Tech Community Worthless to Economic Recovery

One of the most notable things about the dot com bubble burst is that the innovations and technologies established in the late 90s and early 2000s spurned the comeback of the economy and the establishment of a new economy of business and internet value. We called it, for better or for worse, Web 2.0 and it was marked by stark innovations in human interaction driven largely by the glut of bandwidth provided by undersea cables laid in the 90s. The technology that, arguably, caused the downturn that resulted in so many dot-com bombs, became the impetus for a new generation of business and spending.

Unfortunately, this new generation of internet technology, technologists and startups is so far not demonstrating any ability to lay the groundwork for the economic recovery and innovation. Instead, we continue to focus on “teh Twitter”, and marketing gimmicks played out by celebrities like Ashtun Kutcher and Oprah. We talk about the new look and feel of Friendfeed, seen Friendfeed focusing on making what we know better, but ignoring the very impetus for economic recovery proven time again – innovation. Something new. Something radical. Something that challenges the basis of the cultural and societal problems in existence that generate the economic problems affecting everyone, not just a subset of the population existing in a subset of the worlds geography.

In the 1930s, the United States (and by proxy, the world) faced the worst economic crisis in modern history (one could make the argument that the Dark Ages were actually centuries old and worse than anything generated by modern economic recessions). It wasn’t until society was forced to innovate, via programs instituted by President Franklin Roosevelt, that the economy began to recover.

Silicon Valley, as bubble-like as it is, has been the center of innovation in the technology world, for several economic cycles now. In every case in the past 20 years, the impetus for technology growth and recovery, can be categorized by new ideas, new companies doing new things. They don’t rehash the same cycles. They haven’t focused on the same ideas. They start over building from the plateau left from the cycle before – utilizing prior technologies and developing completely new things.

This is innovation and this is not what is happening in this cycle. Instead, the technology world talks about celebrity races to 1 Million Twitter followers. They talk about the mainstream adoption of these technologies. We live in years of yore, still conversing about how Obama won the White House using social media – as if that fact will somehow change our world.

We still talk about advertising on blogs, as if advertising sales are somehow going to spur economic recovery, despite a regression in advertising spending across the board. We still build companies based on an idea that free is a valuable asset.

BREAKING NEWS: The economy spins out of control while people keep spinning stupid ideas worthy of 2001.

It’s time to get smart about business. It’s time to start applying the entrepreneurial spirit that we claim as important to our culture. It’s time for the technology community to actually be important to the economy. It’s time to stop expecting that the President will call upon us as a community of change and innovation, when all we can do is talk about publicity stunts by celebrities.

Grow up, people. Get real about making a difference. Maybe we can actually get this country and this world moving again if we stop being stupid. Maybe. We are not necessarily the chosen ones. That right must be earned.

General Motors, The Feds.

In the early days of this blog, I wrote a lot about political issues. Frankly, when I was getting going in the blogging world almost five years ago, it was about the only thing I knew to do. Political blogging was huge and it was about the only kind of blogging that registered on the radar. Over the years, I’ve found my niche and it is clearly what you find here today. However, today I need to address a huge issue facing the American public, small businesses and every aspect of the American fabric of society. I must get this off my chest, because it matters to business in a way that nothing else in our lifetimes has.

As time goes on, I have gone from extreme right wing conservative to moderately progressive and still trend right on some issues. It doesn’t really matter though, because the principles that I believe in are firmly based in a sense of pragmatic, if not downright cruel, reality.

Over the weekend, the Obama administration did something completely unthinkable that will have a longterm negative impact on the enterprising and innovative American markets. The federal government made board level decisions on behalf of a publicly-traded company, General Motors.

It is clear to any objective mind that the General Motors (and to a lesser extent Chrysler) proposal for restructuring in the face of bankruptcy, and to secure taxpayer funds, was less than adequate. In fact, some rumors from within the company suggest that GM essentially sat on their hands as they approached the deadline originally agreed to with the Bush administration. Clearly, this is less than acceptable. Clearly, this mindset believes that they truly are “too big to fail” and that the feds would simply swoop in and rescue them yet again.

Clearly, clearly, clearly. Yet… none of this is clear.

The Obama Administration suggested a change to threatened the GM board of directors that they had to remove CEO Rick Wagoner.

I understand why. If Wagoner was too sluggish in his behavior, or “sat on his hands pending an Obama bailout” then he certainly needed to be removed. All evidence points to only positive results from his removal. However, the federal government directly intervened in the private sector governance of a publicly traded company.

This outrage is enough, but somewhat legal if they own a portion of the stock. IT’s expected that, as shareholders, the government would want a say.

However, here is the part that no one is talking about. In essence, General Motors has become a Wholly Owned Subsidiary of the United States of America. While your Orwellian alarms go off, let me rub salt in the wound. The SEC is supposed to regulate GM. That’s right, the Securities and Exchange Commission, a fully functioning independent agency of the U.S., is now tasked with regulating itself.

Can anything good come from this? I think not.

In an ideal world, one filled with unicorns and gryffons and other mythical creatures, the SEC executes their funtion without privilege or bias. In an ideal world, GM adheres to the same regulations put in place by the SEC that governs the market. In an ideal world. Since when has self-policing ever worked? Especially with the SEC.

To make matters worse, in an effort to stimulate company growth and remove government ownership of the company (yeah, right), the Feds are likely to make moves that will help GM, but may undercut the market. For instance, cutting the MSRP of automobiles by a certain percentage to stimulate sales. These kinds of actions are generally regulated by the Justice Department (as well as the Commerce Department) and fall under unfair trading practices.

At what point is a U.S. owned company able to compete on the open market without undercutting market tensions and forces, and at which point does the “adherence to market principles” mean the destruction of the company?

My feeling is that the longterm ramifications of bailing out and direct government intervention into the governance and conduct of a company is a dangerous precedent. Beyond a dangerous precedent, I believe it will only exacerbate the complete destructive collapse of the economy.

There will be some who call me crazy. Who call me a sensationalist. That tell me I am too conspiratorial. Remember this post when my predictions actually come to fruition. Within six months.

Welcome to the Machine

Welcome my son, welcome to the machine.
Where have you been?
It’s alright we know where you’ve been.
You’ve been in the pipeline, filling in time,
Provided with toys and ‘Scouting for Boys’.
You bought a guitar to punish your ma,
And you didn’t like school, and you
know you’re nobody’s fool,
So welcome to the machine.

Welcome my son, welcome to the machine.
What did you dream?
It’s alright we told you what to dream.
You dreamed of a big star,
He played a mean guitar,
He always ate in the Steak Bar.
He loved to drive in his Jaguar.
So welcome to the Machine.

Remember that song? From the album Wish You Were Here, Pink Floyd in an almost prophetic motion saw a generational change coming years before it actually arrived. The song was widely believed to be about the music industry and the “slurping” of fresh blood artists into the controlling depths of the recording industry, but I see something far more nefarious and relevant to today in light of the economy and business.

Photo by <a href="http://flickr.com/photos/tonivc/382150181/">ToniVC</a> Photo by ToniVC

In fact, we are so out of our league with the concept of open innovation in a web environment that the generational, societal and economic corrections are about to kick in. The economics are already kicking in with the entire marketplace shrinking, if you look at market conditions, 50% in the last year.

I asked a VC a few days ago what he was investing in in a down economy and his answers indicate low-risk investments – that is, investments that are cash flow positive with an existing customer base. Yeah, not much risk and certainly different than the VC market we’ve been used to. If this is the mindset that is prevalent, there will be fewer innovators as less cash is available to be had. Fewer, or smaller innovations. Welcome to the Machine!

Generational corrections occur when a generational mindset changes. While my friend, Jessie Newburn is the resident generational expert in my circle of influencers, I believe she would point out that the individualistic Generation X that helped create the internet by challenging the established norms of the 1970s and 80, and who possessed the innovative prowess to create two generations of web companies is being replaced by a generation that is more likely to band together and hunker down for the nuclear winter. Hibernation, in a way. Those corrections are beginning to occur, I believe, as consolidations will likely become the name of the game. Welcome to the Machine!

Generational corrections beget societal corrections. Societal corrections merely reflect the mood of the workforce, the innovators and the money movers. When the finances dry up, the companies move into a mode of slow burn/slow growth as opposed to high burn/high growth, then business decisions are made safely. The Machine is safe. It is robotic and automated, programmed with computer-like precision. The Machine makes few (if any) mistakes, yet it is uncreative. It lacks pop and sizzle that innovators provide. When the society corrects itself away from innovation, it becomes precise and routine, but loses the juice that can be risky but productive. Welcome to the Machine!

If you’ve read this far and feel like I desire the demise of innovation, you have read me wrong. I do not. However, there are corrections happening that could last a long time (far beyond the 18 months experts think the economy will take to come back). It is a generational impact that could delay a proverbial Web 3.0 for 10 years or more.

With the trends of the incoming Presidential administration, my feeling is that the next generation of innovation could occur within the public sector itself, but won’t have the exposure or sexiness of that which was considered “hot innovation” in the last 20 years. Less private sector bling. More public sector growth.

What are your thoughts?

Tribune Company Bankruptcy Highlights New Media Opportunity

About an hour ago, the privately held Tribune Company filed for Chapter 11 Bankruptcy protection. The Tribune Company is the owner of the Chicago Tribune, Los Angeles Times and Baltimore Sun, as well as a minority owner of the Chicago Cubs (not included in the bankruptcy filing).

The conversation I’ve heard around this news has been interesting. For as much grief as some of these main-stream press have caused some community members, mostly in politics or local governments where the Tribune papers are, the feeling is that metropolitan areas served by these papers currently cannot function without a hard format newspaper.

The cities with the biggest three Tribune papers all have alternative daily circulars. Kind of. Los Angeles could lose the LA Times and still have the Los Angeles Daily News. Chicago could theoretically lose the Chicago Tribune and still have the Chicago Sun-Times. Baltimore would be stretched thinnest losing the Baltimore Sun and leaving the Examiner (though proximity to Washington, D.C could position the Washington Post or the investigative journalistic Washington Times to fill the void).

What strikes me is the difference between long-standing community members (those who have been born and raised in an area, and have been shaped by the daily circular) and the generational transience of those who simply don’t care, and move from locale to locale throughout life.

I’ve personally lived in the Baltimore area for most of my life, and have no loyalty or affinity to the Baltimore Sun. But those who have lived here all their life (and maybe from another generation) have been directly impacted by the Sun and can’t cope with life without it.

In my life, I can’t answer the famous Palin question/non-answer “What newspapers do you read?” because I don’t. If there is a loyalty to a paper, it is the New York Times. Why? Because they adjusted to a world not based on the physical paper. They are no longer “the grey lady” and now represent something so much more, and have extended their base outside of the previously known and understood paradigm. (Of course, that won’t necessarily keep them out of trouble either, but I digress.)

It will not sadden me to see the Tribune company go. It is obvious to me that newspapers, like the Tampa Tribune, who don’t adjust to the 21st Century need to fail. That does not mean that the age of hard print should die. On the contrary, it is possible for news organizations to rise up around an open culture of information sharing and digital cultural change, and provide an offline (paper) offering as well. It’s not just a possible change. It’s a required one.

Also to be clear, Chapter 11 is reorganization… not apocalypse. The Tribune Company will likely spin off some of these assets to, hopefully, better digitally savvy stewards. It is possible for these papers to reinvigorate and jump into the 21st century as well. If not, they will be replaced by lighter, more nimble and astute media organizations that are digitally competent.

I can’t wait to see how it plays out.

With the Holidays Comes Reason to Have Confidence

If you listened to the talking heads last week, you knew that everyone was holding their breath waiting to find out just how bad black friday sales were going to be. If you listen to the so-called experts, there was no reason for hope and the holiday shopping season would only be the nail in the proverbial coffin.

I suspected that people were not listening to the experts and saw a reason to hope in this economy. As touchy feely as “hope” can be in an area that is defined tightly by the ink of black and white P&L reports, hope, faith and confidence is the driving force behind an economy. We win big because we feel like nothing can go wrong and so we buy, buy, buy and invest, invest, invest. We lose big because the air of an entire way of life is deflated beneath us taking our will and drive to win away.

It’s all about the feeling.

So when economists said that this holiday shopping season would be the worst on record, and that people just weren’t buying like they used to, we could take the prophets at their word, or change the future.

According to Reuters, online sales spiked from a year ago. Some reports used the word “dwarfed” to describe the upsurge and this morning, economists were trying to explain away how they were wrong by saying there was “pent up demand”.

Yes, there was. And the economists missed it. The prophets prophesied doom and were wrong! Mind you, these are the same folks who willingly peddled the economic concepts that buried the mortgage market in the past year.

Folks, I am not an economist. I am not a financial adviser. I know what I hear on a day to day basis talking to people like you and I. I know people are buying. Yes, they are being cautious. But they are buying.

In fact, I may buy a new car before the end of the year when the dealers are dying to make any deal they can. I’ll save some money, and still buy, buy, buy. Don’t buy the hype. This is not the end of the world and the longer we go, the closer we are to the end.

Bubble, bubble, bubble – In Private Equity not Web 2.0 (Classic)

This is the first in an ongoing “Venture Files Classics” written by former Venture Files Editor Steven Fisher. The selections are chosen for historical reference as well as a notorious ability to be right. The original post from January 12 of 2007 can be found here

Being a serial entrepreneur I have been through many business cycles, but the Internet boom of the late 1990’s was an extremely heady time. People were so enamored with what the Internet could do, every one really believed that the old rules didn’t apply.

The reality was that those rules applied more than ever and with the crash in the early part of the century we have tried to learn our lesson.

With these new companies deemed Web 2.0, everyone is expecting another bubble. So many of the same types of companies have been funded so there are bound to be consolidation and just plain failure.

According to Michael Arrington, his entry “Bubble, Bubble, Bubble“, the despite the fact that some companies are failing, the sky is not falling.

In fact I would call this time around the ol’ startup track “saner, saner, saner”.

Despite many of these companies basing their success on being an aftermarket for Google, the smart ones I think many people know that you have to be in this to create a real enterprise and one that makes money. It is not so much about the VC’s but about the ability to use the low cost and barrier of entry to innovate.

But the Dead Pool is not cool

I think that the blog A VC gets it right his counter points on “Building It Up and Then Knocking It Down” are right. He says “over hyping young companies where people are working their butts off and then throwing them overboard quickly into a “dead pool” when they fail is not healthy.

I believe it is dead wrong to put this up there. It just feeds the fire for the chicken little’s of the world. Mike Arrington has known successes when he co-founded helped flip Achex and sold it to First data. I don’t know if he has experienced building a company from scratch and having it fail, many times from circumstances out of your control.

But there is a bubble developing and not where you think…..

The bubble is not with companies it is in the private equity market itself. The model of funding and the way people are evaluating companies is changing. The way investors look at companies is not based on a fast IPO but aligning it to be a sweet acquisition target.

This is helped in no small part since most VC’s invest like they are teenage girls. “Oooo, you invested in a video sharing site, I want one too! You put $5 million into social networking for eco-friendly baby boomers? Find me one so I can get one too!!

Here is how I got there:

  1. The amount of money chasing deals have lightening strike twice to find that repeat of unrepeatable past returns is growing rapidly
  2. The number of opportunities are declining and there are too many copycats plus the cheap money is pouring out to fund them.
  3. Not enough VC’s to serve on boards effectively and make the existing investments get to a proper exit
  4. IPO market is still not there and there is and there are only so many acquisition partners
  5. Higher prices of entry and lower returns

What I don’t know:

  1. When the IPO market might be friendly to tech stocks
  2. If investors will broaden their portfolio choices to get their money working in unique ways
  3. If funds might start giving their money back

Only time will tell if this comes to pass. If you have a good idea, the money is out there but might not be for very much longer.

Crystal Ball? 2-3 years or mid-2008 this is gonna come to a head. Only time will prove me right or wrong.

Editors Note: At the end of 2008, we do now know that the economy has imploded, not simply from web valuations. In fact, web valuations hardly played any part like they did in 1999-2000.

In fact, the web sector has seen much less damage, than the rest of the economy. In fact, there are still investments taking place, if devalued. A series investments for web companies typically range in the $1-2M range which in the larger picture is fairly small. Biotech companies, for instance, typically pull in around $20M for a Series A round.

That does not make the web sector immune, and in fact, Steve is correct in recognizing that there would be a bubble coming, and that it has arrived.