Reading time: 2 – 3 minutes

Chatter in the media about Chicago’s status as a technology hub seems to be growing. In the last few weeks I have been quoted in a couple articles on the topic. The first was a Medill article by Melissa Aparicio that looked at some of the policy issues in the state focused on technology growth. The second was a piece in the Tribune by Wailin Wong that focused on the possibility that Motorola may move their handset division to the west coast after they split the division off in 2011 and what the move may mean for technology.

In both articles I consistently stated my thinking:

• Chicago shouldn’t try to be Silicon Valley.
• Chicago should focus on what it is good at (e.g. building companies that use technology to disrupt businesses like trucking and printing and companies that focus on online advertising, ecommerce, etc.)
• Early stage funding in Chicago is getting better but is still extremely lacking (we need family capital focused on supporting companies in the region).
• There is a lot of great development talent in Chicago but keeping them here is hard and building tech teams is equally difficult.
• What you really need to build the scene in Chicago is to have some home runs hit and then help the lieutenants from those companies start their own companies (we’re starting to see more of that now).

Chicago has a lot going for it but also has some holes that are tough to fill (since they are chicken and egg problems for the most part).

Matt McCall – my former boss and one of my mentors – has a great interview in Fast Company (source: VC Confidential) where he describes his thoughts on the technology scene in Chicago (he even mentions a study/chart on exits in the area that he and I prepared a year or so ago that shows how many billions the Midwest has generated in the past five years). I agree with him on most points but I will say that being an entrepreneur here in the earliest stages is still very hard (but not nearly impossible).

Reading time: 2 – 4 minutes

Forbes India just ran a short interview with Vikram Akula where he talks about how he brings the commercial and social side of microfinance together to help microfinance scale. Akula saw that the three Cs, as he calls them, were hindering the scalability of microfinance and he created SKS Microfinance to address them. Akula’s three Cs are: capital, capacity and cost. SKS has done an incredible job at addressing all three and marrying the commercial and social sides of microfinance together. The result: SKS is on pace to become larger than the Grameen Bank very soon (making SKS the largest MFI in the world with over 8mm customers) and it could be the first MFI to go public in India.

Here is an excerpt from the interview that focuses on how Vikram looks at the social and commercial aspects of SKS:

How do you maintain that social goal, that value addition for your customer when you’re growing at 200 percent? How do you carry that organisational culture across the country? And how do you do that when you also have to show financial profitability for your investors?

We don’t see conflict between the two. Fundamentally our organisation is about creating social value for our customers. I don’t even look at the profit lines. If you ask me the ratios ROE, ROA, I don’t know those things. It doesn’t matter to me what happens — what matters to me is that there’s social value. But I am confident that if we create social value, it will create financial value to our investors and this is the reason why. So first off, how do we create social value? In everything we do, we’re looking at the customers first. Does this work for the member, whether it’s a product, whether it’s a procedure, whether it’s a process?

…

The value for the investors is not the interest on the Rs 2,000 loan — that’s nothing. The value for the investors is when tomorrow she moves from 2 to 10 to 20 to 30 [thousand rupees] and stays with us — that’s when you create financial value. When she moves from one product to four products to five products. The value to the financial investor comes there. In order to create that later value to the investor, I need to have a customer who is extremely loyal to me. How do I make her loyal? By doing what’s right for her.

…

If we don’t treat the customer right today, you undermine long term shareholder value. Every single investor understands that because we are in the fortunate position of being able to pick. There are some investors that don’t understand this, we just haven’t selected them.

Please read the interview if you have a chance. It is worth the time.

Reading time: 5 – 8 minutes

I have begun to read Umair Haque more and more lately.  Haque’s writings have done a few things for me:

1. Reminded me why I love to write and share my ideas.
2. Challenged me to think differently and more critically about the current state of the economy and of business in general.
3. Fired me up about the possibilities for the future.

As all of you know, I love innovation.  I particularly love innovation in technology but I also love innovation in business models, management styles, organizational structures, etc.  I love pushing the boundaries of what is possible and challenging assumptions and commonly held beliefs.

Recently I read a post by Haque that got me thinking.  The post was entitled, “A Manifesto for the Next Industrial Revolution“, and in the post Haque does a great job at assessing where things are and then follows on with what he thinks the future looks like.

Haque suggests that the future of, say, finance, isn’t simply getting more money to lend, it is about organizing the system better.  Haque uses the example of Muhammad Yunus and the Grameen Bank to illustrate this point.  Yunus didn’t simply get some money together to loan to the folks at the bottom of the pyramid, he changed the way lending worked by organizing the lendees into groups that would create necessary lendee payback discipline via peer pressure (this was much needed since there was no collateral available to back the loans) in order to keep payback rates high, which, in turn, made the whole Grameen system sustainable and able to help many more people.

Haque thinks that organizing things is where the innovation that will fuel the next industrial revolution will come from and I don’t think he is far off.

Google is probably one of the most shining examples of the organizing phenomenon.  Their mission is to organize the world’s information and, in doing so, they revolutionized the advertising industry while making it more efficient.  This of course let to incredible growth and huge profits for Google.

Some other examples include Threadless (organizing a group of t-shirt designers and t-shirt buyers who create and buy the shirts rather than Threadless trying to guess at what people might want) and Etsy (organizing production of handmade goods into one place).  Both of these websites list in my top ten and both are centered around organizing and enabling people to choose and create what they want rather than trying to guess at what people may want, mass produce that product and then jam it down people’s throats until the inventory is sold.

What is interesting about both Threadless and Etsy to me is that at a high level they really created marketplaces and marketplaces aren’t new at all.  Perhaps rather than using the term organize we should really use the term market.  Creating markets where people can interact and exchange ideas, goods and services are inherently valuable.  The trick is trying to figure out where the business who facilitates the market can extract the value that will keep the organization and its market up and running.

With Etsy and Threadless the value extraction is fairly simple in that goods are sold to people who pay for them and the companies make a profit (Etsy from fees from the sellers and Threadless through the sales of the t-shirts).  Selling goods is a clear cut way to extract value but perhaps there are other innovative ways to extract value from a market in other industries.

Haque throws out some more things that need organizing including the world’s hunger, energy, thirst, health, finance and education.  All of these are industries that need fresh ideas and new blood and are perhaps areas in which businesses that organize can thrive.

I personally get fired up about innovating in the financial space since I have always been a fan of the financial markets but also realize that they are in dire need of innovation.  What ideas do you all have for a business that organizes things in a way that benefits the business and the financial industry? How do you think the theme of markets and organization can help with the other areas Haque mentions?  I am curious to hear your thoughts and I hope this idea of organization as a means of change and innovation inspires you as much as it has inspired me.

Midwest side note: I see organization as a part of the solution around making the Midwest into the technology hub is really should be.  I find that a lot of people around the Midwest don’t know what other folks are doing and that lack of information really stalls innovation here.

Think of the issue in comparison to Silicon Valley.  In the Valley there are a number of events, meetups, etc. that you can attend in any given night.  This allows for great networking and fantastic visibility into what is going on in the area.  This visibility really helps people to collaborate on things, find talent for their business, get the funding they need and many other things.

The idea of organization as a means to innovate and create value is exactly what Frank and I had in mind when we created TECH cocktail.  We believed, and still believe, that organizing technology focused people in the area would lay the ground work for some amazing change to happen here in the Midwest and we’re starting to see the idea become reality.

We’re going to continue on with our organizing mission by working on events in each of the Midwest cities (i.e. Ann Arbor, Madison, etc.), which will be added the current roster of Chicago, Champaign, D.C. and Boulder.  The intent here is to organize the local communities and then to bring all of the Midwest communities (and some other select communities) together once or twice a year so that everyone from the Midwestcan start a regular dialog with one another.

When combined the Midwest is much more, and will be much more, than the sum of its parts and we hope to be the folks that organize and, therefore, catalyze the technology innovation here in the Midwest.

Reading time: 6 – 10 minutes

Andrew Lahde, manager of Lahde Capital (a small hedge fund in California), announced he is shutting down his fund.  He broke on to the scene in a big way earlier this year after his fund, only one year old at this point, returned ~866% betting on the subprime collapse.

The returns are one thing to be amazed about but his goodbye letter is truly something that will give you a jolt.  While I do think he goes a little off the edge here and there I do think that there are some interesting ideas scattered throughout the short letter that are worth thinking about. At the very least this is a smart guy who now knows what he wants in life and has realigned his priorities and I say good for him.

Here is the letter in full (via FT Alphaville and Portfolio.com).  Lahde surely knows how to go out with a bang, that’s for sure! (via The Big Picture)

Dear Investor:

Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don’t worry about my employees, they were always employed by Mr. Springer’s company and only one (who has been well-rewarded) will lose his job.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life — where I had to compete for spaces in universities and graduate schools, jobs and assets under management — with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.

On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft’s near monopoly. I believe there is an answer, but for now the system is clearly broken.

Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won’t see it included in BP’s, “Feel good. We are working on sustainable solutions,” television commercials, nor is it mentioned in ADM’s similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant — marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let’s stop the rhetoric and start thinking about how we can truly become self-sufficient.

With that I say good-bye and good luck.

All the best,

Andrew Lahde

Reading time: 3 – 5 minutes

As a lot of you know, the stock market was my first love as far a business goes.  I have followed the market closely ever since I was 13 and I continue to do so today.  In my relatively short time following the market I have seen some interesting things.  The unprecedented growth in the 1990s.  The tech bubble inflating and eventually bursting. And now I am watching the incredible sell off set in motion by the credit crunch.

I honestly thought that we’d see some support in the markets around the Dow’s 9,000 mark but the market continued to fall.  That surprised me a little bit considering the values that are there for the taking right now.  I am sure the value guys, like my former boss at Eaton Vance, Mike Mach, are starting to snag some solid companies are ridiculously depressed prices and they will make a killing on the upside (value hounds are going to work!).

To me the drop from the 9,000 level to the 8,000 level was complete fear.  Irrationality had set in.  Over the weekend I did some thinking about this while riding my bike on the lake front and I figured that over the weekend people would start to wise up and the smart investors would start buying again due to the incredibly cheap stock sitting right in front of them.  Today it looks like things are picking up a little and perhaps the fear, while still there, is becoming more rational (if that makes sense) and greed is picking up again.

Matt McCall put out a post today about his thoughts on the credit crunch and how long it may last.  McCall gave a time frame that I also would have suggested; about 2 – 3 years of tough times followed by 2 – 3 years of modest growth and then we will see things pick up again.

McCall also wrote about the difference between equity driven crashes and credit driven crashes, which I think bears quoting.

In equity driven situations, investors need to feel that prices have gotten low enough and they will come back in (fear turns to greed). In credit driven crashes, the whole system needs to “de-lever” and the process is longer and more complicated. The core issue is that families have too much debt. So, the debt needs to go away to fix the problem. Unfortunately, because of cheap debt, poor oversight and general greed, this debt party has gone on way too long. Consumers are underwater on mortgages and credit cards and the government is approaching the trillion dollar nut. Fortunately, corporations are generally not as bad off though some will get into trouble.

It seems that investors are starting to believe that prices have reached a point where they are too low (let’s hope anyway!) but, as McCall says, credit is a whole other story and that piece will take a while to clean up.

This credit crunch is a wake up call for all of us.  Americans have alarmingly high debt compared to the rest of the world.  They also have alarmingly low savings rates.  Combine the two and you have a recipe for disaster, a disaster that we’re currently in the midst of.

However, there is a positive side to all of this.  Perhaps Americans will begin to borrow less and save more.  This would be great for the country in the long run.  Also, as far as startups go, times will be lean for the next 3 – 6 years but in year 7 the best and most lean companies will be left standing and they will reap big rewards for their responsible business building efforts.  In essence we will have separated the wheat from the chaff, which will make our economy much stronger going forward.

I am looking forward to McCall’s follow up post on how VCs and portfolio companies can survive the next 5 – 7 years. It should be a good read.  In the meantime I would suggest reading his latest post in full.  It’ll be well worth the five minutes you’ll spend on it.

Reading time: 4 – 6 minutes

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).

Reading time: 2 – 2 minutes

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!

———————–

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.