Venture Capitalists May Be Left Out Of Burdensome Regulations On Private Equity

from the good-news dept

Last month, we were a bit worried that an admittedly clueless Congress might lump venture capitalists in with other private equity firms in putting forth new regulations. Venture capital is quite different from basic private equity, and the proposed regulations would be quite burdensome for VCs without having any benefit. These "systemic" risk rules don't make sense for VCs who aren't investing in public investment vehicles for short times, but instead do long term strategic investments in private startups. VCs have been pushing Congress on this, and it looks like they finally got through to someone, as it appears that Barney Frank is looking to exempt VCs from any such regulation. This makes a lot of sense as venture capital and traditional private equity are very different animals, and putting them both under the same regulatory rules makes little sense. Putting VCs under systemic risk regulations makes even less sense, considering how unlikely it is that VCs investing in startups are involved in any sort of systemic risk issues.

5 Comments | Leave a Comment..

Venture Capital: A Part Of The Ecosystem, But Not The Ecosystem

from the understanding-vc dept

This happens every so often, but in the last week or so, there's been a spate of "VCs are bad" types of discussions happening on various blogs. It kicked off with a blog post from Jason Fried at 37Signals, blaming VCs for pushing Mint.com to sell to Intuit. VC Fred Wilson did a nice job responding to that charge by pointing out the usual calculus in figuring out when to sell. Amusingly, very few people seem to notice what Fred was basically saying in his post. The undercurrent was that Mint.com likely wasn't doing nearly as well as its cheerleaders have assumed -- and thus, selling out made a lot of sense, not from a VC perspective, but from the founders' perspective.

Still, it's pretty popular in Silicon Valley to knock VCs, and TechCrunch has a post from Vivek Wadhwa pouring on the VC bashing, complaining about VCs taking way too much credit for innovation. Now, I'm a big fan of Wadhwa and his research on startups and innovation, and I'm among the first to bash VCs when it's warranted (and, yes, there are plenty of times when it's very, very warranted), but I think Wadhwa's piece goes too far. He's right that it's a little silly that the the National Venture Capital Association (NVCA) seems to be taking credit for all of the revenue and jobs created from any startup that has ever taken any venture money, but that doesn't mean that venture capital is meaningless in innovation.

While I'm actually a huge fan of building companies without venture capital (and am doing that myself), I think what people need to realize is that venture money is quite useful in enabling certain types of businesses. The problem is when people (very often Silicon Valley people) get into the mindset that raising venture capital is an end goal in itself, rather than looking at the overall business and seeing if it even needs venture money. During the dot com bubble, there was a time when people looked at venture capital like revenue -- the more you raised, the better you were doing, rather than recognizing that it really meant you just had a bigger hole to dig yourself out of. However, in some cases, where a company really does need investment capital to take a business to the next level, smart venture money can be a great help.

The nice thing today is that more and more businesses can be started, built and can scale without that need. That doesn't mean that there's anything wrong with venture capital. In fact, it's better if it's easier to build businesses. But that also doesn't mean that VC is somehow bad or isn't really a key part in accelerating certain innovative businesses. Venture capital is a part of the ecosystem, and that's a good thing. There are times when people give it too much credit, and there are other times when it doesn't get enough credit, but the real trick is just in understanding where and when it makes sense.

8 Comments | Leave a Comment..

Fewer Foreigners Coming To US Grad Schools: This Is A Problem

from the not-good-for-anyone dept

I still cannot understand the antagonism that many seem to feel towards skill foreigners getting jobs in the US. The job market is not a zero-sum game, and there are two important things to understand when it comes to these foreigners:

1. Studies have shown, repeatedly, that bringing in such skilled foreigners helps create new jobs by expanding the economy. In fact, 25% of all tech startups these days are done by foreign-born workers, and in Silicon Valley that number is over 50%.
2. The even bigger point: it's not as if these skilled workers suddenly disappear if they're not in the US. Instead, they remain in their home countries (or other countries) where they're still just as skilled and now more likely to be competing with US companies, who were hindered in hiring the best employees. Getting beat in the market by a foreign competitor isn't good for US jobs. It's terrible for US jobs.

And yet, thanks to the economy and our own immigration policies, guess what's happening? Not only is it incredibly difficult for skilled foreign workers to get jobs, many foreigners aren't even trying to go to US grad schools any more, knowing how difficult it is to get visas and jobs in the US. As many are noticing, this is undeniably bad for Silicon Valley and bad for innovation. Can someone please explain why it's somehow better to let those people compete with US companies, rather than work with US companies to grow them?

139 Comments | Leave a Comment..

Is It An Antitrust Violation To Agree Not To Poach Employees From Competitors?

from the not-entirely-clear dept

The news broke this week that a bunch of big name Silicon Valley companies are under investigation by the Justice Department for their hiring practices and potential antitrust concerns. The specific issue appears to be that the companies may have agreed to not try to poach top execs from certain companies. Apparently there was nothing stopping the employee from getting a job at one of these companies, if they took the initiative -- but the companies wouldn't initiate the attempt. In most cases, the idea was not to poach from partners -- which might just be good business sense (pissing off partners generally isn't a good idea). Where it gets tricky is the accusation that some companies had written agreements not to poach, which could lead to some charges of collusion. Oddly, the NY Times article's title claims that the issue is "unwritten rules" when the details of the article suggest it's not the unwritten, but the written rules that are the problem. There have been studies that suggest that root of Silicon Valley's success was the easy movement of people from job to job -- so if it's true that companies are holding back trying to get the best employees to move around, they may actually be doing a lot more harm to themselves anyway. And, on the whole, it does seem like there's an awful lot of movement between big name companies. Just this week at the Conversational Marketing Summit, one of the speakers had a musical chairs presentation that went on for a long time showing a bunch of execs and how they played musical chairs between Yahoo, Google, Microsoft, AOL, News Corp. and Facebook.

28 Comments | Leave a Comment..

Google Is No Longer Silicon Valley's Legal Defender

from the too-bad dept

When Google settled the lawsuit over its book scanning project, we noted with disappointment how this appeared to signal the end of Google's earlier position of fighting certain legal battles on principle. For a few years, Google's legal team had been taking up a variety of lawsuits purely on principle. In many cases it would have been cheaper and easier to settle, but Google had made clear that it saw those lawsuits as a way to define better law -- and that helped all of Silicon Valley (and, in many cases, the overall economy). Yet, in settling this lawsuit, it became clear that Google was no longer fighting lawsuits on principle, and, in fact would consider settling cases knowing that it actually made life more difficult for the rest of Silicon Valley.

Obviously, as a business concern, this is Google's right -- and some may even say that it's Google's responsibility to its shareholders to do such a thing. I would disagree, simply because, in the long term, by settling these lawsuits, rather than helping to establish what the law says, Google merely invites more lawsuits from more companies hoping to "settle up" as well. Plus, without the law being clear, it creates uncertainty and inefficiency in the market, and that's not good for anyone -- including Google.

Fred von Lohmann, over at the EFF, has written up an op-ed noting pretty much the same thing. The rest of Silicon Valley can no longer rely on Google to fight their legal battles for them -- and, we're all going to be worse off for it in the long run. Not that anyone ever should have expected Google to be the rest of the tech community's legal defender, but it certainly had been a welcome development -- which is apparently now over.

16 Comments | Leave a Comment..

Marty, The Dot Com Cleanup Guy, Is Baaaaaaack

from the watch-your-back dept

Want to know how healthy Silicon Valley startups are at any moment in time? One good way to judge is to just look at the sort of press that Marty Pichinson is getting. We first wrote about Marty, the dot com cleanup guy, back in 2002 when he was the public face of all those dot coms that were shutting down, following the first dot com bubble burst. Throughout that year there were a few more profiles of Marty. Even through 2004, we were still reading about how the startup liquidation business was going strong. Yet, in 2007, as the whole Web 2.0 bubble was inflating, Marty wasn't looking so hot. Business was slow and he was laying off people and shutting down offices.

But with the new financial crisis in full swing, have no fear: Marty's back! He's out amongst the press again, providing interviews on the best ways for startups to deal with impending financial troubles. And, of course, in the worst case scenario, I'm sure he'd love to help liquidate your business for you.

1 Comments | Leave a Comment..

Do Celebrities And Startups Mix?

from the where's-william-shatner? dept

Back during the first dot com boom, you may recall that various startups started to suddenly find "celebrity" front men, from Whoopi Goldberg touting "Flooz" to William Shatner pitching Priceline. This time around, it appears that the various Hollywood celebrities are perhaps a bit more involved in various web startups, but does it matter beyond getting an initial burst of press? Liz Gannes, over at GigaOm, has a good look at the rise of "celebrity" startup founders, noting that while there are a bunch of Hollywood folks jumping in and starting web companies, not many of them have done all that well (at best, a few are muddling along). Apparently, unlike Hollywood, having a big name star isn't all that's needed to make something a success. It also needs a plan that works.

7 Comments | Leave a Comment..

The Fine Line Between A Venture Capitalist And A Con Man?

from the ah,-silicon-valley dept

One of the things you learn about Silicon Valley after you've been here for just a little while is that there are some folks around here who are really, really into the technology and innovation aspect of things -- and then there are those who are only around for the money. Sometimes it's not as easy to tell the two apart as you would think, and that's opened up tremendous opportunities for con men. I recently read the novel Con Ed by Matthew Klein, which shows what a fine line there is, at times, between a startup and a confidence scam in Silicon Valley. While it's a bit extreme, if you've worked at a startup in the Valley you'll probably recognize many of the characters in the book. Klein certainly knows about his stuff on the Silicon Valley startup side -- a decade ago he ran his own Silicon Valley startup that employed me, among other folks. While I can highly recommend Con Ed to anyone who enjoys a good con book, you don't even have to dip into the fiction pages to keep up on the latest cons of Silicon Valley.

The latest true story appears to be about a "venture capitalist," Moses Joseph, who convinced a bunch of big institutional investors to give him money for his fund... and then used it for a bunch of personal stuff, while lying and forging documents to explain to the investors what he had done with the money. This isn't the first time we've seen such "fake" venture capitalists either. A few years ago, there were a few stories of "fake VCs" that were incredibly successful in separating money from investors who believed they were investing in the next hot thing.

Of course, the guy is claiming that he wasn't a con man at all, but just a real VC who got in over his head. My favorite rationalization, though, is from his lawyer, who claims that it's not like Joseph "took money from little old ladies. He didn't. It was from big institutional investors." As if that makes it okay?

The problem with these stories, unfortunately, is that they make people skeptical of the real VCs and real entrepreneurs who aren't scamming. It would be nice if these stories were confined to fictional accounts, but it seems like that's not going to happen any time soon.

8 Comments | Leave a Comment..

Is Military Spending the Key to the Next Silicon Valley?

from the sources-say-no dept

At the end of an interesting post about the changes in the American economy during the latter half of the 20th century, Dane Stangler has an interesting aside about the role of the military in the early development of Silicon Valley. He notes that the Silicon Valley started out as a hub for defense contractors and only later became a center for the private semiconductor industry and (still later) for the software and Internet industries. Stangler suggests that a city looking to become the next Silicon Valley might want to view military spending as a key driver for regional growth. He's right that the military was crucial to Silicon Valley's early growth, and of course it never hurts to have the military creating jobs in your city, but I'm not sure a city today could repeat Silicon Valley's route to high-tech prominence. A big reason the military was so important to Silicon Valley's early development was that a lot of the technologies pioneered there were so expensive that only the military could afford them. Silicon Valley firms were building radars, guidance systems, communications systems, and other stuff that was totally out of reach for ordinary consumers. And the Internet, of course, started its life as a military research network because each connection cost tens of thousands of dollars. But prices dropped steadily, and eventually, Silicon Valley firms created commercial spin-offs that became cheap enough that ordinary consumers could afford them, and the rest is history.

Today, private capital markets are a lot deeper and the consumer market for high-tech products is a lot larger than it was 50 years ago. As a consequence, the military just isn't as important to the semiconductor and communications industries as it was a few decades ago. The military still spends a ton of money on high-tech toys, but private firms also spend billions of dollars on R&D, and their spending is more squarely focused on consumer and business markets. Smart technologists don't have to chase military contracts, they can raise capital and go straight for the consumer market. Of course, it's entirely possible that the military is currently incubating some other category of technology that will become an important private industry in the coming decades. But if you want your city to become an important center for the IT sector, luring military contractors to your area is probably not going to do it.

Timothy Lee is an expert at the Insight Community. To get insight and analysis from Timothy Lee and other experts on challenges your company faces, click here.

25 Comments | Leave a Comment..

Innovation Isn't Dying In Silicon Valley; It's Just Changing

from the change-is-good dept

Apparently Judy Estrin, a well-known Silicon Valley tech entrepreneur and exec, is coming out with a new book warning that the infrastructure needed for innovation in Silicon Valley is going away. The complaint basically appears to be that there's too much emphasis on the short-term, with companies focusing on the quick flip rather than the long haul trends that need to be satisfied to drive real innovation.

I can absolutely understand where this is coming from -- but I think it's wrong. There absolutely are a bunch of folks in Silicon Valley who are focused on the quick flip and the easy cash out. Those folks have been around for a while. They get a lot more attention in the boom years, and during the down cycles you see them fleeing for somewhere else. But that doesn't mean that the overall culture of innovation is in trouble.

In some sense, the argument sounds similar to the complaints we hear from long-time journalists bemoaning bloggers, or professional television producers whining about YouTube. The tools of innovation have changed the marketplace, allowing many more entrants -- and not all of those entrants are all that serious about it, or even that good at it. So, there's a ton of crappy blog content, and millions upon millions of videos that would never, ever show up on a television. Yet, there are also plenty of gems exposed by these systems that would never have come out otherwise.

And the same is true for innovation culture in Silicon Valley.

The "tools" for creating a startup make it easier and cheaper than ever before to simply throw something up and see if it sticks. And, yes, much of it is terrible -- just like plenty of online content is terrible -- but out of that some great stuff evolves. The fact that there are plenty of short term thinkers just throwing stuff quickly at the wall isn't necessarily bad for innovation -- it just means that innovation is taking a slightly different path. There are plenty of folks in Silicon Valley still thinking about the long haul, and looking at the trends and understanding them. But the ability to throw something up and see if it sticks is valuable as well, as it allows a lot more testing of ideas in the real world, without having to make huge initial investments. That isn't to say that short-term thinking is a good thing. It's not. But some folks doing short-term thinking doesn't preclude others from using those lessons to build real long-term innovation.

11 Comments | Leave a Comment..

Silicon Valley Isn't Ignoring China; It's Looking For The Opportunity

from the looking-for-opportunities,-not-threats dept

Echoing some of Rebecca McKinnon's claims that we discussed recently, VentureBeat is running an OpEd piece by Rebecca A. Fannin, claiming that Silicon Valley has its head in the sand about the rising "threat" of competition in China. While there certainly may be some folks who aren't paying attention to China, my take on the situation is quite different.

Silicon Valley, as a broad generalization, doesn't worry about "threats." Instead, it tries to treat them all as opportunities. So, if Fannin is upset to see folks focusing on Twitter and the iPhone rather than the fact that China is building up a healthy and rapidly innovating tech economy, she may be focusing on the wrong thing. It does little to "fret" about the next big threat. There are always people warning about this or that big threat. A dozen years ago, it was how Japan was going to take over the tech industry. That didn't exactly happen. Sitting around and worrying about a threat doesn't make much sense.

Instead, it makes sense to pay attention to opportunities. And, many, many, many people in Silicon Valley view China as a huge opportunity. And, yes, new companies and technologies will flow out of China -- and it will present formidable competition -- but, again, competition isn't a real threat, it's an opportunity to do something even better and more innovative. So, I'd disagree with the assertion that Silicon Valley has its head in the sand about the rise of Chinese innovation. We're just focusing on how to make them opportunities.

10 Comments | Leave a Comment..

Keeping The Benevolent Dictators Of Silicon Valley Honest

from the is-that-any-way-to-build-an-internet? dept

I don't think I've ever had more people send me a single blog post than a blog post from earlier this week by Rebecca MacKinnon discussing her worries about "Silicon Valley's benevolent dictators." It's an interesting read that brings up some excellent points. It starts off pointing out the rather insular view many folks have in Silicon Valley about "the rest of the world" and the sort of hubris that comes out of the Valley on a regular basis. That, of course, is nothing new, and is a criticism that has been leveled at Valley inhabitants for many, many years. And, indeed, there is a "clubby" nature to Silicon Valley at times, that has both good and bad sides to it.

MacKinnon points out, correctly, that Silicon Valley-ites also tend to put blind faith into the idea that technology = freedom, and freedom = good, in a rather libertarian sense. Again, that's been said before. But then she points out something of a contradiction in all of this libertarianism, by noting that in fighting against any government regulation while putting all our faith in technology, we actually end up with a system of "benevolent dictators" made up of the folks who control the technology we put our faith in. That is, she worries that in rejecting government regulation, we've approved a defacto dictatorship in the form of the companies we put our trust in. In some sense, this is channelling Jonathan Zittrain's pessimism about what happens when those benevolent dictators turn away from benevolence.

Basically, what both MacKinnon and Zittrain are pointing out is that technology is just a tool. It can be used for good or for bad purposes, and it's part of Silicon Valley's hubris to assume that good will automatically win out in the end. That is, we've been mostly blessed, because the people putting such tools into practice are doing it for good (benevolent) reasons, but there's always a risk that someone else will do something much worse with it. It's a fantastic point, and one well worth thinking about, but I think the assumptions are a little bit wrong.

It's not necessarily a blind faith that "technology" and "capitalism" are flat out "good," but more a recognition that an expanding market tends to open more opportunities for everyone, and the end result of that expansion is good at a macro level. Capitalism tends to remove the barriers for growth, while technology (or, more specifically following Paul Romer's thesis, "ideas") are what then creates that growth. Capitalism is about removing the barriers, and technology and ideas are about enabling that growth. That doesn't mean that there aren't downsides to both -- but the net gain does appear. And, one thing that has become incredibly clear throughout history is that it's nearly impossible to take away that net gain once it appears. And, conversely, asking the government to create those net gains instead almost always fails, due to the difficulty in accurately regulating a market.

In other words, by removing the barriers and enabling the potential, you've almost guaranteed that when someone tries to use the tools for less-than-benevolent reasons, it only opens up strong demand for someone else to provide the equivalent (or better) in a benevolent way again. And, at the same time, in asking the gov't to manage the benevolence, you almost guarantee less opportunities to actually provide good tools, because you've added hurdles they need to jump through. Yes, there can be bumps in the road -- and, no, it's not always a fun process along the way. But enabling for growth is not blind faith. And, there are plenty of checks and balances in place that should these "benevolent dictators" turn authoritarian instead, the end result (or "revolt" as the case may be) can often be strong enough to deal with it.

So, yes, there may be some benevolent dictators in Silicon Valley -- but they'd be hard pressed to successfully ditch that benevolence without paying a huge price.

Related to this, I've recently been doing a presentation for various corporate execs (almost all from outside the US) on "What Makes Silicon Valley Silicon Valley." It's probably my favorite presentation, because it's fun and it usually challenges a lot of the assumptions many people have about why Silicon Valley has been so successful for so long -- that is, while it discusses some of the "common" reasons, it focuses more attention on the hidden, unexpected and accidental reasons for why Silicon Valley became what it did.

The last time I gave it, I ended up getting into a huge discussion with some European execs who pointed out that many of the explanations seem to run almost entirely counter to what many countries who try to set up their "own" Silicon Valley think. That is, many folks look at Silicon Valley and try to replicate the outward manifestations (a good university, some venture capitalists) and miss the underlying details that create the real culture of Silicon Valley, because they almost seem counterintuitive. And the most basic element of this is enabling the free exchange of ideas (that engine for growth). Instead of doing that, most focus on protecting ideas and limiting that free exchange, falsely believing that hoarding information beats sharing information (even with competitors).

So, what happens is that other countries set up their own Silicon Valleys by focusing on protectionism (greater intellectual property rules, non-competes, hugely funded labs), and ignore the power of the cross pollination of ideas and people throughout Silicon Valley, which make it that much more difficult for any single company to abuse the trust of the people they serve. Should any company turn away from benevolence, that openness almost guarantees a more open competitor shows up in return (sometimes with the same employees from the older company). That openness drives innovation, but also keeps these benevolent dictators honest.

30 Comments | Leave a Comment..

Think Solar-Intel, Not Solar-Google

from the hop-on-the-bandwagon dept

As more entrepreneurs set their sights on the potential to make money (and ostensibly do some "good" in the process) in the solar power industry, it would seem obvious that Silicon Valley would emerge as a hotbed of activity. Anecdotally, Silicon Valley is home to more aspiring founders and CEOs per capita than any other place in the world; people flock here ready to take their shot at the-next-big-thing. The Valley's many success stories have spawned a large group of people who have the name recognition and/or money needed to tackle big challenges. In a recent column, The New York Times draws connections between the experience and aspirations of Silicon Valley's business elite and the likelihood Silicon Valley could also become "Solar Valley".

While many people are looking for the first solar industry Google to emerge, it is companies like Intel that provide the better template for what Solar Valley businesses might look like (Moore's Law having nothing to do with it). Google became a household name and corporate giant barely a half decade after its founding. Key to that success is competing in an industry with low capital requirements, and where creating a successful brand can be a self-fulfilling. On the other hand, Intel was around for twenty five years before its marketing efforts led people to start asking for Intel Inside; even today Intel's products remain essentially hidden behind the more visible brands of PC manufacturers. Like chip companies, solar businesses face capital-intensive startup and long product development cycles. As a whole, the solar industry faces development hurdles like land acquisition, permitting, environmental review, and transmission capacity, which will limit the rate at which solar companies can grow. And solar companies are unlikely to earn much of a premium on their name: your electricity bill will not say Energized By Ausra any time soon. Even residential products will be sold through local solar installers, and homeowners are more likely to choose an installer based on the best value for the service than any particular panel manufacturer that that installer represents.

There's no doubt that interest and investment in solar power will continue to grow in Silicon Valley, and the area will almost certainly produce success stories. But the nature of the industry means that most of the magazine covers will stay reserved for members of the Internet crowd.

Daniel DiPasquo is an expert at the Insight Community. To get insight and analysis from Daniel DiPasquo and other experts on challenges your company faces, click here.

5 Comments | Leave a Comment..

U2 Manager Says Google And Its Hippie Friends Should Pay The Recording Industry

from the still-haven't-found-what-i'm-looking-for... dept

While the IFPI and the RIAA have been actively pushing for ISP liability for file sharing, it appears some in the industry are taking it even further. U2's manager for 30-years, Paul McGuinness, gave a talk at the Midem conference where he blamed Silicon Valley's "hippie values" for creating the problem, and demanding that tech companies of all stripes start paying the recording industry. He's talking not only about ISPs, but also Google, Apple, Microsoft, Facebook and basically every other successful tech company. There are so many problems with this, it's difficult to know where to begin, but let's tackle a few of the quotes:

First he blames these companies who have "built multibillion dollar industries on the back of our content without paying for it."

This is a common refrain from those in struggling industries, but it's meaningless. Complementary goods are a natural for building bigger markets, but no one expects one side to pay the other just for moral reasons. The oil industry's success is built on the backs of the automobile industry, but does the automobile industry demand that oil companies have a moral obligation to pay them? Computer makers have built a multibillion dollar industry on the backs of the internet and software companies -- yet, no one says they have a moral obligation to pay those companies anything. Travel guides have built huge business based on hotels and restaurants around the globe, but does anyone think that those travel guides owe the hotels and restaurants money for doing so? Hell, the recording industry itself was built off the backs of complementary goods such as radio, yet when they paid radio stations, it was known as payola and outlawed.

These companies, McGuiness claims, need to help out "not on the basis of reluctantly sharing advertising revenue, but collecting revenue for the use and sale of our content."

Uh huh. And I guess that automobile companies should be collecting revenue for the oil companies. And, home builders should be collecting revenue for the electricity companies. And, airlines should be collecting revenue for the hotel industry. You see, these are all separate industries. They may be complementary, but it's up to each one individually to figure out the business models that work. None should be pressured into saving the other from its own missteps.

"I call on them to do two things: first, taking responsibility for protecting the music they are distributing; and second, by commercial agreements, sharing their enormous revenues with the content makers and owners."

This is beginning to sound an awful like journalists who claim that Google has a moral obligation to "share revenue" with newspapers.

He claims that what all of these companies do is the equivalent of a magazine that "was advertising stolen cars, processing payments for them and arranging delivery."

That makes for a nice soundbite but has nothing to do with reality. First there's the little problem that nothing is being stolen here, only copied. Second, none of these companies are "processing payment" for unauthorized transactions. Third, none of them are "arranging delivery." It would be like the same scenario, but blaming the guys who paved the road on which the car was driven.

"Embedded deep down in the brilliance of those entrepreneurial, hippie values seems to be a disregard for the true value of music."

First, this shows a misunderstanding about the difference between price and value. It also misunderstands the culture of Silicon Valley, which is generally more libertarian these days than "hippie."

On top of all this, McGuiness is whining about this at the same time that U2 is pulling in incredible profits, making $355 million on its last tour. You know what helped fuel some of that? The fact that a new generation of fans are learning about U2 from downloading its music for free. Not only that, since they don't have to stretch their entertainment dollars as far on buying the actual music, they can pay the exorbitant concert ticket prices that U2 is charging these days.

The problem here isn't that others are letting the recording industry languish. It's that just about every other industry has realized that there's plenty of money to be made in the music industry. As we've pointed out, just about every aspect of the industry is doing fantastically well. More money is being made on concert revenue than ever before. More artists are making music than ever before. More music is being heard than ever before. Even more musical instruments are being sold than ever before in the past. Yet, because one segment of the market (the one selling plastic discs) is unwilling to take some simple steps to change its business model, everyone else has to pay up?

90 Comments | Leave a Comment..

Noncompete Agreements Are The DRM Of Human Capital

from the bad-news-all-around dept

Over the weekend, venture capitalist Bijan Sabet kicked off an interesting discussion by saying that he doesn't believe in noncompete agreements and suggesting, anecdotally, why he thinks that they do more harm than good. Venture capitalist Fred Wilson responded by disagreeing and suggesting that noncompetes do more good than harm. This is a topic that I've become deeply familiar with recently, for some research I've been working on. My interest in the specifics of noncompetes was kicked off by a small part of David Levine and Michele Boldrin's book Against Intellectual Monopoly, where they discuss how the lack of noncompetes helped Silicon Valley grow. This lead me to a lot of research on the topic, some of which I thought it would be worth bringing up, as the discussion has become so heated -- with almost all of it focused on anecdotal points, rather than actual research. Some of this research was for a separate project I am working on, but with so much interest in the topic, I thought it would be worth a detailed post.

Much of this discussion kicked off with AnnaLee Saxenian's 1994 book Regional Advantage that tries to understand why Silicon Valley developed into the high tech hub it is today, while Boston's Route 128 failed to follow the same path -- even though both were considered at about the same level in the 1970s. Saxenian finds that the single biggest difference in the two regions was the ability of employees to move from firm to firm in Silicon Valley. That factor, ahead of many others, caused Silicon Valley to take off, while the lack of mobility in Boston caused its tech companies to stagnate and make them unable to compete against more nimble Silicon Valley firms. Saxenian claims that the difference in mobility was simply due to "cultural" differences between the east coast and the west coast. However, the impact was massive. The frequent job changes helped speed up the process of innovation, as ideas flowed more freely, allowing ideas to quickly change and grow and build upon other ideas leading to faster and better innovation. In contrast, employees in Boston stuck with their firms. The firms grew bigger, but slowly, and new ideas didn't flow nearly as easily. There was less direct competition from firm to firm, so firms were able to rest on their laurels rather than increasing their own pace of innovation.

Ronald Gilson found this to be interesting, and followed it up with his own research suggesting that that it had much less to do with cultural reasons and much more to do with the legal differences between the two places, specifically: California does not enforce noncompetes, while Massachusetts does. Gilson looks at a few of the other possible explanations for the difference and shows how they're all lacking, leaving the difference in noncompetes as being the key difference between the two regions in terms of the flow of information and ideas leading to new innovations. He also explains the history of non-enforcement in California, showing that it was mostly an accident of history more than anything done on purpose.

The problem with all of this research was that none of it really showed how much more mobile employees were in California than elsewhere, so that job fell to some researchers from the Federal Reserve and the National Bureau of Economic Research, who produced some data to back up the findings of Saxenian and Gilson in their report Job Hopping in Silicon Valley. Their data showed that, indeed, there was much greater mobility in Silicon Valley than elsewhere. Their research further backed up Gilson's suggestion that it was noncompetes that made the difference by showing that other high tech communities in California outside of Silicon Valley also showed greater job mobility -- suggesting it was a California-wide phenomenon.

Finally, to make the case even more compelling, some researchers from Harvard Business School put out some research earlier this year that not only compared the situation in Silicon Valley to Boston, but added a third natural experiment in Michigan. You see, Michigan used to not enforce noncompetes, but in 1985, Michigan inadvertently began allowing noncompetes to be enforced again. The research showed that immediately following the change, mobility of inventors in Michigan decreased noticeably, slowing the spread of certain ideas. Their research found that "The networks of small companies so crucial to Silicon Valley's growth would be less likely to develop in regions that enforce noncompetes."

Noncompetes Are The DRM Of Human Capital

In order to understand how this makes sense, just think of noncompetes as the "DRM" of human capital. Just as DRM tries to restrict the spread of content, a noncompete seeks to restrict the spread of a human's ideas for a particular industry within the labor arena. Both concepts are based on the faulty assumption that doing so "protects" the original creator or company -- but in both cases this is incorrect. What it actually does is set up an artificial barrier, limiting the overall potential of a market. It may not be easy to see that from the position of the content creator or company management (or investors). It's natural to want to "protect," but it's actually quite damaging.

We're already seeing this in the recording industry, of course. The desire to protect has actually limited the market size of other avenues for the music industry to make money. It's held back the ability to use music as a promotional good to build up the overall market for other tangible goods. In the same way, noncompetes limit the market size of the industry where those noncompetes are enforced. It holds back the ability of firms to innovate. Innovation is an ongoing process -- and the fuel of that process is the continual spread of ideas that allows multiple parties to build on those ideas, try different approaches and seek better solutions. While it may seem scary to a firm that supposedly "risks" losing some of its top employees to direct competitors, that's not necessarily the best way to look at this. What it does is force companies to keep on innovating and keep trying to come up with newer, better solutions to top those competitors. At the same time, that free flow of ideas means that the companies in the space have more fuel with which to attack the problem, rather than quarantining those ideas off in separate bins that can't be connected.

While it may seem easier to "protect" your ideas and your people, what you really end up doing is blocking off your own access to many of the ideas that you need to continue to innovate. You limit the vital mix of ideas to build not just decent products, but great products. Just as DRM has helped to destroy the record labels when competing against more nimble, more open technology -- noncompetes destroy businesses when competing against more nimble, more open technology clusters.

34 Comments | Leave a Comment..

Can Silicon Valley Repeal The Laws Of Economics?

from the not-paying-attention dept

The changes we've been seeing in the content industries is driven by some very basic economic forces: competition pushes the price of goods and services toward their marginal cost. There's now lots of competition in markets for information goods, and the marginal cost of producing those items (i.e. distributing a copy of an already-produced song or article) is very close to zero. Therefore, we should expect that over time, the prices of those products would also fall, to the point where the price becomes zero and producers use those information goods as a way to sell other goods. And that's exactly what we've been seeing over the last few years. Newspapers are dropping their paywalls and selling ads. Bloggers are giving away news and commentary as a way of building up their reputations. And we're starting to see musicians give away more of their music as a way to build up a fan base for their concerts. These trends are driven by some pretty fundamental economic forces, and there's not much any one person or industry can do to change them.

But some people are very confused about this. For example, writing in the New York Times, Jaron Lanier tries to blame Silicon Valley for setting the Internet up wrong. He claims that "we" could "design information systems so that people can pay for content." Apparently, Lanier hasn't been paying attention over the last decade. What Lanier is alluding to is micropayments, and micropayments have been tried over and over again. Silicon Valley was only too happy to offer consumers opportunities to pay small amounts of money for content. But it turns out that customers hate micropayments. They're a headache to deal with and they produce very little revenue for content creators. After years of trying to get customers to sign up for micropayments, websites finally discovered that it just works a lot better to give the content away and sell ads.

The other thing Lanier apparently hasn't noticed is that there's already a massive industry devoted to producing content and giving it away in order to sell ads. Last time I checked, a ton of people make a living in the television industry, despite the fact that virtually all the content they produce is given away free of charge. Yet inexplicably, Lanier seems to believe that giving away content and selling ads won't be a viable business model in the Internet age. The problem isn't that ad-supported content isn't viable. The problem is that a lot of incumbent media companies have executed their Internet strategies so ineptly that hardly anyone is visiting their sites. You can't sell very many ads if you've got a tiny audience. The solution is for them to come up with more appealing products (hint: dropping DRM is a good first step), not to once again bang their heads against the brick wall of micropayments.

Timothy Lee is an expert at the Insight Community. To get insight and analysis from Timothy Lee and other experts on challenges your company faces, click here.

21 Comments | Leave a Comment..

Can Movies Be Financed Like Tech Startups?

from the venture-capital dept

I wrote last week about the perversity of having a one-size-fits-all contract in an industry that's becoming more diverse and dynamic by the month. Netscape co-founder (and now Ning co-founder) Marc Andreessen made some similar comments last week, but today he's gone further and pointed out an interesting alternative model for organizing the movie industry. He points out that a fundamental weakness of Hollywood's traditional model is that everybody works for a small number of big, bureaucratic studios that hire all the necessary talent and oversee production, distribution and marketing. He points out that this leads to talent getting paid (and behaving) like hired guns. Because they don't share much in the profits, they have little reason to go above and beyond to make the production a success. And if they feel they're getting a raw deal, they don't have a lot of options since there aren't very many studios to choose from. So they go on strike seeking a bigger share of a shrinking pie, instead of looking for ways to make the whole pie bigger.

The technology industry is different. If a talented employee at Microsoft or Yahoo doesn't feel he's getting compensated fairly, he doesn't go on strike. Instead, he proves his point by starting his own company. Employees at small Silicon Valley firms are often given significant equity in lieu of other compensation. The ones who get in early at a really successful startup get filthy rich. As a result, they're part owners of the companies they're working for and they act like it. There's much less friction between management and labor in Silicon Valley because almost anyone who wants to can become part of management by starting a new company or joining a company already in the early startup phase. "Labor" and "management" aren't two separate categories, they're often the same people at different stages in their careers. Andreessen persuasively argues that a similar model can work for Hollywood. Two of the traditional functions of the studios, distribution and marketing, are rapidly being displaced by Internet-based distribution and viral marketing. The equipment required for producing high-quality video is falling quickly in price. The main thing that's still expensive is labor, and that can be had the same way it's obtained in Silicon Valley: by raising venture capital and paying talent partly with equity. A lot of talent will likely be willing to accept a smaller paycheck in exchange for a significant share of the profits from a successful film. And a lot of investors will jump at the chance to be business partners with talented (and maybe famous) actors, writers, and directors. It certainly sounds like a more productive model than the protracted strike we're facing now.

Timothy Lee is an expert at the Insight Community. To get insight and analysis from Timothy Lee and other experts on challenges your company faces, click here.

14 Comments | Leave a Comment..

You Don't Create A Silicon Valley By Government Fiat

from the takes-a-bit-more-than-that dept

Two separate articles came out in two separate newspapers based 3,000 miles away from each other this past weekend -- but together they demonstrate exactly why so many places have had difficulty creating their own, local versions of "Silicon Valley." Especially during the dot com bubble, it seemed like every country and every state wanted to create some area that was a "local" Silicon Valley. There were silicon islands and silicon prairies and silicon alleys and silicon mountains... and almost all of them went nowhere. An article in the San Francisco Chronicle talks about how the original Silicon Valley was created, through a mixture of strong educational institutions, easy flow of capital and a culture that focused on risk, experimentation, entrepreneurship -- and the free flow of ideas. While the government played a big role in early Silicon Valley culture, it was as a customer, not as the creator of the culture. Contrast that to the story in the Washington Post about how Prince William County set out to create a high tech hub, which is still struggling to get much traction in the high tech world. Rather than paving the way for those critical components to form, the county simply set aside some land and (it appears) some marketing efforts to promote the county as a good place for high tech companies. That seems to be about all that many other "silicon somethings" did in the past decade as well -- forgetting that there's a lot more involved in creating a true high tech hub.

9 Comments | Leave a Comment..