Friday, August 31, 2012

Telling the truth is the best long-term strategy in Silicon Valley

A quick follow-up to my post on trust from earlier this morning.

Nick O'Neill wrote a post this morning with the provocative title, "Silicon Valley Is Filled With Liars"

I don't mind the provocative title one bit--after all, that's a technique I use all the time. In the post, O'Neill calls out the common lies we all see--vanity metrics to make a company look good, listing off "committed" investors, relentlessly spinning everything.

He's right. These are all too common, and as a result, we've learned to disbelieve all of them. Thus, when someone actually tells the truth, we tend to discount his or her statements by the same "truthiness discount" we apply to everyone else.

This was something a VC friend pointed out to me about five years ago. "Chris, aren't you putting yourself at a disadvantage by not making outlandish claims and hyping everything?"

My response was simple: I'm playing a long-term gain. I'm going to tell the truth--consistently, and over a long period of time. And as a result, the people who deal with me will actually believe what I say.

Here's a question--would you rather have the trust of the people who actually know you, or the admiration of those who don't?

The latter feels good in the short term, like an addictive drug, but leads to an inevitable crash. Rationally, you'd have to try to hold people at arm's-length, because if they got to know you better, your relationship would degrade.

Strong, close, trust-based relationships are incredibly valuable. A single such relationship ought to outweight hundreds or even thousands of superficial ones based solely on truthiness.

Indeed, if everyone else is lying, truth-telling becomes a powerful contrarian strategy.

In the land of the liars, the truth-teller is king.

Thursday, August 30, 2012

The OS for Silicon Valley is Trust (and we have to protect it)

There have been a lot of words spilled recently about a specific individual in Silicon Valley who appears to have fabricated data to appear well-connected and influential.

Since the discussion has descended into flame wars about that individual and the media outlets who covered the story, I'm deliberately not linking to any of that content.

What I am concerned about is the number of Hacker News commenters who simply spun some variation on "everyone in Silicon Valley is full of BS." Ultimately, this kind of cynical and suspicious attitude harms the entire ecosystem, even when it is justified.

Andy Grove is famous for saying that "only the paranoid survive," but it is probably also true to say that trust is the OS of Silicon Valley.

Back when I was in business school in Boston, I started my first company. I ended up raising capital and building the team in Silicon Valley, even though that meant weekly transcontinental redeye flights (I was still in school at the time, and my school had a no absence policy). The reason is that Silicon Valley is far more open to trying things. I believe that much of that openness comes from the underlying trust we extend here in the Valley.

In theory, investors ought to insist on a full due-diligence package that includes all corporate documents, copies of every contract ever signed, and the full HR files of every employee. But that kind of scrutiny would kill almost any startup with paperwork. Early-stage investing would grind to a halt.

In practice, guys like Andy Bechtolsheim write $100,000 checks to two brilliant guys with an cool prototype. Sometimes, the investors lose their shirts. But in Andy's case, he backed Google--his third billion-dollar company.

Silicon Valley isn't full of risk-takers because we're insane (no matter what some other hubs might claim). It's because we trust each other. Maybe not completely, but more than most other industries. Certainly more than Wall Street.

Classic management theory states that companies exist because of the overhead cost of arms-length transactions. With trust, you can move faster.

In some sense, all of Silicon Valley is like a single mega-firm, thanks to the level of (perhaps irrational) trust we feel.

That trust helps make us special. And it's worth protecting.

The 4 Questions Great Businesses Must Be Able To Answer

I'm a long-time admirer of Jason Fried, the CEO of 37Signals. He's one of the only tech CEOs who is willing to experiment on culture and organization, rather than just technology.

In this recent Fast Company interview, Jason cut to the heart of what it means to be a great business, versus what FC characterized as the "slash-and-burn" approach to startups:
"I think all you have to do is read TechCrunch. Look at what the top stories are, and they’re all about raising money, how many employees they have, and these are metrics that don’t matter. What matters is: Are you profitable? Are you building something great? Are you taking care of your people? Are you treating your customers well? In the coverage of our industry as a whole, you’ll rarely see stories about treating customers well, about people building a sustainable business."
I couldn't agree more. Great businesses don't just deliver financially--they also provide great products or services, and treat their employees and customers well. Simply focusing on financial results leaves you vulnerable to externalities.

In many ways, the poor treatment of employees and customers in high tech is no different than traditional economic externalities like pollution. It's just ironic that the same folks who trumpet their Priuses don't hesitate to drive the equivalent of a Hummer over their employees and customers.

Wednesday, August 29, 2012

It's a Tablet! It's a PC! No, it's a tasty floor wax!

We seem to have reached the stage of tablet evolution where ungainly variations are crawling out of the primordial ooze on a daily basis.

Just today, a single Engadget story covered the Sony VAIO Duo 11--a tablet that converts into a laptop via a slide-out keyboard--and the VAIO Tap 20--an 11.4 pound desktop that has its own batteries and can be used as a 20 inch tablet.

It's almost as if manufacturers have a "Wheel of Form Factors" that they spin, seemingly at random. It's as if they borrowed it from Hollywood ("Cowboys and Aliens! 007 and Indiana Jones! It can't miss!") and it looks like they're headed for similarly disastrous results.

Since I'm old, I can remember many of the mistakes of the past. Let's take a stroll down memory lane and see what we can learn.

1) The luggable PC

Before laptops, we had luggables. These ungainly devices combined underpowered PCs with a Samsonite form factor. It wasn't until the slimmed down Apple Powerbook and IBM ThinkPad appeared that portable computing took off.

2) The Duo Dock

Of course, Apple also experimented with the Powerbook Duo--an ultraportable laptop that could dock with a desktop station. The Duo was sleek and stylish, but ultimately a commercial failure. You simply couldn't cram enough power into such a small form factor:

3) The pdQ

Before smartphones existed, there was the Qualcomm pdQ, which combined a Palm Pilot handheld computer with Sprint cellphone using the simple expedient of being really, really large:

4) The OQO

The OQO was the Duo writ large--or perhaps that's writ small. It crammed a full Windows PC into a form factor roughly equivalent to two modern smartphones welded together. It also cost a fortune. Not surprisingly, it was out of business by 2009.

The lessons to take away from these four ill-fated products is simple: Consumers aren't willing to compromise in an existing product category. It doesn't matter if it's the best floor wax/dessert topping combo.

Computers that fit in your pocket are useful for one thing. So are tablets you can carry. So are laptops with keyboards. Just don't try to combine the three. As Tim Cook pointed out recently, when told of the various combos being prepped by Apple's competitors, "You could build a refrigerator/toaster combo, but I'm not sure anyone would buy it."

Progress Is When The Previously Unusual Becomes Routine

One of the reasons that Silicon Valley has a decent record of overcoming discrimination (though of course it still exists) is that entrepreneurship offers a self-made path to success.

If the old boys club thinks women or minorities can't be CEOs, there's a simple answer--start your own company.

Once there are prominent, successful women/African-American/you-name-it founder/CEOs, the path is opened for those that come afterwards to be picked as CEO.

Marissa Meyer's recent appointment as Yahoo! CEO is a great sign of progress for women in tech, but this story of Liz Pearce's appointment as CEO of Liquid Planner is even greater.

Liz isn't a celebrity. She didn't start the company. She joined the company at age 30, after being a consultant. Sure, she's got a great track record, having worked her way up at Sony, Google, and Amazon, but that's what you'd expect from a CEO.

There's nothing in Liz' background or the story on her appointment that jumps out or is trumpeted as progress.

And that's the true sign of progress.

Tuesday, August 28, 2012

Why DIY seed investing is like taking a job as a court reporter

Jason Lemkin, the co-founder of EchoSign, has written a thoughtful piece about seed investing.

In it, he calculates that if you do 30 seed investments at $25K each (roughly the lower bound for a diversified portfolio), you'd need $750K in capital. (Even this is an underestimate, since it leaves out the need for follow-on investments)

In order for your $750K portfolio to represent a sane proportion of your wealth you'd need a net worth well into the tens of millions.

But it's worse than that--If you put that $750K into a fund instead of investing it yourself, you’d pay 2% a year for 10 years, plus 20% of the profits (I’m going to ignore hurdle rates for now to simplify the analysis). If the fund performed well and delivered a 3X return over that period, there would be $2.25 million in profit; 20% of that is $450,000. Meanwhile the management fees would come to $750K X 2% X 10 years, or $150,000. Overall then, you’d have paid your fund $600K, or $60K/year.

Essentially, a DIY seed investor deploying $750K is paying him or herself $60K/year to make investments. Does that sound like a good annual income for that much hard work?

To put it in perspective, that's roughly what a court reporter makes for typing in transcripts.