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Valuing Innovation: Is a new stock exchange in our future?

Posted on October 9, 2007
Filed Under VC, Business, Innovation | 5 Comments

My friend Dave posted an interesting response to Paul Graham’s latest essay on the future of web startups the other day. While the whole post was very thought provoking the conclusion toward the end of the post really hit me. Here’s the conclusion:

so if you could accurately value the business at any time, and you can get an exit at any time, and transaction cost efficiency goes down… then you don’t have to go to a VC for capital. once you start having a liquid, transparent, efficient market, the cost of capital becomes very cheap. and you could just start BORROWING money instead of SELLING equity to raise capital. and when you wanted to sell, you wouldn’t need any expensive VCs or investment bankers, you’d just sell to Mr. Market at whatever rate he’s willing to pay. lenders could accurately value businesses, bet on a rate of success/return, and quickly undercut the cost of capital for VCs.

I had to leave Dave’s signature use of font size, bold and font color in there for effect.

Anyhow, my first thought was simply that we have a market. The stock market is just such an exchange although you still need investment bankers, VCs and the like to have a shot at playing. So it looks like Dave is really calling for a lightweight stock exchange.

Perhaps this new exchange could take the nasdaq one step further and be a completely lightweight web based service. Of course metrics are the key to this new idea.

Metrics are an important part of just about anything and a new exchange, to be efficient, transparent and liquid would need a good set of metrics for investors and companies to use in valuing their businesses.

I am going to start thinking more on this (putting my finance degree back into use baby!) because I think it is an interesting idea and one that may be possible to execute. Most likely the debt markets for entrepreneurs would be the first thing to start improving with a market that would follow. Are there any bankers out there? How could you see a debt market for startups and metrics around that market shaping up?

Of course the big issue is that start-ups, and innovation in general, is very risky and that is why bankers are adverse to lending to those types of companies. At least with a shipping company the business is easy to understand and the bank can take leins against all of the trucks and other assets which can then be used to get their money back in a default situation.

With web startups in particular what hard assets are there for the bank to take a lein on? The technology/IP is really all there is and that may not have much residual value after a default.

Either way a new market for startups is very compelling and I am convinced there might be a way to make it happen. I am just not sure how right now.

Thinking Like a Leader: The Opposable Mind

Posted on October 8, 2007
Filed Under Business | 1 Comment

I read a great article a few months back in the Harvard Business Review by Roger Martin (dean of the Rotman School of Management and author of The Opposable Mind: How Successful Leaders Win Through Integrative Thinking) where he looks at a concept he calls the “Opposable Mind.”

The Opposable Mind refers to a leaders’ ability to think about two different solutions at the same time and then come to a conclusion that synthesizes them and adds something extra to make a completely unique solution. This conclusion is usually much better than either one of the original solutions. In other words people with “opposable minds” are integrative thinkers.

As Martin puts it:

[Integrative thinkers] see the entire architecture of the problem - how the various parts of it fit together, how one decision will affect another. Just as important, they hold all of those pieces suspended in their minds at once.

The example Martin focuses on in the article is that of Bob Young - founder of Red Hat. Bob came up against a big decision early in Red Hat’s existence that lead him to think in an integrative manner. Ultimately it was the integration of two ideas that made Red Hat the success that it is.

At the time Red Hat was using the “free software” model where they were packaging Linux (software and source code) with the latest updates and selling it for a modest $15 or so to “computer geeks” who were using it mostly on their own machines.

As Red Hat looked to grow they could have either stayed on the same path and while moving into the corporate market or they could have chosen to employ the proprietary software model where you would simply sell the software without the source code at a higher price.

None of these two solutions seemed to work in Bob Young’s mind. Of course the proprietary model wasn’t going to be an option and the free software model was going to cause Red Hat problems with CIOs who were afraid of the reliability of an open source software platform.

Young, while thinking of both solutions simultaneously, came up with the idea to give away Red Hat for free and center his business around services and support. He knew that only one player in the industry would eventually gain the trust of the corporate sector and that services and support would be the way to do it. So, instead of choosing one solution or the other Young came up with a new solution that revolutionized the industry and made Red Hat a big time player.

This idea can be summed up with a quote from Procter & Gamble CEO A.G. Lafley that Martin uses in his article. In response to a question about a brilliant turnaround plan that Lafley had worked out involving both cost cutting and investment in innovation Lafley said:

We weren’t going to win if it were an ‘or.’ Everybody can do ‘or.’

The good news is that Martin, after studying this way of thinking for years, is a firm believer that this is not something you have to be born with. You can, in fact, hone your opposable mind.

Next time you are presented with a problem and a couple of solutions ask yourself what else you could do to solve the problem. Is there a way you could take a little from both solutions and create a much better completely new one? There probably is.

Blog World Expo: Vegas Baby!

Posted on October 5, 2007
Filed Under Conferences | 2 Comments

The Blog World Expo is coming up quickly folks. It is being held in Las Vegas (that’s right, Vegas baby!) on Thursday and Friday November 8 and 9.

I will be speaking at Blog World about widgets. I’ll be covering everything from what widgets are and how to install them to what they can do for bloggers, how bloggers can earn money from them and how they can help bloggers get more distribution for their content. (The talk is Friday, Nov 9th from 1:30pm to 2:30pm - Plug!)

Frank is also speaking on feeds and syndication along with my friend Rick Klau. That talk should be fantastic and a great way for bloggers to learn more about feeds.

If you want to come to the expo (you know you do… c’mon, it’s in Vegas!) you can use the discount code TCVIP (that’s TECH cocktail VIP - yeah, that’s right) for 15% of the normal registration fee.

If you do come to Vegas for the expo, or just for some fun, make sure to follow my Twitters and/or subscribe to my FriendFeed (that’ll give you twitters, pictures via flickr and everything as it happens) to keep posted on where I am. Also, please reach out so we can meet up and grab a beer. Hope to see some of you there!

Wrap up: The New Rules of Tech VC, the Fiction of 20% and VC Innovation

Posted on October 4, 2007
Filed Under VC, Technology, Web, Innovation | 3 Comments

There was a lot of great discussion today about VC so I thought a quick wrap-up was in order. Normally I’d write a full post but the three posts I will briefly touch on below did such a good job I will simply suggest you read them. Here it goes:

The New Rules of Tech VC - Alex Iskold on Read/Write Web

Alex put together a post on RWW today that looks at VC both past an present. He takes readers through the old model, why it worked and why it is changing. He then looks at the current state of VC and to the future of what things may come down the road. Here’s a snippet from the post about the future of tech VC:

Now, putting it all together, leads us to conclude that large venture money is going to migrate away from technology. Specifically, this is what is likely to happen:

  • We will see more smaller size funds and they will be successful
  • Large firms are going to focus on series B deals and will have to pay premium for the same equity
  • Big firms will focus less on tech, shifting to alternative energy, healthcare, etc.

It’s a great article even for those who know a lot about the VC world.

The Fiction of 20% - Fred Wilson on A VC

Fred takes readers through why VCs saying that they have to own 20%, 25%, etc. of a company to make a venture return is simply hogwash. Good stuff from one of the more innovative VCs around.

The Changing Landscape of Early-Stage Investing - Fraser Kelton on Disruptive Thoughts

Fraser has a nice high level wrap-up of innovation in the early stage VC space and adds some of his insight which is always valuable. I am glad Fraser is moving to NYC in January for Adaptive Blue. We’ll be able to finally take our virtual conversations about early stage VC and entrepreneurship offline.

Generalists v. Specialists: What Happened to the Renaissance Man?

Posted on October 4, 2007
Filed Under Business | 4 Comments

Soon after FeedBurner was acquired by Google and we were all settling into our new roles at Google I began to think a lot more about acquisitions and why a lot of them don’t work (not because ours wasn’t of course but because I was thinking about what we could do to make ours work). There are many theories around this topic but one that struck me was the obvious nature of a large company versus a small, nimble start-up.

Particularly I was thinking about generalists versus specialists.

At larger companies the vast majority of people are specialists. They have a particular function and do not cross into other areas of the company much if at all. On the other hand, at start-ups (and smaller companies) most of the employees and founders are generalists. They are the proverbial jacks of all trades and maybe even renaissance men and women. They cross boundaries all the time. In any given day they could be doing their job in business development but also working on the product, a marketing idea, customer support or a host of other things.

After an acquisition these generalists are moved into a really large group of specialists very quickly. Culture shock sets in soon after the move and the generalists try to find their way. The generalists have to figure out roles inside the new large entity that make sense to them. This is hard to do since the roles are so specialized leaving the generalists in a pretty tough spot.

It seems that generalists simply aren’t valued in large corporations with very specialized workforces. However, they really should be.

Top notch generalists are the folks that intuitively “do” all of the management buzz words. They “think outside the box” and “shift paradigms” because they have a diverse set of interests and knowledge and the drive and passion to tackle new things as they come along.

In a knowledge economy generalists should be more valued than ever. It is increasingly important to innovate, create new lines of business expand internationally and think broadly about businesses and this is what the generalists are well suited to.

Ah, but what if generalists really are valued highly? In fact, what if they are valued so highly that generalists are usually the people running large companies (or at least the leaders that are best at leading large companies)? That actually seems to be the case according to Tim Ferriss.

Ferriss wrote an article for the Huffington Post the other day about why it is good to be a generalist (I was a little bummed since this post has been brewing for months and he beat me to the punch but he made some great points that helped push my thinking further along.). In the article Tim touches on his top five reasons to be a jack of all trades. Here they are:

5. “Jack of all trades, master of none” is an artificial pairing.

The 80/20 rule is in effect. Essentially Ferriss argues that 20% of any given skill separates an expert/specialist from a novice. He also says that being a novice doesn’t mean your are mediocre. In his view (and mine) generalists take things (skills, etc.) up to, but not passed, the line of significantly diminishing returns.

4. In world of dogmatic specialists, it is the generalist who ends up running the show.

CEOs aren’t necessarily better at any function in the company than any of their VPs or more specialized staff. However, they do have a broad range of skills that allow them to see the connections between different pieces of the business. Also, due to their broad skill set they are more easily able to innovate and shift on the fly if needed. The best CEOs are top notch generalists.

3. Boredom is failure.

Lack of intellectual stimulation, not lack of money or “things”, is what drives us to depression and emotional issues. Being a generalist means you never lack for intellectual stimulation.

2. Diversity of intellectual playgrounds breeds confidence instead of fear of the unknown.

Generalists tend to empathize with a broad range of issues, people, conditions and also appreciate more of life. They also pursue things due to passion and not because of obligation.

1. It is more fun, in the most serious existential sense.

Totally agree on this one. Learning about lots of things in life and finding some where this is an opportunity for you to build something that changes the world is a great way to go through life. Ferriss also argues that specialists spend their lives making imperceptible changes to things. That said, I would argue that we need specialists to do that since the small things add up and ground breaking technologies and ideas can emerge. I get his point though but he is a tad harsh on the specialists.

Anyhow, point 4 is of course the one I alluded to above (CEOs are usually great generalists) but the other points add a lot to the discussion.

Bottom line, there is nothing wrong with being a generalist. In today’s world a lot of people might say otherwise but we should look at those folks that are driving innovation and holding the top seats in business as an example of what generalists can do.

Side note: Ultimately we need both generalists and specialists of course. Diversity is what makes this world so great. Everyone is needed to keep things moving forward and to innovate.

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