and increase costs for the many to the benefit of the few. I believe that each major party suffers from a related flaw - the Democratic party believes that government can allocate resources more effectively than the people who fund it, while the Republican party protects specific businesses and industries at the cost of the consumer, think of sugar quotas/farm subsidies.

To help me develop a position, I am rereading Milton Friedman's Free to Choose, a book that he co-wrote with his wife, Rose, and a project that explores the relationship between economic freedom and personal freedom.  

The central tenet of his book is that political freedom is only possible with economic freedom. People must be free to choose to pursue where they work, for what wages, what they buy....independent of coercion - he argues that free markets provide a mechanism for voluntary cooperation amongst people. The freedom to exchange goods and services is the most efficient system for exchange we know and is vital to maintain political freedom. For when people are not able to act in their own interests they must be commanded to - we will only do what is not in our interests, and only we can know what are interests are, if we are forced to do so.  

This can be subtle - does the CA state government know how best to spend our tax payer money as it relates to education, for example?  If we let schools compete for the dollars per student our government spends we would receive far better value.  We are not free to choose how we invest our tax dollars in our the education of our children - rather we live subject to a state monopoly and we can only choose alternative education choices if we wish to forgo the tax dollars we have already contributed to education.

Friedman writes, "In addition to what government spends directly, it exercises extensive control over the deals that people can make in the private market. It prevents you from buying sugar in the cheapest market; it forces you to pay twice the world price for sugar. It forces enterprises to meet all sorts of requirements about wages, hours, antipollution standards, and so on and on. Many of these may be good, but they are government dictation of how the resources shall be used."

If we believe that individuals are best able to define what they want, where they are willing to work, what they want to do - then it then follows that government policies that limit such freedom are sub-optimal and will stifle individual freedom.

Government policies suffer from the good intentions and yet have unforeseen consequences that are frightening - for example, using tax payer money to guarantee mortgages and to extend credit made it possible and profitable for banks to underwrite mortgages and then offload the risk to Fannie Mae and Freddie Mac.  A great idea, everyone should own a house, became the root of mis-priced financial risk.  It must be better to let markets compete to supply credit and to price risk based on a voluntary exchange between lender and creditor.

Silicon Valley is perhaps the best example of free markets in this country - groups of individuals, free of any government subsidies, direction, or policy, are able to come together, free of labor laws that limit hiring or firing, and pursue their individual utility.  The ideas and the allocation of resources are highly decentralized and the net result is an incredible wealth and productivity machine.  No one orders that we invest in search engines, new chemical entities, iPhone apps - and yet the market somehow magically delivers innovation and value year after year.  And yet, on many other "needs" we believe that centralized planners can choose on our behalf what we need and how to deliver it to us - postal service, schools, health care, who we can hire, who we cannot hire... 

Decentralized decision making must then trump centralized decision making - complex allocation decisions need to be left to markets where individuals are free to choose.  The role of the policy maker then must be to design markets that maximize decentralized allocation and to work hard to limit any interference, be it government or business, that limits such freedom and decentralization.  Quotas, subsidies, mandates, protected markets, monopolies etc. distort the markets and serve to cheat us all to the benefit of a few.  While it is tempting to believe that a group of smart people can design complex systems that will be optimal - history suggests that is not possible.

As residents of Silicon Valley - we are beneficiaries of the freedom to choose in action.  

We need to urge all political actors to recognize their limitations in making decisions that we should make for ourselves and to open competition in all economic activities to drive the most equitable allocation of our resources.

As much as I admire Barack Obama - I fear the unintended consequences of good intentions whereby a small group of people seek to allocate resources and solve complex issues on our behalf. 

  

Twitter Handle: pricew

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Supply Side Exchanges - They Are Coming

The venture community is very excited about the promise of demand-side exchanges - markets whereby advertisers can buy audience independent of publisher.

To date, advertisers have bought "audience" via publishers who provide demographically/topically relevant audience. If you want to buy sports enthusiasts, ESPN is a good buy. If you want to buy car lovers, Edmunds is your ticket.

Demand side exchanges theoretically allows advertisers to buy audience anywhere on the web and rely on various targeting technologies to match ads to audience - you can now buy a sports enthusiast across the web at large and not just via sports sites.

The net effect of ad networks and demand side exchanges is to put tremendous pressure on tier one publisher CPM rate cards - why spend $15 CPMs on ESPN when you buy the "same" audience for $3 CPMs through an ad network or exchange.

Publishers are being force to do two very important things:

• pull inventory off exchanges and ad networks to maintain their pricing
• break the fungibility argument by delivering more custom, more rich, more engaging ads than those available through a network or an exchange

In my meetings with publishers, it is clear that they are moving to pull their content off the exchanges and our working quickly and thoughtfully to develop custom ad products that outperform display and serve to add value to the advertiser beyond audience alone.

The next logical development, in order to raise net fill rates, will be to develop supply side exchanges - whereby tier one publishers pool unsold inventory and offer it on their terms for premium prices.

Demand side exchanges will be left with remnant crap inventory, and the tier one publishers will work to add value via direct sales, pooled inventory, and through in-house product teams that deliver high-value ad experiences.

I am not bullish on demand side exchanges and feel they will be left holding the bag as the premier sites build a supply side exchange and refuse to allow networks or exchanges access to their premium content.

DEMO 2010

I am sitting at the Palm Springs Airport after three very successful days at DEMO.

Giles Goodwin and I presented the ClickTurn Ad Builder - a self-service platform for building rich media ads and HTML 5 mobile sites.



ClickTurn is a self-service platform for building rich media ad units and HTML 5 mobile web sites. In minutes, publishers and advertisers are able to build rich media ads and mobile sites that leverage the richness of the real-time web.

The ad and mobile site builder support YouTube, Twitter, Facebook, Blog and other content sources, while also providing templates for polls, lead gen forms, and other forms of engagement.

ClickTurn is currently working with LinkedIn, CBSi, IDG, Forbes, FedEx, Cisco, Sprint, Qwest, Panasonic, Gap, HSBC, the Gap, etc to deliver ads that are realizing ~.8% CTRs and ~15% engagement rates.

The Protocol Society

When Alabama and Nick Sabean won the BCS National Championship, ESPN called the win the revenge of the grinder.  The recap story noted that Nick Sabean focuses on process and the "Alabama system."

That is not to say that winning is not important, but rather that Sabean knows that successfully defining and repeating processes is the key to predictable outcomes versus random acts of athleticism. Moreover, the better the system is codified, the more sustainable the athletic advantage

The logic is that by building discipline around core processes and protocols - how to block, how to run, how to tackle - victories will derive from that discipline.

David Brooks, my favorite NY Times columnist, made a similar point in his brilliant editorial - The Protocol Society.

He writes,

"In the 19th and 20th centuries we made stuff: corn and steel and trucks. Now, we make protocols: sets of instructions. A software program is a protocol for organizing information. A new drug is a protocol for organizing chemicals. Wal-Mart produces protocols for moving and marketing consumer goods. Even when you are buying a car, you are mostly paying for the knowledge embedded in its design, not the metal and glass.

Kling and Schulz start off entertainingly by describing a food court. There are protocols everywhere, not only for how to make the food, but how to greet the customers, how to share common equipment like trays and tables, how to settle disputes between the stalls and enforce contracts with the management.

The success of an economy depends on its ability to invent and embrace new protocols. Kling and Schulz use North’s phrase “adaptive efficiency,” but they are really talking about how quickly a society can be infected by new ideas."

In my time as a CEO of a start-up, I have come to appreciate the wisdom of a commitment to process and the incredible momentum that comes from clearly defined models of operation that are well understood, repeatable, and embraced by the team.

Competitive advantage can be found in operational excellence, customer intimacy, technology innovation....however, one way to measure and predict a company's future ability to compete and succeed is to understand how their "protocol capital" as much as their technology.

Good protocols - systems - make for consistent winners. While some may feel process inhibits innovation, the rise of scrum and agile development speaks to the ability to innovate via light-weight processes that turn commitment to protocol into championships.

2009 Redux

Year-end is a natural time for reflection on events of the past year and a time to plan goals for the year to come.

As I think back on 2009, I am struck by a few observations.

The year began with the macro overhang of the economy and the recent failings of the US financial markets. The world lost its orientation and no one knew if we would continue to free fall or if we had hit bottom and that a recovery was the next natural phase.  The ability to navigate is premised on the ability to orient - to know where one is in relation to one's destination. In a global panic, bearings are not possible and decision makers went into paralysis and they scrambled to reorient themselves and to know which was up and which way was down.

Start-ups depend on future growth for their success - investors, customers, management, and employees must believe in a future world where demand remains robust and where future profitability validates today's investment decisions. In a world with an uncertain future, projections that demand future growth become at best optimistic and at worst insane.  Accordingly, the land of start-ups began 2009 with no sense of future direction and free from data points to help suggest a rosy tomorrow would dawn.

With the worst economic conditions since the 1930's as the backdrop, the new year began with tremendous uncertainty, and even worse, an overhang of pessimism in a world (start-ups) that demands optimism.

While the macro picture loomed, the micro conditions for me and Widgetbox were important to revisit. No one can control the economy, but each executive is able to control and influence their own companies - burn rates, employee morale, company direction, strategy, etc.

At Widgetbox, we made some hard but important decisions with respect to how to navigate the "fog." First, if we use financial option value as a framework...the value of an option is a function of volatility and time. The more time and the more volatility, the higher the value of the option. If we think of every start-up as a financial call option, we then can maximize value by extending the duration of the option, while the volatility is self-evident.  As such, we made difficult decisions to reduce headcount and to extend the life of our company and it's option on the future. We let go most of our business people and kept the engineering team largely whole with a skeletal layer of business folks.

Second, we focused on process optimization. Why process? Many start-ups work on the random acts of heroism theory, whereby people work extreme hours to achieve productivity and innovation. As a three-year old company, we needed to find a way to drive innovation and productivity with both a reduced head-count and the need to preserve goodwill and morale. As such, we moved to a formal scrum process, weekly sprints, and a social contract. The contract stated that we would release every Tuesday and that the sprint would be locked down and no new stories would be added to the sprint without the CTO or CEO's approval.  The process investment supported a huge increase in reliability, innovation, and morale and we avoided the burnout that comes from constant changes to development priorities and schedules. We shipped every week of the year and built a product organization that became incredibly nimble and productive.

Third, we focused on monetization. While perhaps an obvious focus area, we were born in an era where platform investments were tied to non-revenue metrics and the basis for value was in uniques, impressions, and other non-financial benchmarks. We knew that to survive we would need to turn our sights on aligning our product investments, features, and users with a viable commercial model capable of delivering venture returns. From a modest run rate in January, we began to grow our revenues steadily month over month and we set a collective goal to 10x the business by year-end.  The whole team's mindset shifted to embrace the goal and every employee began to add ideas, suggestions, and value vis a vis how to best monetize the business. Over the year, we added a billing system, tiered our products and services, became adept at funnel optimization, conversion analysis, data-driven management, and how to work on making our business predictable and scaleable.

Fourth, we matured our thinking on strategy from one in which we would speculatively project "good" ways to grow revenue to pull-based strategy analysis in which our customers - now over 14,000+ - provided us the ideas, feedback, and inspiration with which to invest in products, features, and markets.  While the world was disoriented, we grew in confidence with respect to our direction and how we would navigate our growth and future direction.

In summary, we extended our runway by reducing burnrate (adding 18 months), we invested in process to support scaleable execution and progress, we committed to monetization and made it a company-wide mandate, and finally, and thankfully, customers were able to provide us the direction we once looked to the whiteboard to provide.

As the macro world improved, we are well positioned - as a company and culture - to leverage that the returning sense of optimism.   Customers have helped us identify a new line of business - rich media advertising - that is perfectly suited to our technology. ClickTurn.com is our latest product initiative and one in which I hope to tell you much more about as 2010 begins.

While the world started 2009 in a daze, we were very lucky to have committed employees, patient investors, and customers that helped us maintain our confidence in a better tomorrow. It was by no means an easy year, but one in which the entrepreneurial maxim regarding the need for perseverance and luck hit home.

Why Blog?

I am reading Warren Bennis' seminal work on leadership, On Becoming a Leader.

The book profiles scores of business leaders and seeks to identify common abstractions that help reveal "truths" about leadership.

Early in the book, I came across the following passage, which perfectly describes why I blog and the benefits of structuring your thoughts via a post:

"Faulker said, "I don't know what I think until I read what I said." That's not just a joke. You learn what you think by codifying your thinking in some way. Codifying one's thinking is an important step in inventing oneself. The most difficult way to do it is by thinking about thinking  - it helps to speak or write your thoughts. Writing is the most profound way of codifying your thoughts, the best way of learning from yourself who you are and what you believe."

I imagine that the paragraph above hits bloggers like a visceral truth - thinking, writing, and editing, all the while mindful that others will critique  your thinking, helps to codify and transcend your thoughts from loose collections of ideas into an integrated world view that helps you reveal to yourself what you think and why.

Scott Cook - Wisdom

On Monday, Widgetbox and I were invited to attend and present at Intuit's inaugural entrepreneurship day. Intuit's founder, CEO, CTO, and senior management hosted twenty plus companies to share ideas on innovation and to explore avenues of partnership.

For me, the highlight proved to be an impromptu talk by Scott Cook on lessons learned from 28 years with Intuit.

He boiled down this advice to the following observations:

1. The Power of Word-of-Mouth
1. 81% of Intuit's customers are driven by WOM
2. WOM remains the #1 driver of customer acquisition
2. Be Where the Customers Are
1. Understand where customers buy and make sure your product is readily available
2. Retail traditionally drove the majority of Intuit's sales --> therefore, retail expertise and management were vital to competition
3. Today, the web is replacing retail and again the company is moving quickly to driven on-demand transactions
3. How Do you Create WOM?
1. focus on what you choose to do?
1. The goal is to identify the #1 problem in the customer's life and to build products that demonstrably solve the #1 problem
2. Why is it a problem? How does it manifest itself? What would be the benefit? How can the benefit be measured?
3. If you solve people's #1 problem - they will tell everyone they know about it and the WOM magic starts to happen
   
2. be thoughtful on how you choose do to it?
1. How? Intuit's focus is on customer driven innovation (CDI) - CDI is an immersive and holistic approach to product development. Immersive in that Intuit looks to "live" with its customers to identify the tacit and overt problems facing customers. He talked of the need to observe customers in action and to trust what you see not what they can articulate or verbalize.
   
2. Holistic in that the entire team lives with the customer - eng, prod, mkting - and the cross-functional fluency with the prospect's problem allows for products that are "designed to delight"
4.  Hiring
1. Be very selective
2. Identify 3 most important traits for hire in question
3. Example - Apple retail hires for the trait "deeply caring about others"
4. Interview to diligence and prove the candidate has a proven history of the traits in question

Common sense - for sure - but like many best practices they are harder to implement and manage than they are to understand.

Last Child in the Woods

Last Friday, my wife and I went to see Richard Louv speak.  Richard is the author of Last Child in the Woods, Saving Our Children From Nature Deficit Disorder.

His book and talk center on a series of alarming developments in the lives of America's children:

• increasing divide between the young and the natural world
• loss of freedom and time alone for children to explore the woods, local creek, etc.
• growth in structured "play dates" and the decline of time to create play, particularly play outside
• fear of traffic and strangers that keeps kids inside rather than outside running around and exploring
  

The talk mirrored an article I read about a study in the UK.  A few stats follow to set the tone:

• Less than 10% play of children play in natural settings compared to 40% of adults when they were young.
• Three quarters of adults claimed to have had a patch of nature near their homes and over half went there at least once or twice a week. 64% of children reckon they have a patch of nature near their homes but less than a quarter go there once or twice a week.

 What are the costs of the children losing access to time in nature?

Louv notes research that links nature deficiency disorder with very real mental health challenges (ADD, ADHD) and physical fitness ailments (childhood obesity, diabetes).

For many, time in nature is therapeutic and calming. For parents and adults, it is important that we are aware the growing loss of access to the outdoors that many children face and that we work to lead or sponsor day hikes, fishing trips, camping outings, and other means that allow children the joy that comes from freedom to play, catch frogs, get muddy...in the great outdoors.

Living History: Larry Ellison

Last night, Ed Zander (ex-CEO of Motorola) interviewed Larry Ellison at the Churchill Club.

The interview proved to be fascinating, with Ed Zander a perfect choice to push and prod Ellison on topics ranging from ORCL's early years, his motivations for buying Sun, to politics, sailing, and the prospects for the US economy.

The title of the post "living history" hit home last night. We are fortunate to not only live in a place where monster companies are born and scale, but also to work in an industry where many of the pioneers remain active - Ellison, Jobs, Ballmer, Dell....

While the story behind ORCL is well-known, Ellison made a few very interesting comments worth sharing.

First, he argued that the reason behind the Sun acquisition is to move into the systems business. He believes that the tech industry treats customers like "computer hobbyists." Customers are forced to buy components - servers, storage, switches, databases, app servers, applications....- from a long list of vendor and to then spend vast sums integrating systems to address a given application. His goal is to leverage Sun to create systems - billing systems, airline reservations systems....where engineers optimize the integration not customers and service providers. He envisions building the successor to Tom Watson Jr's IBM, which he views as the most successful enterprise company of all time.

The systems vision is an interesting one and one that flies in the face of conventional wisdom - ie that the industry and customers are best served via a focus on horizontal specialization. Components rather than systems, the industry long argued, delivered the greatest innovation at the lowest total price. His systems vision challenges orthodoxy that specialization trumps integration.

Interestingly, Steve Jobs is also driving a systems based approach. Rather than follow the PC model of separation between hardware, software, peripherals, applications...., Apple provides integrated solutions - systems - that despite the significant price premiums are trumping the PC approach to consumer marketing and strategy. The integration of software, hardware, applications, and services (iTunes) provides greater consumer utility than the "computer hobbyist" the PC industry espouses. The Mac vs PC ads hit this point time and time again.

Second, Larry Ellison is bearish on the US economy. Rather than seeing a W, V, or U shaped recovery, he humorously called for an L-shaped recovery - ie a decline to a new equilibrium from which we will not see any meaningful recovery for at least five years. His logic - 70% of the US economy is premised on consumer spending and US consumers are so overwhelmed by debt that they will be forced to save, not spend, to service massive debt obligations.

Finally, he reeks of competition. He cannot go five minutes without commenting on IBM or SAP. He clearly takes tremendous energy from focusing on an competitor and on rallying the company to take share, to win accounts, and to out market the competitor in question. He made one comment that really struck home - "pick your competitors carefully for you will quickly come to resemble the companies you compete with."

Thanks to the Churchill Club for a great event.

Now

There is a real challenge in being present - that is enjoying right now, this moment. Modern technology and life makes it very easy to be distracted and the stress and pressure of Silicon Valley provide ample opportunity to ponder the past or project the future.

The problem is that such ponderings and projection limit the ability to enjoy right now and sap your energy and effectiveness.

Books on wisdom share a common refrain - the past is the past, the future is uncertain and a projection of anxiety or fantasy, and the only sure thing is right now. Too often people live in their heads - thinking about lost opportunities in the past or making up stories - both good and bad - about the future.

The lack of being present exhibits itself in many ways - chronic BlackBerry checking, the inability to listen, eyes that wander or a blank look that lets you know the mind is somewhere else, conference calls or meetings where it is clear half the attendees are 20% "there" at best.

In many ways, I am far from immune from the risk of living in a fog of yesterday/tomorrow, rather than the very real moment of the now. It is very hard not to be seduced by distraction or to walk around in a fog of thoughts that make it hard to focus or be truly with other people - actively listening and engaged.

When I get home, I try to clear my head and really be home. When I sit in a meeting, I try to clear my head and be there for that meeting. Over a coffee, talking to your wife, your colleague, focusing on the present is laughably hard to do.

But when you can - the ability to enjoy becomes so much greater.

My friend Paul Levine told me that the best you can do is wake up every day and focus on that day - not the day before, the month before, or two weeks from now. But rather, today.

As a CEO, I have found that advice to be very empowering and a great way to handle the ambiguity of tomorrows to come and the anxiety that comes from worrying about missteps in the past.

The Healing of America

T.R. Reid's book, The Healing of American: A Global Quest for Better, Cheaper, and Fairer Health Care, is an important read.

Reid, a Washington Post correspondent, explores health-care systems around the world and asks and works to answer the following questions:

• why is American the only developed economy that does not provide health care to all its citizens?
• why does American spend 2x per capita on health care while leaving 45m uninsured?
• should health care be considered a right or a privilege?
• why are administrative costs 4% of spend in France and 20% of spend in the US?
• why is the US 23rd out of 23rd in life expectancy over 60 amongst developed nations?
  
• hows does health care work in Germany, France, Spain, the UK, Japan....?
  

Health care reform is a very complex issue, and the cacophony of sound bites from both parties only serves to raise, not answer questions. In my effort to come to a personal, informed decision on the issue, I turned to Reid's book after hearing him interviewed on Newshour.

The transcript of his interview with Betty Bowser can be found here.

How Long Does It Take to Hit $50m in Revenue

Very interesting analysis from Tableau Software regarding how long it takes a software company to hit $50m in revenue..

See my post on "When it Goes Right, What Does it Cost to Build a Great Software Company?" for more analysis on time to profitability, time to IPO, median capital raised, etc.

Dashboard at 570

powered by tableau online

The New Normal

Bill Gross of PIMCO is one of the nation's sages. His monthly Investment Outlooks marry wit, wisdom, and market insights to great effect.

His August Outlook, Investment Potions, looks at the implication of the "new normal" GDP outlook on jobs, income growth, and return on assets.

His core point is that the current economy is premised on 5% GDP growth - ie factories, retail stores, job levels, asset allocations, forecast pension returns...all presume that the economy will continue to grow at 5% year after year. We geared our companies and economy to a fixed level of expected economic growth.

Now, we are in the Great Recession and facing high unemployment, lower consumer spending, etc., accordingly, PIMCO forecasts GDP growth closer to 3% than 5%. The implication is that we have massive overcapacity built into the system and we will simply not need all the retail space, cars, jobs, houses, etc that we have built when it appeared all but a certainty that GDP growth was a fixed variable set at 5%. Moreover, pension funds, endowments, and private investors will need to readjust their return on capital expectations to match the long-term reduction in GDP growth.

He writes:

A 3% nominal GDP “new normal” means lower profit growth, permanently higher unemployment, capped consumer spending growth rates and an increasing involvement of the government sector, which substantially changes the character of the American capitalistic model. High risk bonds, commercial real estate, and even lower quality municipal bonds may suffer more than cyclical defaults if not government supported. Stock P/Es will rest at lower historical norms, and higher stock prices will ultimately depend on tangible earnings growth in the form of increased dividends, not green shoots hope. An investor should remember that a journey to 3% nominal GDP means default/haircuts for assets on the upper end of the risk spectrum, as well as extremely low yielding returns for government and government-guaranteed assets at the bottom end.

While the stock market continues to perform, analysts like Gross and structural deficits make a recovery back to the 1990's "normal" hard to imagine. Rather, the economy will need to restructure and shed capacity in order to arrive at a new equilibrium.

Rather than build out our economy to support growth - think of the wave CSCO rode in the 1990s - we may see people unwinding capacity. Spending related to growth - networks, factories, private infrastructure - will need to slow/decline.

Technology - a bell weather of growth - will be a challenged market place.

Perhaps the best play will be to buy assets as the market sheds them....ie, there may well value found in buying hard assets at firesale prices rather than investing in high-growth models that are predicated on new market development and spending.

Not a bullish view, I know, but one that may prove to be the reality.

End of Summer Reading

Quick post: I am in the middle of an historical novel binge and strongly recommend the following.

Genghis: Birth of an Empire
Genghis: Lords of the Bow
Genghis: Bones of the Hills

Terrific stuff and if you want a great biography on Khan, read Genghis Khan, The Making of the Modern World

Finally - Agincourt, the tale of Henry V's epic battle as told by an English bowman.

The Rise of Consumer SaaS

In the past six months, consumer subscription services have exploded across the web.

Until September of last year, the tried and true revenue model for consumer Internet services was on-line advertising. The model - page views, unqiues, and CPMs - is well understood and sites looked to use direct sales and ad-networks (read Google) to monetize traffic and impressions.

The cooling of the on-line ad market, flight to quality for advertisers (ESPN, etc), and the realization that ad revenue may not scale forced many consumer services to consider charging their users for access to functionality and value.

While SaaS is a well-defined success story in the enterprise space, it was considered a virtual truth that on-line users would not pay for on-line services. Why? - free substitutes, ad-funded business models, and a general end-user belief the web should be free, etc.

Today, "freemium" is on the rise and there are great teams across the valley working to monetize via micro-payments and subscriptions.

LogMeIn's IPO provides insight into the power of direct-to-consumer subscription services, as have traditional success stories such as anti-virus (SYMC, MFE).

However, there are many good examples of the consumer SaaS trend

• Vimeo
• Dropbox
• Flickr
• Wordpress
• Widgetbox
  

These teams are working on using price, features, and value to tier users into free and paid product buckets. Furthermore, good work is being done in optimizing user registration, user conversion, affiliate models, A/B testing product and purchase pages, tracking churn, etc.

I expect to see more services looking to move to charging users and to significant innovation in optimizing subscription revenue.

Here at Widgetbox, we use a AAA model to manage the business:

• Acquisition - driving new registered users
• Activity - driving activity, conversions, and value per user
• Ads - monetizing "free usage"

The model and focus on transactions is allowing for tremendous progress in understanding our users, while using the ultimate test - will they pay you for the service - to gauge our value and utility.