Growthology

The Case for Poor(er) VCs

Years ago I remember talking to a junior associate at a venture capital firm about partner salaries. He had just come across a recent salary survey, and he couldn't quite believe a) how high big firm partners' compensation was, and b) how much of that compensation was salary rather than performance carry.

Sadly, little has changed. It is a big part of explanation why venture capital is struggling so much in recent years. When partnerships have such a strong incentive to raise large pools of capital and then pay themselves high-six and even seven-figure salaries based on annually taking 2% from those pools of money, why wouldn't they? As one LP friend put it to me not long ago, any rational investor would do the same in their place. After all, risk is risky, so why not raise large funds and get rich on stable management fees? Investing in successful entrepreneurs is, you know ... tough.

The trouble is, of course, pay for performance goes to zero, at least in the short run, while general partners have the opportunity to become wealthy without investing success. It's a toxic combination, one that helps explain why so many people want into the industry, thus inflating assets under management and making returns worse for everyone, even the VCs who really want to invest like VCs should.

Where do we need to go from here? We need to break the link that says (wrongly) VCs, like mutual fund managers and hedge funds, should be paid on the basis of assets under management. Venture fund complexity and cost do not rise linearly with assets, so we need to stop pretending they do. There are many way to fix this, but the easiest would be to make GP budgets a negotiated item with limited partners rather than being tied to assets. As a side effect, it would make more palatable and economical smaller funds, like those running under $30m, that cannot be operated at all on a 2% of assets basis.

More recent musing on this subject at PE Hub and nPost.

Growth in Afghanistan

The BBC reports (HT Slate.com) details of strategic review given by U.S. General McChrystal to U.S. Central Command. It shows his commitment to counterinsurgency, which I intrepret as "growth strategy." Here's the key line:

Gen McChrystal also wants more engagement with the Taliban fighters and believes that 60% of the problem would go away if they could be found jobs.

Regulating Venture Capitalists? The Right Case and the Wrong One

Financial market regulation should be driven by risk and assets, not by title. That's why I find the whole discussion of regulating venture capitalists more than a little bizarre: Regulate them if you take the principled position that they are a source of systemic risks; don't regulate them if they are not.

Broadly, venture capitalists do not engage in systemically risky activities. They do not usually have leverage, nor do they use complex financial derivatives, nor are they tightly intertwined into the banking system. By those measures they are not source of systemic risk, as commonly understood, in financial markets in the U.S. or elsewhere.

The preceding is the point made in a weekend NY Times OpEd by Alan Patricof and Eric Dinallo. They argue, fairly convincingly, that venture capitalists are not sources of systemic risk, at least not the kind that we tell ourselves we should be worried about post this global financial crisis.

Having said that, however, Dinallo and Patricof make an overbroad claim. Mid-way through they say the following:

Venture-capital funds deal solely with privately purchased equity securities in start-up companies, which are not traded in public markets.

That is untrue.  Venture capitalists regularly participate in PIPEs (private investments in public equities), and they often hold large amounts of stock in portfolio companies that have newly gone public. If the goal is to regulate any institutional investor with a material amount of assets who regularly invests in public markets, it will be hard for venture capitalists to avoid regulation.

All of this drives home why we need to regulate financial market risk, not regulate professional titles. The question isn't whether you are a venture capitalist, a mutual fund, a hedge fund, or a private equity manager. The question should be whether you are, or reasonably could become, a source of systemic financial market risk. Venture capitalists generally don't qualify, but saying that is because they don't participate in public markets isn't the way to make the case.

What Michael Robertson is Excited About

Very smart fellow SoCal entrepreneur Michael Robertson lists on his blog the things he is excited about. The most interesting to me:

Meraki - Wifi in my home has always been spotty until I deployed Meraki units. Plug in these card deck-sized devices and they'll automatically connect to each other, and providing complete wifi coverage in even the most troublesome areas. If you find dead zones, or need to expand coverage, simply buy another device, plug it in and extend your network using mesh technology with zero setup. There's a convenient browser based management system and alerts can send email anytime a device become disconnected.

The Israeli Dream: George Gilder Explains How Israel Become the World's Leading Entrepreneurial Economy

Guest post by Charles C. Johnson

There are some fascinating facts in a City Journal piece by technology guru, Geoge Gilder that warrant careful attention for anyone seeking to explain why it is that Israel, in Carl Schramm’s phrase, has become the world’s leading entrepreneurial economy. The entire article is worth reading, but some points stand out.

On how Israel’s economy used to be run.

In a general enthusiasm for public ownership of the means of production and finance, the government through the 1990s owned four major banks, 200 corporations, and much of the land. Israel’s taxes rose to a confiscatory 56 percent of total earnings, close to the highest in the world, stifling even those private initiatives that managed to pass through the country’s sieves of socialism. Erecting barriers of bureaucracy, sentiment, and culture, Israeli leaders balked the entrepreneurs and inventors who gathered there, creating a country inhospitable to Jewish genius.

On how Israel’s policy vis a vis immigration paid dividends and changed the culture.

The influx of Soviet Jews into Israel represented a 25 percent population increase in ten years, a tsunami of new arrivals that would be equivalent to the entire population of France being accepted into the United States. Largely barred in the USSR from owning land or businesses, many of these Jews had honed their minds into keen instruments of algorithmic science, engineering, and mathematics. Most had wanted to come to America but were diverted to Israel by an agreement between Israel and the United States. Few knew Hebrew or saw a need for it. At best, they were ambivalent Zionists. But many were ferociously smart, fervently anti-Communist, and disdainful of their new country’s bizarre commitment to a socialist ethos that punished achievement.

On the successes of Israel’s reforms:

In under 25 years—starting from those first modest tax reforms of the mid-1980s—Israel has accomplished the most overwhelming transformation in the history of economics, from a nondescript laggard in the industrial world to a luminous first. Today, on a per-capita basis, Israel far leads the world in research and technological creativity. Between 1991 and 2000, even before the big reform of 2005, Israel’s annual venture-capital outlays, nearly all private, rose nearly 60-fold, from $58 million to $3.3 billion; companies launched by Israeli venture funds rose from 100 to 800; and Israel’s information-technology revenues rose from $1.6 billion to $12.5 billion. By 1999, Israel ranked second only to the United States in invested private-equity capital as a share of GDP. And it led the world in the share of its growth attributable to high-tech ventures: 70 percent.

On the growth of Israel’s economy

Germany, ten times larger, roughly tied Israel. In 2008, Israel produced 483 venture-backed companies with just over $2 billion invested; Germany produces approximately 100 venture-backed companies annually. The rankings registered absolute performance, but adjusted for its population, Israel comes in far ahead of all other countries, including the United States.

Shaping the Future

Venrock is celebrating its 40th year in the venture business by putting out the following new book about 40 years of innovation. It’s admittedly more than a little self-serving, but it’s still worth a look for a look at the role the beleagured venture business has played in a host of companies.

Venrock: Shaping the Future, 40 Years of Innovation

View more documents from Dev Khare.

The Robots are Coming, Air Force Edition

Matt Yglesias is taking some flak for a very insightful blog post about the UAV revolution reshaping the Air Force, inspired by a joke General David Petraeus made recently that is taking some flak as well. It seems many comments on Matt's post are disparaging his lack of familiarity with the military, so I thought I might fly to his defense given I have some cred here (USAFA degree, 2 tours of duty in Asia, combat interrogator, and a huge SF collection).

Here's the joke from Gen. Petraeus:

To recall an illustrative story, a soldier is trudging through the muck in the midst of a downpour with a 60-pound rucksack on his back. This is tough, he thinks to himself. Just ahead of him trudges an Army ranger with an 80-pound pack on his back. This is really tough, he thinks. And ahead of him is a Marine with a 90-pound pack on, and he thinks to himself, I love how tough this is. Then, of course, 30,000 feet above them an Air Force pilot flips aside his ponytail. Now — I’m sorry. I don’t know how that got in there — I know they haven’t had ponytails in a year or two — and looks down at them through his cockpit as he flies over. Boy, he radios his wingman, it must be tough down there.

Here's the commentary from Matt Yglesias:

The trouble is that advanced technological developments are driving this logic even further forward through the use of unmanned aerial vehicles. From a rational point of view, UAVs piloted from afar from operators far from the field of battle are a huge win. ...

A service that consists of guys sitting in cubicles playing video games is going to have trouble holding its head high amidst a warrior ethos. And consequently, the Air Force is tending to resist the technological imperative to go more remote.

First off, anyone who thinks the joke told by Petraeus is unprofessional should, in the words of John McCain, "get a life." This is how military folks jab one another. Marines are dumb, airmen are smart. Marines are brave, airmen are smart. That's how the joke goes, people.

Matt's analysis focuses too much on the psychological sensitivity of Air Force officers, but his assessment is fundamentally correct. The Air Force has painted itself into a corner in the sense that the new wave of technology is challenging what has been considered its central mission and identity. While a few may feel as Matt describes, it is incorrect to assume that all Air Force officers are "tending to resist the technological imperative to go more remote." Sure, the institutionalized "fighter pilot-bomber pilot-heavy pilot-other officer" pecking order of the branch is resistant to threats to its structure, and yes, there is a quiet identity crisis / search for mission. But it is pretty clear where that search will end up.

The misfortune of the Air Force is its name. When the Army Air Corps was established as its own branch of service, the rationale was driven more by the rise of nuclear weaponry than airborne weaponry (Think of it this way: America fought and won its only two world wars without needing a separate air arm). Would there be identity confusion if it were named the Nuclear Force?

In fact, the distinction of the Air Force is rooted not in the sky or in the atom but in a rebellious attitude against the status quo of the existing military way of war. The lesson is drummed in every day at the Academy, where cadets eat three meals in Mitchell Hall, named after the controversial General Billy Mitchell (1879-1936):

He antagonized many people in the Army with his arguments and criticism and, in 1925, was demoted to Colonel. Later that year, he was court-martialed for insubordination after accusing Army and Navy leaders of an "almost treasonable administration of the national defense." He resigned from the service shortly afterward.

The heart and soul of the Air Force is innovation, and I would say it goes so far as "creative destruction" in the Schumpeterian sense. This is not an insight, and many blue-suiters have been making the case for years. The evidence, you might say, is the thousand UAVs flying around the skies of Iraq right now.

What's more important is that military strategy overall needs innovation now more than ever.  Asymmetrical warfare can be an advantage to the U.S. if we push the automation of warfare downstream -- ground drones, insect drones. Think of it: a well placed robotic poison bee sting could have saved the world from a lot of war or two. Rather than worry about its warrior role, the Air Force should recognize that by seizing the leadership role in robotic and remote technologies, it will become the predominant branch for conventional, or killing, wars. In 20 years, we can imagine an Air Force that has subsumed all the others in the arena of combat, making the traditional warrior role of the Marines and Army next to irrelevant.

The big innovation that the Army and Marines are hungry for is more effective counterinsurgency (COIN) strategy, particularly in the area economic development.  Face it, the Air Force has the firepower side of the equation pretty well covered. It's the soft side of power where American strategy is weak.

Let me explain using another military joke, one that I used to tell to my roommates and Army buddies when I was stationed at Yongsan in Seoul. First, with a straight face, I asked if they had heard the news about the new rifle the Army had selected to the replace the standard issue M-16, introduced 40 years ago. No, no, they said, haven't heard. Yeah, I told them, after entering all the data from recent military situations - the Cold War, the Balkans, the Gulf War - it was pretty clear what the basic roles were for the Air Force and the Army. So the new weapon system the Brass had selected after careful deliberation by Pentagon experts was the M-21 nylon fiber broom, to help grunts clean up after the zoomies have won the combat phase. To be issued by Christmas. And my buddies, suckered, just groaned and told some story about ponytails and cockpits.

In fact, the resistance to COIN in the Army has been equal if not greater than the resistance to UAVs in the Air Force. Forutnately, the right side is winning, albeit slowly. Just maybe the military will learn that winning the peace is a hundred times more important, if ten times harder, than winning the war. If we need a rebellious Air Force attitude to shake things up and overcome the firepower mentality, all the better.

Wilkinson and The Forgotten Entrepreneur

I met Amy Wilkinson at a lunch this afternoon, and she is an impressive voice for the entrepreneur in Washington, D.C.  After hearing a few stories, I encouraged her to start a blog, and apparently I am not the first.  Take a look at her short article on the Freelancers Union:

Today, 26 percent of U.S. workers are self-employed as Web designers, software developers, financial advisors, artists, writers, musicians, and consultants—to name a few occupations. This number is up from 19 percent in 2006, reports Kelly Services Inc., a Troy, Mich.-based staffing service. The rise of the free agent economy is allowing more and more people to be their own bosses, liberating them from the confines of a traditional offi ce. It also allows companies to cut costs to meet changing market demands.

With the freedom and flexibility of self-employment, however, come the trade-off s of stability and job security. Freelance paychecks can be erratic. Freelance contractors must pay out of pocket for their own health insurance and retirement plans, and they rarely qualify for unemployment. To meet the needs of the growing freelance workforce, Sara Horowitz created the precursor to the Freelancers Union, called Working Today, in 1995. (The organization still conducts research and policy analysis.) In 2001, she launched the first version of a new union, the Portable Benefits Network, which was renamed the Freelancers Union in 2003. The Freelancers Union is not just another labor organization. Instead, it updates classic trade unionism with the modern impulses of social entrepreneurship, supporting itself largely with fees for services. At the same time, the Freelancers Union reveals its trade union spirit by working through political channels to secure better conditions for independent workers.

It reminds me of Amity Shlaes' book, as the forgotten man in political compromise between Big Business and Big Labor has been the Little Entrepreneur for the last few decades.  And it reminded me of Dan Pink's Free Agent Nation. Good company to keep.

Entrepreneurs (And Everyone Else Who Has Flown Since 1978) Owe a Debt to Ted Kennedy

Guest post by Charles C. Johnson

At the risk of wading into the political weeds, allow me to suggest that entrepreneurs owe Ted Kennedy a debt of gratitude for his work regarding airline and trucking deregulation. (h/t: Nick Gillespie of Reason Magazine.)

And the benefits of airline deregulation? The US Department of Transportation estimates that passengers save $19.4 billion dollars per year, thanks to lower fares due to deregulation. Today, airline ticket prices are almost 40% today than they were in 1978. 

 

"Micromortgages": A Better Approach to Economic Development Through Entrepreneurship?

Guest post by Charles Johnson

Our foundation president, Carl J. Schramm, has criticized Yunus's approach to microfinance, most recently in his essay for the Claremont Review of Books. In comparing the Nobel Prizes awarded for economics and peace in 2007, Dr. Schramm argued in the Wall Street Journal that microfinance might not be the panacea for world poverty that aid development agencies, like the State Department, have suggested that it is. With co-author, Dr. Amar Bhidé, Schramm writes,

Mr. Yunus's ameliorative entrepreneurship however is very different from the transformative entrepreneurship that Mr. Phelps argues has been central to modern capitalism. Indeed, most of the ventures funded by microloans in Bangladesh are activities that were marginalized by modern entrepreneurs: They don't involve any economies of scale or scope or the use of new technologies capable of producing significant advances in overall productivity and incomes. 

 Economic development does wonders for peace, but what does microfinanced entrepreneurship really do for economic development? Can turning more beggars into basket weavers make Bangladesh less of a, well, basket case? A few small port cities or petro-states aside, there is no historical precedent for sustained improvements in living standards without broad-based modernization and widespread improvements in productivity brought about by the dynamic entrepreneurship that Mr. Phelps celebrates.

It seems, though, that microfinance, far from being the panacea, may simply encourage consumption at the expense of long term economic growth. As a welfare program, microfinance isn't necessarily bad, as it most likely going to keep people from starving, but it lacks the kind of true impetus to drive true growth. True, Yunus’s model may be preferable to the massive government to government loans and spending of the Bengladeshi government, but that isn’t really saying much, even if the money is put directly into the hands of individuals.

A most recent article, titled,”A $9 Trillion Question: Did the World Get Muhammad Yunus Wrong?,” in Foreign Policy makes a similar point: how can the estimated $17 billion in loans actually help elevate the living standards of the $4 billion in poverty and why has it been so lackluster at generating real results?

Peter Schaefer writes,

Moreover, most of the existing microfinance credit is subsidized. Very little comes from private, profit-seeking capital markets (as of 2004, just $2.7 billion, or about 60 cents per poor person per year). This is because development banks do not really require collateral for their microloans. They often use subsidized credit, as they generally aren't profit-seeking. But banks backed by private capital markets require collateral. This means that their loans are too expensive for most of the long-term needs of the poor.

For instance, the private Mexican microbank Compartamos charges 100 percent annualized interest -- which, to be fair, reflects the real risk of providing an unsecured loan. But such long-term interest rates cannot encourage capital investment in projects that need time to gestate. And though shorter-term loans with 25 or 50 percent annualized rates beat the street rate, such debt cannot be carried for any length of time. As a result, the pool of global capital is largely inaccessible to poor people. And the solutions proposed by Yunus and de Soto for formalizing the economy of the poor and thus lifting them from poverty prove only marginal.

In short, too much debt tends to sink individuals faster than it takes for them to make long-term financial decisions. The author suggests that “micromortgages” could actually help promote real long-term growth. He writes,

How would it work? Let's consider a poor individual living in a house without a title or even an address in Mexico. He hopes to formalize his house. So, he visits a local bank to apply to register his property. To the bank, he represents potential demand for credit -- the bank has incentive to research his claim, help him map his land, assess any improvements, and submit his information to the registry. The bank would do this in return for his loan business and a fee to cover costs. 

The bank would then submit the individual's information to the government, ready for entry into an official national digital registry. Were the application accepted for processing, he could take out a form of title insurance from the bank, which could then safely extend credit to the applicant. The modest application fee would be added to his loan principal, allowing him to immediately use the balance for, say, a long-term micromortgage to finance a business.

 Intuitively, tapping into the equity in your home makes sense. Many entrepreneurs in the U.S. have used home equity lines of credit to finance their businesses, why should the developing world be any different?  

The Robots are Coming, Atlantic Monthly Edition

The latest warning about robots stealing jobs comes from a well written essay by Mike Konczal:

Perhaps we want to think of robots as shapeshifting liquid-metal assassins who travel through time to kill us while we are still rebellious teenagers, or blonde bombshells in red dresses who want to seduce us to steal the military codes so they can nuke the colonies, precisely because that vision is more comforting than the reality that machines are fairly boring bits of code that will generally replace our jobs, depress our wages, and bleed our 401(k)s in ways that are largely invisible to us.

He presents two arguments. One is a chart, the second is logic.

The chart shows the rising national trend in underemployment since 1979, which Konczal interprets without question as a structural shift of some kind ... a decline in demand for unskilled labor, begging for an explanation. It would be nice if he, only in half a sentence, allowed for the possibility that a shift in policy or culture may be the cause. A sticky safety net, for example?  That whole welfare failure that shattered poor families by paying money to single, not wedded, mothers?

The dramatic change in workforce participation over the last half century is not a mystery. Males down, teens down, females up. Are we really supposed to believe that females are generally skilled, males generally not? That that's the big story? Or could it be that a wealthy society experiences shifts in preferences that are fundamentally different than more rural, more religious America? For a view on the cultural explanation, do not miss the (less posty, more thoughtful) essay "What ever happened to the Work Ethic?" by Steve Malanga in City Journal. It is a masterpiece:

Weber famously argued that the Protestant Reformation—with John Calvin’s and Martin Luther’s emphasis on individual responsibility, hard work, thrift, providence, honesty, and deferred gratification at its center—shaped the spirit of capitalism and helped it succeed. Calvinism and the sects that grew out of it, especially Puritanism and John Wesley’s Methodism in England, were religions chiefly of the middle and working classes, and the virtues they promoted led to a new kind of affluence and upward mobility, based not on land (which was largely owned by the aristocracy) but on productive enterprises.

But that's all beside the point. The reason I felt compelled to blog this was Konczal's monster error in his final three paragraphs. His second argument. The nugget:

The increased presences of computers and robots in creating automation and decreasing the need for labor will increase the need for new types of labor. In particular, the labor necessary for the creation, maintenance, and deployment of said machines. But this work is highly skilled, and there is good reason to believe that it will employ fewer people post machines than before.

How can an intellegent, educated writer believe this?  Think, when agriculture became automated, what happened to the 85 percent of the population that stopped farming? Konczal hints that their single option was to become tractor mechanics. Or starve. Or become wards of the state. And that's just shabby reasoning, especially when the division of labor- the most well-known, well-publicized theory in all of social science (okay, maybe a big claim on my part) - tells us what will happen. Labor liberated from its current use will evolve into new and unforeseen occupations. Blogging is the latest example, but the 20th century is littered with jobs that were unknown to the 19th. Cinematographers, professional basketballers, physical therapists. Whole cities and industries were unimagined: Detroit, Hollywood, San Jose. Is it so easy to forget what progress looks like?

I'm confident there were Mike Konczals at the dawn of the iron age warning the tribal elders that new-fangled swords would replace all the warriors. If only it were so.

Startup Success is a Marathon

Becoming a successful company is no overnight thing, as this nice bit of data analysis and visualization shows:

IPO Growth Dashboard

powered by tableau online

[via Caterina]

Boycotters Call for Whole Foods Founder to Be Removed as CEO

Guest post by Charles Johnson 

The ire over Whole Foods CEO, John Mackey's WSJ op-ed on health care has entered a new phase, with union boycotters calling for him to be removed as CEO and chairman by the Whole Foods board. I quote, 

"Mr. Mackey attempted to capitalize on the brand reputation of Whole Foods to champion his personal political views, but has instead deeply offended a key segment of Whole Foods consumer base," CtW Investment Group's Executive Director Bill Patterson said in a statement. 

Meanwhile, the United Food and Commercial Workers Union, which is part of Change to Win, said it will be giving out information to Whole Foods shoppers about health care reform. The group said Mackey's op-ed was an "attempt to undermine Obama's health-care reform."

First of all, the boycott is clearly failing. Whole Foods's stock hasn't fallen a bit since the boycott began. If anything, it's increased! (Which, incidentally, is welcome news to this Whole Foods admittedly extremely small scale stock owner.)

Second of all, why don't we want entrepreneurs injecting their politics into the national debate? If it is acceptable for entrepreneurs to inject their politics into the debate in favor of increasing marginal tax rate, increasing the gax tax, and removing subsidies on fossil fuels? Why isn’t it okay for one entrepreneur, who by all accounts has helped his employees get some of the best coverage available, to weigh in on the health care debate? 

We should be thanking Mr. Mackey for bringing his expertise to bear on a problem of national import, particularly given his experience insuring his own work force!  

(For those interested in greater detail, be sure to check out Megan McArdle's excellent post explaining why the Whole Foods boycott is really a non-starter.)

Economics Bloggers Video

Here's a video of the Kauffman Econ Bloggers Forum:

Thanks to Matt Pozel and Matt Long for an awesome production effort.

Wired Looks Into Craigslist's Refusal to Innovate

Guest post by Charles C. Johnson

In the latest issue of Wired, Gary Wolf takes Craigslist to task for failing to iterate upon its 1999 website design. In an age of apps, why doesn't Craigslist make itself more user-friendly? Wired investigates. [Emphasis is mine.]

 Each of these sites, of course, is merely one of the many sections of craigslist, which dominates the market in facilitating face-to-face transactions, whether people are connecting to buy and sell, give something away, rent an apartment, or have some sex. With more than 47 million unique users every month in the US alone—nearly a fifth of the nation's adult population—it is the most important community site going and yet the most underdeveloped. Think of any Web feature that has become popular in the past 10 years: Chances are craigslist has considered it and rejected it. If you try to build a third-party application designed to make craigslist work better, the management will almost certainly throw up technical roadblocks to shut you down.

Most baffling about the article was just how lightly Craigslist is staffed, reflecting, no doubt, founder Craig Newmark’s fascination with creating online public goods.

Craigslist gets more traffic than either eBay or Amazon .com. eBay has more than 16,000 employees. Amazon has more than 20,000. Craigslist has 30. Craigslist may have little to teach us about how to make decisions, but that's not the aspect of democracy that concerns Newmark most. He cares about the details, about executing all the little obvious things we'd like government to do. "I'm not interested in politics, I'm interested in governance," he says. "Customer service is public service."

Craigslist, though, might be onto something in its refusal to innovate.

. . .  craigslist is old-fashioned in any number of ways. It relies on email and the telephone in an era of SMS and social networks. It sticks to traceless transactions in an industry that makes its living collecting data from every touch. And just as people who run technical companies are reaching an apex of confidence in their ability to invent new forms of community based on sharing everything, craigslist still treats social life as dangerously complex, deserving the most jaded caution. Corporate isolation, user anonymity, refusal of excessive profit, glacial adoption of new features: These all signal Newmark and Buckmaster's wariness about what humans, including themselves, might do if given the chance. There may be a peace sign on every page, but the implicit political philosophy of craigslist has a deeply conservative, even a tragic cast. Every day the choristers of the social web chirp their advice about openness and trust; craigslist follows none of it, and every day it grows.

Tablet Wow

The Journal broke a great story today about Steve Jobs, back at Apple, pushing the design on their newest killer product: the tablet. Also, check this WIRED story about a zero price Dell-Intel product, which predicts 2010 will be the "Year of the Tablet." 

This reinforces my belief / fascination in innovation during a recession. The wave of technological progress is bigger than the ripples of business cycles, even financial panics.

Anyway, I phoned Bob Cringely to get some inside scoop from him, but only got his voicemail saying that he's "in the office, and working like a son of gun."  He'll know.

TypePadding update

So, I'm getting a sense that the TypePad email function doesn't handle hyperlinks, spacing, paragraphs, bullets or indents based on the wordblob that was my last post.And it was credited to our administrator, Keith Mays, who may be secretly trying to take over.  I keep hearing Keith mutter, "Today growthology, tomorrow the Foundation!"  (Do people mutter exclamations?)

Anyway, here's the post as intended:

So TypePad just surprised us with the third new user interface in the last year (okay, maybe it has been 14 months ...).  At least they don't charge us for the forced upgrade, like MicroSoft The Abuser. Still, it will take some time for me to be impressed, and I am honestly shocked it took so long to walk back from the second version. Any time you make users change the nature of a saved file in one corner of the screen while putting the actual "save" button in an opposite corner, you have a problem with an idiot UI architect.

 

This is really a test of the new "post by email" function.  I am using my secret email address to make this post.  If it goes live, I'll be impressed.

 

Speaking of UI design, check out the WIRED article on craigslist.org.  A number of alternative designs are presented, and in my opinion not a one of them is superior to the bare bones of the current version. Websites today pepper you with options: left column, right column, menu bar, box, pop-up. Who isn't ready for a boycott of the sites using pop-up surveys? They might as well say, "WE WANT YOUR OPINION ... AND TO HINDER YOUR BROWSING!  :)"

 

Here's a my quick assessment of the WIRED alternative designs. Keep in mind that my uber dominant criterion for good UI is efficiency, and that means making the core functions painfully obvious. For craigslist, those functions are (1) search and (2) post to classifieds (PTC).  In the baseline design, both functions are top left. PTC is the very top link under the header.

• Web App. This kills the left column and replaces it with a complicated menu ribbon. Fracking ribbon. Search is very clear, but it the rest is a mess. PTC is on the left side of the new right column, in the second row. And this design has one of those detestable box within a box things. And naturally, it ends the subtle lower-case of craigslist with a capital C. Why?
• Khoi Vinh & Team. Starts by capping the brand as well.  Search is relegated down four, five columns below the header. It is highlighted sure, but there are layers of business. Typical tendency to use multiple ways of highlighting stuff. Some gets a colorized background, others a bold, others a new font, others a box. Seems like the same design motif as above, but honestly, WIRED does a crappy job of distinguishing one design from another in an article on design!
• SimpleScott. The best of the bunch, but PTC gets lost.  It is moved to a top right link that is small and light gray, next to the My Account | Help links ... stuff rarely used and now almost invisible. This is in contrast to the eight high contrast black bars telling your eyes what is important. Search is great here, but is it overbearing?
• Matt Willey. Great idea, poor execution.  Getting photos into the main listings is almost zen-like in contrast to the current functionality, which any user knows involves way too much clicking. eBay gets this right.
• Luke Hayman. A text image of Craig? Cute, but stupid.

Bottom line: craigslist is a success because they never sold out. Not to ads, not to fads. At the end of any business idea is the question: will the dogs eat the dogfood? For craigslist, consumers are in love with the current design. Maybe there's a lesson in there for TypePad.

Bernanke the Great

Federal Reserve Chairman Ben Bernanke has been asked by President Obama to serve a second term in the current post, which is deeply good news for America. (I do worry if this is good news for the Professor;  can you imagine how many sleepless nights the man endures?)

Changing horses mid-stream is always a foolish risk, but especially now when the horse is doing just fine.

Bernanke will and has endured severe criticism, most of it ignorant. History will reflect that the Fed was the hero in the crisis, in sharp contrast with the Treasury and the frivolous American legislature. Nobody will be surprised if the bulk of the "stimulus" bill is revealed as impotent in future studies, whereas the monetary policies of Bernanke's Fed will almost certainly be shown to be the key to arresting the panic.

Creative, decisive, expert, even agreeable. Calm. Independent. These are his traits. And I honestly believe only Bernanke can know the intricate details of the current crisis, the policies in place, and the fragility of the world economy. Obama was very wise to renominate Ben Bernanke, and not to put up a new person who would, however intelligent, face a daunting learning curve.

Next up: higher rates!  (Let's see how many friends of Ben there are in 2012. I'll be there.)

Predicting Sci Fi Movie Returns

Guest post by Charles Johnson

In the latest issue of Esquire, there’s a fascinating profile of Sam Worthington, the leading actor of James Cameron’s new, $300 million dollar film, Avatar. (The trailer looks downright amazing.)

Apparently, Cameron wanted the Australian actor to play the part, but the studio opposed this casting, as they hoped that a big name actor might draw more people to the film and help recuperate their initial expenditure. After much discussion, Cameron got Worthington to play the part.

The real question, though, is why did they think that a big name star would gross more money?

What if stars and the director are totally irrelevant? And that all that matters is the story? So are the findings of Epagogix, a British firm that uses neural networks and scanning scripts, makes a tidy sum predicting with uncanny accuracy. (You can read all about their work in Malcolm Gladwell’s article or in Ian Ayres’s book, Supercrunchers.)

So if Epagogix finds that the story, not the stars, masters most to a box office return, and they predict box office returns better than the studios, why do studios continue to insist that pretty faces are what gets people to see the movies?

If history is any indication, sci fi films tend to do well based upon how good of a world they have created, not on the value of the actors that are in them. Star Wars, E.T., and Jurassic Park all come to mind. Most recently, District 9, put together on a shoestring budget of $30 million dollars, grossed $37 million opening weekend, without any big name stars on its payroll. As of right now, it has grossed over $81 million and continues to grow. 

The gains don't seem to be limited to sci fi. Another film, Slumdog Millionaire, grossed over $375 million worldwide on a budget of $15 million, with totally unknown actors. 

So why haven't studios gotten around to realizing that star power is limited and why haven't wages for moviestars adjusted? Is there a lack of entrepreneurial studio executives? 

The Distinct Dystopian Possibility

Tim posted two interesting entries in recent days, both touching on the recurrent question of whether or not we are entering an extended period of Dystopia. Given that it's been just over a year since I happily discounted the possibility of American Dystopia, I thought I might weigh in here. I won't keep you in suspense: I dramatically downgrade my optimism.

There are two related questions here, one pertaining to recent history, the other toward future projections. The first is whether or not the United States economy has really performed as well as we all like to think it has over the past two or three decades. This is a contentious issue among economists and I have nowhere near adequate space to address it, so I'll confine myself to Tim's point:

". . . the existence of the pernicious Dystopian Myth that middle class incomes are stagnant. The Dystopian Myth is social poison, a fiction shouted by the negative nabobs that convinces voters the American economic system is failing them."

Say it ain't so . . . but I will: it's sort of true. In June, Monthly Labor Review published this article, the abstract of which reads:

"OES [Occupational Employment Statistics] data from 2002–2007 reveal that an overall shift in employment towards occupations with lower mean wages hindered growth in the U.S. real average wage and that wage growth was concentrated in higher paying occupations; the data also show a shift in employment from the middle-paying occupations to the highest and lowest paying occupations."

The gist, as you can tell, is that real wage growth in this recent five-year period was basically stagnant overall because of the large growth in jobs paying the lowest wages--which actually appears to have come at the expense of better-paying jobs. The MLR article conveys the image, though not in so many words, of an emerging barbell-shaped wage distribution. Heartening. (I should just point out that Tim's characterization of the myth as a ploy to fool American voters is actually somewhat true--because voting participation follows income. Self-flattery as political vote-buying.)

Onto the larger point: is the United States now entering a Dystopian period of slow or stagnant growth, marred by class conflict, a dysfunctional national legislature (oh, wait, we already have that), and a "new normal" of diminished living standards? Again, this is a subject for a much longer disquisition, but for what it's worth, some recent reading I've been doing--and too many conversations with Paul Kedrosky--has me convinced that we are in for some very trying times ahead. We will see a short-term bounce in GDP growth here in the next quarter or two, but possibly 2010, and more likely 2011 and beyond, will bring discord, precipitated in large part by not only a higher "normal" of oil prices but also the realization that we are about to enter, prepared or not, a serious energy transition. Oh, and China's entire economy might be a bubble and we might be on the brink of having a failed state on our southern doorstep--because of plummeting oil production, not drug lords. (But they don't help; of course, if California legalizes marijuana to deal with its fiscal problems, this would be a boon for Mexico. Wouldn't it be ironic if the United States, irrespective of what party is in power, supported drug legalization because it would forestall the development of a basket case next door?)

OK, so I sound semi-apocalyptic. Don't get me wrong: I don't expect (at least, I don't think I expect) a Joseph Tainter-esque societal collapse. But there is a worrying disconnect between everyone who claims to see "green shoots" around every corner, even those who foresee a longer recession but eventual "normal" recovery, and the reality of long-term energy trends. Look, there is a reason why the Industrial Revolution has been more aptly named the Promethean Revolution (one of the best books on it is Landes' The Unbound Prometheus): humans harnessed inorganic energy. Our entire economic model is based on the premise of cheap coal and cheap oil: techno-utopians consistently ignore the inconvenient fact that much of that computing power they love to tout runs on such energy.

The obverse is that our economic model is not premised on permanently higher oil prices, whatever climate feedback loops we may be instigating, and the nontrivial risk of geopolitical instability. (The U.S. military, by the way, has little room for anything but a realistic appraisal of the future.)

Little of this will be new to readers: we all know we have energy issues to deal with. And, sometimes it's much easier to be pessimistic than optimistic about the future. To be sure, there are a few reasons for optimism. One is that humans are adaptive and we will likely find a way to adapt to the energy challenge. The profit motive will, or should, play a key role in this transition--this doesn't mean there is no role for government. Obviously, there is and should be: federal labs will be critically important going forward, but we need to unlock the innovations in those labs more efficiently. But government's role will be to do what it always does when it acts as facilitator, viz. frame incentives. In this case, it seems that a carbon tax would be an almost no-brainer. Then again, the fact that a carbon tax is treated like a shoot-the-moon option simply reinforces the pessimistic outlook. 

A key piece to moving forward through the next energy transition--and to possibly suppress or at least mitigate whatever geopolitical unpleasantness arises therefrom--is the supply of entrepreneurs. I don't just mean clean tech. We're talking about wholesale economic and social changes here--let's hope in slow motion, rather than abruptly. Don't just take it from me. At the recent World Economic History conference, Robert Ayres presented this wonderful presentation on the relationship between energy and economic growth, concluding that only entrepreneurs can take us forward. How's that for framing a policy debate?

(This pessimistic outlook, of course, will bring some amusement, namely, the perpetual cognitive dissonance of so-called conservatives and liberals as they endlessly bloviate in endless legislative fights. Rightward-leaning folk don't really seem to have dealt with the inherent tension between their Edmund Burke impulse and their defense of free-market capitalism as a ceaseless source of creative destruction. You can't sanction one type of change and seek to prevent the other. And liberals--or in today's parlance, progressives--haven't reconciled the exact opposite dichotomy: their embrace of "social change" as an all-encompassing yet vacuous strategy, but their readiness to preserve nostalgic remnants of the mid-twentieth century economy.)

The most frustrating thing about such a discussion is that it's quite difficult to talk about an alternative future because all we have to structure our imagination of that future is the present state of affairs. When we're trying to imagine what the next economic model will be, and how it will differ from the one that has carried the world forward for the last century and a half, we have little to draw on by way of reference points. But this, oddly, might be the strongest case for optimism: human knowledge always advances in a desultory fashion. We adapt by trial and error and adoption. The potential for future innovation and new knowledge creation shouldn't be in doubt--it's the institutional response, the adoption and absorption, that should be of concern. 

What's important is that we stop discounting the very real possibility that the future could be anything but bright: the fact that the last two hundred years have seen more or less upward progress in terms of human living standards, steadily spreading over the entire globe, is not a reason to believe that the future will simply be a continuation of this. Believing so is the mistake made by Taleb's "turkeys."