Reading time: 3 – 5 minutes

Being back in school and taking statistics and finance classes again has reminded me how much I love data. I am not one of those crazy guys who loves data in an unhealthy way and thinks that more of it will solve of all of the problems in the world mind you.  Nor do I believe it can always be trusted. The world is too uncertain and it is often hard to use data to predict the “once every 10,000 years” events that often do the most to shape the world we live in (read The Black Swan by Nassim Taleb for more on that).

What is interesting to me as of late is that we really have reached the point of having free and ubiquitous data.  In fact, we probably have too much data. I would argue that the financial crisis happened partly due to the fact that too much data was available for humans to effectively analyze and understand. I mean, let’s get real, it isn’t like the data wasn’t there.  If you looked at the right data and crunched the numbers you could have seen, as some did, that we were in for a world of hurt.

So now that we are at the point where data is essentially a commodity of sorts we have to figure out better, faster and cheaper ways of analyzing and visualizing data.  The better we get at this the better decisions we’ll make and the more crises we can avert.

FlowingData posted a quote from Google’s Chief Economist Hal Varian that sums things up nicely:

I keep saying the sexy job in the next ten years will be statisticians. People think I’m joking, but who would’ve guessed that computer engineers would’ve been the sexy job of the 1990s?

The ability to take data—to be able to understand it, to process it, to extract value from it, to visualize it, to communicate it—that’s going to be a hugely important skill in the next decades, not only at the professional level but even at the educational level for elementary school kids, for high school kids, for college kids. Because now we really do have essentially free and ubiquitous data. So the complimentary scarce factor is the ability to understand that data and extract value from it.

I think statisticians are part of it, but it’s just a part. You also want to be able to visualize the data, communicate the data, and utilize it effectively. But I do think those skills—of being able to access, understand, and communicate the insights you get from data analysis—are going to be extremely important. Managers need to be able to access and understand the data themselves.

Hal Varian, The McKinsey Quarterly, January 2009

Since I have been thinking more about data and specifically how the financial crisis could have possibly been averted if we could have had a better handle on the mountain of data crammed into arcane forms like 10-Ks and 10-Qs, I have been reading up on XBRL.

XBRL, or Extensible Business Reporting Language, is an open standard for business reporting that I am very excited about.  It could do for financial data what feeds and xml did for content.  When all of the data is structured we can then start to set up smart software to analyze the large amounts of data that exist.  That’s a big deal.

The good news is that XBRL is slowly becoming mandated for public companies in the U.S. an abroad so we’re not far off from being able to analyze and visualize financial quickly and easily.

XBRL, as I tweeted earlier, is the intersection of some of my favorite things: software, structured data and finance.  I am planning on digging into XBRL much more and will probably write about my findings as I, well, find them. Stay tuned.

Reading time: 1 – 2 minutes

It was about time I automated the “reading time” info that I put at the beginning of all my posts.  Today I whipped up a little wordpress plugin that will add the reading time to the top of any post on any wordpress blog.  Now anyone can add that useful bit of information to their posts.

If you are up for giving the plugin a go please download it and send feedback my way.

Regarding the estimation of reading time: I used 150 words per minute (slightly below average) and 250 words per minute (slightly above average) as the range.  I would love any feedback on whether or not the estimation needs to be augmented.

Updates to come:

• Options dashboard: will allow for changes in words per minute numbers.
• Posting data to the feed: need to figure out how to, if possible, get the reading time data into the feed.

Reading time: 3 – 4 minutes

The Pale Blue Dot: Earth

More words of wisdom from Carl Sagan this week.  I have been thinking a lot about Sagan’s work and his thoughts about life on earth and in other places lately.  I rediscovered his work a few months ago and it couldn’t have been a better time to do so.  With the economic crisis in full effect and a number of other crises of varying degrees going on in the world I needed to get some higher level perspective on things.

Like Sagan, I find that learning more about the Cosmos and astronomy gives one the high level perspective they need.

Take a look at the picture above. See the pale blue dot in the middle?  That’s Earth.

The shot was taken by the Voyager 1 spacecraft on February 14th 1990, almost 20 years ago today and about 12 years after Voyager 1 left Earth. The distance from Voyager to Earth when the photo was snapped was about 3.7 billion miles.  The photo was snapped at the insistence of Sagan who presumably thought it would help all of us gain some perspective, given that the “earthrise” photo from the Apollo missions decades earlier did just that.

Six years later in 1996 Sagan related his thoughts on the deeper meaning of the photograph for a commencement address.  Here are his thoughts:

Look again at that dot. That’s here. That’s home. That’s us. On it everyone you love, everyone you know, everyone you ever heard of, every human being who ever was, lived out their lives. The aggregate of our joy and suffering, thousands of confident religions, ideologies, and economic doctrines, every hunter and forager, every hero and coward, every creator and destroyer of civilization, every king and peasant, every young couple in love, every mother and father, hopeful child, inventor and explorer, every teacher of morals, every corrupt politician, every ‘superstar,’ every ‘supreme leader’, every saint and sinner in the history of our species lived there – on a mote of dust suspended in a sunbeam.

The Earth is a very small stage in a vast cosmic arena. Think of the rivers of blood spilled by all those generals and emperors so that, in glory and triumph, they could become the momentary masters of a fraction of a dot. Think of the endless cruelties visited by the inhabitants of one corner of this pixel on the scarcely distinguishable inhabitants of some other corner, how frequent their misunderstandings, how eager they are to kill one another, how fervent their hatreds.

Our posturings, our imagined self-importance, the delusion that we have some privileged position in the Universe, are challenged by this point of pale light. Our planet is a lonely speck in the great enveloping cosmic dark. In our obscurity, in all this vastness, there is no hint that help will come from elsewhere to save us from ourselves.

The Earth is the only world known so far to harbor life. There is nowhere else, at least in the near future, to which our species could migrate. Visit, yes. Settle, not yet. Like it or not, for the moment the Earth is where we make our stand.

It has been said that astronomy is a humbling and character-building experience. There is perhaps no better demonstration of the folly of human conceits than this distant image of our tiny world. To me, it underscores our responsibility to deal more kindly with one another, and to preserve and cherish the pale blue dot, the only home we’ve ever known.

Reading time: 3 – 5 minutes

Being a long time student of finance (starting digging into the markets at the age of 13) I have been particularly interested in the financial crisis that we are in the midst of.  I have been thinking through why something as large as this crisis happens.  Of course, for something so large and complex, there are a number of things that had to come into play to create the scenario but one macro theme in particular leaped out at me.

The theme I am talking about is removing faces from finance.

What do I mean by that?  My thinking is this: once you remove relationships from financial transactions and instruments things start to get messy.

If you are once removed, for example when you buy the stock of a company that you don’t have any personal relationship with, you are probably OK and you hope that the management is giving you quality data to asses.  There’s trust there.  However, when you get further and further away from a face to face relationship with, say, derivatives like CDOs, things simply get out of hand.

I have never been a fan of derivatives and other “abstract” financial instruments.  I always found it odd that no one really knew what the underlying assets were.  Was it Joe’s house, Acme Corp., both? To the creators and traders of these securities it was just paper (digital “paper”) with an assigned value.

I am not the only one who was worried about the issues that could be caused by abstracting finance.  Warren Buffett was worried too.  He once referred to derivatives as “financial weapons of mass destruction.”  Buffett also referred to derivatives this way:

“There is an electronic herd of people around the world managing an amazing amount of money who make decisions based on minute-by-minute stimuli,” said Mr. Buffett, adding, “I think it’s a fool’s game.”

His partner Charlie Munger was also not a fan.  Munger once said:

“The accounting being deficient enormously contributes to the risk,” said Munger, lamenting that executives and shareholders were getting paid on “profits that don’t exist.”

Exactly. Profits that don’t exist and assets no one really understands or can put a face to is a recipe for disaster.

At this point I should note that when I say face to face I don’t necessarily mean it literally.  I am more or less referring to the relationship one has with an asset and how close they are to it.  That being said, let’s take a look at the banks.  I will keep it short since I all of you already know what I am going to say.

Banks, given the market’s appetite for CDOs, were able to grant loans and then immediately get rid of them to someone who would package them up and send them off to a big bank like Merril Lynch who would then create CDOs, etc. etc.  Do you see the issue here?

A bank’s business is to take in money in the form of savings and distribute it (and thus take on risk) in the form of loans on which they make their interest (i.e. their profit).  Normally the banks have to look someone in the eye and really figure out if the person will pay the bank back since the bank is stuck with a bad loan if the person doesn’t pay.  The loan default is the bank’s risk.

With CDOs the bank can make a loan and immediately offload their risk (although as we saw a lot of banks didn’t offload the risk fast enough).  Now, as you can see, the bank isn’t incented to look at borrowers as closely.  They are incented to give as many loans as they can and then ship them out the door.  That is when finance becomes faceless, and also “risk-less” for one party, and when one persons transaction is viewed as risk-less the outlook becomes bleak since nothing is really inherently risk-less (just like there is no such thing as a free lunch).

We need to get back to face to face finance where people make deals with people they know and trust and they have to since they have to hold that risk.  We should really think twice the next time we try to abstract finance and create derivatives.  While cool and intereting to finance wonks creating derivatives is probably not a good practice nor does it create long term value for society.

Reading time: 3 – 4 minutes

I just finished Carl Sagan’s “Shadows of Forgotten Ancestors” last night.  Great read.  It is the story of evolution starting from before the planet Earth formed until roughly the present day.  Sagan makes a lot of interesting points in the book around why we are the way we are and what the future may hold.  I don’t have to say much more because anyone who has read any of Sagan’s work before knows he was a gifted author and top notch scientist.

Anyhow, Sagan makes a point about the environment and life’s effect on it that I thought was worthy of some thought.  It turns out that the very first microorganisms on Earth, those that emerged before we even had any oxygen in our atmosphere, “breathed” carbon dioxide and “exhaled” oxygen.

Since the growth of these bacteria were relatively uninhibited, due to lack of predators and other factors like an abundant supply of food, they spread like wildfire.  As their numbers increased so did the amount of oxygen in our atmosphere.  In fact, it increased so much that a lot of the microorganisms likely died and new microorganisms, ones that could process oxygen, rose up to take their place and restore a balance (of course this is a massive oversimplification).

The first life on this planet, while making the planet much more hospitable for future life, actually polluted the planet so badly that a lot of the first life on the planet perished.  Pretty interesting realization. Looks like we’re not the first life to pollute the planet to the point where we are in danger of changing the environment so severely that we can’t survive on it.

The changing of our environment is best summed up by a passage from “Shadows of Forgotten Ancestors”:

By 3 billion years ago, life had changed the color of the inland seas; by 2 billion years ago, the gross composition of the atmosphere [what I was referring to in this post]; by 1 billion years ago, the weather and the climate; by a third of a billion years ago, the geology of the soil; and in the past few hundred million years the close-up appearance of the planet. These profound changes, all brought about by forms of life we tend to consider “primitive,” and of course by processes we describe as natural, mock the concerns of those who hold that humans, through their technology, have now achieved “the end of Nature.” We are rendering many species extinct; we may even succeed in destroying ourselves. But this is nothing new for the Earth. Humans would then be just the latest in a long series of upstart species that arrive on-stage, make some alterations in the scenery, kill off some of the cast, and then themselves exit stage-left forever. New players appear in the next act.  The Earth abides. It has seen all this before.

The good news is that humans have evolved to have significant intelligence.  Higher intelligence, given that is was selected for in the evolutionary process, has to be helpful for something (most likely a lot of things) and climate change is one of those things.  Climate change could wipe us out but we have the ability to understand it, to consciously change our course and to work together to engineer better solutions that serve our needs and that keep our planet healthy.

Reading time: 2 – 2 minutes

Those that know me well know that for the last year or so I have been working with Noam Wasserman on a case for one of his classes at Harvard Business School.  The case was based on FeedBurner but was more specifically centered around the founding team’s journey through their four businesses with the case culminating with the FeedBurner years.

The case is finally finished and Noam will be teaching it for the first time this March.  I have to say I am very grateful for the whole experience for a number of reasons:

1. I had a chance to co-author a case with Noam Wasserman, a guy I consider to be a foremost thinker on entrepreneurship and venture capital (and he’s an awesome guy to boot).
2. I had a chance to really learn about all that went into the four ventures the FeedBurner founders have built over the years and why they made the choices they made.
3. I had a chance to reflect on my time at FeedBurner, the company itself and the ultimate sale to Google and nail down all the takeaways for my future endeavors.

If you ever have a chance to spend some solid time reflecting on anything you’ve done (successful startup, failed startup, etc.) I would suggest working through a case like this to achieve some solid results for your comtemplation time.  I believe writing allows you to firm up your takeaways from the business or experience and you’ll be better off because of that. And if you can’t work through a case just try talking through the business or experience with others that were there with you (and with the founders if possible) and perhaps write a blog post based on your talks or just write something for yourself.  You’ll be glad you did.

Reading time: 2 – 3 minutes

Matt McCall and I had a conversation a few days back about Dan Primack’s post on new VC models (I wrote about Dan’s piece a little over a week ago for those that missed it). I focused on the fact that too much money has been pushed into venture capital during both my conversation with Matt and in my blog post and I do believe that it is a main issue.  However, it appears that the increasing amount of money going into VC funds has a couple of underlying causes (if not more).

1. LPs are trying to push more money into venture capital funds to get lower their unfunded obligations.
2. Venture capitalists are only too happy to take the extra cash to bump up their management fees (since exits and carried interest are hard to come by these days).

Unfortunately point number two is causing a big issue.

VCs nowadays, at least the ones who have raised successive ~$500mm – $800mm funds (i.e. large funds) every couple of years, are in a position where management fees are so high that they can potentially lead to salaries to the main partners in the $6mm – $8mm range (give or take).

This fact, combined with the fact that the IPO market is essentially closed (meaning it is harder to generate exits and, subsequently, carried interest), means that VCs are content raising a lot of cash and deploying it fast so they can cash in on their management fees.  Any good investments that create some carried interest are simply a bonus.

For venture capital to work, carried interest, the amount the partners take of successful deals, needs to be the main driver.  Once management fees get too high they can become a primary driver and, as mentioned above, this scenario becomes even more pronounced when the IPO market is lacking and exits are harder to come by.

Matt just wrote about a post about his thoughts on the VC compensation issue, which, given his many years of experience, has a lot more meat to it than this post.  It is a must read post so please check it out when you have a chance. (Matt also talks about the structure of Warren Buffett’s first fund, which is interesting to note especially in the context of VC compensation.)