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Olson’s Observations

Technology. Innovation. Science. VC. Media. :: by Eric Olson

Archive for the ‘Business’ Category

The Long Tail: Long and Fat or Just Long?

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Anita Elberse, an associate professor at Harvard Business School, recently published a new study in the Harvard Business Review that challenges Chris Anderson’s Long Tail theory. Elberse’s main claim is that the positive feedback loop created by hits will continually perpetuate media companies (movies, music, etc.), and companies like them, as hits-based businesses whereas Anderson’s Long Tail theory suggests that more and more sales will be derived from niche products that make up the tail.

Myself and others in the business have had the inking for some time now that the Long Tail may not be as interesting or profitable as once expected. A lot of startups that launched with the Long Tail as a premise for their businesses haven’t reaped the profits they thought they would (yet at least) and the hits still seem to be a bigger part of business like media as people are able to communicate more efficiently and effectively about the hits. After all, as Elberse suggests, the hits are hits because they appeal to the masses and the stuff in the tail is in the tail because it only appeals to a small base. Put another way, people like to talk about common things when together and if they were consuming more and more from the tail the social nature of consumption would be lost.

I was ready to write a long piece about this phenomenon. About how the Long Tail seems to make a lot of sense given what the internet has enabled but, if one thinks about it, the long tail may not be what the people really want. They may still want common experiences so that they can connect with their fellow people. Thus, hits will continue to dominate sales and, while growth of sales in the tail will continue as well, the growth won’t be as significant as once thought.

As I sat down to write just that a post came up that intrigued me. The post was written by Anand Rajaraman and summarized both Anderson’s and Elberse’s arguments very nicely which is why I am not going to jump into a similar analysis here (his post is well worth the read). However, Rajaraman doesn’t just summarize both sides, he also proposes that the internet may not create the fat long tail of consumption Anderson talks about in his book. Rajaraman instead theorizes that the internet may actually create a fat long tail of influence.

A long tail of influence. That is an interesting idea and one that can been seen in action throughout a myriad of examples in recent time. It is also something that makes sense when taken in the context of what the internet was designed to do: facilitate communication, collaboration and the easy exchange of data.

Since the internet allows us to be hyper-communicative and easily share our voice with the world it means that any one of us at any time have the ability to be an influencer. This is the power of the web.

This power also taps into Elberse’s data. She found that we tend to perpetuate more hits as time goes on (and that these hits generate more and more of the overall sales) and that only heavy consumers of a particular item will dive into the tail (but those users don’t derive as much pleasure from the tail than from the head - the hits).

It seems that Elberse and Rajaraman’s theories, when put together, may yield some interesting insight into what the web really enables. We can all agree that the long tail on consumption still exists but it is uncertain if it will ever be as fat (i.e. garner as much of the sales) as Anderson theorized. I am leaning more toward Elberse and Rajaraman at this point and am looking forward to seeing more research on the subject.

Side note: See Anderson’s rebuttal to Elberse’s work for his side of the story (Anderson seems to argue that the issue between Elberse’s theory and his has a lot to do with semantics). Also, Elberse makes a point in favor of hits still being overly important where she uses Anderson’s own book as an example of a hit that made a publisher’s year and spawned a whole discussion that people passionately participate in as much today as back when the book was out (bottom line: people like to talk about common experiences with each other and that is just fundamental human behavior).

Written by Eric Olson

July 11th, 2008 at 5:17 pm

Posted in Business, Web

Extension 720 on WGN Radio: The Web 2.0 Show

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Just a quick note to inform all of you Olson’s Observations readers out there that I will be making some observations on WGN radio this Friday from 9pm - 11pm on Extension 720 hosted by Milt Rosenberg. Since I am unsure if a lot of you out there are listening to AM radio (and because a lot of you are located outside Chicago) I want to point out that you can listen live online as well.

This show has had a lot of prestigious guests over the years and Milt Rosenberg is known as one of the top interviewers around so I am very excited, honored and humbled to be asked to come on the show. I should note that this is a panel discussion though, not an interview, so I will be on with a few other top notch guests making the show that much more interesting.

This will be my first time on the air since I stopped doing a radio show with my friends back in high school on the local college radio station (95.1 FM WNRC baby!) and I am looking forward to it. I have always loved radio as a way to communicate and talking about what Web 2.0 has done in terms of revolutionizing communication via one of our oldest communication technologies will be a treat. Who knows, maybe we can even get Milt to start podcasting his shows!

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Editor’s note: I have bee lax in writing on this blog lately due to my new gig, TECH cocktail and my studying for the GMAT. That said, I plan to overhaul the site over the next couple months and start writing more frequently again so stay tuned and thanks for your support over the years.

Written by Eric Olson

July 8th, 2008 at 8:00 pm

Posted in Business, Chicago, Web, Web 2.0

Jim Cramer: Midwest is Hub of Innovation

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It is official. Jim Cramer of Mad Money and TheStreet.com loves the Midwest. Today on the roof of Soho House Jim talked about the Midwest, which he refers to as Cleveland Valley (man, I hope that name doesn’t stick), and about how some real solid innovation is happening here.

Cramer took a number of swipes at the internet and technology landscape today specifically calling out the me-too companies in the media space. Here is one quote that stuck out in my mind (via PaidContent.org):

Guitar Hero is “amazing… but when you look at the companies that are innovating, they’re in the Cleveland Valley, not the Silicon Valley.”

As pointed out by PaidContent.org when Cramer uses the term Cleveland Valley he is referring to the industrial firms here in the Midwest who are asking themselves: “What are the big problems of mankind and how can we solve them?”

So Cramer is not quite endorsing the Midwest as a high tech hub per see but I think he gets at the heart of what we’re all about out here and that is creating sustainable businesses and innovation by solving real problems. It is good to see more and more people looking to the Midwest for innovation. We’re at an inflection point in this region. No doubt about it.

Written by Eric Olson

June 9th, 2008 at 6:18 pm

Posted in Business, Chicago

iVentures10: Starting up in Illinois

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iVentures10As programs like Y Combinator and TechStars gained popularity I started to wonder why something along the lines of those programs didn’t exist here in Illinois. After all the modern web was pretty much born at the University of Illinois at Urbana-Champaign (mosaic/netscape, apache, etc.) and other notable web superstars like PayPal and YouTube have come from the minds of U of I grads. Well, I didn’t have to think about this idea for long…

Enter the iVentures10 program. iVentures10 is a program created by Illinois VENTURES initially as a “new kind of internship” for U of I computer science students. However, they recently announced a partnership with Mozilla along with their intention to take applications from around the world.

I think this is a fantastic thing for tech entrepreneurs based here in Illinois and a great way to get others that aren’t based here to spend a summer here in Illinois building their companies. Hopefully we can all show them such a good time they won’t want to leave! Keeping our tech talent here in the state is crucial to Illinois becoming the tech center it deserves to be and this program will clearly help with that effort.

You can learn more about the iVentures10 program on their site and if you think you want to submit an application make sure to get it together soon. The final day to submit applications is May 15th.

Side note: You can also learn more about the iVentures10 program at the next TECH cocktail mixer on May 29th. The team will be at the event along with some of the folks who have been accepted into the program.

Written by Eric Olson

May 1st, 2008 at 10:21 am

Posted in Business, Chicago, Technology, VC

Doing Well by Doing Good

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Paul Graham has released another great essay today titled simply “Be Good.” The main point of Graham’s essay can be summed up with this excerpt:

If you start from successful startups, you find they often behaved like nonprofits. And if you start from ideas for nonprofits, you find they’d often make good startups.

That statement doesn’t seem too interesting off hand but it truly is. Basically, Graham suggests that if you simply work on an idea that legitimately helps people you could find yourself with a very interesting business over time even if the current encarnation of the “business” looks more like a nonprofit (i.e. helping a lot of people without making any money).

Graham lays out some interesting examples of this type of thinking (Google and Craigslist among them) and he also covers the reasons why he believes being good can help you do well. His reasons are:

Power -Being good helps you gain power in the marketplace since you legitimately care about your customers and stakeholders and they, in turn, want to help you (I saw this first hand at FeedBurner). This is related to the concept of Karma.

Morale - Morale remains high even during the inevitable tough times during the life of a start-up.

Help - Other people want to help you and you’ll be able to recruit the best of the best.

Compass - Having a solid mission oriented around doing good acts as a compass for the company.

I think Graham is right on with this essay. I firmly believe that doing good will help you do well in life (and business) and have seen it to be true in my own life.

That said, you have to genuinely do good. You can’t pretend to do good because people will figure you out and then you’ll be in trouble.

Following this topic a bit further I would like to point out that running what may be a traditional nonprofit business as a for-profit from day one may actually help more people and create sustainable change rather than simply providing a bandaid.

Case and point for that line of thinking is microfinance. What does microfinance do? It helps the poor pull themselves out of poverty by giving them loans to start small businesses. Off hand you could say that microfinance institutions should be not-for-profit but in fact most of them (if not all) are for-profit banks.

Being that these entities are for-profits they continually find efficiencies to improve their businesses which in turn allow them to help more people. It seems to me that more “nonprofit” ideas should run themselves as for-profit ventures to increase their sustainability.

Graham has this to say about the topic:

The idea of starting a company with benevolent aims is currently undervalued, because the kind of people who currently make that their explicit goal don’t usually do a very good job.

I think he has a point there but Graham links the issue to what he calls the trustafarians (trust fund folks) who simply want to attempt to do something good but never follow through. I think there is more to it than that.

I believe these folks in nonprofits may not be doing a good job because the organizations, being not-for-profit businesses, have no incentive to lower burn rates, be more efficient, etc. They also can’t afford to pay their employees as well as their for-profit counterparts which means that the top minds don’t go work at non-profits (not true in all cases of course).

Imagine if the nonprofits ran themselves as a for-profit businesses. Then they could afford to hire better people and would be more concerned with conserving cash and helping more and more people through their own growth and increased efficiency (assuming they ran the business well of course).

The bottom line is that you can do very well by doing good so follow your idea through even though it may not seem like a business right now. If you are truly solving a pain the business part of the business will most likely follow.

Written by Eric Olson

April 23rd, 2008 at 4:56 pm

Posted in Business

Starting Up: Two Great Posts from the 37signals Folks

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Are you sure you want to be in San Francisco?

David makes some great points in this article. He discusses what the Bay Area is good at in terms of startups and what it isn’t so good at. He also urges us to think outside the Valley in terms of starting a company. Good stuff and I couldn’t have said it better myself (which is why I didn’t and am just linking to his post).

Quit your job!

Easier said than done right? Sure, but Sarah has penned an inspirational article with some great entrepreneurial examples that will get anyone off their butts and starting up a business. She also notes that you don’t have to try to be the next Google. She suggests that if you do what you love you will be happier and more successful and that success could translate into millions even if you never thought it would (and if it doesn’t but you have a nice business and are happy - so what?). I know I have always stuck to doing what I love to do and everything else has seemed to follow.

Written by Eric Olson

April 23rd, 2008 at 3:06 pm

Posted in Business

Liquidity for VCs: A New Exchange?

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Update: Check out the comment from Dave McClure to hear his thoughts and read his clarification on the VC side of things (i.e. he does think that VCs are needed and helpful in the market but things more competition is a good thing - agreed!). He also links up his startup metrics which are getting better every day.

Liquidity for VCs and entrepreneurs is a topic that continually comes up. It has resurfaced in the last week due to the fact that public markets have pretty much been closed to startups for a while now leaving M&A as the primary liquidity event for entrepreneurs and VCs. This time Fred Wilson is the one kicking off the conversation about VC/entrepreneur liquidity.

Fred is worried about liquidity for obvious reasons but he also adds a new thought into the mix. He claims that web services that are exited via M&A to larger companies can languish inside their new corporate homes. This worries him as a user of the services and has pushed him to think about newpaths to liquidity even more.

The discussion over liquidity ramped up over the past week due in part to the interesting nature of the idea but also spurred along by the TechMeme effect (Fred event spoke about the topic on Yahoo’s Tech Ticker show). It has been interesting to see everyone’s opinion on the issue all the way from VCs should stop whining to agreement with Fred that a new form a liquidity needs to emerge. After absorbing all of the opinions across the web I decided I should chime in.

In fact, I actually wrote about a related topic back in October 2007 in response to my friend Dave McClure’s post. Dave argued that a market should be developed that would allow transparency and would disintermediate the VCs by allowing lenders and other investors to invest directly in startups while allowing startups to keep most, if not all, of their equity. As a student of finance and VC I found that idea very intriguing.

A large impediment to this type of market is solid data (and metrics). With good data debt and equity markets for startups could look like mortgage markets (ouch - bad example!) or the public markets. If you can look at historical startup data and understand the numbers enough to make a solid bet and know your chances of success an interesting market emerges. (Side effect - more actuarial jobs open up.)

Let’s say we can get the data and can figure out the right metrics, then what happens? Well, here is where things get a little tough. The SEC (or a new org like them) would probably want to step in and protect the individual investor from themselves. That’ll be a big brick wall in the way of innovation and it makes this idea a little more long term (man, I hate regulation). What can we do in the meantime then? This is where Fred’s post comes into play.

Fred argues that there should be another way for VCs to liquidate their positions and it could take the form of an exchange. This exchange would not be open to the general public and it would not disintermediate VCs like the one Dave wrote about back in October. What it would do is allow qualified/accredited investors (i.e. anyone except the average joe individual investor - this exclusion eliminates the need for SEC oversight) to trade positions in private companies. This way VCs could trade their positions to others (like PE firms) rather than trying to bring a company public or sell their companies to larger companies.

It is an interesting idea and one that already happens informally as Fred mentions in his post. He simply thinks that a formal market may help. It turns out that this type of market is already springing up in various forms surprisingly enough.

Goldman Sachs launched an exhange for private companies called GS TRuE - short fo Goldman Sachs Tradeable Unregistered Equity - about a year ago (this market is open only to Institutional Investors with $100mm or more in assets). Other networks like this are also popping up (like OPUS-5) and, according to this May 2007 WSJ story, the Nasdaq is planning on launching a smaller market for unregistered equities.

These markets will probably consolidate over time and then we’ll have our main market for unregistered equities which could be game changing. This isn’t quite what Dave was arguing for but it is a step towards it in many ways.

Even without the need for VC liquidity I think this would have come to bear. The increasing regulation of public companies is becoming unbearable for many managers and directors while also adding a lot of expenses into businesses. This is why so many large companies are choosing to be bought by PE firms and brought private (CDW is a great example).

This is a very exciting time for finance/business geeks like myself. Finance can be very innovative and we’re seeing the proof of that right now. I can’t wait to see how these new markets work out.

Written by Eric Olson

April 18th, 2008 at 9:46 am

Posted in Business, VC