Monthly Archives: December 2012

A Trillion (From) Here, A Trillion (To) There

On a day when our politician are wrestling each other on the so-called fiscal cliff to avoid $600 billion in automatic spending cuts, we are reminded that a trillion dollars still matters.

A trillion dollars is what the OPEC cartel countries have pocketed in net oil revenues in 2012.  This is a record account, both nominally and in real terms.  In fact, a decade ago, net oil revenues for the OPEC cartel countries were less than a mere $200 billion.

Common sense tells us that money flows of that size from more innovative, more democratic countries to non-innovative, non-democratic countries must matter.  It’s worth reflecting on that today.

China Versus The Net

I have blogged about how I think “real names,”i.e, a widespread comfort-level of pushing your identity on the net, marks one of the big divides between Web 2.0 versus 1.0.  Moving from anonymity and pseudonyms to real names opened up a new era with social, as a new generation was at the vanguard of inculcating  a comfort level with being outselves on the Internet.

But the thing is that anonymous versus real names is neither unidirectional or unipolar.  Having and retaining the choice is critical, allowing for different comfort levels at the intersection of user and content.

In China, we have a potentially profound move in the other direction.  More than any country, weibo or Twitter-like networks such as Sina, Tencent, Baidu, and Sohu have led to a spread of information under the cloak of pseudonyms about the state, scandal, and corruption unlike anything else, with hundreds of millions of people spreading and receiving information in this way.

Now, the Chinese have enacted a new law that forces internet companies to require those signing up to use their real names in a bid to tamp down the spread of information and opinion that anonymity enabled, making it easier for the state to censor and punish disfavored content.

As a further footnote, this is an expansion of an existing policy that prevented the publication of certain types of content,  As the FT reports:

In 2000, legislation was adopted requiring internet companies to censor the content users published on their sites. A long list spells out the many kinds of posts internet companies must spot, erase and report – ranging from information that threatens national security to that which violates ethnic harmony.

Sina, Baidu and their peers complied by hiring armies of censors. The authorities also started adding their voice to the online cacophony, signing up freelancers with the job of making comments in favour of the government.

We should note with interest that the way a government accomplishes a policy of state censorship in the Internet age is through a distributed network method, by putting the burden on the services themselves to censor in exchange for permission to operate.

Behance and Creative Meritocracy

A little news today.  Adobe acquired Behance.  An endorsement of the talent elevation/talent authenticity thesis that is a big subject of this blog.  There is a nice statement of the thesis and why it is important on the Behance blog post announcing the transaction:

Online applications should foster the discovery of talent and “creative meritocracy.” Those of you who know us well know that Behance is obsessed with fostering proper attribution in creative work. With more transparency around who created what – and with whom – your work will increasingly become a source of new opportunity. We call it “creative meritocracy,” and it happens when the creative world’s work is organized, properly credited, and more easily discovered. As you put your work into the world, we want to make sure you get the credit (and opportunity) you deserve.


24 Seconds, 24 Minutes, 24 Hours

In today’s New York Times. this is Tony Tjan, of Cue Ball, and his wonderful framework on mentoring and giving criticism:

One [mentor] was Jay Chiat, one of the founders of the Chiat/Day ad agency. He had this incredible capacity for optimism, particularly optimism during mentorship. He had this amazing ability to think of every reason why an idea might work before criticizing it and thinking why it might not work. When you’re a mentor, you’ve got to realize that people are often sharing their dreams, and I think it’s human nature to be a critic. We’re skeptics. As you get older and more experienced, wisdom is great, but you also have to be careful not to automatically impose your mental framework and your lessons.

I’ve translated it into a rule that I try to get people to follow, and I’m still working on this. When someone gives you an idea, try to wait just 24 seconds before criticizing it. If you can do that, wait 24 minutes. Then if you become a Zen master of optimism, you could wait a day, and spend that time thinking about why something actually might work. In venture capital, you’re at the intersection of human capital and their big ideas, their dreams. My favorite quote is from Eleanor Roosevelt: “The future belongs to those who believe in the beauty of their dreams.”

This ties in nicely with Bill Gurley’s thesis that the one career-making investment might break the rules and pattern-recognition honed through years of long experience.  If so, it is worth spending some time thinking about why an idea might work before dismissing it.

Bill Gurley II: The Advantage of Being the Small Fish In A Big Pond

Here is the second Bill Gurley post.  This corresponds to the second video on the GigoOM link:

Too often, we think about outside money as being a validator, but Bill illustrates that the opportunities to have a meaningful exit become far more constrained by taking money.  The most obvious point is through the dilution, but the important related point is that the entrepreneur needs to build value beyond the sweet spot of many acquirers.  The dpreview example that Bill gives is particularly compelling.  Here is a rough transcript, but listen to the entire video:

The number one type of acquisition that the big companies like to do is $20 to $70 million.  The minute you take venture…and all of a sudden everyone’s expectation is its got to be $150 [million] or more or we are not saying yes…and that frustrates the buyers…and so if you have a killer product that might elicit a $30 million exit and you can bootstrap and hustle your way and own 80% of it…80% of $30 million is $24 million and that’s a lot of money for an entrepreneur…and I think a lot of people get caught up in the game of venture…

I love this story of dpreview which is a website for digital camera reviews. 1 guy. 1 founder. and Amazon reportedly…I have heard anywhere from $40 to $70 million for a single guy…it wasn’t a venture-backed deal…it worked out very well for that entrepreneur.

Bill Gurley and the Dilemma of Rules

Bill Gurley — the very sage Benchmark partner and incidentally perhaps the tallest VC in the game (6’9”) — was interviewed by Om Malik recently.  I encourage you to watch them, but two clips in particular, about thinking about risk that I want to particularly highlight in adjacent posts:

First, he notes that a venture capitalist’s reputation might be created by just one investment.  That creates a tension, since you need experience – a period of developing pattern recognition and “rules” – but then the one investment that defines your career might be one that defies those and other rules.  Listen to the first clip on the link above and then here is an excerpt of my rough transcript:

Waiting around to hit the one out of 10,000 pitches and getting it right; that’s a tough game to play and it’s really easy to miss…and a lot of the ones that become the breakout players break any rule set that you have created…

So, you have a rule set through experience, discussion, learning, but then you also need the wisdom, instinct, and courage to break those rules in order to truly hit the grand slam.  This strikes me as the tension in truly doing anything great — knowing the rules, but also knowing that you need to break certain of them sometimes because ultimately it’s not a formula.

Taking Seriously A Changed Labor Market

We assume — perhaps sometimes too smugly — that jobs lost through waves of innovation are replaced with other jobs.  In other words, dislocations are temporary as education, geographical moves and other changes help the labor force readjust to new jobs.

Steel workers become health care workers.

But what if it’s not always true — what if you have a more permanent change in the economy such that labor loses even while the economy grows?

We are increasingly seeing this question asked and the discussion as to causes and potential solutions starting.  For example, Albert Wenger of Union Square Ventures has an ongoing discussion on his Continuations blog.
Today, Paul Krugman jumps into the debate.  He hypothesizes a combination of two possible causes on labor losing out to capital:
First, he observes automation replacing labor:

About the robots: there’s no question that in some high-profile industries, technology is displacing workers of all, or almost all, kinds. For example, one of the reasons some high-technology manufacturing has lately been moving back to the United States is that these days the most valuable piece of a computer, the motherboard, is basically made by robots, so cheap Asian labor is no longer a reason to produce them abroad.

In a recent book, “Race Against the Machine,” M.I.T.’s Erik Brynjolfsson and Andrew McAfee argue that similar stories are playing out in many fields, including services like translation and legal research. What’s striking about their examples is that many of the jobs being displaced are high-skill and high-wage; the downside of technology isn’t limited to menial workers.

Second, he notes the potential effect of increased market power:

What about robber barons? We don’t talk much about monopoly power these days; antitrust enforcement largely collapsed during the Reagan years and has never really recovered. Yet Barry Lynn and Phillip Longman of the New America Foundation argue, persuasively in my view, that increasing business concentration could be an important factor in stagnating demand for labor, as corporations use their growing monopoly power to raise prices without passing the gains on to their employees.

Avoiding Lean As Ideology

We’re all familiar with the Shakespearean phrase “Too much of a good thing…”  Like great things, great ideas have their limits. Last week, Marc Andreessen noted some of the limits on the Lean Startup method.  Two of Andreessen’s points really stuck out:

First, some ideas cannot be done in a small-scale or they just need to work in their entirety.  Andreessen says:

“I would serve this as a challenge for the Lean Startup community. Especially the ones with the really audacious goals. Sometimes they start audacious because otherwise the product will never get to market. The Macintosh, that product had to exist in its entirety for people to wrap their heads around it,” he said, pointing to modern entrepreneurs like Elon Musk’s ventures as ones that can’t be done on a small-scale at first. “You got to get the rocket into space.

Second, if you have a vision, it can take some persistence to figure out how to implement it.  Andreessen says:

“The pivot. It used to be called, ‘the fuck-up.’ Taking the stigma out of failure is very exciting,” he said. “But we see founders who give up too quickly. It’s permission to give up very fast. Are they really going to do the heavy lifting over time?…

We joke around the office that the worst is the fetish for failure,” he said. “You want to preserve the good of the idea when it comes to pivoting, but you don’t want people to be intentionally encouraged to fail. Maybe it’s time to add a bit more stigma. The entrepreneurs I admire, I admire the ones who pivot but I really admire the ones who have persisted.”

Amazon: Searching For Stuff

The most surprising statistic that I have heard in a while: a significant number of shoppers start at Amazon before Google.  The Economist reports:

Some experts think Amazon also poses a threat in this battle to find things. “Google used to be the toll-taker, directing people to Amazon,” says John Battelle, a seasoned Valley-watcher and the founder of Federated Media. “Now people are increasingly bypassing it and going straight to Amazon to find and buy stuff.” He has a point: Forrester, a research firm, reckons that 30% of America’s online shoppers begin their search for a product at Amazon.

This is in interesting contrast to my post yesterday about online education and Google.  In some ways, Google is more weighted toward services/products that operate with sales cycles requiring qualified sales targets on the front end such as online education and insurance, rather than retail products.

The Dark Pools of Art

A while ago, I posted about the impact of “scarcity” and “status” in the market for art, as a model for an asset whose value depended on something other than a stream of future earnings.

An interesting excerpt from a recent Barrons piece on how one could manufacture “scarcity” and “status” and thus asset values in such a market:

But here, now, the important caveat: The art market is opaque. Behind the scenes of this unregulated market are moments when modern artists, perceived to have temporarily fallen out of favor and become undervalued, are quietly bought up wholesale and then heavily promoted by big-time dealers and their best clients holding the stock. These artists will defy a market’s correction and continue to soar for other reasons.

Take Spain’s Joan Miró, an important artist who was neglected for years and has recently been elbowed to the front of the line. “Miró is one of the few modern artists whose prices were not fetching extremely handsome sums for the past 10 or 15 years,” says Galbraith. “A number [of dealers] seized this opportunity, found many Mirós in the market, and decided this was going to be the next big thing.” About two years ago, Galbraith noticed major dealers suddenly appearing on industry panels and raving about Miró. Et voilà. Today, Miró is the ninth-best-selling artist in the world, so far this year moving $153 million worth of canvases.

The real sign of a bubble about to burst, advises Edelman, is when previous “sponsors” of an artist — read major dealers or collectors — start offloading works. Since they’re adept at hiding their tracks, it’s not always easy to spot. But consider the German artist Gerhard Richter. Over the past several years, the market makers made sure everyone knew Richter was an undervalued contemporary artist whose prices could only rise. The markets dutifully responded. This year Richter was again among the top-selling artists in the world, so far selling $297 million worth of paintings.

Earlier in the year, Richter was outselling even Picasso and Warhol. We thought something was wrong with this picture, and perhaps the market finally agreed with us. In October, at the top of the market, Eric Clapton sold his Richter in London for $34 million. The controversial art-collecting hedge-fund heavy, Steven Cohen, immediately tried to follow suit by putting his Richter, Prag 1883, up for sale. Christie’s heavily promoted the Cohen-owned canvas in September, predicting it would sell “in the region of $15 million.” Prag 1883 was finally listed with a more modest $9 million to $12 million estimate, but there was no sale of the work during the November auction, even at that reduced price.

It is unlikely that major collectors and dealers holding stock will allow for a free fall in Richter’s prices, as it would devalue the entire portfolio of paintings they still hold. But could the overheated market for Richter be self-correcting? Is the market for Warhol similarly vulnerable?