Something to keep in mind just in case someone ever wants to throw several million my way…
I still don’t think you should raise as much as you can, for several reasons, but I’ll just highlight the most important. You will spend what you raise. If you raise $10 million, you will quickly ramp up to a burn rate of $800k a month, because the investors don’t want their money to sit in a bank account earning interest with 36 months of runway while you hire employees 2 and 3. The amount of money you raise sets you off on a course at a specific pace. Your board will want to know why you aren’t deploying capital. You will hire a marketing team because you can afford to hire a marketing team. You will hire a vp of sales before the product is ready because you can afford to hire a VP of sales. Companies that raise $10 million dollar A rounds don’t raise $5 million dollar B rounds, they raise $30 million dollar B rounds. If you have not accurately predicted how quickly you can grow the top line, you will quickly find that the cap table has gotten away from you, and you will have less flexibility to build the company the way you might like to if the market zigs when you thought it would zag. You want to give yourself the flexibility and room to react to market forces so that you can build the best company possible.
Duncan Watts summed up an experience on cumulative advantage this week in the NY Times, based on the article ($) of a year ago in Science. It’s of importance to anyone in the position of publisher, having to try and select which of many candidates to invest in, as well as anyone scratching their head wondering why Justin Timberlake is so popular.
In our study, published last year in Science, more than 14,000 participants registered at our Web site, Music Lab (www.musiclab.columbia.edu), and were asked to listen to, rate and, if they chose, download songs by bands they had never heard of. Some of the participants saw only the names of the songs and bands, while others also saw how many times the songs had been downloaded by previous participants. This second group — in what we called the “social influence” condition — was further split into eight parallel “worlds” such that participants could see the prior downloads of people only in their own world. We didn’t manipulate any of these rankings — all the artists in all the worlds started out identically, with zero downloads — but because the different worlds were kept separate, they subsequently evolved independently of one another.
This setup let us test the possibility of prediction in two very direct ways. First, if people know what they like regardless of what they think other people like, the most successful songs should draw about the same amount of the total market share in both the independent and social-influence conditions — that is, hits shouldn’t be any bigger just because the people downloading them know what other people downloaded. And second, the very same songs — the “best” ones — should become hits in all social-influence worlds.
What we found, however, was exactly the opposite. In all the social-influence worlds, the most popular songs were much more popular (and the least popular songs were less popular) than in the independent condition. At the same time, however, the particular songs that became hits were different in different worlds, just as cumulative-advantage theory would predict. Introducing social influence into human decision making, in other words, didn’t just make the hits bigger; it also made them more unpredictable.
The VC bloggers have been discussing alternate funding models for a while, but this story from the New York Times on Sevin Rosen Funds giving back $250 million to $300 million to investors is more than just punditry, it’s walking the talk…
“If we really believe that there are fundamental structural problems in the venture industry, should we raise our fund and just hope that the problems will get better?” the firm wrote. The answer was no.
The recent Frontline documentary on China, The Tank Man, set a striking contrast of the 1989 Tiananmen Square protests against the business and economic boom created since then. They describe this flow one to the other as an unspoken social contract between the government and the people: we’ll give you jobs and prosperity if you accept the status quo on social freedoms. And yet they also point out the rapid growth in protests throughout the country. Is this a contradiction? Is the government just buying time?
“Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it.”
– Steve Jobs, Fortune, Nov. 9, 1998
This Street.com story on Apple’s under-investment in R&D has been making the rounds with the exclamation that more money does not equal more innovation. As a principle, I agree with that, and in fact it’s one of MIG’s axioms that “innovation is not expensive”. But by this we mean you can’t simply throw money at the problem, you have to tap into the capabilities of people. That said, money — especially to a hardware company with proprietary software — doesn’t hurt, and it’s worth looking more deeply into Apple’s situation to understand what’s going on.
- The Street article compares the most recent R&D spending as a percentage of sales (“While sales have grown at a compounded annual rate of 27% over the last four years, R&D spending has grown at an average rate of just 5.6% per year over that period.“). This masks the exponential increase in recent sales (65% net sales in Q4 2005). Since innovation is a function of how people work, scaling R&D simply to match sales could be futile and possibly harmful as an organizational development change. Just because accounting usually measures R&D as a percentage of sales doesn’t mean it should be managed that way.
- In absolute terms, Apple’s R&D investment is up $59 million in Q4 2005 over Q4 2004. For all we know this might be a good, sustainable R&D investment rate for them.
- The IDC analyst quoted in The Street article of course doesn’t know the reasons for the drop in R&D investment (nor do I). The article does mention an equally plausible theory is that Apple is learning how to be more innovative with less money, e.g. through management innovation that ultimately leads to other kinds of innovation. And isn’t doing more (sales) with less (R&D investment) a good thing?
- The comparison to other companies in Apple’s industry is a good idea, but the comparison is restricted to R&D as a percentage of sales. It ignores the effectiveness of that R&D investment vs. other factors and the directionality of the R&D-to-sales relationship. Just consider where, with regard to new markets, Apple is heading and where Sony is heading.
- Where the article really misses the point, IMHO, is by saying, “But even with all of Apple’s market and business prowess, the company is still, fundamentally, a technology company.” It may not be in the IT analysts’ interest to say so, but the nature of R&D investment is changing (at least in Apple’s industry) from solving tough technical problems to solving tough design problems.
- Finally, it’s ironic that analysts who have historically criticized Apple’s returns now criticize their frugality! I tend to think the traditional IT analysts will always find a way to not love warm, fuzzy Apple.
When everyone realizes Apple faces more design than technology issues, analysts will start to ask how much companies are spending on R&D of people rather than R&D of technology.
- Listen to the Gentiles, Pay attention to what intelligent people are saying, even if they do not have your customs or speak your analytical language.
- Question the question, In general, if people in a field have bogged down on questions that seem very hard, it is a good idea to ask whether they are really working on the right questions. Often some other question is not only easier to answer but actually more interesting!
- Dare to be silly, What I believe is that the age of creative silliness is not past. Virtue, as an economic theorist, does not consist in squeezing the last drop of blood out of assumptions that have come to seem natural because they have been used in a few hundred earlier papers. If a new set of assumptions seems to yield a valuable set of insights, then never mind if they seem strange.
- Simplify, simplify, The strategy is: always try to express your ideas in the simplest possible model. The act of stripping down to this minimalist model will force you to get to the essence of what you are trying to say (and will also make obvious to you those situations in which you actually have nothing to say).
James Surowiecki’s Lifers reviews some statistics and concludes that — contrary to popular belief — long-term employment in the U.S. hasn’t disappeared at all. But what has changed is the amount of risk employees are expected to shoulder in terms of…
- Benefits: Health benefits and pensions have decreased
- Stratification: “Companies now tie compensation more closely to performance, so that people at the top take home much more, relative to their colleagues, than did the high-fliers of thirty-five years ago.“
- Unemployment: “People who are unemployed stay unemployed, on average, about fifty per cent longer now than they did in the seventies, and only about half as many receive unemployment insurance as did so in 1947.“
Yale political scientist Jacob Hacker has called this “the great risk shift.”
Perhaps a better framing of the Index of Sustainable Economic Welfare (ISEW) is GNH: Gross National Happiness. Jigme Singye Wangchuck, king of the Himalayan nation of Bhutan, says GNH consists of “economic self-reliance, a pristine environment, the preservation and promotion of Bhutan’s culture, and good governance in the form of a democracy.”
On a related note, I just returned from Italy where the Slow Food movement has morphed into Slow Cities, an emphasis on local sourcing and less harried lifestyle. Spreading to other parts of Europe, the media reported the conflict between the desire for slower cities and the perceived need to compete with countries like China and India.
The Economist reassures us that manufacturing jobs shifting to the east is natural, and that those are actually less safe, less desirable jobs. The “rich nations” will provide more services, which are difficult to export. And…
People always resist change, yet sustained growth relies on a continuous shift in resources to more efficient use. In 1820, for example, 70% of American workers were in agriculture; today 2% are. If all those workers had remained tilling the land, America would now be a lot poorer.
Given the destructive human rights situation in China, how do we decide to interact with companies there? I don’t think no action is a choice; the sheer amount of influence the Western world and China exerts on each other through commerce alone makes it impossible for any one person or company to remain unaffected.
Free marketers like the Cato Institute argue that “America should not play the dangerous game of pitting human rights activists against free traders. American prosperity and global prosperity are better served by open markets than by well-intended economic sanctions.” But this does nothing to address the human rights problems, and we know that ‘all it takes for evil to triumph is for good men to do nothing.‘
And there’s no doubt we should be careful about it, as even seemingly innocuous efforts like Yahoo!’s can draw undesirable attention.
One option is to exert pressure politically. The U.S. government is already doing this to a limited extent. But given we cooperated much less with the communist Soviet Union and apartheid-ridden South Africa, it’s surprising we cooperate so much with communist, oppressive China. Politicians could use this issue in order to embarrass opponents for their cow-towing China-friendly behavior, but given the reflexivity of the dollar that’s a long shot. A subtle variation on this would be to embarrass anyone not willing to reduce our debt because it’s handing control of our economy to Asia, which in turn will give us more leverage with Asia on issues like human rights.
I was exposed to the ISEW by Josephine Green of Philips at the ID Design Strategy conference. She struck me as the female John Thakara: highly intelligent and morally scolding, and dropping in your lap the challenge of solving the problems she just convinced you are vitally important.
To understand how ISEW differs from, say, measuring GDP, first look at them graphed together:
Then read the description:
The ISEW is one of the most advanced attempts to create an indicator of economic welfare. It is an attempt to measure the portion of economic activity which delivers genuine increases in our quality of life – in one sense ‘quality’ economic activity. For example, it makes a subtraction for air pollution caused by economic activity, and makes an addition to count unpaid household labour — such as cleaning or child-minding. It also covers areas such as income inequality, other environmental damage, and depletion of environmental assets.
And hear how the proponents respond to criticism:
Some commentators say that the use of such ‘non-statistical’ judgements invalidates the utility of ISEW. However, this is even more of a problem for GDP when it is used as an indicator of progress — for its own value judgement is that these adjustments be set at zero.
In the past you might have gotten traction with a name like ISEW, but I’d like to see it reframed — possibly with the help of the Longview Institute — into an idea progressive political candidates can run on. For now, we can all start chipping away at the use of GDP.
James Surowiecki elegantly encapsulates yet another economic trend, this time it’s the falling-yet-floating dollar. Essentially the dollar is falling because Americans don’t save and keep spending, accumulating incredible debt, and the dollar is not crashing because Americans keep buying… from Asia, who is interested in buying lots of dollars to prop up our currency and our spending habits.
So if no one panics, we’re alright for a while. But once the US population pyramid flattens out, we’ll have less spenders and more older adults wishing they had saved. And then maybe Asia won’t view us as such a great candidate for subsidies.
I was talking to Monika and Ulrike from Germany last night and that country has the reverse problem: a lot of saving and not enough spending. Compared to the US, it seems their habits favor long-term stability and short-term pain.
Brett points to The Quality Cure? (paid archive) a New York Times profile of David Cutler’s ideas for reforming healthcare in America, where providing more care without going bankrupt seems impossible. Cutler, an economist, developed financial models to show how we should “focus on improving the quality of care rather than on reducing our consumption of it. Rather than pay less, he wants to pay more wisely — to encourage health-care providers to do more of what they should and less of what is wasteful.” (see Atul Gawande’s The Bell Curve for more on measuring doctors’ performance.)
To accomplish this, he’s acknowledged that purely financial thinking isn’t enough, we need to integrate the economics with human-centered organizations, smarter use of technology and innovative organizational design:
Reoriented to managing ”health” rather than merely costs, H.M.O.’s might again become a useful part of the healthcare landscape, Cutler says. Managing care, he says, was a necessary idea that went off the tracks as H.M.O.’s became remote, single-minded cost-control freaks. His models for the future are the progressive organizations (he calls them hippie places) like Kaiser [Permanente, the insurer and provider based in California] that employ their own doctors, invest in computers and ”engage” their patients. They manage quality as well as cost.
The Economist says, tongue-in-cheek:
…the dollar has been dethroned even sooner than we expected. It has been superseded not by the euro, nor by the yen or yuan, but by another increasingly popular global currency: frequent-flyer miles.
Turns out there’s about $14 trillion in frequent flier miles in circulation.