Category: business

somebody’s watching

~ ginsu ~ Leave a comment

There’s a certain techno-futurist vision of personalized advertising where constant surveillance leads to complete erosion of privacy, all in the service of targeting advertising to your behavior and tastes.  The most popular picture of this future was in the movie Minority Report, where talking ads creepily enveloped the hero in a wash of ad patter while he ran for his life.

adsthatseeyou

Despite this dystopian vision, I think the current level of public concern about the privacy invasion of targeted advertising could be described as significantly beneath swine flu and slightly above Lyme-disease bearing ticks.

But this year, the largest online advertisers and ISPs have really begun to show their power over consumer behavioral data.  The New York Times has been utterly obsessed with this topic, to the point where it’s somehow news when a company decides not to use a targeted ad system.  (I wonder if it there could really be such a thing as behavioral tracking so creepy that even advertisers won’t use it.  The cynic in me says that the system probably just didn’t work well enough to justify the cost.)

Consumers who are asked about privacy generally want greater control over their marketing data, but don’t know how they can achieve it.  In sympathy to this consumer demand, the industry’s leading ad networks have banded together to establish best practices for use of consumer data.  (This sympathy was perhaps supplemented by the interested attention of the FTC.)

Industry self-regulation is a time-honored method of appeasing and forestalling government regulation.  There are areas where this works just fine (in terms of industry commercial interest, if not art) – comics, movies and video games – this tends to involve public morality.  And there are areas where greed and the public interest seem destined to cycles of boom and bust and bust – some industries just don’t seem capable of operating without eventual crisis in a deregulated environment.

So will the ad industry’s attempt self-regulation turn out more like the entertainment industry’s successes with the morality police, or the financial industry’s pathological self-destructiveness?

On the one hand, the dynamics of targeted advertising share some characteristics with complex financial instruments:  advanced algorithms, proprietary trading systems, a leveraged financial return from a slight mathematical edge.  On the other hand, consumers are not in bed with advertisers in the way that they were with their bankers and brokers and realtors.  A little willful blindness made everyone happy for a while in finance, but that same blindness in advertising only covers growing consumer unease.

There are startups that tried to give greater consumer control over marketing data, but none really got a lot of traction.  The problem may have been that the problem wasn’t big enough yet.  Until everyone’s singing like Rockwell, it could still be too early.

advertising in 3 E-Z slides

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Has the Internet ushered in a revolution in advertising, or is web advertising destined to fail?

I couldn’t begin to have an opinion without some basic context about advertising, so I gave myself a crash course.  Here’s the 3 most important things I learned:

1.  Advertising has multidimensional sectors.

Two of the fundamental axes in advertising are the lines between brand and direct response marketing, and between online and offline ads.

ad status

I can’t do the differences justice here, but essentially brand marketing is intended to make you feel a certain way about a product, while direct response is intended to make you take an immediate action regarding a product.

The concepts seem simple, but whenever new media arises, it can be quite tricky to determine what kind of advertising is suited to the media.  When the Web first burst into mass acceptance, some advertisers treated this new medium as a branding opportunity, plastering their logos and flashy campaigns wherever they could.  Google was among the first to realize that direct response principles fit the Web much better than branding – deliver ads against search results and you have a natural audience to act upon that hyperlink.

But the Web continues to evolve, giving continued opportunities to make the wrong choices about ads.  When social networks like Facebook reached mass popularity, many advertisers tried to deliver targeted direct response advertising to demographics discovered through the social graph.  But “banner blindness” and the very social intent of these sites combined to make pure direct response ads ineffective.  The better strategy for advertisers in social networks is to build a community and create engaging viral media to enhance the brand.

So the lesson here is that advertisers have to make very savvy choices between brand and direct response advertising as the evolution from offline to online continues.

2.  Online and offline ad spending patterns are currently inverted.

In the excitement about the growth of online advertising, it’s easy to forget that offline is still much bigger, with online making up roughly $23 billion of a $137 billion U.S. ad market.  These numbers are even more interesting when examined along the divide between brand and direct response.

 

According to one estimate, around 75% of offline ad dollars are spent in brand marketing, while 80% of online ad dollars are spent in direct response.  Because offline is so much bigger than online, that means that direct response offline (a.k.a. “junk mail”), makes up around $28 billion.  Yep, junk mail is bigger than the entire Internet ad industry.

Now here’s a point that’s a little more abstruse, but I hope it’s worth the time to understand it:  the advertiser’s spending pattern is inverted in online vs offline.

Offline brand advertising is expensive to create, but reaches a mass audience, so the spend per viewer is low.  Take a Super Bowl ad:  a 30-second commercial can cost $4 million (for air time and a lavish production cost), but with 95 million viewers, that’s only 4 cents per viewer.  Let’s call this low cost per viewer a mass spending pattern.

Offline direct response advertising total cost is lower, but higher per person reached.  For example, it can cost $50K to produce and mail a catalog to 10K recipients.  At $5 per person, that’s 125 times more expensive per person than a Super Bowl ad!  But it works because of the targeting – those 10K people have been identified by the advertiser as being likely to be interested in the product.  This low threshold, high cost per viewer is a targeted spending pattern.

The patterns are rewired online.  Search advertising and email campaigns are direct response in that there is a clear desired action (usually a click).  Though the cost of the keyword or email campaign can be relatively low, the distribution is very broad, so the cost per viewer is extremely low –  this is a mass spending pattern.

Conversely, doing effective brand advertising on a social network requires really identifying the target demographic and crafting a creative campaign to get that ballyhooed viral explosion.  That means relatively high creation cost and a specific audience, resulting in a high cost per viewer – this is targeted spending.

So offline, brand advertising is mass spending while direct response is targeted spending.  And online, brand advertising is targeted spending while direct response is mass spending. Or at least, that’s the way it is today . . .

3.  Successful advertising tactics will seek equilibrium.

Pundits are always rushing to declare failure, or any new method the death of all old ones.  But offline advertising feeds online, and online direct response may morph into “brand response.”  Advertising, like nature, restlessly searches for equilibrium.  The story above is heading towards a more stable balance so the value of the spending better matches the returns.

ad future

It’s not controversial to suggest that offline ad dollars will move online – that’s more an observation than a suggestion at this point.  And it’s also been an observable trend that offline direct response marketing is declining at an even faster rate than offline brand marketing, because Internet direct response has rapidly become effective for larger audiences.  But I’m adding two conjectures that aren’t easily observable today.

First, online brand marketing will grow at a faster rate than online direct response.  This means that social media like Facebook and Twitter (like them, not necessarily those two) will grow revenues faster than Google.

Second, online brand spending will revert back to the offline spending pattern of mass rather than targeted, and online direct response will similarly go to targeted spending rather than mass.  I believe that dominant social media sites and practices will arise that allow brand advertisers to reach a large audience at a low cost per viewer.  At the same time, increasingly effective data collection on Internet consumers will allow data holders to sell highly targeted direct response ads at premium prices per consumer.

What does it take to get from here to equilibrium?  In monetary terms, holding the total ad industry constant at $140 billion (not a safe assumption):

  • $50 billion will move from offline to online
  • $15 billion will move from offline direct response to online direct response
  • Online direct response will grow by $20 billion, while the revenue per viewer seeks a relatively high number
  • Online brand marketing will grow by $30 billion, while the revenue per viewer seeks a relatively low number

That is a lot of money sloshing around, in a lot of different directions.  I think it’ll happen within 5 years.

best startup blogs for entrepreneurs

~ ginsu ~ 2 Comments

I once made a case for pmarca as the best startup blogger evah.  Now that I’m in the midst of my own entrepreneurial efforts, I’ve had plenty of occasion to revisit the category.

I still think no one matches Marc for the sophistication and deep experience of his posts.  But I think that once you have the background that he covers, if you are working on a startup you might want something that gives you more guidance about what you are facing day to day.  So here are a few possibilities for interested entrepreneurs:

ReadWriteWeb is running a serialized book called Startup 101 that describes the startup life cycle.  It has a number of factors against it:  the information is very broad and basic, it’s directed only at web startups, it assumes little to no experience in business generally.  Nevertheless it looks to be shaping up as a nice basic primer for first-time startup folks.

Venture Hacks has some good info, mostly about fundraising but also assorted other categories.  This is possibly the best resource for those who are mystified about how VCs think.

Eric Ries has made a name for himself around the catchphrase “The Lean Startup” – a solid summary of fundamental principles of running a low-burn, nimble business.  Much of this might seem fairly obvious to folks who have worked in modern web startups, but Eric has a really nice clean delivery of the concepts.

Steve Blank has shared the stage with Eric for “Lean Startup” presentations, so the two have a common mindset.  Steve differentiates himself with a much longer history of entrepreneurialism, which gives him great authority and many informative war stories to share.  His customer development model is highly valuable to any startup (though a bit better oriented to enterprise customers than mass consumers).

Steve’s blog has risen to another level in recent posts about how entrepreneurs can stop lying to themselves and deserve an epitaph that signify a family life well lived.  I haven’t seen any other startup blogger come closer to giving this topic the time and attention it deserves – managing the demands of a startup in balance with a rich family life is incredibly difficult.  Perhaps too few have succeeded in this to inspire many good blogs about it.

Finally, probably my favorite category of startup blog is from those who are blogging the process while they’re doing it.  Signal vs. Noise is a classic in this category, but I like to find new blogs from relatively unknown startups.  Two that I happened across recently are from the founders of Expensify and Alice.

What are your favorite startup blogs?  I’m particularly interested in finding ones from startup founders who are blogging it while they’re doing it.

http://steveblank.com/about/

entrepreneurial lobbying

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Warning:  this post is very long and concerns tax policy, and so is likely to suck your soul while you read.  However, if you have been or ever will be a highly successful entrepreneur, then I’m talking about matters that mean millions of dollars to you.  Enjoy.

We are in a time when the government’s hand in the U.S. economy is heavier than at any time since as least as far back the 1930’s.  Makes me wonder who, if anyone, lobbies in D.C. for the benefit of entrepreneurial activity?

The National Venture Capital Association has been in the news of late, as it tries to avoid Congressional and Treasury proposals to regulate “private pools of capital” – a generic term that includes hedge funds as well as venture capital funds.  Hedge fund activity in the credit markets may have contributed to the systemic failures in the financial system, but commentators indignantly proclaim that venture capital had nothing to do with the current mess.

The NVCA is the main lobbying organization of the venture capital industry, and in their stated mission and nearly all of their public policy positions, they say they have a broader mandate to “support entrepreneurial activity and innovation.”  The NVCA wants Washington to understand the VCs are not merely investors, but part of the lifeblood of the entrepreneurialism that fuels massive portions of the U.S. and world economy.

I suspect that at first the fine folks at the NVCA made this connection to entrepreneurialism because it sounds worthy and friendly to politicians, as compared to being cast as mere financial speculators.  But now this connection has become a key conceptual anchor of their argument that venture capital should be treated differently from hedge funds and other private equity funds.  Those other guys are pointy-headed number crunchers, see, who move massive amounts of money and credit with extreme disregard for our financial system.  VCs are closely involved with startup innovation, heck they are practically entrepreneurs themselves!

This conflation of VCs with entrepreneurs is even more critical in what has become the most important lobbying battle in the history of the NVCA, the fight over carried interest tax policy.  I think if more entrepreneurs understood this particular public policy issue, there might someday be better lobbying in DC for related issues that are closer to the hearts and wallets of entrepreneurs.

Briefly, VCs are typically compensated in two ways, with management fees and carried interest.  Management fees are a small percentage of the total capital commitment of the fund.  For example, a $100 million fund might have a 2% management fee, so the VCs receive $2 million per year for their operating expenses.  Carried interest is basically profit sharing on the investment.  So for example, if the $100 million fund operates for 10 years, and makes $500 million, a 20% carried interest might be applied on the profit – that would be $500 million less the $100 million of invested capital, less the $20 million of management fees (assuming 2% per year).  So 20% of $380 million is $76 million.  I’ve smoothed over a lot of variations and complexities, but this is basically how it works.

And how the U.S. tax system works – smoothing over a thousand times more variations and complexities – is that you either pay ordinary income tax of 35%, or long term capital gains tax of 15%.  Have you guessed what the carried interest tax policy battle is about?  That’s right:  carried interest has historically been taxed as capital gain, but many are now calling for it to be taxed as ordinary income.  In the example above (which would not be a particularly large or extraordinarily successful fund), the 20% difference in tax rates would mean $15.2 million less for the fund managers.  You can see why this is the Battle of the Century for the NVCA.

Now, let’s get back to this point about VCs being practically entreprenuers themselves.  In Congressional testimony, the NVCA says that venture capitalists rise above mere “financial engineers” (presumably the hedge funds and private equity guys), contributing sometimes daily management attention and real “sweat equity” into startup companies.  Some entrepreneurs may snicker at that testimony, and others may pluck their eyeballs out rather than read it.  I can freely admit that I’ve seen VCs who do make invaluable contributions to their portfolio companies, far above merely providing money.

But if the NVCA really wants entrepreneurs to view their efforts to “support entrepreneurial activity” favorably, they ought to extend their views on tax policy to the issues that really and directly affect entrepreneurs.  See, although startup founders can readily enjoy capital gains treatment on the value of their equity, some bizarre tax policies in this country often have the practical effect of forcing ordinary income treatment on the equity stakes of many private company employees.  The NVCA is fighting tooth and nail so that VCs (who are almost like entrepreneurs, after all) can get capital gains tax treatment, while saying not a single word about the policies that cause millions of startup employees to have their equity gains treated as ordinary income.

There are many ways that the NVCA could advocate tax policy for the benefit of entrepreneurs, but I’ll note the two most obvious ones, one a layup and the other a long ball in difficulty of change:

The layup is the Section 83(b) issue.  This is just an utterly bizarre policy that is harmless to entrepreneurs if you file all your paperwork correctly, but it is ruinous to entrepreneurs (and often their companies and lawyers) when there is a mistake in filing.  Briefly, founders and very early employees of startups usually receive stock (not options, but the stock itself) that is subject to vesting.  The tax code says that ordinary income tax is due as the stock vests, on the spread between the price paid for the stock and the value on the date of vesting.

That’s a real problem, because even as the stock vests, it has no liquid market – meaning that the stock can’t be sold easily.  So an entrepreneur who holds this stock in a successful company would get huge tax bills that he or she cannot pay.  Fortunately, the IRS allows the stockholder to make a “Section 83(b) election” – this is an election to pay the tax at the time of the initial stock purchase.  Since typically the price paid for the stock is the fair market value of the stock at the time of purchase, there is no spread and therefore no tax is due.

So that would be harmless, except that if you don’t file the election in the right way at the right time (30 days after purchase), you have to pay taxes the default way.  And that kind of mistake does happen, and it can cost millions – not just for the taxpayer, because ruinous tax issues for company founders and early employees can easily sink the company itself, and also typically results in malpractice suits against the company lawyers.

Why should the default position in the tax law be to pay a ruinous tax that no rational person would ever voluntarily elect to pay?  Why not just have a law that says if I don’t do a cartwheel on my lawn every 30 days, then I have to give my house to the IRS?  This is just utterly inane, so inane that it should be an easy win for the NVCA if they were to take it up as a lobbying cause.

The long ball would be for the NVCA to go after AMT/ISO reform.  This is a very complicated issue, but bear with me, because this problem does routinely affect startup company employees.  In a vast, vast oversimplication:  the problem is that the Alternative Minimum Tax requires Incentive Stock Option holders to pay a tax on exercise of their options, even though the company is private and there is no liquid market for their shares.

In a successful company, this can mean a tax vastly exceeding the assets of the employee, with no means of paying it.  A typical solution for many is to sell their shares at the mercy of the less liquid secondary markets (at severe discounts), in order to be able to pay the taxes.  And of course, a sale in that situation is typically taxed at ordinary income rates rather than capital gains rates, because of ISO tax rules.  So AMT and ISO rules conspire to mean that startup employees often are forced to sell their stock at discount values, and to add insult to injury the gain is taxed as ordinary income rather than capital gain.

So, NVCA:  you need to go after those two issues before any knowledgable person should regard you as an advocate for entrepreneurs and innovation.  Not only would you get the cosmic satisfaction of your actions actually conforming with your words, but you would also likely get grateful contributions from entrepreneurs and their lawyers.

faith and reason and startups

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Faith is often mischaracterized as the opposite of reason, a belief held outside of rationality. But irrational belief is not faith, it’s just simpleminded credulity. And those who have no reasons other than reason are no less simple.

Faith and reason, properly understood, are intertwined sources of truth. The encyclical Fides et Ratio states this more elegantly:

Faith and reason are like two wings on which the human spirit rises to the contemplation of truth

In this light, I contemplated Fred Wilson’s note about investing on faith. The implication for some may be that this is investing without reason. However, Wilson’s leap of faith is no less legitimate than “pure” reason. Unlike religion, truth for startups has an ultimate arbiter in this plane of existence: return on investment. There are legions of startups that had all the reasons in the world to succeed – great idea, huge market, killer team – and yet they failed nonetheless. I’d bet that experienced startup investors have succeeded as many times on what Wilson calls faith as they have by stacking up reasons.

Coincidentally, the next day, Steve Blank posted on the startup transition from faith to facts. It might seem hard to argue with his view that startups begin on faith and must quickly move to facts to succeed. Again, I wouldn’t draw the divide that sharply. I’d say faith is a requirement throughout the journey, and so are facts. From day one, you must believe in what you’re doing, have faith informed by reason. And also from day one, you must engage with the facts; endlessly and relentlessly collect, examine and act on available facts with all your reason supported by your faith.

startups as the path to enlightenment

~ ginsu ~ 3 Comments

So if you didn’t work at PayPal during their halcyon days, what else makes for an attractive startup résumé?

I would say that ideally startup hiring managers should try to get folks who’ve been through at least two of the four private company stages, including at least one that the hiring company has not yet been through.

Well, I would say that, except I find that these “stages” are not particularly well defined by anyone.  Or at least not anyone I could find in 28 seconds of Googling.  So like any moron with a digital pen and printing press, I can just make up my own definitions.

Some of the typical “stage” terms are seed, early, expansion, and late – these are often used by investors, are vaguely defined, and don’t always track to a company’s internal status and expectations.  I’ll try to align the four stages of private company progress with some more-fun-if-equally-irrelevant quadrilateral perspectives, from psychology and Buddhism.

Stage I:  pre-product

psych: unconscious incompetence – the individual neither understands or knows how to do something, nor recognizes the deficit or has a desire to address it

Buddhist: the path to stream-entry; the fruition of stream-entry

This stage is everything before you have a product launched to anyone outside your “friendlies” (relatives, friends, close contacts) – from the idea on the napkin to your Hello World! launch to the general public.

What others call ‘seed stage’ is often short of this – just the idea through a prototype, with ‘early stage’ then following from pre-launch to revenue traction.  But although that division may be natural for funding demarcation, from a product perspective you just don’t know what you have until it’s in the hands of the buying public, so I regard all of this period of not knowing as a single period of sustained ignorance.  It is all the pre-product path before the fruition of entering the great stream of commerce.

Stage II:  maximum iteration

psych: conscious incompetence – though the individual does not understand or know how to do something, he or she does recognize the deficit, without yet addressing it

Buddhist: the path to once-returning ; the fruition of once-returning

This is the period where the company has both the maximum flexibility and the most urgent need to rapidly iterate development.  Not just product development – everything about what the company makes, does and is.  The flexibility is there because the product has been launched, which not only lifts the inchoate burden of launch, but begins the collection of data (customer feedback, product metrics, use data etc) which can now be mined for insights about how to shape and reshape the product.  The need is there because if you don’t iterate, you will not grow and then you will not exist.

And again, it’s not just product iteration but an opportunity to examine and tune everything you do as a company:  recruiting and review systems, management team and tools, compensation, cultural principles, office design, everything.  The things you do to shape the company during this period will have an enduring effect on everyone who works there for years to come.  Too bad you don’t really know what you’re doing just yet.  But now is the time to get on the path to once-returning, to reincarnation and rebirth into the next stage.

Stage III:  revenue optimization

psych: conscious competence – the individual understands or knows how to do something; however, demonstrating the skill or knowledge requires a great deal of consciousness or concentration

Buddhist: the path to non-returning ; the fruition of non-returning

Unless you were oh-so-clever enough to launch without a revenue model, the company began to enjoy early revenues during the maximum iteration stage.  Iteration remains critical, but now your flexibility is naturally limited by the existence of paying customers, who often have a limited tolerance for change.  You have to optimize existing lines of revenue while making careful tradeoffs in launching new lines of revenue.  You may for the first time begin pursuing meaningful acquisitions or divestments that could change the face of the company.

This stage may be the most difficult among the four; your hard-earned knowledge seems to have the perverse effect of increasing the challenge.  When you were young and ignorant, it served you well to underestimate the difficulty in changing the world.  Now that some corner of the world has bent to your dream, you find that the dream is a shared hallucination of many rather than your own private trip – and your role isn’t to enjoy the ride but to supply the vehicle.

Nonetheless you are on a path of no return:  in returning there is only defeat and regression to a lower form of living; you can only move forward for true enlightenment.

Stage IV:  maturity and liquidity

psych: unconscious competence – the individual has had so much practice with a skill that it becomes “second nature” and can be performed easily (often without concentrating too deeply)

Buddhist: the path to enlightenment; the fruition of enlightenment.

The mature company does not have to be moribund, there is a vitality and pleasing grace to the well-oiled machine.  You know what you’re doing and you’re at the height of your powers, freed from the mixed blessings of youth.

And no matter your personal attitude towards money, getting the company to liquidity is the last barrier to enlightenment.  (Here I’m putting aside the case of those who want to build a big, sustainable private company without calling it a “lifestyle business” – the more typical startup dream involves shareholders and employees who want to be able to freely trade their stakes in the business on the open market.)

With your first big liquidity event, you find out if the other side of that barrier really is nirvana.  You find out whether the money has changed you, or whether it exposed who you really are.

That is the startup path as self-actualization, the startup path to enlightenment.  When you’re hiring for a startup, you need to pay careful attention to which of these stages your candidates have progressed through, and uncover their self-knowledge about their enjoyment in what has been learned and their eagerness to learn what hasn’t.

btw, if you are on that path or would like to be, and have skills in javascript, php and/or other web programming-fu: send me your résumé! (just a link to your LinkedIn or other relevant online bio would also be fine.)  use the intarwebs to find how to contact me.

résumé gold

~ ginsu ~ 2 Comments

If you are a hiring manager for a tech startup, what is the one company you’d most like to see on the résumé of a prospective candidate?

A lot of people might reflexively answer ‘Google’ on the belief that it’s still the most interesting and profitable company in technology.  While this isn’t as bad as saying ‘IBM’ or ‘Microsoft’ it’s still an undue faith in the benedictory power of large companies.

Not that there’s anything wrong with folks from IBM or Microsoft, mind you – I’ve worked with many and hired some, and don’t regret any incidences from either.  However, as a statistical matter, you’re not likely to find the kind of employee that really thrives in a small startup if they’ve spent a ton of time working in longstanding behemoths.

Doesn’t mean that big companies can’t innovate – in fact these days some say that only big companies can innovate big.  Of course, it may be that the people saying that tend to reap consulting dollars from big companies for advising on innovation . . .

Anyway, Google is a slightly different case than IBM and MSFT, in that it hasn’t been around as long and is not quite so large in terms of revenue and employee base.  However, because of the neck-crimping trajectory of Google as a company, I think it might be hard to get startup-ready employees out of Google:  the good ones that are still there are engaged on the big premium projects, many of the not-so-good more recent vintage are as big-company-minded as anyone, and the truly great early employees who departed are retired or VCs – too rich to be enticed into a little startup unless they start it themselves, which they rarely do as it distracts from counting the money.  Even if you follow startup news, you don’t hear so much about Google guys leading startups, with the notable exception of Paul Buchheit at FriendFeed.

So, if not Google, what company should be the most desirable to see on a résumé, all other things being equal?  I think I’d pick the one company that spawned founders and early investors and employees at YouTube, LinkedIn, Facebook, Yelp, Slide, Zinga and Yammer:  PayPal.

See, the ideal company – at least in terms of educating talent for the next venture – doesn’t have a Googlerian or Microsoftesque trajectory.  From founding to acquisition by eBay for $1.5 billion, PayPal lasted about four years and grew to a profitable company with over 600 employees, having been through a lot of growth, innovation, regulatory challenges and corporate evolution.  People in key positions through the bulk of that time saw the whole arc of company development, but never got so fat and happy that they didn’t want to do another startup.  Yep, if you’re hiring for a startup, the name you’d most like to see on that résumé is PayPal, pre-acquisition by eBay, natch.

love the machine

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The Wall Street Journal reported that Google is working on an algorithm to predict which of its employees is likely to leave. Putting aside for the moment whether there is some creepy aspect to the machine anticipating personal career choices, there are two aspects to this that I find interesting.

First, exactly how and why did this make it into the news? I’m not questioning whether it’s newsworthy (it is), I’m wondering about the exact path that this took from fact to front page. Was this program broadly announced at Google, and a random employee alerted the media? That would be one typical path. Was it an unannounced program, and someone in the HR department leaked it to the press? Or perhaps the HR folks proactively fed this to the press. If one of the latter two, what’s the motivation? Does it make Google look smart as a company? Does it comfort employees to know that Big Brother is watching and cares whether or not you leave? I don’t think any answer to any of these questions is necessarily a bad thing, I’m just wondering what the answers are.

Second – and more answerish this time than questioney – it’s really interesting to consider the reported inputs to the algorithm. According to the WSJ, “data from employee reviews and promotion and pay histories” comprise the formula. At first glance, this might seem logical: you would hope that reviews and compensation have some correlation to job performance and satisfaction.

Ah but then – you’ve been hoping that all your life, haven’t you? And haven’t you found that the content of employee reviews is often radically disconnected from actual performance, that the “wrong” person often gets promoted, that compensation has at best a tenuous connection to performance and satisfaction?

So the data set might not be as logical as it first seems; fortunately the magic of the sample size means that this isn’t a logic problem, but simply a correlation exercise. There is certainly some correlation between the content of that data and the incidences of employee departure, or Google wouldn’t be trying this.

But I’d bet that the correlation is much weaker than you’d think, and much weaker than Google would like. Any manager knows that reviews and compensation are blunt tools, and these are likely to be trailing indicators rather than the leading indicators of dissatisfaction that you want for real predictive power.

I worked at a company that somewhat famously had a “Love Machine” – a simple tool for employees to express appreciation for each other. Basically, as an employee, if a colleague did something that you appreciated, you could send them a point of Love, along with a one-line comment as reason for the gift. It was just a neat little way to say Thank You, and people really appreciated both giving and getting Love. And as very minor benefit, periodically the accrued Love points would be paid out to employees as a cash bonus.  (Distribute that on a Friday and watch people really spread the love around.)

When this was reported externally, some people misunderstood the corporate purpose of the Love Machine. Which is to say, some people thought it had no purpose at all, except as some gross hippy dippy vibe. Those people not only misunderstood the effect on morale, but also vastly underappreciated the value of the data from the Love Machine.

Think about it: as a manager, is it valuable to know which of your employees is appreciated, and which is not? The Love Machine is certainly not the sole source of information on this, but the data gives at least some general information on both specific and aggregate cases. You can see not only who is appreciated, but who gives appreciation. You can see which departments are praised and which toil without recognition. You can see who works across departmental boundaries and who only interacts upwards or downwards in their own reporting silos.

All this is phenomenally powerful data that gives factual indication of matters that you might otherwise pay significant amounts to guess about through expensive organizational consultants. I was convinced back then and I still am today that if HR departments and managers understood the power of this data, every company would have a Love Machine. Most would call it something else, but that part is just internal marketing.

Back to Google: as far as I know, they don’t have a Love Machine. But that doesn’t mean that they are feeding the best data they have into their Who’s Leaving? algorithm. Nearly every company has somewhat similar data in their email traffic, and certainly in a big data set, email traffic would work quite well. Now, I’m not saying that the email content should be analyzed – even though many companies actually do that, I find it unacceptably creepy. I just mean the fact of communication. Every manager knows that communication is a powerful indicator (and motivator) of job satisfaction.

Who’s talking to who? Who’s on how many email lists? What is the response rate and timing and length? Is communication cross-functional, up and down and across reporting levels, inside and outside the company?  All of that information is available in company email – I guess you could call it the email graph.

I would bet almost anything that this kind of data from email traffic provides a more powerful indicator of who’s leaving the company than the data from reviews and compensation. In fact, I’d bet that the email graph has better correlation to actual job performance than performance reviews!

Of course, the combination of those data sets could be even more powerful, and it’s entirely possible that Google is already doing this, though that wasn’t reported in the Journal piece.

black storm networks

~ ginsu ~ Leave a comment

So what’re you up to these days?

I’m spending a good amount of time in residence with my old friends at Storm Ventures, which reminds me of the last time I sat around with them, back in 2002. Coincidentally that was also around the last time the sky was falling, though the dot-com implosion was more localized than today’s lovely global financial crisis.

Although more contained, I think in many ways that downturn felt more severe in my world, the tech industry centered around Silicon Valley. It seemed that there were more local job losses, but more than that, the feeling of panic ran a little deeper, and wasn’t backstopped by the recent practical experience that we have today because of the prior crash. When the dot-com bubble burst in 2000, the prior domestic market crash was in 1987, and 13 years is enough time for people to forget, long enough for the prime of a career to pass through the ephemeral industries of the tech world. In 2008, the last crash was only 8 years ago, so now most people working here remember what happened the last time, and they can separate the chickens from the oracles.

A lot of people say that an economic downturn is a great time to start a new business. Of course, there’s a difference between saying it because others say it, and saying it because you’ve seen it before. In 2002, one of the partners are Storm was saying it to me, and it all made logical sense: costs were lower, recruiting was easier, competition was scarce. But I hadn’t seen it before. Tae Hea Nahm and Tim Danford at Storm were sure it was the right time to incubate a company, so they formed Black Storm Networks and recruited the founding team of Ajay Mishra, Pat Calhoun, Bob Friday and Bob O’Hara. The founders huddled in Storm’s offices through the dark days of telecom nuclear winter and built the company piece by piece.  I was lucky just to hang around and watch the sweat and optimism they put into every single day.

Jump ahead to 2005 and Black Storm had become Airespace, the leading startup for a new class of enterprise wireless networking equipment.  That year, Airespace was acquired by Cisco in a great deal for both sides. I was lucky again, for by that time my peripatetic career had allowed me first to invest in the company for another firm, and then to join the team in time to help the last push.  For most people, the story of any startup ends with the liquidity event. But I enjoy watching the afterstory too; I like to follow whether the acquired product continues to succeed, whether the team has an impact in the new company and afterwards. On that measure as well as others, I’m really proud of the Airespace team.

The product and its successors achieved a dominant market position. Airespace’s CEO, Brett Galloway, has become a senior exec at Cisco responsible for all wireless and security products. Pat Calhoun is now the CTO of one of Cisco’s biggest business units. Bob Friday continues his wireless wizardry as a director of engineering for Cisco. After several successful years for Cisco, Ajay joined Airespace’s biz dev paladin, Bob Tinker, for another startup run. Bob O’Hara pulled perhaps the best move, retiring from Cisco last year to live in Twitterville.

Anyway, my fondness for that team and those days brings me back to these days, back at Storm with time to dream. I believe it because I’ve seen it:  an economic downturn is a great time to start a new business.

Update:  Bob O’Hara adds his perspective.

that’s entertainment

~ ginsu ~ Leave a comment

Is social media entertainment?

Of course it is, whatta silly question, you say. When people spend their leisure time engaged in updating their profiles, messaging each other with pokes and posts and status updates, posting and viewing photos and videos – well, that’s entertaining. The answer to the question from the user’s perspective is undeniable. But of course the fun in any analogy is to see how far you can extend it, so I’m really wondering if social media is entertainment from a business model perspective.

Think of a big-budget movie. A group of people get together around a concept, script or performers. They raise financing in excess of $100 million from traditional studio and independent interests, often pre-selling shares in future revenue stream. Many dozens, sometimes hundreds of people are employed in executing the vision into the reality of the work on screen. Distribution occurs not just in theaters, but downstream on DVD, TV, and of course the Web. A successful blockbuster returns hundreds of millions of dollars in a burst, and a continuing annuity essentially forever.

Is this so different from what we’ve seen in social media? From Tribe to Friendster to MySpace to Facebook, it’s been a hits-driven business. People assemble around a concept and produce, and it seems that there is a limited window for the concept to catch fire with the broader public. If and when it does catch fire, there is a period to maximize revenue during the peak of popularity, and then a long slow decline. Maybe the curve is a little more like a successful TV series than a blockbuster movie, but the dynamics are the same: the production of a media experience that has temporal value for audience entertainment.

This is certainly an analogy that most social media companies would resist. They prefer to think of themselves as technology companies, building a platform for media delivery, or even becoming a fundamental part of the infrastructure of communication.

It’s not easy to define a platform on the Internet. You would think the concept of infrastructure is simpler. It’s relatively easy to envision the most concrete elements of the communications infrastructure: the physical wires (be they fibers, cables or tubes), the hardware of routers and switches and terminal devices, the often unglamorous stuff that moves the bits and bytes around. Database and storage are surely infrastructure components as well.

But can a software service company become part of the infrastructure? This isn’t a question of offering infrastructure services in a cloud of computing – it’s a question of whether a service that is not about transport and storage of information can be considered essential to modern communication.

In areas where that can be considered a serious question, we have an enormous market. Search is the prime example. Without search, the way we communicate and create on the Internet would be severely hampered, in the same way it would be hampered if we didn’t have significant storage or large databases. And search is a good example of a putative infrastructure element that must be provided as a service – which means a business can be built around it. Coming up with a protocol like TCP/IP may give birth to the Internet, but it doesn’t necessarily give rise to any dominant business for its creator.

So are the companies involved in today’s creation of social media making infrastructure? Can essential services be built in social media that become a fundamental component of communication? Even if so, is the social graph going to be as enriching as TCP/IP (that is, in more of a spiritual than monetary sense)?

Or is it all “just” entertainment?