Steve Krause : Blog

The Power of the Portfolio: VCs and Entrepreneurs

Kudos to the venture-capital (VC) firm First Round Capital for offering its entrepreneurs an exchange fund: If First Round invests in your startup, you can exchange a small percentage of your own company shares for shares in a fund tied to the total First Round portfolio's performance. As First Round's managing director Josh Kopelman said, "When I was an entrepreneur, I remember the feeling of having all my eggs in one basket -- and it is our hope that this fund will remove some of that stress." Assuming the details of the plan are consistent with its spirit, it will be a great option for entrepreneurs and a positive differentiator for First Round.

That said, beyond the normal VC role of facilitating relationships among portfolio companies, how else can VC firms leverage their portfolio-holder position on behalf of those in the portfolio? For example, could a VC firm share a health-care/benefits program across all its early-stage startups? Each startup would pay its own way, just as if the startup had its own program. However, a portfolio-wide program would have better terms due to its size, would eliminate the cost and hassle of each startup finding and establishing its own plan, and would offer COBRA for individuals at failed startups (who ordinarily would be out of luck, since COBRA is predicated on the continued existence of a company).

I am sure other examples exist, and I look forward to seeing them emerge for the benefit of entrepreneurs and VCs alike.

Recovering Energy from Shock Absorbers (Levant Power)

In the past, I've written about harvesting power from human motion, including the idea of generating power from vibrational energy imparted from vehicles to road structures like overpasses. Some former MIT students, now entrepreneurs, have hit on a smart variation of this idea: They harvest power not via the road structures but via the vehicles' shock absorbers.

From their company's Web site:

Levant Power Corp. has identified an alternative energy source previously untapped by vehicles: the suspension system. The energy of a vehicle traversing varying roads and terrain is significant and currently dissipated as heat through conventional shock absorbers.

Our product, GenShock, recovers this energy and utilizes it for fuel economy gains, providing additional onboard electricity. In addition to extending a vehicle's range, GenShock improves ride quality via an adaptable, variable-damping suspension. GenShock is a turnkey replacement for standard shock absorbers, requiring minimal installation time and little to no maintenance.

File that under, "Ideas, Good."

Trademarkery

Below is the "GE basic floodlight 45." I direct your attention to little "TM" next to the word "basic." The "TM" is an attempt to assert a trademark on the word "basic."

From Wikipedia's Trademark page:

A trademark or trade mark is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify that the products or services to consumers with which the trademark appears originate from a unique source, and to distinguish its products or services from those of other entities.

Even within the context of floodlights as a product category, it's unclear how the word "basic" provides any uniqueness or distinction. So how can that "TM" be there?

"TM" indicates an unregistered trademark, which is just a unilateral assertion of trademark. For example, whoever at GE decided that "basic" was worthy of a "TM" did not need to ask a government agency for permission. With an unregistered trademark, the classic Nike slogan applies: you can "just do it."

But wait, that Nike slogan is a registered trademark, denoted by an R inside a circle. In the United States, it means the U.S. Patent and Trademark Office found the mark to meet the USPTO's criteria for distinctiveness and such. With this government endorsement, a registered trademark provides a far firmer legal basis for defending a mark.

So the next time you see a dubious "TM," remember that "TM" is more bark than bite.

Truth from the Technical Trenches

In a recent interview with Charlie Rose, Google CEO Eric Schmidt explained how Bill Joy gets investment ideas:

I have a friend who is a venture capitalist, Bill Joy, who described how he does venture capital. He uses Google to search for all the new ideas....He starts off — he starts off with a search. I’m interested in hydrodynamics. And he learns by digging — by repetitive searching until he finds the [technical] papers that are authoritative. He looks for who the authors are, and he calls the authors. These are people no one ever calls. So they return his call. [laughter] Right? And that's how he learns.

[The video and transcript of the interview are at this TechCrunch page.]

A long time ago, when my job was to forecast the future of digital media, I used a method similar to Joy's. It was the early 1990s, before anyone knew what the Web was. The big issue of the day was interactive television (ITV). Cable and phone-company CEOs clambered to tout how amazing their new services would be. In lieu of actual services, they had fancy mock-ups. However, the only reality these mock-ups demonstrated was the press's ravenous hunger for stories about ordering a pizza via your TV's remote control.

As you might guess, the CEOs and marketing types were pushing the big ideas and alluring mock-ups. Meanwhile, out of the spotlight, squads of engineers were scrambling to make the network, server, and set-top technologies fulfill the vision. Every big phone and cable company had a field trial planned. It was a race to the promised land.

During this hubbub, a reporter from the Wall Street Journal interviewed me about prospects for an upcoming trial by the phone company US West, which planned to use set-top boxes adapted from the video-game company 3DO. The trial was planned for a certain date, and the reporter had asked me how realistic that date was. I said, and was quoted in the Journal, that it was not realistic.

This perspective contradicted all the publicly stated information about the trial, and it made some waves at the time. However, it proved correct, as I knew it would. Why? Because I had been talking to several engineers involved with the trial. Per the Bill Joy story, these were people that no one from the outside world called. But once they realized I could talk their language, and that I knew what was happening in other trials, mutually beneficial conversations ensued.

Like all the other engineers on various trials, the US West / 3DO engineers were not only behind schedule but continuing to slip due to the need to improvise much of the technical work as they went. I'd seen this story many times, and it always got worse before it got better. Thus, the chances of the trial hitting its target date were essentially zero.

With other trials, I'd sometimes find an engineer that tried to recite the company line. But if reality was different, it was easy to detect. For example, a CEO might have claimed that his trial's set-top box would cost $300 as soon as volume ramped up. But an engineer would be hard pressed to hold that line when presented with a components list that totaled something like $3,000, where most component prices already reflected volume pricing for other existing applications.

That was the beauty of talking to technical people in the trenches. They were closest to the truth of what was actually happening, and their normal inclination was to be realistic in the face of facts. In a commercial world biased toward the production and distribution of hype, this perspective was often a useful corrective and occasionally, when something really was going to work, a powerful confirmation.

Hyundai Assurance

From the carmaker Hyundai:

A decade ago Hyundai pioneered America's Best Warranty™. Now we're providing another kind of confidence. Finance or lease any new Hyundai, and if in the next year you lose your income*, we'll let you return it. That's the Hyundai Assurance.

At Hyundai we think it's easier to find a job when you've got a car. That's why, for a limited time, we expanded Hyundai Assurance, and we've added...something extra. A plus, as in Hyundai Assurance Plus. If you lose your income, we'll make your payments for 3 months while you get back on your feet, and if that's not enough time to work things out, you can return the car with no impact on your credit.

As a marketing program, I admire Hyundai Assurance for several reasons:

It has an unusual value proposition—something that most people haven't heard before. If nothing else, it has attracted media attention and gotten people talking about the Hyundai brand.

It recognizes the effect of tough times and lets Hyundai say, "We get it." Contrast that with the current media image of American auto executives, which is something like:

[Image by Randy Bish of the Pittsburgh Tribune-Review]

Perhaps most interesting is this observation from Rob Walker, writing in the New York Times Magazine:

As of early March, no Hyundai buyer had yet returned a vehicle bought under the Assurance umbrella. This raises the intriguing point about what sort of consumer is being reassured. Probably anybody who is really afraid of losing a job simply isn’t going to buy a car right now. But somebody whose insecurity is more abstract, who perhaps simply needs a rationale for a big-ticket purchase at a moment when the headlines are full of doom — that’s different.

The program started in January 2009, and participants must make at least two monthly payments. So the window has been short for buyers to return a car or miss payments in an allowable way. Still, as of March 23rd, the blog Kicking Tires reported:

[H]yundai spokesman Dan Bedore confirmed that so far no one has used the program. It’s still early in the plan’s lifecycle and final March figures have not come in, but the fact that no buyer has taken advantage of it says that at least the 55,133 people who bought a Hyundai this year probably still have their jobs.

While most automakers' sales were down in early 2009, Hyundai's were up.

Bubble Fuel

As a postscript to Geeks Bearing Formulas, I liked Semyon Dukach's explanation of the financial crisis. In summary, there are many ways of goosing near-term returns in exchange for risk of ruin later. Investors will pass if the risk is obvious. However, many investors can't resist the attraction of higher returns if the extra risk is not obvious. Ponzi schemes have this property because they intentionally hide their unsustainability. This hiding amounts to fraud, and thus Ponzi schemes are illegal.

Whereas a Ponzi scheme has a mastermind who understands the con, the reckless use of credit default swaps emerged by itself. The financial instruments were complex, and their use was largely out of public view. However, they appeared to work legitimately, which was all most of the participants wanted to know. Even money managers who were uneasy joined the crowd, fearing their own returns would suffer in comparison. Fueled by and feeding back into the housing boom, the party kept heating up and up, until it melted down.

In some respects, this explanation seems like a familiar take on why bubbles occur. The thing that interested me was the necessary role of complexity.

As long as the mathematical analysis of the risk of ruin lies beyond the understanding of the CEOs, the money managing organizations can stay competitive by employing their latest version of a return-boosting [gimmick], without admitting to themselves or to others that they have been peer-pressured into the financial equivalent of selling their soul to the Devil.

Put another way, credit default swaps were successful as bubble fuel largely because of their inscrutability. This made them easy to abuse because their catastrophic risk was diffused and obscured among a huge web of complex, private trades. With the risk hidden and the returns good, it was easy for the market, as a system, to con itself.

So, going back to the responsibilities of "geeks bearing formulas," a key responsibility is to know that the market would rather use a formula for bubble fuel than truth. When the latter supposedly correlates with the former, be wary indeed.

[Dukach's post put this topic in terms of the gambling system called Martingale, in which the gambler keeps doubling down until recovering with a win—that is, until a statistically inevitable string of losses busts the gambler before the recovery win can occur. It's definitely worth a read for that angle, which I omitted for simplicity.]

From Newspapers to News

I get all my news electronically, mostly via my handheld devices. It's been that way since 1996, when I discontinued my subscription to the physical newspaper. These days, I get more news from more sources than I ever did in the days when The Paper came on paper.

This past holiday season, I was visiting relatives near Chicago, browsing through their (physical) Chicago Tribunes. As with other newspapers, the Tribune's advertisers and subscribers are increasingly migrating to the Internet, where they are less lucrative to the newspaper. The current economic climate is not helping: In December 2008, The Tribune Company filed for bankruptcy (the kind where the company keeps operating while it reorganizes, as opposed to the liquidation kind).

My relatives love their Chicago Tribune, but less so now. It's thinner, the stories sandwiched among seemingly ever-bigger ads and photos. What surprised me, however, was the amount of content The Tribune still has that is not Chicago-specific.

For example, given The Tribune's economic woes, how long can it have its own movie critic? If there is nothing Chicago-specific about reviewing movies, and the Internet is awash with professional and amateur reviews of every movie out there, why should The Tribune pay the full freight of its own movie reviewer?

Back when newspapering was good business, there was no need to ask such questions. Papers had movie critics and a wide variety of other writers to provide a unique voice to their readers, who did not necessarily have alternate voices readily available. But in a world of abundant alternatives for a newspaper's content, where does the traditional newspaper add value? I'd think it would be in local content, where the alternatives are fewer and weaker. This applies not just to news and sports but also to art and entertainment happenings unique to the newspaper's area. For a major metropolitan area, that's still a substantial swath to cover.

Maybe The Tribune is paring back in exactly this way, but it was not apparent from a cursory view. Per the movie-critic example, maybe the Tribune's movie critic is the rare star that can be syndicated to other newspapers. Or maybe there's an angle to this subject I'm missing. But I can say this: My relatives prefer their newspaper on paper, yet the withering of what they consider to be "their newspaper" is prompting them to ask me how they can get their news—as opposed to "their newspaper"—online.

Theory and Practice of "Customer Focused"

While reading Adaptive Path's Subject to Change, I came across this telling graphic:

The data's original source is Bain & Company's paper Closing the Delivery Gap, from 2005.

Water-Based Data Centers

Every once in a while, an idea comes along that combines breakthrough creativity with utter practicality. Google's water-based data center is such an idea.

The problem: A huge cost in Google's business is building and running data centers. An individual data center houses thousands of computers that together run Google's services. Operating the computers requires a lot of power. Moreover, because many computers are packed tightly together, keeping them cool is a major issue.

The solution: Float a data center on an ocean ship. The power comes from converting tidal motion into energy. The cooling comes from sea water, pumped through. An undersea cable carries the data to shore.

If that sounds good, also consider that the facility may not be subject to taxes or government regulation, depending on where the ship is positioned. Finally, the transportation world already has an infrastructure for moving standardized containers around. Thus, Google can build its data-center in containers-sized modules, truck them to a container port, and drop them on a ship.

Of course, implementing this idea will have many obstacles. Maybe it will never work because of devils in the details. Whatever the outcome, the idea itself deserves praise just for the ingenuity.

How Not To Do Customer Service

Once upon a time, a cable TV installer arrived at my house. He didn't know which services I ordered, but he knew he was there to install something. As first steps go, this one was not a confidence-builder.

I told him which services I ordered. As he was doing the install, I noticed he was providing the wrong set top box for our service. When I asked him about this, he was surprised I knew the difference and said that he "just ran out" of the correct boxes, but this one would work.

I pointed out that it wouldn't work as well. I asked him to get the correct box and come back. He said he couldn't do that; I needed to make another appointment.

I asked him why that was my problem to solve, considering it was he who did not have the correct equipment. He didn't have an answer, but he suggested the fastest solution was for me to take the wrong box and swap it at the local cable store, nearby on Bloomfield Ave. He said this in a knowing tone, as if I'd eventually end up there anyway.

Later, I went to the cable company's Web site but couldn't find a store locator to get the store's exact address. I ended up finding the store locator by Googling the cable company's name and "store locator." Sure enough, it was on the company's Web site, but there was no obvious way to get to it.

I put in my zip code. The only store that came up was a Best Buy somewhere in West Hartford—literally "somewhere" because there was no address or phone number provided. Perhaps the store locator was hard to find because it was not meant to be used.

So I moved on to the cable company's "live chat" feature. Having started a session, the screen said, "Status: You are waiting for an analyst to assist you."

While waiting for the chat feature to do something, I called the cable company's support number. It told me they were experiencing higher than normal call volumes. "If your call is not of an urgent nature, please call back later." I rechecked the chat window...no change.

While waiting, I searched Google for the cable company's name plus the name of towns in the immediate vicinity. It provided a listing, not on Bloomfield Ave. I called the number. No one answered, and the voicemail box was full.

I had left the support number on speakerphone, and it eventually got me a person who gave me the address of the cable-company store where I could exchange my box. It was neither on Bloomfield Ave., nor at Best Buy, nor at the office where the voicemail was full.

Having gotten an answer on the phone, I bailed out of the chat feature, which was 25 minutes into waiting for an analyst. In doing so, I got a customer-satisfaction survey for my Web visit. Eager to express an opinion or two, I was disappointed to find that most of the questions were irrelevant to my visit. For example, the first question was, "Please rate the ability to limit sharing of your personal information on this site." There were multiple screens, largely filled with such irrelevant questions. I skipped the whole thing.

Later, I went to the store. I waited a while. When my number was called, I found that the store itself "just ran out" of the correct boxes. I expressed frustration that my time was being wasted. I asked whether I had done something wrong in the process. No, said the person, but perhaps my expectations could have been set better.

Let us examine and extend that insight.

Maybe the cable guy could have said, "Hey, I'm sorry, but I just realized I don't know what you ordered or if I have the right equipment. Let me get your order now, and if I'm not set to do this right, I'll schedule myself to come back first thing tomorrow with the right gear."

Or, lacking that, the cable guy could have said, "I'm sorry it's a hassle, but your best bet is to swap this box at the local cable store. I think it's on Bloomfield Ave., but let me call them to make sure they have the box you need and to get the exact address."

Or, lacking that, the cable company's Web site might have had a findable and functioning store locator.

Or, lacking that, the cable company's chat feature and support line might have had one of those messages that estimates how long until a person would be available.

Or, lacking that, the person I eventually reached might have suggested that I call the store to make sure they had the box I needed because sometimes the boxes are out of stock. (Actually, this would not work because the store apparently does not have a public phone number. Rather, the only number given was the cable company's general support number.)

The irony is, if one of the first few scenarios above would have happened, I probably would have said the overall experience was good, because I would have appreciated someone's taking the initiative to fix a problem. But with failure at every turn, it's harder to be understanding. And irony upon irony, the company's one attempt to solicit my feedback (the customer-satisfaction survey on the Web site) was so poorly executed that it wasn't worth using.

Having read this far, you might be wondering if I ever got the right box.

While at the cable store, I asked whether they had a waiting list or some other way to notify me when the correct box was available. Looking as if he was taking pity on me, the guy asked for my name and number. He wrote it on the back of a piece of scrap paper. He also offered that I could set up another appointment and maybe the correct box would be on that truck. "Maybe?" I asked. "Why would the truck come if the box wasn't on the truck?"

That was like asking why things fall down, not up. It just works that way.

A day later, I happened to be driving near the cable store. Having zero expectation of success, I went in anyway, skipped the line, and asked someone if the correct type of boxes were available. The person said yes. I took a number. I got the box. Everyone lived happily ever after—the key word being "after."