Olson’s Observations

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

The Credit Crisis: What’s with the stock market?

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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.

Written by Eric Olson

October 13th, 2008 at 9:59 am

The Far Horizons Project: Part I

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For those that don’t know I will now confess that I am a space geek and that I also spend some time volunteering at the Adler Planetarium here in Chicago teaching both kids and adults about space and the cosmos.  I recently started to get involved in a project going on at the Adler that I find very exciting.  The project is called Far Horizons and the goal of the project is to encourage amateur space exploration and we plan to do so through high altitude ballooning missions and, eventually, through the design and launch of earth-orbiting micro-satellites.

The long term vision of Far Horizons is to create a community, centered around the Adler, that will design, build and operate space missions.  It will be like our own mini NASA.

A few years ago the founders of Far Horizons heard about a group of people building things called “CubeSats”. CubeSats are extremely small (4 inches per side cubes) satellites built to certain specs.  The cost to build a CubeSat is pretty cheap and the launch costs (via secondary payload in a private launch) are about $40,000.  Not cheap by any means but still relatively inexpensive compared to a traditional satellite launch with costs on the order of $40,000,000.

What the founders realized was that CubeSats were an ideal opportunity to bring space exploration to the public.  Until now space exploration has been the province of large corporations or governments and has not involved the general public. CubeSats meant that individuals or clubs could now participate in space exploration directly.  Knowing this they started work on Far Horizons.

That said, the founders realized they needed to start modestly and that lead them to high altitude ballooning.  High altitude ballooning is a great test bed for components that will eventually end up in the satellites. Many of the challenges faced with high altitude ballooning are similar to those that will be encountered in future satellite missions; a tight power budget, weight restrictions, very low pressures (the balloon flights go high enough that the pressure is <1% of sea level), low temperatures (down to -60 degrees), high radiation, the need to use radio communications, etc.  Also, with ballooning new designs are more easily able to be tested.  A complete mission only costs a few hundred dollars (including gas for the chase vans) and a few days to a few weeks for the equipment building.  Not bad right?  On top of all the benefits I just listed ballooning is much more accessible to high school students, which is one of the programs and the Adler’s main audiences.

So, as I mentioned I recently joined this project and I am very excited about it.  I participated in my first balloon launch last weekend and we hit about 114,000 feet at the peak (click here for pictures) which is above 99% of the Earth’s atmosphere.  At this height the horizon is about 400 miles away.  You can actually see the blackness of space above and the curvature of the earth below. The images are fantastic.

In the mission this past weekend we had HD cameras as the payload.  I hope to get some of the video together soon and post it here. Here is a picture of the path of our balloon from last weekend.

The amount of technology involved is more than one might think and is pretty interesting. For example, each balloon has a GPS receiver and a radio transmitter on board.  The GPS signals are translated to what are essentially a set of modem tones and those tones are then transmitted in a form of packet radio called APRS.  The chase van is equipped with a receiver that grabs the packets, translates the tones back into data and then feeds them to a computer in the van.  A plot point is then created on a map (including the height, speed and bearing of the balloon) on the laptop along with a GPS data point for the current location of the chase van.  That is fairly basic but things will only get more interesting on that front as well as we move to developing satellites.

Speaking of tech, we really need a solid programmer (or two) on the team to help with our tracking software and some other items.  We will probably do this work in C but we’re flexible. If you are interested in joining the team please shoot me a note.  Also, if you are an engineer or are just generally interested in helping out please send an email my way.

I will post further udpates over the months/years as we move this project forward.  I am excited to be working on this from a pure scientific standpoint but also because this has the potential to be an incredible learning took for both children and adults.  Again, I will keep you all posted on the progress of all of this.  It should be a blast to democratize space exploration.

Written by Eric Olson

October 10th, 2008 at 7:06 pm

What do VCs think about the market meltdown?

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This is a question I have been hearing a lot lately and one that I have thought a lot about.  My initial reaction is simply that VCs are long term investors so we don’t freak out about these market fluctuations.  A couple other thoughts I had were simply that the limited partners in VC funds are so large that they will continue to be good for their commitments and that the IPO market is already non-existent so, from that perspective, things can’t get much worse with regards to the the IPO-as-exit exit strategy (however, they can get worse from the get-acquired-by-big-co exit strategy).

Matt McCall referenced a post today on his blog that came from PE Week.  The PE Week post did mention the “long term” comment and some others but also suggested that VCs and their portfolio companies have actually become smarter about business since the dotcom bust and that has helped them weather the current storm without too much worry.

Below you will find the four ways that VCs and portfolio companies have changed since the dotcom bust as published in the PE Week article.  The mindset is certainly different than it was in the bubble but in some ways it is still the same (just this week I saw a couple situations of startups acquiring startups which made me wonder a bit about exit strategies).

1. Better Money Management: Milestones matter to VCs. Ask any entrepreneur, and you’ll find it’s likely he or she are getting money in tranches based on deliverables. Most tranches go through, even when milestones aren’t met, but the process allows VCs a better way of keeping track of the progress of their portfolio companies. VCs are less likely to write mega checks in the early stages, many have raised the bar of proof points needed to get a big round. Money is also more likely to go to things that directly drive valuation increases as a smaller percentage of any round is going to PCs, servers and bandwidth.

2. New Sales Models: It used to be about “Big Game Hunting” and multimillion dollar site licenses. It’s a model that was great for vendors: get all the money up front, then worry about delivering the product. But Software as a Service permanently transformed the way IT was sold. Now new installations are cheaper and can be scaled slowly. It’s a model that’s been adopted by IT appliance and PC companies as well. So when Datamonitor finds that IT budgets aren’t going to rise in 2009 Datamonitor Survey , there’s less reason to freak out. Most IT buyers have already planned their spend out: it’ll be re-upping on the services they’re already subscribed to.

3. Decreased Addiction to Advertising: The banner ad was a big part of any dotcom business model. When advertising budgets fell, hundreds of online businesses shriveled on the vine. Now, online businesses look less to online advertising for real revenue. Google Adwords had a big hand in that. Suddenly it was a lot easier to install advertising on your site, but it was also less lucrative. Nobody ever got rich putting up Google Ads, but at least using the service saves companies from having to hire expensive advertising sales people. The addiction to advertising has been broken and many companies are looking for other ways to make real value online.

4. Moderate Exit Expectations: If you’re not looking to flip a startup to the public market, what do you care that Wall Street’s investment banks are falling like dominos? Had this same crisis had happened 10 years ago, you can bet VCs would be pulling their hair out. But when there are already no IPOs, it’s hard for the public market to get worse. When exit expectations are more reasonable, it’s easier to keep cash burn in check. Startups are less likely to build out sales teams, for example, planning perhaps to later plug in to an exisiting sales organization via aquisition.

Written by Eric Olson

September 25th, 2008 at 12:21 pm

Posted in VC

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Technology Transfer in the Midwest: Looking Up

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Crain’s Chicago Business published a great article about technology transfer in the Midwest a few weeks back entitled “Seeking a breakthrough“.  The article specifically focused on tech transfer in Illinois and mentioned that, to date, Illinois has not done a great job of tech transfer.

Having come to Chicago from one of the most vibrant tech transfer centers in the world, Boston, MA (second only to Silicon Valley imho), I have seen what a great tech transfer system looks like and what it can do for the local economy.  Compared to Mass and the Valley we haven’t been doing a great job of commercializing technology from university labs (and from government labs) here in Illinois.

We all know the stories that still break our hearts.  Mosaic/Netscape, PayPal, YouTube, etc.  All of these companies were founded by Illini and yet ended up on the west coast.  The numbers also back up our lack of tech transfer.  From the Crain’s piece:

Between 1996 and 2006, Illinois universities spun off 124 companies and made $180 million from startups and technology they licensed directly to existing companies, according to the Deerfield-based Assn. of University Technology Managers. In that same period, the Massachusetts Institute of Technology alone started 220 companies and made $344 million. Stanford University made $209 million between just 2002 and 2006.

Those numbers say it all but we can (and will) turn this around.

What can we do to turn this around? One of the first things we need to do is not so easy.  We need to build some high profile success stories here in Illinois.  I would argue that is already happening with FeedBurner (acquired by Google in 2007) and TicketsNow (acquired by Ticketmaster in 2008) along with a handful of other solid companies that have exited recently (disclosure: DFJ Portage was an investor in FeedBurner and TicketsNow).  That said, those companies did not come out of university labs.  However, the success stories should still show people both in and out of labs and investors that great companies can, and are, built right here.

As the Crain’s piece suggests, more high profile successes in the state will create more technology millionaires who will then help to mentor and seed the next generation and so on and so forth.  This is the same way Silicon Valley and Boston, MA were born and why the biggest thing we can do is build some very successful technology companies here in Illinois.

The infrastructure is also being put into place to make technology in Illinois a mainstay.  The University of Illinois at Urbana-Champaign has built a fantastic research park and incubator (which I frequently visit and which will house TECH cocktail Champaign this week) as has the Illinois Institute of Technology (again, another place I frequent).  Both of these places along with other facilities are helping to change the tide of tech transfer here in the state.

What about the money though?  We all know that investors like to be close to their companies, which is why many Illinois startups have to leave the state to get up and running.  So we also need more investors here in the state.  The good news is that we are starting to see a growth in the investor pool here in Illinois.  From the Crain’s piece:

U of I created an independent fund, Illinois Ventures LLC, based in Chicago, with the help of private donors in 2002. Its goal is to provide early-stage money and logistical help to university-based startups.

Illinois Ventures has invested $20 million so far in 15 companies, among them Tetravitae Bioscience Inc., an alternative fuel company in Chicago, and has attracted another $300 million in outside investments, much of it coming from venture-capital funds on the coasts.

Ron Kirschner, a retired physician with an MBA from DePaul University, started Heartland Angels in Skokie in 2004. The group has grown from six to 22 investors and has put more than $3 million into six early-stage Midwestern companies. Four of those grew out of universities, among them Abiant Inc., a Deerfield company based on research from the University of Chicago and New York University. The startup uses imaging to help drug manufacturers improve products by mapping how they affect the brain.

I would also add the the Chicagoland Chamber of Commerce created a fund a little while back called the Illinois Innovation Accelerator Fund (i2A for short) which is a $10mm vehicle dedicated to funding innovative technology companies here in Illinois.

Also, as most of you know, the firm I am an associate with, DFJ Portage Venture Partners, focuses only on the upper Midwest and has for quite some time.  We are able to bring the global resources of Draper Fisher Jurvetson (DFJ) into the region while remaining locally focused, something we think will really help the region grow and help entrepreneurs create world class companies right here in Illinois (and throughout the Midwest).  As you can imagine we are very bullish on the Midwest as a technology center and we are excited to be part of the growing technology community here.

Successful technology transfer efforts will be a big part of what ultimately makes Illinois a leader in technology and tech transfer efforts are certainly getting exponentially better each and every day here in Illinois (for example Northwestern did a $700mm deal last year to sell part of its royalty rights to Pfizer’s pain drug Lyrica - a drug based on Northwestern research).

We are just now hitting the big upswing in the “hockey stick” here in Illinois and across the Midwest.  We are well on our way to rivaling the coasts when it comes to technology but we’ll no doubt do it our own special way making the Midwest a unique and exciting place to start and build technology companies.

Further discussion on this topic: Chicago Tech Report: “Understanding why Marc Andreesen left Illinois” by Blagica Bottigliero

DFJ Network featured in USA Today

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A number of people have asked me about the DFJ Network since I joined DFJ Network fund DFJ Portage (Midwest network affiliate) back in February.  People seem to be curious about how the network works and what the purpose of it is.  Edward Iwata of USA Today apparently had the same curiosity and put together a piece in yesterdays USA Today about the network.

The piece is very high level but I think it conveys the value of the network to entrepreneurs and to the VCs in the network.  The piece also covers why the network idea makes sense in an increasingly global world and why DFJ started to push the network idea forward a few years back.

I think the network approach DFJ has built thus far is solid and perhaps the future of the venture capital model.  I am excited to see the network idea evolve from the inside (especially given my interest in new and innovative VC models) and I’ll be sharing more of my thoughts and observations on the network as time goes on.

Written by Eric Olson

September 10th, 2008 at 11:23 am

Web Innovation: Have we seen the best or is it still to come?

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More and more posts about the web I come across seem to lament over the state of the web these days. Specifically these posts suggest that we aren’t trying hard enough to innovate. Some also suggest that we really aren’t innovating on the web anymore, that we’re just creating small iterations on what already exists. In fact Mark Cuban said as much in a post the other day:

Personally, I think Web 2.0 already is tired. When social networking or Twittering applications that are nice to have, but not a need to have, are the best we can do. We ain’t doing much. Lets get real. As much fun as Twittering can be, shouldn’t we all be able to agree that if its the latest and greatest application, the Internet has Jumped the Shark ?

When I first read that section of Cuban’s post I was floored. Then I started to think about it and wondered if he may be on to something. I started to agree with him. There are bigger problems to solve with technology. Why are we spending so much time, money, energy and intelligence on things like Twitter? Do services like Twitter really matter?

After thinking on that for a bit I came to realize that we may simply be in an innovation valley right now. If you were to look at innovation over time you would see that bursts of innovation hit followed by a lull and then another burst. Innovation is cyclical in the way that evolution is. Bursts followed by relatively long lulls, etc., etc.

So maybe the web hasn’t “Jumped the Shark.” Maybe we haven’t reached the limits of what the web can do. Perhaps we’re just in a valley, in the midst of a lull which will head into another burst of innovation.

Looking at things another way I also realized that innovations like Twitter could be the way the web, and computers in general, we meant to evolve from the very beginning. After all in the early 1960s, Robert Fano, at the time MIT’s Ford Professor of Engineering, organized Project MAC at MIT to demonstrate the feasibility of “general-purpose, independent, on-line use of computers by a large number of people” (cite: MIT’s Technology Review Magazine - July/Aug 2008 - p.96).

Fano organized the project because he believed that the power of computers didn’t necessarily lie in their computational power, he believed the power of computers could be found in their ability to connect people and allow for collaboration and the sharing of information. Aren’t these same high level goals that services like Twitter carry forward? I’d say so.

While Twitter may not be a technological marvel it is furthering how we communicate and that is really what computers and the web do best.

Are we in a lull? Perhaps. Are we simply taking the next steps toward better electronic communication? Sure. So, perhaps the future of the web isn’t as bleak as people like Cuban suggest. Of course only time will tell.

Side note: What is disturbing is the lack (and continual cutting) of spending on science here in the United States. Without more research funding we will fall behind and could see our society begin to decline (as many other societies in history have when they promote decadence and push furthering science and learning aside). We need to get money to the people who are working on the breakthroughs that really change the world.

Written by Eric Olson

July 11th, 2008 at 6:03 pm

Posted in Innovation, Web

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