Thursday, August 19, 2010

The Salad Bowl

Moon, aliens, earth

Imagine we were Martians, kicking back on our porch up there on that dusty red ball, peering through a giant telescope at a tiny blue planet the locals call Earth. Over the last several thousand years we would have witnessed an almost endless cycle of tyrants presiding over wars, genocides, beheadings, rapes and all the other awful things earthlings have been known to visit upon each other. At some point it would no doubt occur to us that what the place really needed was one patch of land —somewhere— that those trying to escape such fates could trek to and live free lives. In time, they would even have a shot at escaping the bottom rungs of Maslow's hierarchy of needs (food, clothing, shelter etc.), left to pursue better times for themselves and their families. It's a good idea, and no doubt us aliens would've thought of it :)

And then, just like that, it happened. It wasn't necessarily pretty, and there were casualties both indigenous (i.e. Native Americans) and otherwise, but sure enough, a giant sprawl of resource-rich land protected by two oceans was claimed for just such a purpose. Initially in small bands, about 400 years ago the first of four major immigration waves hit the shores of what later came to be known as the United States of America. These early immigrants (aka Colonists) were almost all from the islands comprising the United Kingdom, with a smattering from the Continent itself (Denmark, Finland, France, Germany, Italy, The Netherlands [see my NYC history post], Poland, Portugal, Sweden and Finland).

Forget Plymouth Rock; over the next 100 years most immigrants arrived in Philadelphia, the main port in those days. Many sought fortune or adventure, while others fled religious, political or ethnic persecution. All came for a better opportunity for both themselves and their families. Many could not afford the passage to America and came as servants. Such servants often signed an indenture to work for a master for a half-decade or more to repay the cost of the ticket. While the earliest blacks from West Africa were brought over as indentured servants, most arrived as slaves (World Book Encyclopedia).

England, Africa

By 1700, approximately 250,000 immigrants inhabited the Colonies. Considering the disease-ridden floating wooden boxes that passed for boats in those days, a pretty good run-rate. Then it tripled. By 1775 another 500,000 people had made the treacherous crossing. A flood of French, German, Irish, Italian and Scottish escaping conflict and oppression made their way here. America was just too good an idea, and it's time had come. So of course this led to war. Had England had an air force, America would still be a Colony. Fortunately, the planes came later.

At Sea

In 1807 the U.S. Congress made it illegal to bring slaves to America; by then about 375,000 Africans had been imported as slaves. The total population in America at that time was around 5.5 million. Then the second wave of immigration hit...

Over the next 50 years, nearly eight million people entered the U.S. Sure, by then the boats were better, but still… Nearly all of them came from Northern or Western Europe. About 1/3 were Irish (potato famine). Most Irish had no money, so they stayed pretty much where they landed, namely on the East Coast. Another 1/3 were German. They had some money, thus many made the pilgrimage to the heartland in search of land to farm. Later, many of Scandinavian origin would follow suit. Ever wonder why there are so many blue-eyed people in the Midwest?

By 1855, immigration had slowed to the point where various U.S. states actually sent officials overseas to market themselves. Railroad companies did as well. Better ships and major declines in travel time (and fares) made crossing the ocean easier. And the Gold Rush was rocking California. Chinese immigrants streamed across the Pacific to strike it rich. Meanwhile, French-Canadian immigrants slid south, moving into New England, Michigan, Illinois, etc.

California Clipper

And that's when our current problem began. The flood of immigrants alarmed many native-born Americans, who were often only a generation removed from their own immigrant roots. Some feared job competition; others disliked the religion, politics or ethnicity of the newcomers. During the 1850's, the America Party (aka the Know-Nothing Party) demanded laws to reduce immigration and to make it harder for foreigners to become citizens. Fortunately the party soon faded away. The feelings of a vocal few, however, did not.


In 1875, the United States passed its first restrictive immigration law. It prevented convicts and prostitutes from entering the country. Perhaps our first use of profiling. Then came our second: During the late 1870's, Californians demanded laws to keep out the Chinese immigrants. In some instances mobs attacked those already here on the grounds that they were lowering wages. Of course they were a source of cheap labor, as has always been the case with new immigrants. Those doing the protesting were themselves the progeny of those who had done much the same a short time before. In 1882, they got their law in the form of the Chinese Exclusion Act.

One of the things that went right came in the form of a gift from France. Dedicated in 1886, the Statue of Liberty was erected on a small island south and west of Manhattan, with the following inscription…

Statue of Liberty

Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tossed to me,
I lift my lamp beside the golden door!
These words have resonated with me, along with many Americans, since the first time I learned them. Even as a young boy I would vividly envision the often-terrible passage over, the alien environment where everyone spoke a different language, and the fend-for-yourself individualism so often contrary to their home-country norms.

Over the next 50 years an astounding 25 million new immigrants poured into the country, this time from nearly every corner of the globe. Good ideas tend to spread. People came from all over Southern and Eastern Europe, including Czechs, Greeks, Italians, Hungarians, Poles, Russians, and from the area now known as Ukraine. The inability to make a living at home was not the only reason for their coming to America. Some were drawn by what they had heard of the Declaration of Independence. Many left their homes because they were forced out. In Russia, the government began to jail or kill Jews. Hundreds of thousands fled Russia and Poland, seeking safety in America. In Turkey, the government persecuted Armenians, a Christian minority in a largely Muslim country. They, too, fled to America. From farms or villages all over Europe, many had walked to a seaport. Some made month-long multi-hundred mile journeys. They scrimped on food to save the $10–15 for steerage accommodations on a trans-Atlantic steamer. The net result? By 1910, most larger U.S. cities had sections known as Little Italy, Little Hungary, Little Russia, Chinatown, etc. Without question the largest international gathering on the planet.

Unfortunately, bad ideas also tend to spread… Many native-born Americans were hostile toward these immigrants. Some felt they had reason: The newcomers took their jobs. Never having known any condition except oppression or poverty, many of these new Americans would take any work at any wage offered. Sometimes immigrants were used as strikebreakers. The working man often viewed these new arrivals as enemies. In most cases, however, the hostility was not based on reason, but rather a reaction to differences. Some of these immigrants were a different color. In many cases their accents and gestures were, um, alien, and the food they ate seemed odd. A surprising number of educated people believed the new invaders to be inferior.

Irish potato famine

Religion, too, played a major role… Irish immigrants were mostly Roman Catholics, as were many of the Germans and most of those from Hungary, Italy and Portugal. A large number of native-born American Protestants were hostile to these immigrants. As well, many German immigrants were Jews. In addition, Muslim immigrant populations from Indonesia, South Asia and Yemen began to develop. The hostility witnessed against the Chinese in the 1870's now turned on Jews, Roman Catholics, Japanese, Muslims and, finally, new immigrants in general.

By 1917 the U.S. began to require that adult immigrants be literate, and added most of the Pacific Rim to the original ban on Chinese. The U.S. moved to a percentage-based system in the 1920's, with a complex calculus based on census data that permitted immigrants in quantities roughly equivalent to the percent of the total population. I would file that under bad ideas, and it clearly missed the point of the Lady standing in New York Harbor.

As one might expect, the Great Depression saw immigration drop sharply. America may have even been net-negative during that time. World War II reversed that. The War Brides Act admitted spouses and children of military personnel returning from duty. Also, as China was an ally during the war, the U.S. lifted the ban on Chinese immigrants. But it wasn't until 1952 that the U.S. passed a law making citizenship available to people from anywhere. Not long after, lines began to form from conflict hot-spots around the globe, including China, Cuba, Korea and Hungary.


In 1965 the U.S. switched to hemispheric quotas, and, notably, they favored the East (about 60/40 with a 290,000/year cap). Relatives of U.S. citizens, resident aliens and those with 'special skills' were favored. In 1978 Congress eliminated the hemispheric focus in favor of a global annual quota (same 290,000/year). A decade later three million 'illegals' were granted amnesty. In the aftermath, however, new laws were not strictly enforced. The 1990 laws bumped the raw quotas to 700,000/year, with preference for immigrants from countries that had sent relatively few people our way in the more recent past… Europeans and Africans.

Today, most U.S. immigrants come from Mexico, India, China, the Philippines, Haiti, the Dominican Republic, Jamaica, Cuba, South Korea and Vietnam. Although a large number of newcomers still settle in the East and Midwest, many others move to Florida, California, Arizona (well, they did until this year), New Mexico, etc. All seek the opportunity—economic and otherwise—America affords, in spite of the hardships involved. Newly arrived immigrants advance only if they have drive, determination and energy. The children of immigrants are in a better position. They learn the customs and language while growing up. They have substantial schooling before starting work. Education was, and is, the key to success for immigrants, and to this day many immigrant parents of native-born children value and emphasize education above all else. In medicine, law, education, finance, building trades and many other professions, the number of children and grandchildren of immigrants has grown to be very large. Many immigrants—or their children—make great successes of their lives, leaving an indelible mark on America's history.

england, eastern europe, western europe, asia

In the end, almost everyone in America comes from somewhere else. Unless you are a native (Indian) American, that means you (or possibly a Clovis, whoever they were). At any rate, a place where people are free to pursue a better life without threat of tyranny and abuse is a good idea. A place that accepts wave after wave of immigrant from all points on the globe, thereby ensuring new generations of people to work their way up the rungs of society while vastly improving their economic possibilities… A good idea. Finding some way to humanely and fairly manage a steady, legal inflow given the demand… A reasonable idea. Allowing a vocal few to dictate policy that reverses both the interests of the nation and the point of America in the first place? A bad idea. Policies that expire student visa-holders upon graduation from our institutions of higher learning or in general encourage some of the smartest to leave? A terrible idea.

Personally, I want them to stay. I want to convince them to stay because, at least for those that come here for education, increasingly they view better opportunities back in their home countries, and this trend will only grow: In the last 50 years the world has made unprecedented quality-of-life gains in many places around the globe. This is great news for the planet, but poses an increasing challenge for America as opportunities exist in many more places today than ever before.

I don't just want the super-smart and/or already connected, capable of gaining entry into elite U.S. schools. I also want the immigrant-entrepreneurs {see}, the nurses, the programmers, the fishermen, the hairdressers, the ditch-diggers, the cab drivers, the cooks, and, in short, anyone whose intent is to come here to pursue a better life for themselves and their families. I want them in part because they provide the fuel for future growth, but I also want them because their perspective, work ethic and culture enrich us all, and we are better for it despite the sometimes uncomfortable dislocations. It is, in the end, the whole point of America. Naturally, we can't just blow a whistle and fling open the gates; America does need to administer a well-conceived series of legal immigration programs, and by-and-large it does. The danger lies in the many ill-conceived “programs” once again rising in popularity, usually by politicians working up crowds to curry votes. (0.1 “anchor babies” were born while you were reading this).

None of us have a right to rob the oppressed, under-nourished and economically-hogtied of this free space because we were here earlier. As native-born Americans we are merely stewards of a shared residence for those marginalized elsewhere who often risk everything to pursue the chance of a better life in America.

As have so many before, the gate-closers who rally against new immigrants will, in the fullness of time, be viewed as they always have: Reactionist nativists with a personal agenda who have forgotten their roots, and indeed the entire point of America. Their arguments are always the same: They're taking our jobs. There's too many of them. These types won't assimilate. The system can't afford them. The country is different now. These positions fly in the face of our entire history, as well as the admirable and unique principles upon which it was built.

Immigration at its best should help both the new home country and the immigrant. After all, our interests are aligned: Immigrants want to work, make money and live a better life. The country benefits as these immigrants contribute to the GDP. Instead, people take a binary view—someone succeeds at the cost of another. Immigrants do well, so it must be at the cost of native-born Americans (M. Lee —NYC). But it isn't a zero-sum game; the nation benefits from the increase in ideas, customs, culture and connectedness to the rest of the world. And it always has. Some jobs do get displaced as we make room, and there is pain; but other jobs are newly created by immigrants who start businesses and hire locally. The wealth of our nation—in human capital terms—increases exponentially.

Frederick Jackson Turner
Frederick Jackson Turner

The United States is often called a melting pot, which is sort of misleading as it suggests that to become an American is to become just like all other Americans. In fact, America is unlike any other country precisely because Americans are not alike. An American historian, Frederick Jackson Turner, once said that the United States ought to be described as a salad bowl rather than a melting pot. Americans get mixed together like leaves in a salad bowl, by remaining distinct. They are not melted down into a common type. And that's a good thing.

[An article based on this post under the title
"The New Backlash Against Immigrants Is Offensive And Absurd -- We're All Immigrants" was also published in the Business Insider]

Friday, June 18, 2010

Here's Why This Latest Wave of New York Startups is Just the Beginning

[Also published in the Business Insider]

Once again, there is a renewed sense of enthusiasm about the New York City startup community. Today we are seeing a major influx of high-quality entrepreneurs moving here—or back here. The quality of company formation has never been higher, and there are a variety of reasons for this.

Perhaps most obvious is that New York City has always been a place where people want to live, and today is no exception. There are two additional factors now driving New York’s increasing popularity among aspiring, sophisticated entrepreneurs. First, the general trend toward capital efficiency, and second, what I call the horizontalization of information technology.

Capital efficiency means that more companies can afford to move to New York if they choose. A variety of dramatic cost-reducing realities have lowered the fixed-cost of building a software or web startup by an order of magnitude. At the top of the list are the rapidly advancing technologies of open-source software and cloud computing. As a result, some of the hardware and support-system costs (such as large staffs of IT personnel and extensive real-estate footprints) once associated with operating in New York simply do not apply in this new environment.

Dennis Crowley at Where 2.0
Dennis Crowley, founder of Foursquare

Horizontalization is more nuanced. The technology industry has been a standalone industry throughout most of its history, a vertical that stood alongside other large industries. Today, technology is becoming more of an integrated portion of the existing stacks—or the distinct components of hardware, middleware and software required to operate entire IT infrastructures—within businesses rather than a separate vertical industry. As a result, essentially all industries—including the seven industries headquartered in new York—are increasingly able to make use of the lower-cost, better-integrated information technology that open-source software, cloud computing and related innovations are enabling.

With this evolution comes a striking change in calculating the optimal location for technology businesses. It is simply no longer true that technology companies must be located near technology centers. Today, the optimum strategy often puts these companies near business centers, where the customers are. Few business centers in the world are as central as New York City. No matter where something is invented or produced, it is sold here.

Michael Bloomberg, the city's most successful digital entrepreneur

Outsiders may see this accelerating startup activity in New York as a new phenomenon, but those of us who have been active within the local startup community since its revitalization in the early 1990's have a different view. I regard this latest surge in activity as yet another wave in an impressive chain of entrepreneurship that is rooted in the long history of New York City.

New York’s place as a fountain of entrepreneurial activity—and why it appears to hold even more potential today -- cannot be properly understood without a fundamental appreciation of the region's rich tradition of entrepreneurship and commerce. A look at the past can provide important clues that help make sense of the present. Moreover, I believe that this 400-year history provides vital context for informing the conversation now taking place about the technology community in New York today, and for further building the entrepreneurial ecosystems to nourish it.

The Beginning

Before there was New York City, there was New Amsterdam, and it didn’t start with the Puritans. The Dutch West India Company deposited 100 people on the shores of what would later become New York City back in 1624. All were entrepreneurial, pragmatic, money-seeking traders who didn't much care for rules. Two years later, Peter Minuet bought Manhattan for an infamous $24 in trinkets, from Indians who did not live here. And so it began—a portentous new outpost of western civilization, literally created over a deal.

Peter Minuet, Manhattan
Peter Minuet buys Manhattan for $24.

The area has a long history of what I call an entrepreneurial class; these are individuals for whom an “off-the-rack” life does not suffice. The tinkerers, the inventors, the merchants who believe they alone have the instincts, skills and chutzpah to reinvent the world around them have always been drawn to this city. There was a reason those Dutch men and women got on the boat almost four hundred years ago, and it had little to do with religious persecution. These were the first New Yorkers, and they were entrepreneurs.

From the earliest days, waves of entrepreneurial activity have advanced the local economy here. These waves sometimes were manifested in completely new arenas, other times through the deployment of technologies within existing businesses. Yet the drumbeat always remains the same: Maturing industries experience a talent drain in favor of more entrepreneurial endeavors. First a trickle, then a steady downpour. Eventually, maturation leads to consolidation and scale, and the process is repeated. Some of the more important entrepreneurial waves in New York City and its immediate surroundings have included fur trading, timber, sugar refining, shipbuilding, tobacco, banking, canals, railroads, clothing, textiles, electricity, media, entertainment, advertising, communications, fashion and a long list of other industries that have come and gone with the passage of time. Today, seven industries remain headquartered in New York, and all are undergoing rapid technological transformation.

New York Banking is Born

In the latter part of the 18th century, New York banking was born with the founding of the Bank of New York. Within a dozen years many more banks followed, new services were devised, and trading—previously the passion of a few dedicated risk-takers huddled under a buttonwood tree in lower Manhattan—coalesced in the form of the New York Stock Exchange. These new institutions—and their product-creation engines—would finance entirely new industries on a national level. Men such as Hamilton, Burr, Morgan, Goldman, Drexel and many others less well-known were, if you will, the Bill Gateses and Michael Bloombergs of their day. All this activity in financial services was in part dependent on two unrelated technological transformations: communication through newspapers, and over wires.

JP Morgan portrait
J.P. Morgan

Newspapers Begin to Drive Information & Advertising

Although newspapers of one sort or another had been around for some time, they were generally small, highly localized and very partisan. The ability to rapidly and broadly disseminate information was still new to the world even at the turn of the 20th century. (The New York Times, itself founded in 1851, was one of the earliest papers to go national, but that didn’t happen until several decades after its first editions were printed.) It was the commercialization of the electrical telegraph, which occurred in the mid-19th century, that enabled the transformation of newspapers through a localized method for disseminating news. This new technology reduced the time it took for a letter or news story to travel across the country from weeks to minutes, making it possible to provide more complete information. Today, of the three national papers sold in the United States, two are published from New York. (New York currently boasts about 270 newspapers printed in 40 languages.)

Henry Luce
Henry Luce, founder of Time.

With the rise of the newspaper—and later—the magazine, advertising soared as a new business model developed by entrepreneurs and merchants to promote their wares to a larger customer base. Erickson, McCann, Thompson, Rubicam, Barton, etc., all founded their eponymous firms between the late 19th and early 20th centuries, and all in New York. Many grew rapidly through acquisition, rolling up smaller, entrepreneurial firms whose ranks had surged from roughly a dozen in mid-century to several hundred by the 1920s. Nearly one hundred years later, seven of the eight largest advertising firms in the world reside in New York.

NYC: The Land of Entertainment

Entertainment was dominated by New York from its earliest days. Vaudeville—and later, Broadway—was an industry populated by highly competitive entrepreneurs. Since news and advertisements sold tickets, and ticket sales meant profit, the unique combination of the media, advertising and banking industries stoked the rapid growth of this form of entertainment. It helped of course to have a rapidly-growing middle class with the time and money to take in these productions. You probably can guess from where much of this early audience hailed. In time, new technologies like radio, and later film and television, would transform forever the nature of entertainment. Much of the production and eventually the creative arms of the entertainment industry as we know it today moved to Los Angeles, primarily for weather-related reasons. Still, even now, all four major TV broadcasters, many of the largest cable channels, and three of the four biggest record labels are based in New York. One-third of all Indie movies are still made here, and an incalculable number of TV shows.

Content Needs to be Distributed: The Birth of Communications

Since content in one form or another was the product of all these New York-centered industries, it was logical that the media for distributing it and the input technology for enabling it (electricity) needed to be located nearby. And it was. Entrepreneurial businesses such as The New York & Mississippi Valley Telegraph Company (now known as Western Union) were created here. The Edison General Electric Company (which ultimately became General Electric) was established by Thomas Edison a few miles southwest of lower Manhattan, in Menlo Park, N.J. In fact, the first commercial power station ever built was on Pearl Street in lower Manhattan.

Tom Edison Wikipedia
Thomas Edison

Dozens of related startup businesses also were founded in and around New York City, although for reasons of cost, space and safety, many followed Edison’s lead and conducted most of their research in nearby New Jersey. Much of the telecommunications infrastructure we rely on today at a global level has grown from innovations created and still in development just south and west of New York City. While rising labor costs and other factors have long since curtailed local manufacturing significantly, research and development, and the management of existing corporate infrastructure, are still based here.

NYC in 2010: Commerce Comes Full Circle

As I stated earlier, New York is home to at least seven global industries: finance, media, publishing, advertising, communications, retail, and fashion. More than 10 percent of the Fortune 500 are headquartered in or near New York City; a greater percentage than any other location in the United States, including all of California. The City is also the most international city in the U.S. (and not just because the U.N. is located here) as measured by immigration, diversity, trade, representation, tourism, languages, population, religious views, quantity of international flights, unpaid parking tickets by country, and so on. Nearly one-third of New York Metro residents are immigrants, even today. It also is one of the leading cultural capitals of the world, with a cornucopia of diverse artistic, intellectual, ethnic and religious offerings. Millions of people consider New York City one of the world’s great places to live. This is despite the inherent challenges associated with nearly 20 million people living within a relatively small geographic area, or the equivalent of one of every 16 people in the United States.

Ben Lerer 300x200
Ben Lerer, founder of Thrillist

It is against this backdrop that New York’s entrepreneurial class is again rising. The earliest signs of this resurgence appeared in the 1980s, when entrepreneurs like Michael Bloomberg grasped the transformational nature of computer technology on financial services. Throughout the 1990s, many non-financial entrepreneurs left their posts at the region’s major media conglomerates in search of new opportunities utilizing the latest technologies. Compact disks were the first of these new technologies, then came the rise of the Internet. Early winners such as N2K, DoubleClick, 24/7 Media,, and ScreamingMedia emerged, creating a groundswell of new activity.

At the same time, already-strained technology budgets were pushed into overdrive in the face of widespread concerns over Y2K disruptions. Enterprises spent even more heavily, upgrading their IT systems before the clock rolled over to the year 2000, on top of large budget commitments already underway to embrace the new age of the Internet. New York experienced this so-called “dot-com boom” in step with the rest of the developed world, but with a decided bias towards media and entertainment. The bursting of the dot-com bubble dealt a temporary setback to New York’s entrepreneurial community, yet the transformational nature of new technology was not stalled for long. Today New York is embarking on the second half of what undoubtedly will be seen as a massive resurgence of entrepreneurial activity, extending perhaps for another twenty years. None of this implies that there won't be periods of indigestion as various bubbles inflate—and burst—within different technologies and industry sectors, but the fundamentals are in place.

So why is New York so well-positioned this time around? The key factors are: 1) the industries anchored here; 2) the tectonic shifts occurring within those industries, based largely on technological advances; 3) personnel dislocations; and 4) the propensity of the companies within those industries to spend aggressively on technology. For example, global IT spending within financial services is around $550 billion, annually. Communication spending on IT is about $400 billion. Retail’s share is around $150 billion. And so on. In total, companies within these and other industries are projected to make spending decisions on close to $1 trillion in technology—every year—for the next decade or two. Of course, the majority of deployments generated by these purchases will not occur within the New York area; most happen across the decentralized global organizations of major corporations, and the varied locations of smaller businesses. Yet many of the decisions will be made here. And many of the decision-makers will be impacted by the entrepreneurial class, whether in developing and procuring new products and services, or by being recruited into start-ups.

The New York-centric news media will continue to closely monitor and report on the media-related start-up culture within the region. This coverage will dominate relative to what is reported on the start-up activity in other major industries. This is natural, given the impact of media innovation and commercialization on the news media’s own rapidly evolving industry. But make no mistake: The revolutionary benefits—and consequences—of accelerating entrepreneurial activity will have a major impact across all NY-based industries, both foundationally (e.g. broadband deployment, elastic computing, spectrum optimization), and at the higher layers (real-time webs, complex data visualization, semantic analyses, mobility, location-aware services, exchange platforms, big data modeling, and a cornucopia of other technologies).

When all the pieces are put together, the reasons behind today’s surge in pathbreaking New York start-ups are easy to grasp. New York remains one of the world’s greatest and most livable cultural centers. It has a diverse core of seven global industries competing aggressively, increasingly through technology. A new set of lower-cost economics is enabling technology providers to operate closer than ever to business centers such as New York. And New York is attracting a widening pool of talent for start-ups that is highly motivated. This latest wave in the long, storied history of entrepreneurship in New York is only getting started.

Saturday, June 5, 2010

Populist blather is approaching a high-water mark

Populism is fueling a vitriolic debate around Carried Interest tax 'reform', as demonstrated by the comments over at Chris Dixon's blog. It can feel good to go off on extreme examples like Steve Schwartzman eating $400 crabs, but it's important to think through what will really happen if this legislation actually becomes law.

Tax policy as it relates to finance and investment activities in the U.S. has as its primary goal the provision of incentives / disincentives based on 'preferential' activities. It is about incentivising behavior, not some individualized and debatable construct of fairness. Preferential activities are defined as long-term investments that promote real GDP as opposed to short-term trading with zero-sum outcomes. As a nation we have decided the correct metric is 365.

So, the question is, do we want to revise the incentives, and if so, how? Changing the policy on 'carried interest' will, in fact -- and with all due respect to my friend Fred Wilson's hypothesis -- impact the flow of commitments into venture capital, private equity, leveraged buyouts, oil & gas, real estate, and just about every other partnership-based investment alternative out there. This will happen at least two ways...

First, these asset classes will be less profitable. Why? Because some of these newly-imposed 'costs' will be shared by the limited partners, reducing total returns for them -- and their respective asset classes. It is naive to believe that only GP's will be affected. This will spark an exercise in reallocation analysis, and a flight to 'perceived' quality for those dollars that remain committed.

Here's what you will end up with... Fewer, larger 'marquis' firms with more pricing power, synthetic 'structures' that echo current LP economics but somewhat divorce term enforcement (more on this below), and tougher deals for entrepreneurs (the mid-range firms with only moderate power will be most at risk, yet it is precisely this group that creates the competitive dynamic that startup companies have enjoyed in recent years).

Second, fund mangers will certainly come up with creative structures (never forget the laws of unintended consequences, Idealism's frequently-fatal flaw) that traverse legal roadblocks while dissaligning shared incentives within the core investment activity. In other words, 'carried interest' will go away, replaced by some form of partner-based ownership (most likely same as common stock) on a deal-by-deal basis. Now, take a moment to think about that... and then think about future financing events, board representation, even deal selection - and the inherent conflicts of interest therein. Turning a performance compensation mechanism into an owned option difficult to claw back will certainly not be in the interests of either startup companies or LP's (or the pensioners, endowments etc., that comprise them).

In sum, reducing the normalized return differential between common alternative asset classes and ordinary market investing - and thus altering the perceived risk-profile - will have real dollar consequences, make no mistake. Think you dislike hedgies now? Wait until a quarter of alternative assets pour into their coffers.

Moreover, it will significantly alter deal structures creating further chasms between funders and founders. And by the way, at least in the last ten years (as it relates to VC anyway) had this Bill been in effect, your US Gov tax bounty would have rounded to, um, essentially zero.

Couple of other points on this Carried Interest tax question....

1) As for Carried Interest being a 'fee', it's a performance override (and in no way definable as 'revenue'). Any payment -- performance-based or otherwise -- is ultimately 'describable' as a fee. The question isn't the nomenclature, it's in the certainty and timeliness of the payment, and the underlying asset that generated it. If it's under 365, then it's short-term. If it's directly attributable to the increase in value of a long-term asset, that's materially different than a tip for a job well-done.

2) Every successful VC I know could earn a multiple of their current salaries in other (and not necessarily so different) businesses; they choose to trade off substantially lower current economics (about 5:1 by my calculation) for even higher future earnings potential. But that's just what it is.... potential. Implicit in this contract is a larger piece of the pie and a cap gains tax-rate on value-creation in exchange for the assumption of this risk. Take away the tax benefit and VC's will be more risk-averse, not less. It is also ridiculous to suggest that the best people will stay in venture capital 'because they love it' despite substantially-diminished economics. Seriously?

3) As has been pointed out by others like Jeff Bussgang, quite a few of us in this business are ourselves entrepreneurs, having built successful, long-term venture capital businesses. We risked our capital, security and futures to chart our own course. But VC firms do not have exit opportunities like the startups in which they invest. We know that going in, so it's okay as long as alternative paths to wealth creation remain. You can count on two hands the number of firms that have sold or gone public since the dawn of this industry some fifty years ago -- and on one hand the number that have actually been successful at it. That's maybe half a percent; a tiny fraction of the transaction rate startup companies enjoy.

In the end, I prefer a system that rewards long-term value creation over the casino that is Wall Street. And my viewpoint may surprise you, in that I, too, believe that there is a difference between investing a dollar from my own pocket versus a dollar managed that came out of yours. Which is why I think the long-term gains rate should be revised down, to 10% for a principal's money, 20% for OPM override earned beyond a 12-month period (up from 15% today), and then the rest at short-term rates. This in my view achieves the all-important goal of delivering proper incentives for long-term investment over short while being a 'fairer' system. Bear in mind that despite all of the derision around OPM, most all businesses - including most startups - use it to build value. In the end, all of us are 'stewards' for someone else's money, one way or another. The economy doesn't care from whose actual pocket it's long term dollars come. Nor do entrepreneurs.

VC-as-bogeyman is a popular meme at the moment, and I can't say it isn't somewhat justified. That said, babies and bathwater come to mind, and, unfortunately, heart-felt but unexamined populism rarely leads to better policy. It's not supposed to; rather, it's highest and best use is to stir debate. The current carried interest Bill will do little more than hurt the startup ecosystem while raising a de minimis amount of tax revenue.

Saturday, April 17, 2010

Vision, or blindness?

David Fisher once wrote...

“What often characterizes visionaries is their lack of vision. It's a popular idea that people of genius see farther and clearer than other people, but perhaps the truth is actually the opposite. Visionaries often don’t notice the enormous and obvious impediments to realizing their technological dreams – roadblocks apparent to more practical people”.

I think he makes an excellent point, as relevant today as at any time in history. Maybe more so.

Saturday, March 27, 2010

As a species, we almost always over-estimate how fast things will change. But we always underestimate how much things will change. Thus….

My ten predictions before the world is slated to end in Dec. 2012....

·10) Eric Schmidt will no longer be CEO of Google. As giant media foes attempt to absorb excess profits in part derived on the backs of their content, things will get sticky. Eric will grow weary of the countless battles, stock price pressure, and growing discord in the senior ranks. One key factor? Bing. Why? Well, it’s like Pepsi, or Burger King. As Americans we are comfortable with virtual oligopolies, but not monopolies. We require an alternative to Coke and McDonalds. Yahoo by itself has failed at being that alternative. On the other hand, if there is one company that can challenge Google’s hegemony with pockets every bit as deep, it is Microsoft. Forget whether you think Bing is ‘better’ or ‘worse’ – irrelevant. It is a credible substitute, and it will be used by major media to try and squeeze Google’s profits. Which leads me to my next prediction….

·9) Paid search and natural search will become…. Search. We have grown comfortable in the knowledge that those slippery marketers are relegated to the internment camps of the paid section of search pages. But users really don’t care – what they want are good results – paid or not. The state-of-the-art today for paid results has them look and feel just like the real thing. Which they often are. In the near future, result hierarchy will be, in part, based on pay - but pay for performance - not just ranking. The gotchas leading to pay-walls and other poor user experiences will sink in the listings no matter the dollars thrown at them, in favor of a single search stream where dollars will play a role (but not the only role) in influencing rank. And this will happen in real-time!

·8) Steve Jobs and Apple will go one of two ways, and neither is great (but one is decidedly better than the other). In scenario 1, Jobs is permanently sidelined due to illness. To my memory, there has never existed a major corporation more personality-dependent than Apple (at least in modern times – I put him up there with Howard Hughes). Thus, within a very short period of time the brilliant, legendary, maniacal focus he possesses will be lost, and decisions that appear to be ‘better’ for the organization and its products will be made. These half-steps will be compromises designed to keep up with the world while preserving Steve’s ‘legacy’. This will not go well.

Scenario two – and in my mind also problematic for Apple -- Steve Jobs sticks around but doesn't 'think different'. In this case, we run the risk of a 2.0 version of the capitulation that was Apple 1.0 failing to discern the tea leaves and license its software to other platforms. We are beginning to see this play out now. In fact, Android exists because Apple was unwilling to work out a deal with Google. Jobs’ personal demons may not be suited to an alternative path. Android has already begun to eat the world. History may not repeat, but it usually rhymes. Hence, my next prediction…

·7) Android will have 3x the number of applications in its app store than the iPhone / iPad / iTouch triumvirate does. Not too long ago, there existed a thriving packaged-software industry, and a trip to Computerland circa 1984 would have revealed shelf after shelf of Apple-ready software, along with a smaller section of IBM & compatible boxes amidst strange Charlie Chaplin posters. How long did it take the era’s ISV’s to swap over to Wintel? Not long. I know not a single example of a company with an iPhone app today that hasn’t either a) already ported, b) is about to port, or c) is planning on porting their application to Android. With Apple, the hardware is better. The vision is better. The usability is better. And it is a closed (curated is the current term of art, though iTunes is far more than just curated) system in a world that prefers open.

·6) Major media companies will erect pay-walls & windows where they can, attempting to suppress the notion that everything wants to be free on the internet. Actually, we are multi-generation-conditioned to pay for stuff (one way or another) on every medium ever invented. Will the efforts to erect a pay-wall at the NY Times go over well? No. Will it eventually work? Probably. Will the WSJ - under Murdoch - attempt to de-index Google? Probably. Will they be alone? Certainly not in threatening to do so.

A decade ago the world faced a fork in the road…. In one direction was a universe with pay-for-crawl deals where search engines shared their excess profits with the content vendors. Down the other road? Well, that’s where we are now. Those same media giants were too scared, disorganized and ill-prepared for the tectonic shift the free-wheeling internet posed. Thus, they were only too happy to have their wares crawled and displayed somewhere. Free distribution! In fact, that’s how they described it. Suffice it to say, their opinions have changed. In the end, those with (good) content tend to get paid. It certainly will not happen overnight, but by the end of 2012? I would say that fork will have merged.

·5) Google’s hegemony has a half-life about half that of Microsoft
. Meaning, it will reach the populist doesn’t get it / is a death star stage in half the time. Some would say it’s already there. These would be the bleeding-edge types. Incumbents always have trouble transitioning to a new era. Despite a smorgasbord of books written on the subject, the issue is rarely the way they react to such situations. It’s in how they perceive them. Which is to say… they don’t. When you're at the top of the mountain, it's nearly impossible to overcome the feeling that you can see all. Until you actually feel it in the pocketbook. Then you panic and seldom make the right choices.

Does this mean Google won’t be meaningful? Does anyone truly believe Microsoft isn’t still meaningful? Of course it is. Both are and will continue to be giants. But as outsized profits are re-distributed back into the ecosystem to the creators and owners of content, quarterly results will go from reduced 'up-trajectory' velocity, to flat-ish, and maybe even down-and-to-the-right in some areas. Stocks will dip. In Google's case, people will speculate about what they will do with with all that cash. My guess… they will buy a big media company :-)

And for a change of pace, I predict...

·4) Lloyd Blankfein will not be CEO at Goldman Sachs
. His crime? Being too Googleable. Zero-sum-game hedge funds (like GS) do not do well in the spotlight; they are at their best working within the shadows, extracting profits from inefficient environments (or selling stuff nobody understands – you decide). At any rate, Goldman CEOs have always been notable for their distinct lack of notability outside of Wall Street. Blankfein no longer qualifies, and will ‘retire’ as soon as it’s clear he wasn’t forced to by outsiders.

·3) An accidental release of nano-particles will occur in a major body of water, killing an untold number of fish and other creatures as the tiny objects pass through the blood-brain barrier. This will lead to renewed cries for stricter regulation and temporarily slow down advancement in the technology. In an odd twist, this same core technology will one day dramatically improve the health of our world’s seas by delivering anti-pathogens to vast ocean-dwelling populations. But that will come later, after we kill a bunch of fish.

·2) People will begin to discover relatives they did not know they had
– via the intersection of DNA sequencing and the internet. This will bring to the masses what is only experienced at the leading periphery today; that one can meet and then dislike relatives not just based on physical proximity (which for all of history is how it has been done), but via the internet.

·1) Tiger will again win the Masters…. In 2012. Then the world will go boom. Or not. If it does, it will have nothing to do with the Mayans. Solar Cycle 24? Maybe.

Sunday, January 31, 2010

Interpol chief slams body scanners at Davos

Speaking to the Associated Press at the World Economic Forum in Davos, Interpol Secretary-General Ronald Noble argued that better intelligence and information sharing is required, rather than wide-scale body scanning technology.

I think he is absolutely right. We throw money at technology and award contracts to giant government contractors on systems that will do little more than spook the general public while providing some illusion of security. Meanwhile, we have sparse data on who is actually doing the traveling. Detroit is simply the latest example of paying attention to the wrong thing... an inter-departmental database check would have prevented the incident. It also might have flagged many of the terrorists involved in 9/11 before they boarded their flights.

Last year the TSA in the US (which has not had a leader for 14 months and counting) let an entire industry die - the Trusted Traveler industry - rather than help foster its growth. How big a deal was that? Well, a quarter-million people had provided more detailed information about themselves than is actually known about the airline employees moving bags under your airplane, so you tell me. Had the industry survived, that number would likely have been in the millions within a couple of years.

Knowing who a traveler is - and what disparate databases show about their activities and associations - is far more valuable than the cat-and-mouse game played at the screening stations, which is mostly theater and will again be bypassed. First it was box cutters, then exploding shoes, then came the 'liquids" scare, and most recently, exploding underwear. What's next, TSA-issued one-piece jumpsuits and changing rooms? ("...Remember, all clothing, including undergarments, must be checked or you will not be allowed to board the aircraft...").

None of this is meant to knock the hard-working and decidedly overstressed 'blue shirts' on the front lines. Imagine walking in their shoes for a few moments and the thankless, unpleasant task they face on a daily basis becomes apparent. Are a few clueless? Sure, but most are hard-working folks trying to earn a living while enduring countless under-breath comments and eye-darts.

What we need is a new mindset in how we think about foiling the tactic that is terrorism. After all, Wellness is to the Emergency Room as Information is to the Security Checkpoint. In a word: Prevention. This doesn't eliminate the need for the ER -- or the Checkpoint -- but certainly helps to minimize the heroic (and uber-expensive) efforts at the last line of defense. Yet we simply do not spend the time or money building - and linking - the systems we already have. The interest isn't there. Nearly a decade back I was on the board of a company with leading-edge data mining technology considered the best in the world at the time. This company sold tens of millions of dollars worth of software to many if not most of the Fortune 500 and their global counterparts. We contacted the FBI and offered to give it to them for free after 9/11, no strings attached. Also said we would help them integrate it all, gratis. After a few months, we gave up calling back.

In the end, it is a mentality, and it permeates our Congressional psyche. We want the big, expensive toys - the B2 bombers, the drones, the 70-mph tanks - but then we end up with nasty low-tech attacks like zodiacs ramming destroyers, vans with fertilizer, knife-wielding hijackers, exploding garments (and undergarments!), and IED's. Even in the information game, our strategy seems to be 'go big or go home'. Projects like Carnivore/Raptor/Echelon are supersize-ticket items that result in amazing data velocity and gobs of 'analysts' (in all governments, assets = power). No doubt these programs have had their wins (as have bombers, drones and tanks) but in the 21st century they are not enough. Nor is the silo ethos that doggedly persists amongst the alphabet agencies. Creating the DHS (One Ring To Rule Them All, I guess) has done little to combat that.

So I applaud Interpol's Noble on having the chutzpah to even suggest the system is getting it wrong as the 'Scan Baby Scan!' battle-cry marches forth. We need more of that. Wonder how long he will keep his current job. I hear there's an opening at the TSA.