Some Perspective Before the Facebook IPO

As we approach the pricing of the Facebook IPO, and before we get too carried away with watching the deserved valuation, these are my thoughts on where Facebook may have settled in the Internet ecosystem.

On the positive side, its revenue numbers are incredible, despite the low quality of much of the display advertising on the social network and the lack of an advertising model for the mobile applications.  This reflects the incredible amount of user engagement with Facebook and the aggregate dollars being pumped into online advertising.

It’s great that the advertising is so strong, because on other measures, Facebook has been a disappointment.  There was, perhaps still is, this line of thinking that Facebook’s control of the social graph would take the life out of other social applications by moving them onto Facebook.  In my estimation, the evidence over the last year has proven this to be completely wrong.  Let’s count the ways.  Twitter is a better content sharing platform, Instagram is hotter for photosharing, Foursquare beat out Facebook check-ins, Facebook Deals (its Groupon competitor) died off quickly, social shopping has not taken off, and we have heard little since the massive media kickoff about Facebook Messaging which was supposed to kill off everyone else’s emails.  In sum, Facebook has had no success extending its control of the social graph into applications.

This is not a bad thing.  It suggests that Facebook will be positioned as a platform that is an enabler, rather than a killer of entrepreneurship.  Indeed, perhaps its future is as a platform that’s not itself particularly hip, but as an utility for the new, new thing to plug into the social graph, utilizing people’s sunk investments in establishing and maintaining their connections, so a new application can ride the social graph in a bid to publicize, go viral, and grow quickly.

Trickle Down Consumption

Earlier this year, I observed that the “extravagance at the top creates “bling” expectations through society, in addition to leading to price inflation in things from property to eating out to wardrobes.”  Surprisingly, there is new academic research on this point:

In particular, they focus on how changes in the behaviour of the richest 20% of households affect the spending choices of the bottom 80%. They find that a rise in the level of consumption of rich households leads to more spending by the non-rich. This “trickle-down consumption” appears to result from a desire to keep up with the Joneses. Non-rich households spend more on luxury goods and services supplied to their more affluent neighbours—domestic services, say, or health clubs.

The Innovation Fertility of Amazon

Last summer, I wrote the following about Amazon Web Services, Amazon’s cloud services business:

Not only is Amazon’s cloud services an amazing business for it, Amazon,along with others surely, but with significant credit due to it, has made the world an innovation platform, enabling the low-cost, lean, prototyping innovation culture of today.

Today, a FT article takes stock of how fast AWS continues to support a wide diversity of innovation.  AWS is being used to operate two Nasa robots probing Mars,  host AirBNB, and Netflix’s video streaming (which incidentally Amazon competes against with its own Instant Video service).  Amazon continues to cut prices on the service, with prices for it services having declined about 75% since 2006.  And it seems to be doing pretty well for Amazon with annual revenues of over $1 million.

Small Adjustments, Big Gains

Esther Duflo is a young superstar economist – MIT professor, MacArthur genius, and winner of the John Bates Clark medal – and she works on the economics of fighting poverty. One of the lessons from her work in development economics on addressing bad outcomes in human behavior is:

Fourth, poor countries are not doomed to failure because they are poor, or because they have had an unfortunate history. It is true that things often do not work in these countries: programmes intended to help the poor end up in the wrong hands, teachers teach desultorily or not at all, roads weakened by theft of materials collapse under the weight of overburdened trucks, and so forth. But many of these failures have less to do with some grand conspiracy of the elites to maintain their hold on the economy and more to do with some avoidable flaw in the design of policies, and the ubiquitous three is: ignorance, ideology and inertia.

The way i read this is that bad outcomes often have to do with some flaw in the system which leads to massively bad outcomes. In policy, it can be small adjustments that, if implemented, can lead to much better outcomes. Making a systematic change that addresses the flaw, often linked to taking on ignorance or inertia, can give better results, because, and not to be too naive, people want those better outcomes.

The same rule applies in other complex systems including those tackled by great technology businesses.  Technology is just another mechanism for fixing on massive systematic failures.  And like in the policy world, it’s a small twist of a screw in the system that could lead to much better outcomes. So, for example: people want to communicate better, and better, simple, and more interactive interfaces like Twitter and Facebook exploded by designing systems that fit that desire better than existing ones. Other solutions can fix poorly performing markets by taking advantage of market mechanisms such as easier supply, better price transparency, or more perfect information.

Like with policy, as entrepreneurs, it’s looking for the simple elegant solutions and mechanisms to fix big systems that are likely to be the best way to yield massive results.

The Modern Public Intellectual

Growing up, one of the dream lives was being a public intellectual, thinking big ideas and then impacting the world.  In reality, “public intellectuals,” in modern times, has been a myth — in reality, little of the former, other than in ones’ own minds or in narrow echo chambers, and none of the latter.

The new public intellectual is someone who thinks of the way society works and can work better and then uses technology to actually test and implement those propositions. Reid Hoffman, a Marshall Scholar, for what it’s worth, lives this, as explained in the quote below.

Hoffman once dreamed of being a public intellectual – someone who could influence the direction of humanity by thinking deep thoughts and joining the public battle of ideas. That ambition took him to Oxford university, as a Marshall scholar, in the 1990s to study philosophy. However, the narrowness of academic life eventually put paid to those thoughts.

In their place, the online world has become a giant Petri dish for his sociological interests. In the internet and software businesses, new ideas and ways of behaving take shape with remarkable alacrity. The internet acts like a lever, turning social experiments into vast online communities.

There is more reality to the new public intellectual than the old!

The Deep Primal Fear of True Innovation

There is a funny thing about our search for big ideas. We like the idea of having a big idea, and we like when big ideas are actually achieved, but in between Paul Graham observes that they can scare the crap of us and others around us. Graham explains:

Don’t worry, it’s not a sign of weakness. Arguably it’s a sign of sanity. The biggest startup ideas are terrifying. And not just because they’d be a lot of work. The biggest ideas seem to threaten your identity: you wonder if you’d have enough ambition to carry them through…This phenomenon is one of the most important things you can understand about startups. You’d expect big startup ideas to be attractive, but actually they tend to repel you.

The horror of these nascent ideas to both others and to you has to be managed.  Graham further explains:

Empirically, the way to do really big things seems to be to start with deceptively small things. Want to dominate microcomputer software? Start by writing a Basic interpreter for a machine with a few thousand users. Want to make the universal web site? Start by building a site for Harvard undergrads to stalk one another.

Empirically, it’s not just for other people that you need to start small. You need to for your own sake. Neither Bill Gates nor Mark Zuckerberg knew at first how big their companies were going to get. All they knew was that they were onto something. Maybe it’s a bad idea to have really big ambitions initially, because the bigger your ambition, the longer it’s going to take, and the further you project into the future, the more likely you’ll get it wrong.

 

 

 

New Career Insights

There are approximately 160 million participants in the American labor force; Linkedin has approximately 60 million members in America. This is a massive private, self-reporting sample of the job market, with phenomenal potential for insight.  For example, there is great opportunity for understanding career paths (through tracking of resumes) and getting insight into what job hunters think are the skills in demand on the ground in the market.  Linkedin can be doing so much more in allowing researchers and other entrepreneurs to utilize this data through its APIs.

Here is a short piece from the Economist on the topic.

Innovation Optimism

According to two recent books, four reasons why innovation is accelerating:

• Philanthropists who sponsor innovation.
• Frugal innovation — trying to provide things cheaper — seeking to provide goods and services to poor people.
• Do-it-yourself innovation.
• Prizes to incent innovation.

The Regret Test

Some useful words from Jeff Bezos on evaluating opportunities and risk:

Even so, in the 1990s he hesitated to leave a good job in the world of finance to set up Amazon after a colleague he respected advised him against it. But Mr Bezos applied what he calls a “regret minimisation framework”, imagining whether, as an 80-year-old looking back, he would regret the decision not to strike out on his own. He concluded that he would, and with encouragement from his wife he took the plunge as an entrepreneur. They moved from New York to Seattle and he founded the company, in time-honoured fashion for American technology start-ups, in his garage.

This may explain why Mr Bezos is so keen to ensure that Amazon preserves its own appetite for risk-taking. As companies grow, there is a danger that novel ideas get snuffed out by managers’ desire to conform and play it safe. “You get social cohesion at the expense of truth,” he says. He believes that the best way to guard against this is for leaders to encourage their staff to work on big new ideas. “It’s like exercising muscles,” he adds. “Either you use them or you lose them.”

Age Is Just a Number

A counterpoint to inferring causality in this age of the young entrepreneur:

This is not to say that the rise of young entrepreneurs like Mr Zuckerberg is insignificant. The barriers that once discouraged enterprise among the young are collapsing. Social networks make it easier to build contacts. Knowledge-intensive industries require relatively little capital. But the fact that barriers are collapsing for the young does not mean that they are being erected for greybeards. The point is that the creation of fast-growing businesses is now open to everybody regardless of age.