I mean, I’m sure people do steal books, but it doesn’t seem to happen in any extraordinary volume, as compared to, say, music. It’s not unusual to know someone who has downloaded a copyrighted music file without paying for it (aka “stealing”) – you might have even done it yourself, no? – but do you know a single person who has ever downloaded a copyrighted book without paying for it?

The music industry has been famously apoplectic for years about the problem of illegal music file sharing. The movie industry watched the music guys disintegrate, and is aggressively riding the Big Hollywood effort to stop the evil Internet so that what happened to music doesn’t happen to movies.

Now the book industry is also undergoing seismic shifts due to new technology, but this begs the question: why didn’t books, the older and easier medium to steal, come first – why doesn’t anyone steal books?

Is it the medium?

Smaller things are usually easier to steal, and this goes for the digital world as well as the physical world. Constraints on bandwidth, storage and processing power are one reason that music files are more broadly shared or stolen than movie files – a typical movie file is well over 100 times larger than a typical music file. But a book file can easily be less than a tenth the size of a file for a 3-minute song, so again, it seems strange that these little book files don’t get the five finger discount.

Maybe music and movies are different because they require electronics to play a recording. As electronics have gone from analog tape recordings to digital media files, music and movies got swept up in waves of theft because those files played on devices that could be connected to a vast file sharing network. Meanwhile, books did not have a common electronic reading device until the Kindle and Nook.

I’m not sure I buy this narrative – recordings of audiobooks have been around for just as long as music files – do you know anyone who has ever stolen an audiobook? Now that the Kindle and Nook have been around for a while, have you ever heard of anyone using these devices to read troves of stolen books?

Is it possible that the difference is not in the technological trappings of the media, but in its emotional impact? Do music and movies move something in the soul that causes people to steal, because the enjoyment of the media is so irresistible? I doubt it, because there are emotionally gripping books as well as dull songs – I don’t think there’s a category of books that get stolen more often than others, other than the category where the title is a command to steal.

Maybe the reverse is true – perhaps movies and especially music are trivial fluff, not valuable enough to fear stealing, while books are weighty, too precious to steal. Price may provide a clue here: a hit song is now around a dollar, a movie around ten dollars, and a new digital book is ten to fifteen dollars. Perhaps the market is validating the theory that books are more valuable, more emotionally compelling, and therefore harder to steal casually. But I doubt this too – there are a lot of crap books out there, and you can learn more from a three-minute record baby than you ever did in school.

Is it the audience?

Maybe the people who enjoy books are different from the people who enjoy music and movies; or at least, they’re different when they’re enjoying books, even if they’re the same people.

Viewing unauthorized download of copyrighted files as “theft” or “stealing” requires a certain conception of a moral universe. Many books, especially novels, convey some sense of moral order, or even when conveying moral disorder the implicit contrast to a typical moral universe always exists. Maybe the people who enjoy reading books are people who believe in a particular kind of moral universe, one in which unauthorized downloading of copyrighted material is rightfully considered stealing. In short, maybe book lovers are better people, and don’t steal. Presumably under this theory, music lovers are dirty techno-hippies with no sense of right and wrong.

Or … maybe book lovers are just weird. The urge to possess books as a physical object is common enough that even obsessive collection is considered only a gentle madness. Possibly the act of stealing a digital file is simply unsatisfactory, as it doesn’t sate this need to possess the object – shoplifting a file just isn’t the same. While music lovers do have some notable examples of vinyl obsessives, this doesn’t seem as common as the book geekery is among bookworms.

Is it possible that book lovers simply have more to lose, being a smaller and almost by definition more educated (i.e. literate) class of people? Maybe music and movie lovers that are of the same social and economic class as book lovers actually steal music and movies just as infrequently as book lovers steal books?

Is it the industry?

The music industry was famously hostile and arguably stupid in its stance to file sharing, and Big Hollywood seems determined to replicate that stance regarding all the evils of the Internet. In contrast, the book industry seems scared, but oddly accepting of its fate, almost savoring the last days of their bygone ways, lounging on the beach languorously watching the tsunami roll in.

Or maybe the book industry is simply smaller than the music and movie industries, and so hasn’t spent the time and money to raise the hullabaloo that other media industries have raised. And being a smaller industry, maybe it’s simply more accepting of change.

Is it possible that the book industry isn’t in utter panic because they’re aware of the history of media cries of wolf, howls of inevitable doom that accompany each technological change, each of which result in more money and more opportunity? Maybe book publishers are relatively sanguine in the knowledge that they’re making higher profits than before the Internet ruined their industry.

…

This is all just semi-coherent rambling, but it’s a ramble that’s been rattling around my skull for a while now. I don’t really have a clue why people don’t steal books, or at least don’t seem to steal books in comparison to music and movies. I’m hoping one of the handful of readers who stumble across this post can point me to a better answer.

Last month, I wrote about why Second Life failed so I didn’t have to write about why Second Life failed. I mean, that post wasn’t about reasons for failure, it was about the fact of failure. My thought was that there are many people who simply assume Second Life failed, and they’re wrong, and there are many who will passionately argue that Second Life has succeeded … and they’re wrong too. Failure can only be judged by the ones who were trying to succeed.

It would be safer for me to say that failure is a matter of perspective, for surely failure passes through the same lens as beauty in the eye of the beholder. I do understand that many SL Residents were on their own journeys, and so of course they are their own best judges of the success of those journeys. But it would be an artful evasion to claim that any of those journeys, or even all of them together, constitute the sum total equation for the success of Second Life. We were trying to do something more – or at least, something else – and we failed. (Of course, I’m talking about the team and the company that I knew, years ago. The team there today is on their own journey, which I know next to nothing about.)

So if I’m willing to be this myopic and insular about judging failure, you can bet I’d be just as parochial in reviewing the reasons. I’ve seen and heard a lot of speculation that I don’t agree with: poor strategy, worse execution; lack of focus, misplaced focus; poor technology, doomed architecture; dumb marketing, uncontrollable PR; niche market, bizarre customers; crazy culture, undisciplined development; bad hiring, bad management; feckless board, dominating board, ignorant board. I’ve heard it all, and while there may be a grain of something like truth here and there, none of these things holds real explanatory power as a reason for why Second Life failed.

We failed as people. We failed as a team. Our failure was intensely personal, particular to each person involved, and ruinous to the overall team.

I’m going to switch now from “we” to “I” but I want to be really clear about why. We Lindens were all in it together, and there is a broad sense in which all credit and blame goes to all of us … but not in this post. Here, I’m talking about maybe half a dozen people, and so it would be too much of a personal attack for me to try to describe the failures of anyone other than myself. I’m willing to attack myself in this forum, but not my former colleagues, all of whom I still respect and a few of whom I love like my own family. But I want you to remember the “we” because otherwise the rest of this post is going to seem incredibly egocentric: there’s a certain kind of self-blame that’s really self-aggrandizement, and though I regard my own failures as critical, even the most deluded version of the story couldn’t claim it was all about me.

So. I failed as a person. I failed the team. I was responsible for many elements of our strategy, execution, culture and management, and those decisions aren’t the ones I regret. What I regret, to the extent that I’m capable of regretting such a rich learning experience for me, is giving up. I don’t mean at the end, when I was tired and disillusioned and looking around at a company I didn’t recognize and a future I didn’t want to live. A lot earlier than that, I gave up on people that we needed, people who were flawed and fragile but necessary. I let people fail, I let people go, I let people hide in their illusions and fears, I let them give up because I’d already given up.

The irony was, when I joined the company, I was supposed to be an experienced hand that would bring some sanity to a crazy world. But I indulged my own worst instincts - throughout the craziest times, when I could’ve done the most good, I just brought more crazy. I was having fun, but I chose my own twisted growth over a higher goal, and at times I was just plain mean or selfish or drunk. I really wasn’t ready for the opportunity that Linden Lab presented to me. I really wasn’t the guy I should’ve been when I got there; I didn’t know what I needed to know until I left.

Too many of the key leaders at the Lab were working through similarly damaging personal limitations. You might ask whether this really points to a failure in culture or hiring or leadership, and that would be a fair question. It’s true that Linden had a way of hiring certain kinds of people and forcing them to confront their own deepest flaws – but I think that’s beautiful, a feature not a bug. What we needed was one or more or all of us to conquer our flaws, to enable the entire team to rise above the limitations of each of us. But none of us defeated our own demons, and so all of us perished.

I’ve been gone from Linden Lab for over two and a half years, and still my failure haunts me. The last day of the year is always a good moment to come to terms with the passage of time, and this New Year’s Eve I’ve decided I should finally accept the fact that I’m never going to let it go. I’ll try to reach peace through the zen realization that peace is unattainable.

Slate published an article titled “Why Second Life Failed” that also, like this post, is not an elucidation of reasons why SL failed – but unlike this post, it is not an authentic attempt to support the proposition that SL indeed failed. It is simply an effort to market a new book by posting an article with a catchy headline. There is an unavoidable paradox in that any marketable headline with the structure “Why [X] Failed” must use for X something that has first achieved at least some significant success, otherwise the title would be too obscure to attract readers. I started a company called Bynamite that folded after less than two years – no one writes articles titled “Why Bynamite Failed” because no one’s ever heard of Bynamite.

This mild paradox isn’t sufficient defense for SL’s ardent users and thoughtful critics. As is often the case with posts about SL’s demise, the comments to the Slate article are full of well-informed, intelligent and passionate conversation that puts the original article to shame. At Terra Nova, Greg Lastowka suggests that SL remains fertile ground for study, with the pointed rejoinder that “Second Life never failed – the media reporting on Second Life failed.”

As a former Linden, I appreciate the desire to insist that Second Life hasn’t failed. I joined Linden Lab in 2005, at a time when we had a few dozen employees and registered users in the tens of thousands. By the time I left four years later, we had around 7 times the number of employees, several hundred times as many users, and almost a hundred times the revenue. It certainly felt like success to me. I left sated with a feeling of accomplishment, and great hope for the future of Second Life.

But I also left feeling depleted. We had stumbled our way from obscurity to something like prominence, but I didn’t know how to take it to the next level. We weren’t making progress despite having bountiful talent, desire and resources. We had a beautiful company, a real culture of beauty and love, genuine emotion for each other and for the world we were helping to build. And it wasn’t working, not well enough and not fast enough and not big enough.

Perhaps there never was a next level. Perhaps it was always the destiny of Second Life to be an innovative niche product for a select group of people, a worthy subject of serious study, a constantly evolving emporium of edge cases. Maybe we should have just hunkered down, and focused on maintaining an elaborate playground for only a select audience of passionate and creative people. We could eke out a fine living, and damn the rest of the world who just didn’t get it.

But I couldn’t damn the rest of the world, because dammit, I’m from that rest of the world. I was never a true Resident of Second Life; I was a visitor, an outsider with the good fortune to see the incredible things that people can do in a truly free environment. I was inspired, amazed and delighted by Second Life – as well as occasionally revolted, offended and demoralized – and the diversity and depth of this experience was a revelation to me, one that I believed that everyone can appreciate.

And I still believe that, which is why I have to accept that Second Life has failed (so far, we must always say so far). The reality is that Second Life is still a niche product, and to deny that I wanted it to be something more would dishonor the heartbreaking glory of our ambition. It’s fair to say that Facebook became our second life, but it’s also shortsighted. Not so long ago, people laughed at the proposition that anyone wanted to maintain a virtual presence online that could form the basis of social interaction. Facebook did put an end to the dismissive chuckles on that topic.

But it’s equally laughable to say that this is where we’ll stop, that the final destination of online interaction consists of wall posts and text messages in two dimensions. I still believe that there’s no sensible way to define an impassible boundary between where we are today and a time when people “live” in a three-dimensional virtual environment. I’m still a true believer, an old true Linden in that way. So I have to admit that Second Life has failed.

So far.

Praise follows death like the glowing debris that trails a comet, and the writing in the sky says that Jobs was the greatest CEO ever. A few muted voices remember that he was famously harsh to work with, but this is universally regarded as an entirely justified mania for perfection. Considering his accomplishments, it seems almost irrelevant that he denied the obligations of paternity for one child, and consciously decided that his children should know him through biography rather than time spent with him, even – or especially – in the final stretch towards death, when the remaining time must be remorselessly allotted like oxygen in a sealed room.

This isn’t criticism of a great man. It’s a reminder that many of us would willingly make the same choices, were such greatness within our reach.

We say it’s not so, and try to believe it. We encourage each other to remember family, remember health, remember that a life of striving includes the quest to achieve a full and humane life through our work. But the life of Jobs is the story of his jobs, of his one true job: making a dent in the universe through the creation of products that become a part of our lives. For his success in that, we forgive and excuse his personality defects. We cannot blame a man for failing to uphold principles that we would throw aside ourselves if only we could be assured that the universe was malleable to our touch.

Saying that “you are not your job“ is a comfort; it alleviates the cognitive dissonance between your self-image and the productive economic output you contribute to the world. The lessons of Steve Jobs deny that comfort; his strongest exhortations insist that you are all about the things you make for the world – not for yourself, not for your hobbies or leisure, not even for your family and certainly not your friends if you have any. You have to do great work, never settle, remember that each day could be your last, don’t waste time living someone else’s life.

There is no obligation to community, family or friendship in these words – though strangely, there is an overwhelming commitment to society in the desire to dent the universe, for this is not a universe of cold cosmological phenomena, it’s a universe of people, and his ambition is all about changing how people live. For Jobs, if this ambition involved sacrifices of a more universal personal nature, there is no question that it was worth it. It was worth it for him, and his efforts were certainly worth it for us.

It’s touching to see the determination with which Jobs’ sayings are repeated in the wake of his death. But the message of his most appealing words isn’t quite the message of his life. He told us to follow our hearts, to trust our intuitions, to ask ourselves if our plan for this day is how we’d want to spend our last. But those are not goals, they are only beautiful means to an uncompromising end. The goal of Jobs was to be insanely great in a world-changing way. That’s the hard part of the message to understand. All of us can hope to understand what is in our own hearts, and can hope to have the courage to follow it. Almost no one alive has a realistic ambition to change the world – what many of us think of as world changing is merely interesting, hopefully entertaining, and possibly enriching.

In an excerpt in the WSJ, Lutz phrases a classic question of executive management, about the tension between leading by example or by autocratic demand:

I had to ask myself, and still do today, if it is the proper role … to get down in the trenches for hours on end, teaching the love of perfection in the smallest details when perhaps a more impatient autocrat would simply have ordered—nay, demanded—that it happen ….

This question has been asked and debated across many industries over many years. In information technology, we’ve seen different answers at HP, Intel, Microsoft, Google, Apple and Facebook. Often within the same company, the story swings between democratic (“emergent” is the trendier term) and autocratic over time, but you could roughly say that HP and Google have been known for emergent corporate cultures, and Intel, Microsoft, Apple and Facebook have been thought of as more autocratic. The public imagination tends to favor stories based on a single personality as leader, so it is likely that every tale of an “autocratic” workplace radically overstates the effect that any one person can have on a large organization.

But still, leaders matter even in the most emergent management styles, and Lutz’s question is a deep one. The tension exists because when a leader is right, autocratic demand will always lead to the best outcome in the shortest possible time – but no one is always right, and the flip side is that autocratic demand leads to the most disastrous failures very quickly when the leader is wrong. Emergent management is an attempt to institutionalize greatness over a long period of time, a period exceeding the career length of any single leader. Lutz asks the right questions again:

But does the autocrat, no matter how gifted, create sustainable success? Or does his style drive away other capable leaders who would form a leadership team after the great man’s departure? . . .

The fact is, though, that my effort to instill into the organization a drive for perfection and customer delight in all things was successful. And still I wonder—was I right? Did I change the core of the product development culture by teaching, or did I rely too much on my own will and my considerable influence to get what I wanted?

Strikingly, Lutz is haunted by the failure of his lessons to stick at Chrysler. He had left that company secure in the knowledge that his standards and principles were permanently embedded in the corporate culture. But it didn’t work – new leadership quickly shifted the company into a bean-counting mentality, and the passion he’d invested there evaporated as easily as spilled alcohol. He thinks there will be a different outcome at GM, but it’s not clear why there’s any reason to believe this.

I find some divisions in Lutz’s dichotomy questionable: an autocratic leader can certainly get down in the trenches, and an emergent leader can certainly demand great results. I agree that sustainable success is the ultimate arbiter of greatness – but if the company doesn’t succeed through crisis points, which sometimes require an autocratic hand, then it will not have the chance to measure a track record over generations of leadership. So I would say that a company – and its leaders – have to be able to master both styles, and most crucially, know when and how to switch from one to the other.

I’m not too flexible about the term, unlike those who believe in four types of entrepreneurs. I think an entrepreneur makes a for-profit business that didn’t exist before, without the benefit of existing infrastructure. That rules out what some call social entrepreneurship, because working for nonprofit good is too different than pursuit of viable commercial enterprise. And it rules out corporate entrepreneurship, because starting a new division or business line for an existing company is very different from starting a company from a cocktail napkin.

I said different – I didn’t say harder or more admirable. The numbers probably say that social and corporate efforts are harder, as there seem to be more new companies than there are new social efforts or successful businesses started within large companies.

I’ll differentiate some more: Although I’d include both the fruit stand owner and the tech company titan within my view of entrepreneurs, I don’t think they’re the same in most ways, even at their respective starts. Fruit stands aim for some daily living, selling a well-understood product, within a social infrastructure that understands and supports the concept of buying and eating fruit. The most extreme tech founder dreams of all the money imaginable, with a product that initially seems bizarre, with no apparent revenue model, distribution channel, or plausible customer interest. Although these two kinds of people have something in common, they have a lot more differences. So “entrepreneur” isn’t a binary label – it’s possible for one entrepreneur to be more entrepreneurial than another. Labels are most useful when we use them to distinguish and measure concepts. I don’t like seeing a meaningful word diluted to appease egos or ease conversation.

Because the company I work for now is fairly well known, I should doubly-triply-quadruply emphasize that this is all my opinion, and moreover it’s my opinion about me. I can believe that for many entrepreneurs, coming to Google doesn’t mean that your days as an entrepreneur are over – those entrepreneurs are more entrepreneurial than I ever was, which I’ve admitted isn’t a high bar.

And although I’m still a startup guy at heart, I can believe that Google can in important ways return to its startup roots, even though I’m naturally inclined to disbelieve that a large company can have the “energy, pace and soul of a startup.” But I’d say that you have to measure the energy and pace in the context of the scale of the ambition. People who think that Google is slow or that the competition is anything other than the unknown future are probably underestimating the enormous opportunity remaining in the information economy.

Ah, but that last bit, the “soul” of a startup … what does that even mean? That’s tricky, and probably the topic of another post.

As a startup founder, whenever anyone tells you that your idea won’t work, that it won’t be popular, that no one will care, that no one wants it – you hear all of this as: “Your baby is ugly.”  Founders invest time, money, emotion and the goodwill of their friends and family into the company; it really can feel like raising a baby. It saddens me that I haven’t been able to find a home for our pride and joy.

I couldn’t even get the company “acqhired” - that is, have our company acquired merely in order to hire Ian and me.  That kind of “hacquisition” seems pretty common around Silicon Valley these days, but I failed to get it done.  It hardly makes a difference though – a hire wrapped up in a sale is merely a mask.  Our goal wasn’t to build a resume in the form of a company, we were aiming a lot higher than just getting hired.  It’s important to own your failures, and this experience has certainly given me plenty to learn from.

But I’m proud of what we were able to do in the time we had.  We put out a beautiful service that received nice launch coverage and some industry mindshare.  Serious publications highlighted Bynamite as a useful tool and a company to watch.  We took a little shot at the opportunity and had good enough results to seriously question why we won’t take it further.  I’ll probably detail and try to answer those questions in a later post, but not for a while.

In the meantime, I still have a passion for the relationship between online advertisers and consumers.  To the extent my new duties allow, I’ll keep Bynamite up as a hobby project outside of work.  I’ll consider selling the assets to someone who cares about the product, or perhaps even turn it into an open source or otherwise community-supported effort.  If you have any ideas about what to do with Bynamite, feel free to comment here or send me a note via LinkedIn.

Today’s example: The Internet is a new platform for consumer media. That’s a striking revelation . . . in maybe 1994 or perhaps as late as 1998. This may be hard to believe today, but there was a time when it was revelatory to describe the Internet as a new form of popular media, rather than as a niche technology.  Today most people would declare the Internet as the second most important form of media (behind TV).  It seems so obvious now that the Internet is a consumer media delivery system.  And yet, it’s easy to find ways to overcomplicate this simple picture.

Take for example the argument over whether The Web Is Dead. Putting aside the easiest objection – that many claims of death are exaggerated – the thesis basically says that “the Web” was supposed to be this great open playground that changed the world forever, but a variety of closed systems now threaten the promised paradise. We are supposed to get hysterical over the idea that content that was free on the Web will not be free forever, and that there will be special access channels that only some people will be able to afford.

But the Web isn’t dying, it’s just evolving the way that consumer media have always evolved.  The history of consumer media is littered with similar patterns of free and paid content, amateur and professional content, sponsored and bought content. There are many examples where a new medium was popularly established with free content, and evolved into a tiered system of both free and paid content. Look at television – once it was free (i.e. ad-supported), then cable TV came along with both an ad-subsidized paid model (basic cable) and an ad-free paid content model (e.g. HBO, PPV).

The same thing is happening with this wondrous new medium of the Internet, and the most wondrous thing of all is that anyone thought it would be any different.  The Internet is wonderful and has changed many things in the consumer content landscape, in terms of interactivity, variety, engagement, and low production and distribution costs. But one thing it hasn’t changed is that consumer media, as a whole industry, will always trend toward payment for quality content, and toward concentration of media power in the hands of a relatively small number of players.

I wish that weren’t true, but it is true today and will always be true for as long as we remain human beings.

We like to think that technology frees us from the scarcity-based economics of the past.  And it’s true that changes in scarcity can free up new business models.  But there is no kind or amount of technological advancement that can eliminate scarcity in two areas:

• Quality. Quality content is by definition scarce: no matter how great the aggregate improvement in overall quality, there will always be some portion that is better than the rest. The development and application of new technology to content only heightens the divide, not flattens it – because the quality of the content includes not just artistic merit but its presentation and convenience to the consumer.
• Attention. Human attention is limited, both in the aggregate and for any individual. No matter what automatic aggregation, filtering, or curation tool is ever developed, we can’t radically increase the finite amount of real human attention for consuming media. Even if we develop technology that actually stops time, our biology dictates a finite attention span – there’s only so many hours of media a brain can absorb in a day, no matter how long the day is.*

Since quality is scarce and attention is finite, there will always be an opportunity to charge money for the best content – and since this includes charging for the best quality presentation and delivery, it means that there will necessarily be a two (or more) tiered Internet. You can call it surrender, you can call it the death of the Web, you can call it whatever you want – but recognize that it’s progress, it’s evolution, it’s the future as well as the past.

——-

On a related (and more obscure) note, lately there’s been a lot of conversation about the evolution of certain parts of the venture capital business. I can’t do the whole conversation justice – but basically the narrative is that there is a new mode of investing in the consumer Internet sector, with smaller but smarter initial investments, giving rise to an expanding birthrate of web startups, and raising the specter of a seed investor bubble.  Again I’d ask, should we try to understand all this as a new phenomenon, or is this just a different variation of a familiar pattern?

Consider that a lot of “Consumer Internet” is no longer mostly about technology development, it is about media content development. From that perspective, a lot of the shifts in venture investing are about a certain class of savvy investors becoming media investors instead of technology investors. They’re not evolving to some kind of new model of investing, but cycling into the model of investing that you see in more mature content production businesses.

I think that consumer Internet investors will become more and more like television producers and financiers, and less like “hard” technology investors.  If that’s right, you’ll stop seeing conversation about equity vs convertible debt, and will instead see a move toward the revenue-sharing model that is common in the TV and movie industry.

Some people will regard this theory as idiotic, controversial and even demeaning (if you think being a TV producer is worse than being a VC), but for me it’s just doubling back to the basic insight that the Internet is a new platform for consumer media.  Now that the original mid-’90′s revelation has come true, you can expect that the investment economics will repeat old patterns more than they create new ones.

——-

* I realize that there are people who believe that in the future, technology could enhance brain function as well as create endless renewable energy – making essentially limitless time and capacity to enjoy leisure activities, including consumption of media.  Without opining on the likelihood of that future, I’d just note that it’s a future in which we are no longer human, as we understand humanity today.

We launched our beta product at Bynamite about a month ago, and were lucky to get covered in the New York Times.  I wish this post could be about “How To Get Covered in The New York Times,” because that would be some really valuable information for the startup community.  But we were simply very lucky – a friend introduced us to a potential business partner who was really interested in our story, who introduced us to the Times reporter, who had been thinking and writing about related issues for a long time.  Everyone in the chain was very thoughtful and patiently dedicated to understanding what, if anything, is interesting about what we’re doing.  Sometimes the pieces just fall into place, and that’s what happened here.

Before that series of fortunate events, we had been preparing a more traditional scrappy startup PR strategy, which I learned from the interwebs.  Balsamiq‘s marketing advice and launch homework are invaluable; in particular I was focused on the 10 PR tips from Weebly.  We had identified about 45 blogs, big and small, that I intended to contact one by one, with the holy grail being coverage in one or more of the major tech blogs – TechCrunch, Mashable, ReadWriteWeb, GigaOM and VentureBeat.  Just as I was starting to reach out to the list, the Times reporter confirmed that his story was very likely to go forward in the Sunday business section.

At that point, we had a decision to make.  On the one hand, the TechCrunchosphere is the place to launch consumer tech products – the audience is intelligent, opinionated, and early adopting.  This is an audience that understands that startup companies launch “unfinished” product.  It’s not a good idea to get mainstream press before your company is really ready for it.  On the other hand, our product goes contrary to the tech orthodoxy that had largely proclaimed that no one cares about privacy.  Would TechCrunch readers be the wrong audience for our more mainstream message?

Although these are complicated concerns, we didn’t take long at all to decide, and we were swayed for one irresistible reason: it’s the New York freaking Times!  As much as I’m with the punditocracy that declares newspapers dead, I just couldn’t help myself – I grew up reading the Times, and I really wanted to see if we could get in the paper, the good ol’ physical, dead-tree paper.  So we saved the blog efforts for a later time – hopefully after we’ve learned our lessons from the beta and are ready to relaunch with a more complete product.  It’s sort of a topsy-turvy press strategy, and there’s probably a whole ‘nother post in whether or not it’s stupid, but that’s not the point here.  The cool thing today is that we get to compare results from different PR launch paths.

Here’s the Visits graph from Udemy’s launch:

Here’s a similar graph from Bynamite’s launch:

Here’s the referral chart from Udemy:

And the corresponding chart from Bynamite:

Now, the point here is NOT to say that Bynamite PR is any better or worse than Udemy PR!  That kind of comparison would draw all sorts of wrong conclusions, not least because I’ve cheated here by including 30 days of data to Udemy’s 23 days.  Also, note that Bynamite is a browser extension that records a page view when the extension bar pops up (that’s why the Avg. Time on Site is absurdly high).  Different products are going to have lots and lots of reasons for different metrics.

But the conclusion I’m willing to draw is that getting covered in the Times is roughly equivalent to coverage in the major tech blogs.  Not an order of magnitude higher, and certainly not smaller.  So for anyone hoping to confirm the relevance of mainstream media, I suppose that’s a victory of sorts, though it’s just as accurate to be amazed that media sources that barely existed 5 years ago are now equivalent to the “paper of record” that’s been around for 150 years.

It’s also interesting to note that both Udemy and Bynamite got a secondary bump 5 or 6 days after the original coverage.  In Udemy’s case, that bump exceeded the initial coverage, and was almost entirely driven by a mention in one source, Thrillist.  Bynamite’s secondary bump was smaller than the first, and was a result in pickup by many smaller sites that focus on covering downloadable apps.  Also like Udemy, our traffic has settled down to a much quieter pace, though significantly higher than the near complete obscurity prior to the press coverage.

I’m still digging through the details – and by the way, could use some help, if anyone reading this wants to drive through Google Analytics with me, let me know!

Pleased to meet you
Hope you guess my name
But what’s puzzling you
Is the nature of my game

Facebook may be overplaying its hand, but do we really understand the game they are playing?

We’re mad at Facebook because we feel like helpless pawns in an environment we need but don’t control.  Even though I’m included in that “we,” I have some sympathy for Facebook because I was once on the other side of a similar divide between the consumer and the company.

At Second Life, we (this time I mean we-the-company) had a seemingly omnipotent grip on the environment our users needed.  In theory, we knew our users intimately, knew who their friends were, knew where they went and what they did.  We owned their means of payment and communication, we set policy for their leisure and commercial activities.   This is a level of control that Facebook dreams of, not in a virtual world but for the entire Web . . . and it’s scary that they actually seem to be on the path to getting there.

Some of our most devoted customers were also our most vocal critics, because they were so deeply invested in the world they helped create – and every change in the service affected their lives deeply.  A few critics assumed that since our every change seemed to hurt some users, it should be easy to build a competitor that would satisfy all users.  But Second Life “killers” and open-source alternatives never gained traction, while Second Life continues to grow long after the hype cycle forgot about virtual worlds.

One lesson in all of this for me was that most critics and competition never really understood our business.  Our operation was so multifaceted and complex that every competitor only focused on the one or two things that they believed were important, and individually or collectively they never assembled a cohesive whole that could challenge our market dominance.

I’m seeing the same thing today with Facebook’s critics.  Competitors who think an open (source or otherwise) alternative to Facebook will bring down the giant simply fail to understand the business they are competing against.  Open identity, open interests and open social graphs are very difficult to grow and support without an overriding service reason to spur adoption and use:  People have an online identity and social graph because of the services they use, not the other way around.

I can’t speak to the question of evil, but I do have a mental benchmark for the next Google, and it isn’t simply about being the next giant tech company.  The next Google would have to create an entire sector of economic activity, keeping a dominant position worth many billions of dollars while also creating many billions of dollars of value for other companies.

Before Google, the commercial Web was motley mix of emerging media, with some interesting economic opportunities in portals, ecommerce and auction.  Google created and dominated search advertising, but the utility that search brought to the Web was a major driver in the overall economic growth of all advertising on the Web, including display advertising.  Today the entire commercial Web runs on advertising, and Google helped create many more billions of dollars than it captured for itself.

If Facebook merely becomes the world’s best ad network, they would not be the next Google.  They would simply be the biggest winner in the economy that Google helped create.  They could even suck all the oxygen out of Google’s room and thereby kill Google, but that wouldn’t make them the next Google any more than John Wilkes Booth was the next Abraham Lincoln.

I think Facebook’s ambitions go far beyond advertising.  I’ve got no crystal ball showing the future, but the analogue from the past that seems relevant to me is television.  TV was once a wondrous new technology, giving rise to a new world of entertainment and news media.  Businesses quickly hooked the economic engine of advertising to the media of television, and decades of fantastic growth followed.  It once seemed a given that television would hold a central place in our media lives forever, and that it would always be free.

And then cable TV came along.  You might not remember this personally, but cable TV was initially a terrible affront to consumers.  People had become accustomed to getting a huge amount of media for free, and now these horrible new companies wanted outrageous fees every month for the same kind of media.  This could be very painful for a consumer with devotion to a particular kind of content, for example a sports fan seeing important sporting events disappear into the hole of paid TV.

Could the same thing happen to the Web?  An entire generation has become accustomed to Web media as free media, and assumes that will be true forever.  But cracks in that assumption have appeared recently.  We’re seeing a new wave of paid content efforts on the Web.  More importantly, we’re seeing platform owners make good money from Web-like content, like Amazon with Kindle and Apple with iPhone/iPad.

Amazon and Apple have shown that you can make money from digital content if you own all the important parts of the value chain, from digital content rights to an ecommerce store to a payment service to a physical device.  Facebook could be about to find out whether you really need the last link of that chain.  They might not need control over the physical device, because they have something even better in the social graph and identity management.

Facebook knows who you are and knows who your friends are, and they own that information in a way that no one ever has before.  Add in the right content relationships, a payment system, and a universal interest indicator, and that becomes a complete enough platform to enable more paid content on the Web.  A hidden key may be that their payment system is a prepaid credit system, which allows small transactions that would otherwise have burdensome costs and usability barriers.

That may sound a little abstract, so I’ll offer up this fanciful example:  I go to visit Pandora for music, and Facebook and Pandora immediately know it’s me.  They know what kind of music I like, and they know what kind of music my friends like, so they are able to recommend some really great music for me.  Right there I have already participated in a content transaction:  I have offered my valuable tastes and contact information to Facebook, who handed that info over to Pandora – you have to think that Facebook gets paid for that.

And Pandora was glad to pay, because I really like that music they recommended.  In fact, I liked it so much that now I’m going to sign up for a Pandora subscription.  I’m about to reach for my credit card when I realize, hey, I can pay for this with Facebook credits!  Oh, I see I’m a few credits short.  No problem, I’m going to go this this Facebook game, SheepWorld, and rack up the extra FB credits I need – then back to Pandora to pay.

A bunch of little transactions happened in that scenario, and none of them actually involved me pulling out my wallet.  In fact, it seemed like fun, it didn’t seem like I was paying at all.  I was able to participate in a new economy because I’m a Facebook user, and now I’m getting used to paying for premium content.  And when the New York Times puts up its paywall, I’m not going to care so much because I’ll be paying with Facebook, which separates the media consumption experience from the payment experience.

Sound a little farfetched?  Could be.  But there was a time when I couldn’t imagine paying for TV.  Both free broadcast and paid cable television still bring in a lot of money, but cable is a much better business.  If Facebook enables new revenue opportunities on the Web for content creators, they will enrich themselves and enrich others even more.  I won’t like it, just as I didn’t like it when I started paying for TV.  It would be the end of the Web as we know it.

Boat-burning advocate Marc Andreessen understands disruptive innovation as well as anyone.  At the very core of the startup culture that Marc helped create is a belief that small companies in the aggregate have a huge advantage over incumbents for bringing disruptive innovations to market.  A big company can’t become a small startup simply by destroying its current revenue model and firing all its employees – that would only result in a burned out shell, not a new startup.  A new startup can only be formed by innovators coming together to form a new company.  I realize there are exceptions to these statements, but they are very few and far between.  So “burning the boats” is statistically likely to be an exceptionally bad strategy for newspaper companies.

Tech writer Erick Schonfeld says it’s hard to watch the newspaper industry die slowly, noting that it could take decades for the newspaper industry to dwindle from $30 billion dollars a year down to nothing.  But Erick’s been covering startups for over 15 years, he’s seen successful startups kill the dinosaurs time and time again.  Like all of us in the startup world, he celebrates the success of startups against incumbents.  I don’t get the lamentation here – is it because the bedside deathwatch is comprised of relatives of the victim?  Who is burning the boats supposed to help, the dying incumbents or the anguished observers?

Given that the startups are going to beat the incumbents anyway, there’s nothing wrong with newspapers dying slowly.  Twenty years of slow death isn’t preventing innovation – all the innovators are outside the incumbents anyway.  But inside the incumbents are real people, hundreds of thousands of people who depend on their dying jobs to feed their families, many of whom aren’t going to succeed on the other side of the disruption.  Is there something wrong with letting those people eke out another twenty years of dead-end jobs?

This isn’t soft-hearted humanitarianism.  My heart’s hard enough to admire a capitalist system that sometimes causes individual misfortune.  But my point here is that the slow death of newspapers is an example of capitalism working correctly.  Big-footed incumbents are supposed to lose to startups.  Large companies are supposed to cling to their dying revenue streams while nimble competitors bring innovation to market.

Investors in those large companies have already “priced in” slow death – the stock price reflects the conventional wisdom that these companies will slowly go out of business.  The stock price for public newspaper companies most certainly does not price in a “burn the boats” strategy, which would result in irresponsible destruction of shareholder value, as well as damaging all those jobs and lives.

This is actually a place where brutal capitalism and soft-hearted compassion have common ground.  Newspapers are dying and no one is going to do anything about it.  For the love of humanity and capitalism, just let ‘em die a slow death.

Amusingly (and presumptuously), today’s report claims to define “True Twitter users” as active.  They say that a True Twitter User has at least 10 followers, follows at least 10 people, and has tweeted at least 10 times.

Why should we accept this definition?  Analyses like this often come from a position of functional ignorance.  I believe that only the company can have a “Truly” meaningful definition of “active” users, and there are often good reasons that the company shouldn’t waste time debating this definition with external observers.

This is especially true when a company has an evolving revenue model.  In those cases, “active” is only meaningful in the context of a business model cycle that some people call “Startup Metrics For Pirates” because of the acronym AARRR:  Acquisition, Activation, Retention, Referral and Revenue.  ”Active” is the second “A” here, and what matters in the definition is that customer acquisition efforts lead to active users, who participate in activity that they want to repeat and tell their friends about, which ultimately results in the company getting paid.

So if Twitter had zero customer acquisition costs, and tweeting was both addictive and viral (obviously, none of these things are strictly true), then the only definition of “active” that would matter is “user who tweets once.”  Or, if Twitter charged only users with 100K followers, and only users who had 100 followers in the first month ever get to 100K followers in their lifetime (again, not true), then the active user definition might be “user with 100 followers in first month.”  My dumb revenue models here are not the point; the point is that “active” only has meaning in context, and only the company understands that context, especially in a pre-revenue company.

Twitter, rather famously, has not publicly settled on its revenue model.  Undoubtedly they have dozens of ideas, and so they have many dozens of potential definitions of “active” – and they’re not obliged to share any of those ideas with you or me.  They don’t need to waste time with ignorant and disinterested people (myself included):  it’s no use picking over these definitions with people who are not deeply invested in the business (as employee or investor), and who therefore lack the information and commitment required to contribute productively to the discussion.

I call this the Chinese Menu approach (“Pick one from Column A, one from Column B . . .”): Group blogs together by thematic category, and then read only one blog in each category. Every once in a while, I’ll change up the one that I pick in each category, so I don’t get sick of the same meal time after time.

I add and drop blogs from categories all the time, and some blogs could be in multiple categories.  But the key is to just read one in each category.  This approach works well for me.  Switching up the meal selection once in a while helps keep me open to different perspectives.  I never miss anything truly essential, as great posts tend to be cross-linked extensively, or come to me by other means.  Incidentally, the same approach works ok for Twitter (though it’s not ideal).

In the startup world, failure is a badge of honor.  An honest postmortem of mistakes made along the way is greatly appreciated by the community.  For example:

• Eventvue
• Lookery
• Untitled Partners
• neotis wissensmanagement GmbH
• GameClay
• BricaBox
• MyCarpoolStation
• [unfunded idea]

The comments on each of those posts are overwhelmingly sympathetic, admiring and supportive.  Celebrating failure in context is a distinguishing aspect of our business culture versus many other countries.

In contrast, when the President of the US admits mistakes, the national and international coverage seems to imply that the admission itself its newsworthy and perhaps unwise.  Comments are largely vitriolic and incoherent.

Now, I think that failure can be overrated as an indicator of future success.  But I firmly believe that the openness to failure in business is one of the things that makes this country truly great.  It’s ironic and sad that this cultural gem does not extend into our political arena.

UPDATE 4 Oct 2010: Here’s a great list of the 25 best startup postmortems.

Watching the gyrating reports on the price paid for Apple’s purchase of music streaming service LaLa reminds me that acquisition prices are widely misreported and often misunderstood even when correctly reported.  Some people only want to know one number – the price paid – without caring about the many other numbers that are relevant to understanding who got what:  the company’s cash on hand, outstanding debt, financing history, and other numbers relevant to the capitalization of the company.

Even the best reporting often misses one important element of the analysis:  newly issued options (or other equity) shortly before the deal.  I like to call this the “options icing” – and it’s a very important concept for understanding what really happened.  For company founders, management and especially employees, it can mean the difference between a happy and tragic outcome for their startup.  The “icing” is both icing on the cake for employees, and also a good way to ice a bad cap table.

The options icing doesn’t come into play very often, but it is more common when the acquiror is a large, sophisticated tech company that historically rewards employees with equity incentive.  This kind of acquiror understands that the future success of the acquired product is less about the technology and more about the personnel continuing to prosper in the big company environment.

Let me make up an example.  A big company has got a problem if the market value of a 50-person company they want to acquire is only $20 million, while the investors have already put in $35 million into the company.  Typically, the investors have to be paid back first before anyone else gets paid, which means that employees would get nothing, which means that the big company would spend $20 million and get a bunch of seriously disgruntled employees, who will probably leave the company pretty soon after the deal. Even if the investors agree to restructure their liquidation preference, say by half, you still have very little left over:  $17.5 million to investors, $2.5 million for employees.  Let’s say that 1/2 of the employee stake is owned by 2 founders, and then you’re down to only $1.25 million for 48 other employees.  Nobody is happy with that outcome.

Here’s where the options icing comes in.  The company could issue a huge pool of options to employees who would be critical to carrying the product forward (in any scenario, whether acquired or not).  Say they issue $10 million worth of new options.  The magic here is that a smart acquiror will be willing to pay for some or all of those new options.  Even though the company is still only worth $20 million, the acquiror could be happy to pay $30 million if the options are issued to the right folks with the right terms.

The “right terms” include typical vesting terms, so the employees receiving options are incented to do great work for the acquiror.  From the employee’s perspective, this is fair because it is a whole lot better than the stick in the eye they would have been getting under the $20 million scenario.  From the acquiror’s perspective, this is a good deal because rather than flushing $20 million down the toilet, they are making a rational $20 million purchase, with a nice $10 million compensation package that addresses the compensation disadvantage that big companies face in competing with startups.

One of the key reasons that people work in startups is that you can really move the needle for the company’s value.  In financial terms, if you are part of a startup that creates, say, $100 million in value, then it’s a pretty neat feeling to have made nothing into $100 million, and you can get rewarded handsomely for that.  But if you are in a big company that is worth $100 billion, nobody will really notice, or even be able to tell, that you added $100 million in value – it certainly won’t make much of a difference in the stock price.  And that creates a compensation disadvantage for big companies that are trying to motivate their employees with equity grants.

But in the scenario above, the big company can pay for $10 million in stock grants to motivate a relatively small number of employees to execute on a product they clearly understand.  If these employees can turn that $20 million business into a $100 million business, they will be rewarded for it in a manner comparable to their rewards if they had remained an independent company.  That kind of compensation is generally not possible to award in a big company other than in this scenario because of internal “fairness” issues.

The beauty of all of this is that it is one of the few situations in this rotten ol’ world that deal dynamics favor the rank-and-file employees.  Most corporate dynamics, especially in big deals, have a tendency to screw the little guy.  But in order for this situation to be a good outcome for everybody, the rank-and-file employees have to be rewarded in a fair manner.  Coming back to my example above, the options icing can be win-win-win all around:  The investors can get a little tip for agreeing to the restructuring and the new equity; let’s say they get $18 million, just a bit more than they would have made otherwise.  That leaves $12 million for the employees – say the two founders take $3 million, more than twice as much as they would have made under the $20 million deal.  The other employees get $9 million, more than 7 times as they would have made.  The acquiror paid $10 million more, but as described above, this is money that really makes sense to spend, and it’s more like incentive compensation than it is acquisition consideration.

And this deal gets reported as a $30 million price paid.  But really from the right perspective it should be regarded as a $20 million deal.  Now, I am not saying that anything like this is what happened in the Apple-LaLa deal – actually the discrepancy in the reported numbers is too large to be explained by options icing alone.

A little while ago I suggested that online privacy concerns are best addressed by free market solutions, not governmental regulation.  I’ve discussed the topic with quite a few entrepreneurs, investors and professional marketers, and the overwhelming view in that group is that regular consumers just don’t care about online privacy.  ”They” say:

• privacy is too complicated a topic for consumers to understand
• no one reads privacy policies
• consumers can be distracted from privacy concerns with the offer of just about any shiny object

Much of that might be true – but I also took the time to talk to a bunch of “regular” consumers.  And these things are definitely true:

• consumers know that their privacy is being compromised by many online services
• consumers do not like being taken for granted
• consumers will avoid services that abuse their information, and will seek services that use their information properly

These two sets of “truths” are not mutually inconsistent.  To me, they add up to:   Online services can gain a competitive advantage by giving consumers the most sensible default choices along with the right advanced options for privacy – make it simple, but make it right.  I think Facebook believes this, and that’s why they keep tinkering with their policies.  They understand that a lot of their initial attraction was a result of making different privacy assumptions than more open services like FriendFeed and Twitter.  They know that even if no one ever reads their privacy policy, if they make the wrong choices about privacy, they will lose users.  As they saturate their available audience, they have to figure out how to strike the right balance among their different demographic bases, all the while competing with the advantages that more open services have.

These are extremely nuanced choices, but getting them right makes the barrier to competitive threat all the more defensible.  And these are product choices; this is something that many I’ve talked to misunderstand:  people think that this privacy stuff is just legal mumbo jumbo or regulatory mishmash.  That’s plain wrong – laws and regulations are just the cart behind the horse.  In a social product where community is paramount, policy choices are product choices.

The tech-über-alles crowd would have you believe that “de-indexing” from Google would be suicide for any publisher.  The assertion there is that Google drives the majority of web traffic, so if you’re not findable through Google, you might as well not be on the Internet.

But that assertion flies in the face of another observation from the technoscenti – social media like Facebook and Twitter are becoming increasingly important as traffic drivers (though this importance may be overhyped).  We may be heading towards a future where the links are shared through social media are more valuable than search links.

More importantly, and against the prevailing wisdom in some circles, content still matters.  People use media services because of the content on it.  Other factors are important too:  the features must be complete, the UI has to be easy, the price has to be right, yadda yadda yadda.  But would any of those other factors make up for terrible content?  No, content is, if no longer king, still the jewel in the crown.

If Bing is able to be the exclusive search partner for the right content, Google is dead.  Of course, what’s “right” can vary quite a lot from person to person.  For me, it’s as simple as two publications:  If the New York Times and Wikipedia are de-indexed from Google, I’m going to stop using Google in favor of the search engine that has those two.  I might think it’s unfair, I might think it’s a triumph of soulless MBAs over tech heroes, I might think it’s the desperate grasping of dying empires.  But I want the content I want, and those principles aren’t enough to prevent me from switching.

Bing doesn’t have to make deals with every content provider, just a dozen or so critical ones that will cause another 40% market share gain (they’re at 10% now).  Sure it’ll be expensive to acquire the best content, but Microsoft’s got more cash than Google.  Once it’s 50/50, it’s anybody’s ballgame but the advantage goes to the one who has the content.

I’m pretty sure that Google is not going to sit back and smugly assume that Murdoch’s gambit will fail.  They’re going to get involved, they’re going to try to start locking down their own partnerships.  If I were them, I’d start with Wikipedia, one of the most important search result destinations on the web – it’s in the top five results of just about any search you do.  Sure, they’re a non-profit, but non-profits need money too.

I was born in New Jersey, grew up about 45 minutes outside of the city, and went to school and started my career in NYC.  I’ve been out in the San Francisco bay area for over a decade now, and I’m firmly rooted here with family and career, but the thought of going back to The City (the one and only “The City” – pretenders begone!) still occasionally buzzes in my head like a bee in a speeding car.  However, on a trip back to New York last week, I realized that one of the things that prevented me from moving back is my own very New York attitude.

Over the past few months, a few New York based technoscenti have carried a conversation about NYC as a startup environment.  Chris Dixon said conditions are ripe for a new NYC tech revival, Fred Wilson and Charlie O’Donnell agreed but noted that NYC has been a strong tech scene for years, and Dixon and Wilson came together to agree again that the NYC startup sector is special.  All this caused me to reflect on why I left the city that I love to pursue a tech career in Silicon Valley, and why I’d do it again.

It all goes back to why I went to NYC in the first place.  I was learning the law, I wanted to be a dealmaking lawyer.  And while there’s law and lawyers all over the world, the pinnacle of the practice is in New York.  Routine transactions in New York would be considered fantastically complicated almost anywhere else, and complex transactions in New York are so far above other places that they can’t be considered the same category of endeavor at all.  So if I was going to be a lawyer, I had to try to do it in the belly of the beast.

And it was a great time, but after a few years I realized I wanted to be more connected to the creation of something from nothing, rather than the financial engineering of something into vast amounts of money.  That meant working in startups, because startups aren’t about money but about value creation (a distinction often lost on New Yorkers).  So I shifted the path of my journey, but I retained that New York attitude of wanting to play on the biggest possible stage, and in the startup world, that meant going to Silicon Valley.

There are other great startup scenes in the world, and New York is certainly a special startup environment.  But if you’re a stage actor, you don’t go to New York dreaming of playing Off Broadway; you dream of your name in lights on the Great White Way.  Because I grew up as a New York dreamer, dreaming of a startup career meant leaving New York for the biggest and baddest startup scene in the world.

It’s all a bit ironic, and I’m not saying this “big stage” attitude is right.  In fact, it’s almost certainly not a healthy way to live.  A healthier attitude would be less entranced with the size of the stage, and more focused on the production and your role within it.  I think that’s the attitude held by Chris, Fred and Charlie, and I really look forward to seeing those guys continue the public conversation (and private work) about making New York into one of the great startup locales in the world.  For those interested, Elie Seidman is another good new voice in the thread, and of course Joel Spolsky is a longtime stalwart for software engineering in NYC (or anywhere).

The shocked reaction misses an important point:  Everyone believes that investments in companies like Twitter are likely to fail, including the investors in Twitter.  For the most part, people who invest their money in companies like Twitter are not putting their life savings into a single company; they are investing their portfolio (or an allocation of it) into high-risk, extremely-high-return-potential companies.  For that high-risk portfolio, it could be rational to invest in companies with a 90% chance of failure, if there is sufficient return for the other 10%.

Now, there aren’t many actual portfolios that are (intentionally) structured with any allocation to a class of investment with a 90% failure rate.  But it would be completely typical if every single non-employee investor in Twitter made their investment from an allocation that has a greater-than -50% failure rate.  In other words, most Twitter investors believe that it’s likelier than not that Twitter will fail.  (Here, “failure” means that the investment will fail to reach the modeled return, not that the company will completely go out of business.)

It’s easy to say that Twitter will probably fail, but how many critics are confident that there is a less than 10% chance at a 10X return?  Investors in Twitter don’t bank on Twitter, they plan that either Twitter or one of the other companies in that allocation of their portfolio will make an outsized return.  Many of those investors have been right time and time again about their projected portfolio performance, which means that as a reward they will continue to invest in companies that are likely to fail.

But these people seem to talk on and on about privacy with some seriously flawed assumptions.  They assume that everyone agrees on what privacy is, and that everyone wants privacy in exactly the same way.

I’ve become enamored of the comparison between privacy and religion.  Even without being religious scholars, most people have a basic notion of what the word “religion” means.  And most everyone understands that different people can have very different views about how to practice their religion, or whether to practice any religion at all.

Privacy is the same way, isn’t it?  There is some shared understanding of what the term means, but the specifics of the meaning and practice of privacy can be very different among different people (especially across generations).  Some people don’t believe privacy is important at all, choosing to live without it.

Both religion and privacy deserve the protection of our laws, and for very much the same reason:  the practice of these matters according to one’s own belief is essential for building and maintaining a sense of meaning in life.  In simpler terms, a personal view of these things are required elements of the pursuit of happiness.

Our laws protect religion (and atheism) without saying that “religion” must include a single deity, or prayer at sunset, or robes or hats or ritual.  It’s a mistake to think we should protect privacy by defining exactly what data people should consider private.

Breaking my tradition of linking privacy posts to ’80s songs, because this early ’90s song has perfectly apt lyrics:

Every whisper
Of every waking hour I’m
Choosing my confessions
Trying to keep an eye on you
Like a hurt lost and blinded fool, fool
Oh no, I’ve said too much

The New York Times thinks so:  just since I’ve been paying attention, I’ve noticed – 1 2 3 4 5 6 7 8 – eight articles about the threat to consumer privacy posed by increasingly effective online behavioral ad targeting.

Jeremy Liew is concerned that the recent public interest push for privacy regulation will threaten startup media companies, suggesting that the ad networks should band together to lobby against online privacy regulation.  He says “While it is always hard to argue against privacy, the impact of this level of restriction would be enormous for companies relying on online advertising.”

It’s not that hard to argue against privacy, it’s just . . . delicate.  And I think simply saying that a lot of money is at stake isn’t enough of an argument.  So I’ll try to make a better argument for why privacy legislation of online advertising is likely to cause more harm than good.

I’m actually a huge fan of the Electronic Frontier Foundation and Consumers Union, and I think their hearts are in the right place on this.  I’m generally in favor of legislation that protects consumers from predatory practices in the marketplace.  But although privacy is a special value, it is not something that is well served by detailed regulation.

The problem is that privacy means many different things to different people, so everybody’s expectations can be quite different in terms of both substance and process.

The substance of privacy is the content of what you want to keep private.  Some people don’t care if you know whether they are male or female, but they don’t want to reveal their age.  Some are ok with gender and age, but not job and income – etc, etc.

The process of privacy is about the availability, collection and use of the information.  Some people want to opt-in to every interaction, some prefer to have opt-out control.  Some are ok with information used in the aggregate but not the individual, or even vice versa.  Some are ok with information being used by private parties, but not the government, or for a day or a month, but not a year or a decade.  Etc ad nauseum.  Few of us are ever thinking about exactly the same thing when we think about privacy.

Privacy may be a fundamental right, but it’s more like the right to freedom of religion than the right to trial by jury.  The latter is a specific procedural right, which we want everyone to have in a very clearly defined way.  The former protects an abstract and highly personal set of values, which each person may regard in a different way.

In the US, we don’t protect religion by telling people what it means; we protect it by saying that the government won’t promote any particular form of religion, and people can exercise any form they choose.  The failing of the public interest proposal on online privacy is that it presumes to define privacy for everyone.  That’s a dangerously unsophisticated view of a standard that varies from person to person and evolves across generations.  A time-traveler from before the Internet would not recognize what the average Facebook user calls “privacy.”

So how do I think privacy concerns should be addressed?  Well, by the market, of course. Don’t get the wrong idea:  despite my love of entrepreneurism and therefore capitalism, I don’t believe that the market is infallible, nor do I believe a free market must be unregulated.  But where you have complex consumer preferences and an infinite variety of potential solutions, a market is often the best way to satisfy the most people.  Think again back to religion:  people basically make their religious choices in a free market as well.

Consumers should have a large variety of choices about how their personal marketing-relevant data is collected and used by advertisers.  The role of governmental regulation here should be limited to traditional consumer protections about clear and full disclosure, contracts of adhesion, and anti-competitive practices.

The government just needs to make a level playing field.  People do care about privacy, and companies that can address those concerns correctly and creatively will make a lot of money.   And that matters not just because it’s a lot of money, but because it’s a case where consumer interest and the pursuit of money can be aligned.

[Apparently I've decided that my posts on online privacy must be titled by reference to 80's hits.]

But my thinking about this whole conversation is best summed up by the immortal (and surprisingly moral) William Munny:  Deserve’s got nothing to do with it.  People talk about venture capital compensation as if there is some moral justification for what they make, or conversely a moral reason why they shouldn’t make their money.

Now, I don’t belong to the amoral school of thought that says that people “deserve” whatever the market will pay them – sometimes the market is wrong, sometimes the conditions are unfair, so sometimes there are outcomes that are morally unjust.  However, this is not one of those times.

Venture capitalists negotiate their compensation terms with extremely sophisticated investors.  Those investors are willing to pay VCs an amount that still gives the investment portfolio an expected return that is correct at the time of projection.  Sometimes the investor projects incorrectly, but that’s not a moral misjudgment, it’s just people not being good and/or lucky at their jobs.  And if the VC sector underperforms expectations, compensation will get adjusted over time.  Deserve’s got nothing to do with it – this is a case where the market is perfectly capable of taking care of itself.

Dixon emphasizes that the most important thing about equity grants is the percentage of the capitalization granted, and Wilson adds that the implied valuation of the grant (number of shares times share price of most recent financing) is also useful.  While these things are true, my objection is that the probable audience for this advice is composed of prospective startup employees, and the use that they will make of this advice is to try to choose a job based on the value of the equity grant.

This is a bad idea for two reasons.  First, valuing an equity grant is only secondarily about determining the percentage of the company – it is primarily about determining the exit value of the entire company, an exercise at which professional investors in the field routinely fail. (Fred himself will tell you that 2/3 of venture investments in a successful fund will break even or lose money.)  If you are thinking about joining a startup, and you have 2 choices, you are very unlikely to have any rational basis for believing that 0.1% of one startup will be worth more or less than 0.2% of the other.

Second and more importantly, if you want to work in a startup, you should not choose where to work based on compensation.  You need to pick the project and the people that get you most excited, period.  Without a belief in the mission and an authentic fit with the team, you will not be successful anyway, so any compensation will be a waste of your time and their money. If you have other employment options, you should explain that to the place you want to join, and if they want you they will make the comp work within their range, and you should accept.  Or, if you simply want to work at the place where you will be paid the most, you should not work at a startup. (Don’t be offended, this isn’t a test of character or a judgment of your soul – if you’re not a startup person, that doesn’t make you any worse or better than the people who are.)

Dixon actually gives really good advice in his post, for those who are paying attention:  ”If management tells you the number of shares and not the total shares outstanding so you can’t compute the percent you own - don’t join the company!”  As I’ve said before, the reason to have a detailed conversation about equity comp with your manager is to test management’s clarity and forthrightness in general – not because you have any hope of making a correct equity valuation.

I would be willing to bet that neither Dixon nor Wilson has ever made a choice of company to join or invest in based on equity percentage.  They made their choices from their interests in the market, the product, the team – and then later, after a decision to join/found/invest has essentially been made, they did some optimization around the equity.  Choosing the other way around is about relying on luck, not successful choices and preparation.

[Bully for you if you know the reference for the title of this post!]