Olson’s Observations

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.

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).

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.

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.

I received an advance reader’s edition of Creative Capital back in early March and have been dying to read it. The book, as I was told, was the story of the birth of the Venture Capital industry putting it right in my sweet spot. History and VC - what could be better? I knew I didn’t know the whole story but I figured there was going to be a lot about the early days in the Valley. Firms like Kleiner and Sequoia would be spoken about a lot and Hewlett Packard would be hailed as one of the early wins.

What I was surprised and delighted to find when I opened the cover and dove into the book was that the birth of venture capital happened right in my own backyard in Massachusetts with a firm called American Research and Development (ARD) and a Harvard Professor/Businessman/WWII General named Georges Doriot (oh, and Digital Equipment Corp founded right in Massachusetts was the first big hit for institutional VCs and for ARD).

While the book does give all of the requisite history of venture capital from Doriot’s founding of ARD after WWII, to the spinouts of ARD which included Greylock, to the rise of the valley with Kleiner Perkins and Sequoia what really kept me engaged was the biological information on Doriot and specifically his business philosophies and sayings.

Here are a handful of Doriot’s famous sayings:

A team made up of the younger generation, with courage and inventiveness, together with older men of wisdom and experience, should bring success.

One should not only be able to criticize but should always have a suggestion to make.

Don’t challenge others’ statements, have them repeat them over again.

Conditions which are best for workers will give best production!

Ask about prospects who didn’t buy product.

Always challenge the statement that nothing can be done about a certain condition.

Those are some great quotes from a very wise man and there are many more (in fact, Fred Wilson is posting one per day on his blog until he runs out).

I have to say that I subscribe to most if not all of Doriot’s philosophies and it is interesting to me that there are a lot of folks uttering the same philosophies today as if they were new even though they were developed by a man over 50 years ago (and there was someone who probably figured them out before him as well).

One particular section of the book hit me hard since it touched on the relationship between entrepreneurs and VCs (something I have thought a lot about and also have written a lot about over the years). I will quote the paragraph from the book in full here:

ARD’s biggest hurdle was usually convincing these small, yet proud companies that they needed outside help. But Doriot didn’t hold that against them. He knew that if entrepreneurs weren’t self-driven and a bit egotistical they’d be punching the clock for IBM or General Electric. [Doriot] then closed his lecture by stressing the importance of management assistance in the venture business. “There is always a critical job to be done,” said Doriot. “There is a sales door to be opened, a credit line to be established, a new employee to be found, or a business technique to be learned. The venture investor must always be on call to advise, to persuade, to dissuade, to encourage, but always help to build. Then venture capital becomes true creative capital - creating growth for the company and financial success for the investing organizations.”

That’s a mouthful and a half but what Doriot says in that small amount of words is very important. It seems as if there will always be a struggle between entrepreneurs and VCs in that entrepreneurs by nature will never think they need a VC or that VCs will add value to their company. In reality entrepreneurs need VCs and VCs need entrepreneurs in order to change the world which is what we’re all in it for in the first place. (Of course that statement doesn’t apply to all businesses as some can be bootstrapped and/or don’t take a lot of up front capital.)

I can’t do this book justice in a short blog post so I will stop here and say that I highly recommend this book to any VCs or aspiring VCs out there. Doriot’s words of wisdom can’t be beat when it comes to venture and to business. I would also recommend this book to entrepreneurs who are interested in the history of VC. History always provides context and this book certainly gives that much needed context to the entrepreneurial climate in the U.S. and abroad. Lastly, I recommend this book to any person interested in or currently practicing the art of business. This book will show you how America’s entrepreneurial scene came into being and why we still look to entrepreneurs and VCs to drive the next wave of technological innovation that will propel us even further into the future.

Matt McCall pulled together a pretty interesting post on his blog VC Confidential the other day based on a 2005 NY Times article entitled “So You Want to be a Venture Capitalist” by Gary Rivlin.

As someone who has recently entered the world of venture capital I was interested to see what Rivlin had to say and luckily Matt had pulled all the salient points together in his post (The guy is working me pretty hard so reading a whole article is tough these days… I thought VC was supposed to be a cushy job!).

Turns out that there is a lot of turnover at VC firms (70%+ at some of the top firms over an 8 year period from 1997 - 2005) for various reasons but it seems that a lot of times it is due to lackluster performance. Looks like VC is a true meritocracy - just like entrepreneurship - as it should be.

It also takes a while to see a new VC through to the “go/no go” stage.

It is a mentoring business with a long gestation period…”probably 6-8 years and you should be prepared for losses of about $20 million (per person)”.

I had heard these numbers before so this wasn’t shocking to me. That said, I did make sure that I joined a firm where I was going to be able to obtain a lot of mentoring. If you are looking to join a firm ask them if they will be able to spare time for mentoring. If they can’t you should consider learning elsewhere. VC is an apprenticeship business, no question.

Success in VC, as most people probably know/guess, is mainly due to VCs ability to judge people and their keen sense for market inflection points. This quote from NEA founder Dick Kramlich sums that point up nicely:

…it’s more about people skills and the ability to assess whether there’s a market for something.

This is perhaps why the transition from entrepreneur to VC can be a tough one. After all when you invest in a company you aren’t going to operate it since that is what the operators/founders are there for. Operational experience will no doubt allow you to give the portfolio company solid and informed guidance but in the end you aren’t the one jumping into the day to day management.

As a VC you need to be able to asses the people, the technology and the market as well as recognize patterns. I would also argue that the people part is very important. A lot of top VCs agree with that sentiment including the founder of the very first institutional VC fund, Georges Doriot, who always said that a Grade A person with a Grade B idea will win over the Grade B person with the Grade A idea any day of the week. I subscribe to that completely. As with most things it always comes down to the people.

I would love to get my hands on some data in 5 - 10 years to see how well the “entrepreneur VCs” did compared to the folks who haven’t operated. With the current trend being to turn successful entrepreneurs into VC I think there will be some interesting data to look at (Noam - how about this for a subject matter on the next paper we team up to write?). It would be nice to have some hard numbers to back-up the anecdotal evidence Rivlin brings up in his article like this snippet:

“Most of us learned the hard way that venture investing is best left to the professionals,” said Marc Andreessen, the co-founder of Netscape Communications.

Shortly after America Online paid $4 billion to buy Netscape, Mr. Andreessen helped bankroll a venture firm called 12 Entrepreneuring, a short-lived partnership forged in early 2000 by Benchmark and a pair of successful Internet entrepreneurs, Halsey M. Minor and Eric Greenberg. But 12 Entrepreneuring ceased operations only 18 months after it started, and the partners, including Mr. Andreessen, lost nearly two-thirds of the money they had invested.

Of course that is only one case and I should point out that there are a number of great entrepreneur-cum-VCs around like Brad Feld. The point I am making is simply that success any given related thing - whether it be entrepreneurship or something else - doesn’t mean you will be a great VC.

“I think what a lot of these guys [i.e. people who jumped into VC in the late 90s] learned, some the hard way, is that you’re a natural athlete or you’re not,” said Sanford Robertson, the co-founder and former chairman of the investment bank Robertson, Stephens & Company, who has been investing in venture funds for more than 20 years. “Some can do it, and some can’t, and like with athletes there’s no way of telling until they take the field.”

It looks like you either get it or you don’t. It is a natural ability to asses people and their technology/business. Wow, for someone new to the business that’s a pretty interesting - and heavy - tidbit. I’d like to think I have a good (albeit naive at this point) sense for this business but time will tell.

I will leave you with a tidbit about the background of one of the most famous VCs in the world, Mike Moritz. Moritz proves there is no obvious background for a great VC. He was a business journalist and writer for Time before he joined Sequoia in 1986 (although he did hold an M.B.A.).

Side note: I have been meaning to put up my personal reflections on my first few months in VC. Those are coming soon. Stay tuned.

As 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.