July 2022 - Deep Work: Rules for Focused Success in a Distracted World

This month we learn about the explore popular productivity book Deep Work, by Cal Newport, a professor of theoretical computer science at Georgetown.

Tech Themes

1. Deep vs. Shallow. Just like Lady Gaga and Bradley Cooper, we, too, are trying to avoid the shallow. Newport starts his book with an overview of Deep Work compared to Shallow Work. Deep Work is focused, undistracted efforts at achieving the peak of your abilities. On the other hand, Shallow Work includes small, logistical tasks that the brain does not need to be entirely active to solve. Newport argues that more time should be spent in Deep mode. It leads to greater productivity and offers a way for individuals to differentiate themselves with the quality of work they do. In Newport's mind, the distracted Tiktok-obsessed world we currently inhabit is only getting more Shallow, so embracing Deep Work is the only way to survive. Shallow Work tends to involve lots of context switching from Task A to Task B. When this context-switching is repeated incessantly throughout the day, our ability to focus on anything diminishes, and we can end up in a permanent state of shallowness.

2. Deep Styles. Newport believes there are four core styles of Deep Work: Monastic, Bi-modal, Rhythmic, and Journalistic. The Monastic philosophy of Deep Work tries to completely eliminate all distractions. An example of Monastic Deep Work is famed computer science professor and Turing award winner Donald Knuth. Knuth does not have an email address. As he explains: "I have been a happy man ever since January 1, 1990, when I no longer had an email address. I'd used email since about 1975, and it seems to me that 15 years of email is plenty for one lifetime. Email is a wonderful thing for people whose role in life is to be on top of things. But not for me; my role is to be on the bottom of things. What I do takes long hours of studying and uninterruptible concentration. I try to learn certain areas of computer science exhaustively; then I try to digest that knowledge into a form that is accessible to people who don't have time for such study. On the other hand, I need to communicate with thousands of people all over the world as I write my books. I also want to be responsive to the people who read those books and have questions or comments. My goal is to do this communication efficiently, in batch mode --- like, one day every six months." Clearly, the monastic state tries to maximize deep work by shutting everything else out. The Bi-Modal philosophy asks the studier to program stretches of life wholly dedicated to Deep Work. Newport uses famous Penn psychology professor Adam Grant, as an example. Grant batches all of his teaching in the fall and all of his research in the spring. This schedule allows him to flip between modes into excellent-teacher Adam and excellent-researcher Adam. In these states, he's entirely dedicated to being the best at each subdomain, providing simplicity, clarity, and purpose to his routines and focus. Rhythmic philosophy entails finding certain times of day to work in stretches of Deep Work. This approach is the most accessible style of Deep Work for people who don't control their schedules. Newport recommends you plan out a week's worth of Deep Work in regular chunks to establish a routine for getting your mind ready to "Go Deep." The last Deep Work mode, the Journalistic philosophy, may be the most challenging style but can have incredibly intense effects. Newport gives Walter Issacson as an example here: "It was always amazing … he could retreat up to the bedroom for a while, when the rest of us were chilling on the patio or whatever, to work on his book … he'd go up for twenty minutes or an hour, we'd hear the typewriter pounding, then he'd come down as relaxed as the rest of us … the work never seemed to faze him, he just happily went up to work when he had the spare time." Find a philosophy that works for your current work structure!

3. Busyness != Productivity. In today's corporate world, many people equate busyness with productivity. Have I been sending and receiving emails all day? Have I been in meetings? Have I completed five zoom calls? These all feel vaguely productive, or maybe they don't. But either way, they take up large portions of our day. One only has to look at the hilarious new trend of young employees at mega-tech companies posting about their busy days doing what amounts to 3 hours of work while being spoiled by ridiculous offices and employee perks. Maybe this is why Facebook and Google have recently publicly told employees that their organizations are not very productive. Zuckerberg went as far as to say: "Realistically, there are probably a bunch of people at the company who shouldn't be here." Sundar Pichai created a "Simplicity Sprint "week to identify ways to make Google's 174,000 employees more productive. The world may be in for a more focused, intensely productive time with an imminent recession looming. Maybe that is why so many great companies are borne out of times of trouble?

Business Themes

1. Think Weeks and Unconcious Processing. Bill Gates is famous for taking two weeks a year completely off to set new directives for his life and professional work. We covered this in our June 2021 book regarding information overload in investing. Newport definitely likes the idea of Think Weeks - encouraging people to find separate locations from home or work to build creative momentum for the week. Individuals can also take some grand action, like traveling to a remote place or paying a significant sum for specialized accommodation to signal the importance of the work they are about to attempt. Newport also dives into the idea of unconscious processing or a work shutdown. Newport argues that downtime aids insights, helps recharge the energy needed to work deeply, and pushes us to focus only on necessary things (i.e. that nighttime email responses are usually not super important).

2. Four Disciplines of Execution (4DX). To help people in their Deep Work journies, Newport introduces us to the Four Disciplines of Execution (4DX), a framework created by the FranklinCovey company for helping companies work better. FranklinCovey is the business associated with Stephen Covey, and his highly successful 7 habits of Successful People and First Things First. His son Sean Covey, wrote and popularized 4DX. The four disciplines espoused by the framework are: (1) Focus on the Wildly Important, (2) Act on Lead Measures, (3) Keep a Compelling Scoreboard, and (4) Create a Cadence of Accountability. Clearly, the first discipline focuses on identifying the significant goals we want to achieve. The second discipline is a bit more nuanced and prompts us to think more about the inputs to success rather than the success itself. As an example, a company might have a revenue target for the year, but that target could be broken down into simple actions by the sales team to reach out to customers, understand use cases, and position the company's product to help. Discipline 2 argues that we should focus on these leading indicators of success rather than revenue achievement itself. The third discipline is about creating consistency and identifying success. Jerry Seinfeld offers a great example of this practice: "He [Jerry Seinfeld] told me to get a big wall calendar that has a whole year on one page and hang it on a prominent wall. The next step was to get a big red magic marker. He said for each day that I do my task of writing, I get to put a big red X over that day. 'After a few days you'll have a chain. Just keep at it and the chain will grow longer every day. You'll like seeing that chain, especially when you get a few weeks under your belt. Your only job next is to not break the chain.' 'Don't break the chain,' he said again for emphasis." This advice likely explains the phenomenon of maintaining Snapchat streaks at all costs. The fourth discipline is about establishing accountability for achieving the goals set out during the previous week. FranklinCovey insists that you hold yourself accountable each week. Hopefully, all that's needed is a 15-minute scheduled window to see your progress. The 4DX method is straightforward, clear, and helpful for executing any goal.

3. Amp it Up. In the spirit of next month's TBOTM, let's talk about amping up the intensity of our Deep Work. Newport discusses the early and incredible success of Teddy Roosevelt in what seemed like everything he tried. As one blogger notes: "While at Harvard, TR developed an intense study or "deep work" attitude. He would schedule every minute of his day including every activity, meal breaks, and classes. Any "spare time" was slated for study - study that did not include daydreams, sips of tea or any sign of indecision. He focused, without breaks, an intense frenzy of concentrated energy." As BusinessInsider notes, the way to incorporate this into our lives is by: "Newport says one way to incorporate rewarding deep work into your life is 'to inject the occasional dash of Rooseveltian intensity into your own workday.' This entails selecting a high-priority task, estimating how much time it would normally take you, and then creating a deadline well below the typical allotted time." Newport, a theoretical computer scientist, has a formula for how to describe this strategy: Quality Work (QW) = time Spent x Intensity. Quality work therefore does not always need to be achieved through laboring hours but can instead be supplemented with blistering intensity and focus. How do you achieve this superior intensity? There is no theory for becoming a more intense worker, but Newport believes that work intensity is a muscle that can be honed over time with more and more efforts of intense, Deep Work.

Dig Deeper

• Cal Newport Explains Deep Work

• Walter Isaacson | Full Address and Q&A | Oxford Union Web Series

• Donald Knuth - My advice to young people (93/97)

• The surprising habits of original thinkers | Adam Grant

• Jerry Seinfeld — A Comedy Legend’s Systems, Routines, and Methods for Success | The Tim Ferriss Show

February 2022 - Cable Cowboy by Mark Robichaux

This month we jump into the history of the cable industry in the US with Cable Cowboy. The book follows cable’s main character for over 30 years, John Malone, the intense, deal-addicted CEO of Telecommunications International (TCI).

Tech Themes

1. Repurposed Infrastructure. Repurposed infrastructure is one of the incredible drivers of technological change covered in Carlota Perez’s Technology Revolutions and Financial Capital. When a new technology wave comes along, it builds on the backs of existing infrastructure to reach a massive scale. Railroads laid the foundation for oil transport pipelines. Later, telecommunications companies used the miles and miles of cleared railroad land to hang wires to provide phone service through the US. Cable systems were initially used to pull down broadcast signals and bring them to remote places. Over time, more and more content providers like CNN, TBS, BET started to produce shows with cable distribution in mind. Cable became a bigger and bigger presence, so when the internet began to gain steam in the early 1990s, Cable was ready to play a role. It just so happened that Cable was best positioned to provide internet service to individual homes because, unlike the phone companies’ copper wiring, Cable had made extensive use of coaxial fiber which provided much faster speeds. In 1997, after an extended period of underperformance for the Cable industry, Microsoft announced a $1B investment in Comcast. The size of the deal showed the importance of cable providers in the growth of the internet.

2. Pipes + Content. One of the major issues surrounding TCI as they faced anti-trust scrutiny was their ownership of multiple TV channels. Malone realized that the content companies could make significant profits, especially when content was shown across multiple cable systems. TCI enjoyed the same Scale Economies Power as Netflix. Once the cable channel produces content, any way to spread the content cost over more subscribers is a no-brainer. However, these content deals were worrisome given TCI’s massive cable presence (>8,000,000 subscribers). TCI would frequently demand that channels take an equity investment to access TCI’s cable system. “In exchange for getting on TCI systems, TCI drove a tough bargain. He demanded that cable networks either allow TCI to invest in them directly, or they had to give TCI discounts on price, since TCI bought in bulk. In return for most-favored-nation-status on price, TCI gave any programmer immediate access to nearly one-fifth of all US subscribers in a single stroke.” TCI would impose its dominant position - we can either carry your channel and make an investment, or you can miss out on 8 million subscribers. Channels would frequently choose the former. Malone tried to avoid anti-trust by creating Liberty Media. This spinoff featured all of TCI’s investments in cable providers, offering a pseudo-separation from the telecom giant (although John Malone would completely control liberty).

3. Early, Not Wrong. Several times in history, companies or people were early to an idea before it was feasible. Webvan formed the concept of an online grocery store that could deliver fresh groceries to your house. It raised $800M before flaming out in the public markets. Later, Instacart came along and is now worth over $30B. There are many examples: Napster/Spotify, MySpace/Facebook, Pets.com/Chewy, Go Corporation/iPad, and Loudcloud/AWS. The early idea in the telecom industry was the information superhighway. We’ve discussed this before, but the idea is that you would use your tv to access the outside world, including ordering Pizza, accessing bank info, video calling friends, watching shows, and on-demand movies. The first instantiation of this idea was the QUBE, an expensive set-top box that gave users a plethora of additional interactive services. The QUBE was the launch project of a joint venture between American Express and Warner Communications to launch a cable system in the late 1970s. The QUBE was introduced in 1982 but cost way too much money to produce. With steep losses and mounting debt, Warner Amex Cable “abandoned the QUBE because it was financially infeasible.” In 1992, Malone delivered a now-famous speech on the future of the television industry, predicting that TVs would offer 500 channels to subscribers, with movies, communications, and shopping. 10 years after the QUBE’s failure, Time Warner tried to fulfill Malone’s promise by launching the Full-Service Network (FSN) with the same idea - offering a ton of services to users through a specialized hardware + software approach. This box was still insanely expensive (>$1,000 per box) because the company had to develop all hardware and software. After significant losses, the project was closed. It wasn’t until recently that TV’s evolved to what so many people thought they might become during those exciting internet boom years of the late 1990s. In this example and several above, sometimes the idea is correct, but the medium or user experience is wrong. It turned out that people used a computer and the internet to access shop, order food, or chat with friends, not the TV. In 2015, Domino’s announced that you could now order Pizza from your TV.

Business Themes

1. Complicated Transactions. Perhaps the craziest deal in John Malone’s years of experience in complex deal-making was his spinoff of Liberty Media. Liberty represented the content arm of TCI and held positions in famous channels like CNN and BET. Malone was intrigued at structuring a deal that would evade taxes and give himself the most potential upside. To create this “artificial” upside, Malone engineered a rights offering, whereby existing TCI shareholders could purchase the right to swap 16 shares of TCI for 1 share of Liberty. Malone set the price to swap at a ridiculously high value of TCI shares - ~valuing Liberty at $300 per share. “It seemed like such a lopsided offer: 16 shares of TCI for just 1 share of Liberty? That valued Liberty at $3000 a share, for a total market value of more than $600M by Malone’s reckoning. How could that be, analysts asked, given that Liberty posed a loss on revenue fo a mere $52M for the pro-forma nine months? No one on Wall Street expected the stock to trade up to $300 anytime soon.” The complexity of the rights offering + spinoff made the transaction opaque enough that even seasoned investors were confused about how it all worked and declined to buy the rights. This deal meant Malone would have more control of the newly separate Liberty Media. At the same time, the stock spin had such low participation that shares were initially thinly traded. Once people realized the quality of the company’s assets, the stock price shot up, along with Malone’s net worth. Even crazier, Malone took a loan from the new Liberty Media to buy shares of the company, meaning he had just created a massive amount of value by putting up hardly any capital. For a man that loved complex deals, this deal is one of his most complex and most lucrative.

2. Deal Maker Extraordinaire / Levered Rollups. John Malone and TCI loved deals and hated taxes. When TCI was building out cable networks, they acquired a new cable system almost every two weeks. Malone popularized using EBITDA (earnings before interest, taxes, depreciation, and amortization) as a proxy for real cash flow relative to net income, which incorporates tax and interest payments. To Malone, debt could be used for acquisitions to limit paying taxes and build scale. Once banks got comfortable with EBITDA, Malone went on an acquisition tear. “From 1984 to 1987, Malone had spent nearly $3B for more than 150 cable companies, placing TCI wires into one out of nearly every five with cable in the country, a penetration that was twice that of its next largest rival.” Throughout his career, he rallied many different cable leaders to find a deal that worked for everyone. In 1986, when fellow industry titan Ted Turner ran into financial trouble, Malone reached out to Viacom leader Sumner Redstone, to avoid letting Time Inc (owner of HBO) buy Turner’s CNN. After a quick negotiation, 31 cable operators agreed to rescue Turner Broadcasting with a $550M investment, allowing Turner to maintain control and avoid a takeover. Later, Malone led an industry consortium that included TCI, Comcast, and Cox to create a high speed internet service called, At Home, in 1996. “At Home was responsible for designing the high-speed network and providing services such as e-mail, and a home page featuring news, entertainment, sports, and chat groups. Cable operators were required to upgrade their local systems to accommodate two-way transmission, as well as handle marketing, billing, and customer complaints, for which they would get 65% of the revenue.” At Home ended up buying early internet search company Excite in a famous $7.5B deal, that diluted cable owners and eventually led to bankruptcy for the combined companies. Malone’s instinct was always to try his best to work with a counterparty because he genuinely believed a deal between two competitors provided better outcomes to everyone.

3. Tracking Stocks. Malone popularized the use of tracking stocks, which are publicly traded companies that mirror the operating performance of the underlying asset owned by a company. John Malone loved tracking stocks because they could be used to issue equity to finance operations and give investors access to specific divisions of a conglomerate while allowing the parent to maintain full control. While tracking stocks have been out of favor (except for Liberty Media, LOL), they were once highly regarded and even featured in the original planning of AT&T’s $48B purchase of TCI in 1998. AT&T financed its TCI acquisition with debt and new AT&T stock, diluting existing shareholders. AT&T CEO Michael Armstrong had initially agreed to use tracking stocks to separate TCI’s business from the declining but cash-flowing telephone business but changed his mind after AT&T’s stock rocketed following the TCI deal announcement. Malone was angry with Armstrong’s actions, and the book includes an explanation: “heres why you should mess with it, Mike: You’ve just issued more than 400 million new shares of AT&T to buy a business that produces no earnings. It will be a huge money-loser for years, given how much you’ll spend on broadband. That’s going to sharply dilute your earnings per share, and your old shareholders like earnings. That will hurt your stock price, and then you can’t use stock to make more acquisitions, then you’re stuck. If you create a tracking stock to the performance of cable, you separate out the losses we produce and show better earnings for your main shareholders; and you can use the tracker to buy more cable interests in tax-free deals.” Tracking stocks all but faded from existence following the internet bubble and early 2000s due to their difficulty of implementation and complexity, which can confuse shareholders and cause the businesses to trade at a large discount. This all begs the question, though - which companies could use tracking stock today? Imagine an AWS tracker, a Youtube tracker, an Instagram tracker, or an Xbox tracker - all of these could allow cloud companies to attract new shareholders, do more specific tax-free mergers, and raise additional capital specific to a business unit.

Dig Deeper

• John Malone’s Latest Interview with CNBC (Nov 2021)

• John Malone on LionTree’s Kindred Cast

• A History of AT&T

• Colorado Experience: The Cable Revolution

• An Overview on Spinoffs

November 2021 - Ender's Game by Orson Scott Card

This month we check out the futuristic sci-fi war drama, Ender’s Game. While the book is meant for kids, its a quick read and a great story.

Tech Themes

1. The Metaverse. During Ender's time at Battle School, he interacts with the Mind Game, an individual game reflecting the thoughts and experiences of each person. Later, as he preps for battle, Ender uses a simulator to learn and practice commanding an army of battleships. These experiences in the simulator are completely personalized, driven by a supercomputer that can do whatever it wants to serve up experiences in the game: "You don't understand, sir. Our Battle School computer is only a part of the IF network. lf we want a picture, we have to get a requisition, but if the mind game program determines that the picture is necessary--it can just go take it." These hyper-personalized mind game experiences are similar to the latest ideas surrounding the Metaverse. The Metaverse is an unclear vision of cyberspace where individuals can interact in virtual reality, mixed reality, or augmented reality in a new computing paradigm. Facebook was so excited about the Metaverse that the company announced it was going to invest $10B in building out its virtual reality platform and changed its name to Meta Platforms, Inc. Matthew Ball has covered the Metaverse since 2018 and has penned his own definition: "The Metaverse is a massively scaled and interoperable network of real-time rendered 3D virtual worlds which can be experienced synchronously and persistently by an effectively unlimited number of users with an individual sense of presence, and with continuity of data, such as identity, history, entitlements, objects, communications, and payments." This is reminiscent of the world we explored in our September 2019 book, Ready Player One, and somewhat similar to the 1990s promise of the information superhighway. It will be interesting to see how the Metaverse develops in the coming years.

2. Anonymity on the Internet. As Ender continues his training at Battle School, Peter and Valentine hatch a plot to create division throughout the world. The two decide the best way to take over the world as young, intelligent children is to write blog posts under a pseudonym and gain a mass following, eventually exercising their political influence. To avoid suspicion, Peter and Valentine switch emotional positions and take on the roles of historical figures aligning with their viewpoints. Peter becomes John Locke, a liberal philosopher, and inventor of the Social Contract, while Valentine becomes Demosthenes, an Athenian hellbent on inciting a war against Macedonia. While the idea of two teenage children starting war by writing on the internet is comical now, the specter might have been possible in the pre-mass internet era of 1985, the year Ender was published. This also raises the contentious shield of anonymity offered by the internet. While some argue that complete anonymity could mean the end of rational society, others say that anonymity must be preserved. This concept of anonymity is extended further in the over-hyped decentralized, crypto/web3 world of the future, where 15-word recovery phrases might become the norm for ultimate secrecy. Internet security and anonymity are likely to evolve if we move to a decentralized computing world - whether this is good or bad remains a matter of view.

3. Technology and Governments. The International Force (IF) is a space army designed by the world to fight against the evil Buggers. The surprising thing about this International Force is how it unifies different governments: "Val, it was bound to happen. Right now there's a vast international fleet and army in existence, with American hegemony. When the bugger wars are over, all that power will vanish, because it's all built on fear of the buggers. And suddenly we'll look around and discover that all the old alliances are gone, dead and gone, except one, the Warsaw Pact." The Warsaw Pact was the agreement between the Soviet Union and several neighboring states following the creation of NATO. Funnily enough, the Warsaw Pact disbanded in 1991 with the fall of the Soviet Union, six years following the publication of Ender's Game. After Ender defeats the Buggers, the world immediately descends into political chaos until Peter comes to power. A once unified world with incredible technology like real-time technological communication through the Ansible is now torn apart by politics. These events bring up the broader role of government in the technological landscape. As we saw earlier this year, global non-US tech superpowers like Bytedance (owner of Tiktok) can cause immense political tension. Furthermore, companies like Taiwan Semiconductor (TSMC), that offer a unique product in a politically contentious region can even provoke the potential for war. Technology enables globalization while also raising the question of who owns non-physical products - the government, a company, or the world?

Business Themes

1. Lonely at the Top. Card paints a world where the entire universe's future lies on children's shoulders. Ender becomes commander of the International Fleet, put in the challenging position as leader of older kids. He has to generate empathy while maintaining command. But Ender is just an intelligent child, and throughout the book, he finds himself in bad situations. He eventually grows to be the leader of his launch group and then the leader of his own Dragon Army. As Ender gains in stature, he loses touch with his friends. In one instance, he fears battle school enemies might jump him in the hallway and chastises Petra when she asks him to chat: "'Petra, if you had actually taken me aside just now, there are about a dozen boys following along who would have taken me in the corridor. Can you tell me you didn't notice them?' Suddenly her face flushed. "No. I didn't. How can you think I did? Don't you know who your friends are?" Many CEOs describe that the job can be lonely because you are naturally the final decision-maker. Even as a young child, Ender was forced to become a leader and suffered the mental instability of the job.

2. Sending a Message. The IF chooses Ender because he is a mix of his two siblings, Peter, who represents extreme violence, and Valentine, who represents empathy. Violence is a recurring theme throughout the book - personal violence between individuals, violence between nations, and violence between civilizations (humans and buggers). In two dramatic sequences, older boys try to corner an unsuspecting Ender. Ender uses his brains to evade an attack but severely injures the attacker to send a message: "They were all wondering if he was dead. Ender, however, was trying to figure out a way to forestall vengeance. To keep them from taking him in a pack tomorrow. I have to win this now, and for all time, or I'll fight it every day and it will get worse and worse. Ender knew the unspoken rules of manly warfare, even though he was only six." Ender thought he needed to message all of his potential attackers. However, these beatings weigh on him constantly, and he spends the rest of his life regretting them. The violent nature of these attacks is reprehensible and difficult to compare to the business world. But it does raise how some executives act with emotion to humiliate or denigrate employees. Recently the CEO of online mortgage startup Better.com fired 900 people over a zoom video call. Beyond the act, the message it sends to employees is even worse. These events can follow executives, with media coverage continuing for over five years after the event itself. Actions send messages. They should be taken with caution when emotion or retaliation is involved.

3. Self-Managed Teams. Ender is a tactical magician and completely changes the Battle Game. Ender's approach is novel: "He had the army drill in eight-man toon maneuvers and four-man half-toons, so that at a single command, his army could be assigned as many as ten separate maneuvers and carry them out at once. No army had ever fragmented itself like that before, but Ender was not planning to do anything that had been done before, either. Most armies practiced mass maneuvers, performed strategies. Ender had none. Instead, he trained his toon leaders to use their small units effectively in achieving limited goals. Unsupported, alone, on their own initiative." This approach is called Self-Managed Teams. The autonomy offered by allowing individuals to manage themselves gives extreme ownership to employees. Self-Managed teams work well in places with repeated work, where employees trust each other and have high self-awareness. This exciting concept has worked well in several businesses, including Facebook and Google.

Dig Deeper

• Ender’s Game (the Movie)

• Demosthenes and Locke - An Essay by Alyssa Rosenberg at the Atlantic

• An Interview with Orson Scott Card

• The Department of Defense is issuing AI ethics guidelines for tech

• Peter and Valentine Wiggin in Ender’s Game

August 2021 - Hit Refresh by Satya Nadella, with Greg Shaw and Jill Tracie Nichols

This month we look at how Satya Nadella reignited Microsoft’s fire and attacked new spaces with a growth mindset. The book is loaded with excellent management philosophy and complex Microsoft history.

Tech Themes

1. Bing: The Other Search Engine. After starting at Microsoft as an engineer and rising through the ranks to lead Microsoft Dynamics (its CRM product), Nadella was handpicked to lead the re-launch of a brand new search engine, Microsoft Bing. Bing was one of Microsoft’s first “born-in-the-cloud” businesses and Nadella quickly recognized four core areas of focus: distributed systems, consumer product design, understanding the economics, of two-sided marketplaces, and AI. Microsoft had a troubled history with search engines and wanted to go big quickly, submitting an offer to buy Yahoo for $45B in February of 2008. Microsoft was rebuffed and thus Nadella found himself launching Search Checkpoint #1 in September of 2008 ahead of a June 2009 Bing launch. What are the odds that Microsoft’s future CEO would have early cloud, distributed systems, and advanced AI leadership experience? It was an almost prescient combination!

2. Red Dog to Azure. Microsoft started working on the cloud two years after Amazon launched AWS. In 2008, veteran software architects Ray Ozzie and Dave Cutler created a secret team inside Microsoft known as Red Dog, which was focused on building a cloud infrastructure product. Red Dog was stationed under Microsoft’s Servers and Tools business unit (STB), with products such as Windows Server and Microsoft’s powerful RDBMS, SQL Server. In 2010, Microsoft CEO Steve Ballmer asked Nadella to lead the STB business unit and set the vision for their then single-digit millions cloud infrastructure business. It was a precarious situation: “The server and tools business was at the peak of its commercial success and yet it was missing the future. The organizing was deeply divided over the importance of the cloud business. There was constant tension between diverging forces.” How did Nadella resolve this tension? It was simple - he made choices and rallied his team around those decisions. He focused the team on hybrid cloud, data, and ML capabilities where Microsoft could take advantage of its on-premise, large enterprise heritage while providing an on-ramp for customers eager to make the shift to the cloud. Microsoft has since surged to an estimated 20% worldwide market share making it one of the biggest and fastest-growing products in the world!

3. Re-Mixed Reality. Microsoft’s gaming portfolio is impressive: Xbox, Mojang (aka Minecraft), Zenimax Media (Maker of Fallout, Wolfenstein, and DOOM). Microsoft also owns the Hololens, a virtual reality headset that competes with Facebook’s Oculus. Many believe the future computing generations will take place in virtual reality, augmented, or mixed reality. Nadella doesn’t mince words - he believes that the future will not be in virtual reality (as Facebook is betting) but rather in mixed reality, a combination of augmented reality (AR) and virtual reality, where the user experiences an augmented experience but still maintains some semblance of the outside world. Nadella lays out the benefits: “HoloLens provides access to mixed reality in which the users can navigate both their current location - interact with people in the same room - and a remote environment while also manipulating holograms and other digital objects.” Virtual reality blocks out the outside world, but that can be an overwhelming experience and impractical particularly for enterprise users of AR/VR/MR technologies. One of the big users of the HoloLens is the US Army, which recently signed a rumored $22B deal with Microsoft. It is still early days, but the future needs a new medium of computing and it might just be mixed reality!

Business Themes

1. Leading with Empathy. Satya Nadella’s life changed with the birth of his son. “The arrival of our son, Zain, in August 1996 had been a watershed moment in Anu’s and my life together. His suffering from asphyxia in utero had changed our lives in ways we had not anticipated. We came to understand life as something that cannot always be solved in the manner we want. Instead, we had to learn to cope. When Zain came home from the intensive care unit, Anu internalized this understanding immediately. There were multiple therapies to be administered to him every day, not to mention quite a few surgeries he needed that called for strenuous follow-up care after nerve-racking ICU stays…My son’s condition requires that I draw daily upon the very same passion for ideas and empathy that I learned from my parents.” Nadella reiterates the importance of empathy throughout the book, and rightly so, empathy is viewed as the most important leadership skill, according to recent research. How does one increase empathy? It’s actually quite simple - talk to people! Satya understands this: “It is impossible to be an empathetic leader sitting in an office behind a computer screen all day. An empathetic leader needs to be out in the world, meeting people where they live, and seeing how the technology we create affects their daily activities.” Leadership requires empathy - hopefully, we see more of it from big technology soon!

2. Frenemies. One of the first things that Satya Nadella did after taking over the CEO role from Steve Ballmer in 2014 was reach out to Tim Cook. Apple and Microsoft had always had a love-hate relationship. In 1997, Microsoft saved Apple shortly after Steve Jobs returned by investing $150M in the company so that Apple could stave off potential bankruptcy. However, in 2014, Nadella called on Apple: “I decided we needed to get Office everywhere, including iOS and Android…I wanted unambiguously to declare, both internally and externally, that the strategy would be to center our innovation agenda around users’ needs and not simply their device.” Microsoft had tried to become a phone company with Windows Mobile in 2000, tried again with Windows Phone in 2010, and tried even harder at Windows Phone in 2013 with a $7.2B acquisition of Nokia’s mobile phone unit. Although Nadella voted ‘No’ on the deal before becoming CEO, he was forced to manage the company through a total write-off of the acquisition and the elimination of eighteen thousand jobs. So how could Nadella catch up to the mobile wave? “For me, partnerships - particularly with competitors - have to be about strengthening a company’s core businesses, which ultimately centers on creating additional value for the customer…We have to face reality. When we have a great product like Bing, Office, or Cortana but someone else has created a strong market position with their service or device, we can’t just sit on the sidelines. We have to find smart ways to partners so that our products can become available on each other's popular platforms.” Nobody knows platforms like Microsoft; Bill Gates wrote the definition of a platform: “A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it.” Nadella got over his predecessor’s worry and hatred of the competition to bring Microsoft’s software to other platforms to strengthen both of their leadership positions.

3. Regulation and Technology. Nadella devotes an entire chapter to the idea of trust in the digital age. Using three case studies - North Korea’s attack on Sony’s servers, Edward Snowden’s leaked documents (that were held on Microsoft’s servers), and the FBI’s lawsuit against Apple to unlock an iPhone that might contain criminal information - Nadella calls for increased(!) regulation, particularly around digital technology. Satya uses a simple equation for trust: “Empathy + Shared values + Safety and Reliability = Trust over time.” Don’t you love it when a company that the government sued over anti-trust practices calls on the government to develop better laws! You’d love it even more if you saw how they used the same tactics to launch Microsoft Teams! Regulation in technology has been a hot topic recently, and Nadella is right to call on the government to create new laws for our digital world: “We do not believe that courts should seek to resolve issues of twenty-first-century technology relying on law that was written in the era of the adding machine.” He goes further to suggest potential remedies, including an efficient system for government access to corporate data, stronger privacy protections, globalized digital evidence sharing, and transparency of corporate and government data. I imagine the trend will be toward more regulation, especially with the passage of recent data laws like GDPR or CCPA, but I’m not sure we will see any real sweeping changes.

Dig Deeper

• “Culture Eats Strategy for Breakfast” - How Satya Nadella Rebooted Microsoft

• Satya Nadella Interview at Stanford Business School (2019)

• Microsoft is Rolling out a New Framework to its Leaders - Business Insider

• Satya Nadella email to employees on first day as CEO

• HoloLens Mixed Reality Demonstration

April 2021 - Innovator's Solution by Clayton Christensen and Michael Raynor

This month we take another look at disruptive innovation in the counter piece to Clayton Christensen’s Innovator’s Dilemma, our July 2020 book. The book crystallizes the types of disruptive innovation and provides frameworks for how incumbents can introduce or combat these innovations. The book was a pleasure to read and will serve as a great reference for the future.

Tech Themes

1. Integration and Outsourcing. Today, technology companies rely on a variety of software tools and open source components to build their products. When you stitch all of these components together, you get the full product architecture. A great example is seen here with Gitlab, an SMB DevOps provider. They have Postgres for a relational database, Redis for caching, NGINX for request routing, Sentry for monitoring and error tracking and so on. Each of these subsystems interacts with each other to form the powerful Gitlab project. These interaction points are called interfaces. The key product development question for companies is: “Which things do I build internally and which do I outsource?” A simple answer offered by many MBA students is “Outsource everything that is not part of your core competence.” As Clayton Christensen points out, “The problem with core-competence/not-your-core-competence categorization is that what might seem to be a non-core activity today might become an absolutely critical competence to have mastered in a proprietary way in the future, and vice versa.” A great example that we’ve discussed before is IBM’s decision to go with Microsoft DOS for its Operating System and Intel for its Microprocessor. At the time, IBM thought it was making a strategic decision to outsource things that were not within its core competence but they inadvertently gave almost all of the industry profits from personal computing to Intel and Microsoft. Other competitors copied their modular approach and the whole industry slugged it out on price. The question of whether to outsource really depends on what might be important in the future. But that is difficult to predict, so the question of integration vs. outsourcing really comes down to the state of the product and market itself: is this product “not good enough” yet? If the answer is yes, then a proprietary, integrated architecture is likely needed just to make the actual product work for customers. Over time, as competitors enter the market and the fully integrated platform becomes more commoditized, the individual subsystems become increasingly important competitive drivers. So the decision to outsource or build internally must be made on the status of product and the market its attacking.

2. Commoditization within Stacks. The above point leads to the unbelievable idea of how companies fall into the commoditization trap. This happens from overshooting, where companies create products that are too good (which I find counter-intuitive, who thought that doing your job really well would cause customers to leave!). Christensen describes this through the lens of a salesperson “‘Why can’t they see that our product is better than the competition? They’re treating it like a commodity!’ This is evidence of overshooting…there is a performance surplus. Customers are happy to accept improved products, but unwilling to pay a premium price to get them.” At this time, the things demanded by customers flip - they are willing to pay premium prices for innovations along a new trajectory of performance, most likely speed, convenience, and customization. “The pressure of competing along this new trajectory of improvement forces a gradual evolution in product architectures, away from the interdependent, proprietary architectures that had the advantage in the not-good-enough era toward modular designs in the era of performance surplus. In a modular world, you can prosper by outsourcing or by supplying just one element.” This process of integration, to modularization and back, is super fascinating. As an example of modularization, let’s take the streaming company Confluent, the makers of the open-source software project Apache Kafka. Confluent offers a real-time communications service that allows companies to stream data (as events) rather than batching large data transfers. Their product is often a sub-system underpinning real-time applications, like providing data to traders at Citigroup. Clearly, the basis of competition in trading has pivoted over the years as more and more banking companies offer the service. Companies are prioritizing a new axis, speed, to differentiate amongst competing services, and when speed is the basis of competition, you use Confluent and Kafka to beat out the competition. Now let’s fast forward five years and assume all banks use Kafka and Confluent for their traders, the modular sub-system is thus commoditized. What happens? I’d posit that the axis would shift again, maybe towards convenience, or customization where traders want specific info displayed maybe on a mobile phone or tablet. The fundamental idea is that “Disruption and commoditization can be seen as two sides of the same coin. That’s because the process of commoditization initiates a reciprocal process of de-commoditization [somewhere else in the stack].”

3. The Disruptive Becomes the Disruptor. Disruption is a relative term. As we’ve discussed previously, disruption is often mischaracterized as startups enter markets and challenge incumbents. Disruption is really a focused and contextual concept whereby products that are “not good enough” by market standards enter a market with a simpler, more convenient, or less expensive product. These products and markets are often dismissed by incumbents or even ceded by market leaders as those leaders continue to move up-market to chase even bigger customers. Its fascinating to watch the disruptive become the disrupted. A great example would be department stores - initially, Macy’s offered a massive selection that couldn’t be found in any single store and customers loved it. They did this by turning inventory three times per year with 40% gross margins for a 120% return on capital invested in inventory. In the 1960s, Walmart and Kmart attacked the full-service department stores by offering a similar selection at much cheaper prices. They did this by setting up a value system whereby they could make 23% gross margins but turn inventories 5 times per year, enabling them to earn the industry golden 120% return on capital invested in inventory. Full-service department stores decided not to compete against these lower gross margin products and shifted more space to beauty and cosmetics that offered even higher gross margins (55%) than the 40% they were used to. This meant they could increase their return on capital invested in inventory and their profits while avoiding a competitive threat. This process continued with discount stores eventually pushing Macy’s out of most categories until Macy’s had nowhere to go. All of a sudden the initially disruptive department stores had become disrupted. We see this in technology markets as well. I’m not 100% this qualifies but think about Salesforce and Oracle. Marc Benioff had spent a number of years at Oracle and left to start Salesforce, which pioneered selling subscription, cloud software, on a per-seat revenue model. This meant a much cheaper option compared to traditional Oracle/Siebel CRM software. Salesforce was initially adopted by smaller customers that didn’t need the feature-rich platform offered by Oracle. Oracle dismissed Salesforce as competition even as Oracle CEO Larry Ellison seeded Salesforce and sat on Salesforce’s board. Today, Salesforce is a $200B company and briefly passed Oracle in market cap a few months ago. But now, Salesforce has raised its prices and mostly targets large enterprise buyers to hit its ambitious growth initiatives. Down-market competitors like Hubspot have come into the market with cheaper solutions and more fully integrated marketing tools to help smaller businesses that aren’t ready for a fully-featured Salesforce platform. Disruption is always contextual and it never stops.

Business Themes

1. Low-end-Market vs. New-Market Disruption. There are two types of established methods for disruption: Low-end-market (Down-market) and New-market. Low-end-market disruption seeks to establish performance that is “not good enough” along traditional lines, and targets overserved customers in the low-end of the mainstream market. It typically utilizes a new operating or financial approach with structurally different margins than up-market competitors. Amazon.com is a quintessential low-end market disruptor compared to traditional bookstores, offering prices so low they angered book publishers while offering unmatched convenience to customers allowing them to purchase books online. In contrast, Robinhood is a great example of a new-market disruption. Traditional discount brokerages like Charles Schwab and Fidelity had been around for a while (themselves disruptors of full-service models like Morgan Stanley Wealth Management). But Robinhood targeted a group of people that weren’t consuming in the market, namely teens and millennials, and they did it in an easy-to-use app with a much better user interface compared to Schwab and Fidelity. Robinhood also pioneered new pricing with zero-fee trading and made revenue via a new financial approach, payment for order flow (PFOF). Robinhood makes money by being a data provider to market makers - basically, large hedge funds, like Citadel, pay Robinhood for data on their transactions to help optimize customers buying and selling prices. When approaching big markets its important to ask: Is this targeted at a non-consumer today or am I competing at a structurally lower margin with a new financial model and a “not quite good enough” product? This determines whether you are providing a low-end market disruption or a new-market disruption.

2. Jobs To Be Done. The jobs to be done framework was one of the most important frameworks that Clayton Christensen ever introduced. Marketers typically use advertising platforms like Facebook and Google to target specific demographics with their ads. These segments are narrowly defined: “Males over 55, living in New York City, with household income above $100,000.” The issue with this categorization method is that while these are attributes that may be correlated with a product purchase, customers do not look up exactly how marketers expect them to behave and purchase the products expected by their attributes. There may be a correlation but simply targeting certain demographics does not yield a great result. The marketers need to understand why the customer is adopting the product. This is where the Jobs to Be Done framework comes in. As Christensen describes it, “Customers - people and companies - have ‘jobs’ that arise regularly and need to get done. When customers become aware of a job that they need to get done in their lives, they look around for a product or service that they can ‘hire’ to get the job done. Their thought processes originate with an awareness of needing to get something done, and then they set out to hire something or someone to do the job as effectively, conveniently, and inexpensively as possible.” Christensen zeroes in on the contextual adoption of products; it is the circumstance and not the demographics that matter most. Christensen describes ways for people to view competition and feature development through the Jobs to Be Done lens using Blackberry as an example (later disrupted by the iPhone). While the immature smartphone market was seeing feature competition from Microsoft, Motorola, and Nokia, Blackberry and its parent company RIM came out with a simple to use device that allowed for short productivity bursts when the time was available. This meant they leaned into features that competed not with other smartphone providers (like better cellular reception), but rather things that allowed for these easy “productive” sessions like email, wall street journal updates, and simple games. The Blackberry was later disrupted by the iPhone which offered more interesting applications in an easier to use package. Interestingly, the first iPhone shipped without an app store (but as a proprietary, interdependent product) and was viewed as not good enough for work purposes, allowing the Blackberry to co-exist. Management even dismissed the iPhone as a competitor initially. It wasn’t long until the iPhone caught up and eventually surpassed the Blackberry as the world’s leading mobile phone.

3. Brand Strategies. Companies may choose to address customers in a number of different circumstances and address a number of Jobs to Be Done. It’s important that the Company establishes specific ways of communicating the circumstance to the customer. Branding is powerful, something that Warren Buffett, Terry Smith, and Clayton Christensen have all recognized as durable growth providers. As Christensen puts it: “Brands are, at the beginning, hollow words into which marketers stuff meaning. if a brand’s meaning is positioned on a job to be done, then when the job arises in a customer’s life, he or she will remember the brand and hire the product. Customers pay significant premiums for brands that do a job well.” So what can a large corporate company do when faced with a disruptive challenger to its branding turf? It’s simple - add a word to their leading brand, targeted at the circumstance in which a customer might find themself. Think about Marriott, one of the leading hotel chains. They offer a number of hotel brands: Courtyard by Marriott for business travel, Residence Inn by Marriott for a home away from home, the Ritz Carlton for high-end luxurious stays, Marriott Vacation Club for resort destination hotels. Each brand is targeted at a different Job to Be Done and customers intuitively understand what the brands stand for based on experience or advertising. A great technology example is Amazon Web Services (AWS), the cloud computing division of Amazon.com. Amazon invented the cloud, and rather than launch with the Amazon.com brand, which might have confused their normal e-commerce customers, they created a completely new brand targeted at a different set of buyers and problems, that maintained the quality and recognition that Amazon had become known for. Another great retail example is the SNKRs app released by Nike. Nike understands that some customers are sneakerheads, and want to know the latest about all Nike shoe drops, so Nike created a distinct, branded app called SNKRS, that gives news and updates on the latest, trendiest sneakers. These buyers might not be interested in logging into the Nike app and may become angry after sifting through all of the different types of apparel offered by Nike, just to find new shoes. The SNKRS app offers a new set of consumers and an easy way to find what they are looking for (convenience), which benefits Nike’s core business. Branding is powerful, and understanding the Job to Be Done helps focus the right brand for the right job.

Dig Deeper

• Clayton Christensen’s Overview on Disruptive Innovation

• Jobs to Be Done: 4 Real-World Examples

• A Peek Inside Marriott’s Marketing Strategy & Why It Works So Well

• The Rise and Fall of Blackberry

• Payment for Order Flow Overview

• How Commoditization Happens

December 2020 - Do Androids Dream of Electric Sheep? (Blade Runner) by Phillip K. Dick

This month we read the classic sci-fi novel, Do Androids Dream of Electric Sheep? The book follows Rick Deckard, a bounty hunter searching out android robots who are pretending to be human beings. Along the journey, the reader is asked to consider: what does it mean to be alive? Philip K. Dick was a crazy sci-fi writer, producing many books and stories that became famous like The Man in the High Castle, Minority Report, and Total Recall. Although his writing career was prolific, Dick was a troubled individual. He was a heavy drug user, he married five times, he experienced drug-induced “paranormal activities” and he was physically abusive to at least two of his wives. While

Tech Themes

The common, modern depiction of a Turing Test

1. Are you an android? In 1950, British computer scientist Alan Turing conceived of the Turing Test, a hypothetical test to determine whether a machine can display intelligent behavior. Turing asked the question, “Can machines think?” and attempted to define a test whereby a human might be tricked into believing a machine was human. The test design is fairly complex but involves a human asking written questions to a machine in another room. If the machine can convince the interrogator that it’s human, then machines can “think.” This Turing test is mirrored in the Voigt-Kampff test used throughout the book. It’s unclear if the test works, and Rick Deckard almost misdiagnoses Rachel in the book's early parts. At the end of the book, the test is turned on its head, with Rick impersonating John Isidore (another human), trying to convince machines (in another room) to let him in. This role-reversal and the questioning of who is an android happens throughout the novel - at times, Rick, Phil Resh, and Harry Bryant might all be androids. These questions are the centerpiece of sci-fi lore. They are also explored in a similar style in the famous movie Ghost in The Shell, where people have now have some organs and limbs replaced by electric parts. When a cyber-attacker named the Puppet Master takes over the machine network of technological parts, it’s unclear who is human, who is an android, and who is possessed by the Puppet Master. In the video game world, this idea has also recently been explored in Detroit: Become Human. In the game, which is set up in choose-your-own-adventure style, players can play as humans or androids and choose whether they stay in character or break out of their controlled, android state. The idea of an interrogator or bounty hunter snooping out rogue machines has been explored across books, film, and video games. As technology has become more prevalent in our lives, the cultural mediums may have changed, but the classic philosophical question - what does it mean to be alive? - remains.

2. Predicting the future. The Blade Runner movie is famously set in Los Angeles, 2019, while the book is set in 1992 in San Francisco. The book itself was written in 1968, and the movie Blade Runner debuted 14 years later in 1982. In 2019, Blade Runner experienced a comic resurgence as its dark, bleak futuristic society of flying cars, fully intelligent artificial beings, and international space travel never happened. Today, predictions of computing and artificial intelligence abound. In his original Imitation Game paper, Alan Turing made one of the most famous AI predictions: “I believe that in about fifty years’ time it will be possible to programme computers, with a storage capacity of about 10^9, to make them play the imitation game so well that an average interrogator will not have more than 70 percent, chance of making the right identification after five minutes of questioning.” It’s tough to know if this prediction came true (other than the 10^9 part because that is only 1 GB), with some places claiming to have built algorithms that beat the Turing Test. Interestingly, one common theme emerges about these computing predictions - both experts and non-experts typically predict about 15-25 years out. In the Innovators, Walter Issacson posited that this was enough time to allow people to engage in imaginative thinking. Roy Amara, co-founder of the Institute for the Future, probably put it best: “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.” How long run is the long run, though? As John Maynard Keynes proclaimed: “In the long run we are all dead. Economists set themselves too easy, too useless a task if, in tempestuous seasons, they can only tell us that when the storm is long past the ocean is flat again.” It is seriously hard to estimate the combination of changing technologies and infrastructures, which unlock completely new and cost-effective ways of building things. Will we have self-driving cars in 20 years? Will we have Artificial General Intelligence? Will we have quantum computing? I have no idea.

3. Technology and nature. One theme repeatedly explored throughout the novel is this balance or tension between technology and nature. World War Terminus has caused a layer of radioactive dust to fall over the world, killing animal life and changing the environment. Mechanical animals are the norm, and Rick dreams about procuring a real horse, ostrich, or goat one day. He regularly checks his Sidney’s Animal & Fowl Catalogue like a stockbroker checking the latest price change. A real animal is significantly more expensive than a mechanical version, despite it being nearly impossible to figure out whether an animal is real or fake. This mirror’s the book's whole premise - a real human is more important and valuable than an Android despite increasingly small differences between Androids and humans. Rick realizes this at the end of the book: “The spider Mercer gave the chickenhead, Isidore; it probably was artificial, too. But it doesn't matter. The electric things have their lives, too. Paltry as those lives are." Technology and nature have a tradeoff in today’s world as well. Cloud computing is certainly energy-intensive, but according to the companies that run those clouds (like Google Cloud or Microsoft Azure), it is significantly less intensive than having companies run their own data centers. Beyond the environmental impact, the behavior of nature is something to consider when operating a data center. A few years ago, Facebook data centers went down when a Snake chewed through a switchboard and took down all services. In 2014, a shark bit through an underwater Google fiber cable, and in 2012 a squirrel took down a Yahoo data center. Animals, technology, and nature are constantly interacting, sometimes in unexpected ways.

Business Themes

1. Status seeking and the growth of e-commerce. In the battle to achieve status, real animals are a highly sought after status symbol. Early on in the book, Rick engages in a jealous conversation over his neighbor’s real horse: “‘Ever thought of selling your horse?’ Rick asked. He wished to god he had a horse, in fact any animal.” After revealing that his sheep was electric, Rick’s neighbor kindly remarks that he won’t tell the other people in the apartment complex, suggesting that if people knew Rick had an electric sheep (rather than a real one), they would look down on him. While this interaction seems weird, it parallels so many interactions people have today. Vance Packard offered a description of “status seekers” in 1959: “People who are continually straining to surround themselves with visible evidence of the superior rank they are claiming.” As general consumption and wealth rose after World-War II in the US, luxury goods became more attainable for more classes. Globalization of supply chains also increased this trend. When commerce moved online, new shopping styles and behaviors emerged. E-commerce purchases can frequently replace feelings and there is even a psychological disorder caused by excessive purchasing: Buying-shopping disorder (BSD) is characterized by extreme preoccupations with and craving for buying/shopping and by irresistible and identity-seeking urges to possess consumer goods. Patients with BSD buy more consumer goods than they can afford, and those are neither needed nor frequently used. The excessive purchasing is primarily used to regulate emotions, e.g. to get pleasure, relief from negative feelings, or coping with self-discrepancy.” Dick may be signaling that humans seek status and importance compared to their reference groups, regardless of setting or what indicates that status to others, whether it be an expensive handbag or a goat.

2. Buy goat now, pay-later. 2020 saw the emergence of buy-now, pay-later (BNPL) vendors like Affirm, Klarna, and Afterpay. These companies typically offer zero-interest loans to consumers and get paid a 5% merchant fee for increasing purchases at e-commerce stores. The stores (like Peloton for example) increase sales and the consumers benefit from not having to pay a significant upfront payment. The other way these companies make money is by charging interest payments on specific types of purchases (likely where the merchant doesn’t want to give away a fee). These interest rates can be really, really high - averaging around 10-30% depending on the purchase. This is not a new concept and the idea of payday loans at predatorily high-interest rates has been around for over 30 years. Luckily, the purchases that these BNPL providers are financing tend to not be really high-value products, but it’s still concerning that some people are buying things without understanding the true value they will have to pay in interest. When Rick purchases a real goat, after killing three androids, he finances it, paying $3,000 upfront and entering into a three-year payment contract. Rick’s wife Iran is outraged at the cost of the goat: "‘What are the monthly payments on the goat?’ She held out her hand; reflexively he got out the contract which he had signed, passed it to her. ‘That much,’ she said in a thin voice. ‘The interest; good god — the interest alone. And you did this because you were depressed. Not as a surprise for me, as you originally said.” With BNPL providers now securitizing these consumer loans and selling them off to banks, I wonder if we will see any new regulation come to bear for the benefit of consumers. If people are not careful, they could be locked into long contracts with significant interest over time.

3. Two case studies in electric animals. Electric animals have actually been invented and while they may not be the equivalent of Goddard from Jimmy Neutron yet, they are pretty funny and interesting case studies. Sony released the AIBO dog in 1999 after many years of research. The original robot dog cost $2,100 (~$3,500 in today’s dollars) and sold about 65,000 units. The programmable software allowed the dogs to be used in a variety of situations including an AI soccer world cup. The initial popularity of the dogs waned, and price wars with new rivals caused sales to decline. In 2006, the AIBO dog was discontinued. In 2018, it made a resurgence and is now a barking flexible model that you can pet, play games with, and feed. Another tale of odd mechanic animals is Boston Dynamics. The company that spun out of MIT in 1992 produced massive quadruped animals including one called BigDog, that was capable of balancing, walking up-hill, and carrying significant amounts of equipment. The Company had trouble selling products though and was acquired by Google in 2013 for an undisclosed sum. This came at a time when Google was pushing heavily into robotics with Google Glass and what would become Waymo - they literally titled this Project Replicant (the name used for Android in the Blade Runner film). After some more years of underperformance, Google sold Boston Dynamics to Softbank in 2017. After years of development, the company finally released a product to consumers for a whopping $75,000. The dog is still pretty creepy and comes without a real face, unlike the Aibo. In 2020, it was announced that Hyundai had acquired an 80% stake in the business at a $1.1B valuation. We are still years away from having electric animals that mimic real-life animals and that may be a good thing.

Dig Deeper

• Blade Runner: How Its Problems Made It a Better Movie

• Does Buy Now, Pay Later Threaten Credit Card Issuers?

• Predicting a Future Where the Future Is Routinely Predicted

• An Overview of the latest Affirm Consumer Loan Securitization

• Snakes in a Facebook Data Center

November 2020 - Tape Sucks: Inside Data Domain, A Silicon Valley Growth Story by Frank Slootman

This month we read a short, under-discussed book by current Snowflake and former ServiceNow and Data Domain CEO, Frank Slootman. The book is just like Frank - direct and unafraid. Frank has had success several times in the startup world and the story of Data Domain provides a great case study of entrepreneurship. Data Domain was a data deduplication company, offering a 20:1 reduction of data backed up to tape casettes by using new disk drive technology.

Tech Themes

Data Domain’s 2008 10-K prior to being acquired

1. First time CEO at a Company with No Revenue. Frank is an immigrant to the US, coming from the Netherlands shortly after graduating from the University of Rotterdam. After being rejected by IBM 10+ times, he joined Burroughs corporation, an early mainframe provider which subsequently merged with its direct competitor Sperry for $4.8B in 1986. Frank then spent some time at Compuware and moved back to the Netherlands to help it integrate the acquisition of Uniface, an early customizable report building software. After spending time there, he went to Borland software in 1997, working his way up the product management ranks but all the while being angered by time spent lobbying internally, rather than building. Frank joined Data Domain in the Spring of 2003 - when it had no customers, no revenue, and was burning cash. The initial team and VC’s were impressive - Kai Li, a computer science professor on sabbatical from Princeton, Ben Zhu, an EIR at USVP, and Brian Biles, a product leader with experience at VA Linux and Sun Microsystems. The company was financed by top-tier VC’s New Enterprise Associates and Greylock Partners, with Aneel Bhusri (Founder and current CEO of Workday) serving as initial CEO and then board chairman. This was a stacked team and Slootman knew it: “I’d bring down the average IQ of the company by joining, which felt right to me.” The Company had been around for 18 months and already burned through a significant amount of money when Frank joined. He knew he needed to raise money relatively soon after joining and put the Company’s chances bluntly: “Would this idea really come together and captivate customers? Nobody knew. We, the people on the ground floor, were perhaps, the most surprised by the extraordinary success we enjoyed.”

2. Playing to his Strengths: Capital Efficiency. One of the big takeaways from the Innovators by Walter Issacson was that individuals or teams at the nexus of disciplines - primarily where the sciences meet the humanities, often achieved breakthrough success. The classic case study for this is Apple - Steve Jobs had an intense love of art, music, and design and Steve Wozniak was an amazing technologist. Frank has cultivated a cross-discipline strength at the intersection of Sales and Technology. This might be driven by Slootman’s background is in economics. The book has several references to economic terms, which clearly have had an impact on Frank’s thinking. Data Domain espoused capital efficiency: “We traveled alone, made few many-legged sales calls, and booked cheap flights and hotels: everybody tried to save a dime for the company.” The results showed - the business went from $800K of revenue in 2004 to $275 million by 2008, generating $75M in cash flow from operations. Frank’s capital efficiency was interesting and broke from traditional thinking - most people think to raise a round and build something. Frank took a different approach: “When you are not yet generating revenue, conservation of resource is the dominant theme.” Over time, “when your sales activity is solidly paying for itself,” the spending should shift from conservative to aggressive (like Snowflake is doing this now). The concept of sales efficiency is somewhat talked about, but given the recent fundraising environment, is often dismissed. Sales efficiency can be thought of as: “How much revenue do I generate for every $1 spent in sales and marketing?” Looking at the P&L below, we see Data Domain was highly efficient in its sales and marketing activity - the company increased revenue $150M in 2008, despite spending $115M in sales and marketing (a ratio of 1.3x). Contrast this with a company like Slack which spent $403M to acquire $230M of new revenue (a ratio of 0.6x). It gets harder to acquire customers at scale, so this efficiency is supposed to come down over time but best in class is hopefully above 1x. Frank clearly understands when to step on the gas with investing, as both ServiceNow and Snowflake have remained fairly efficient (from a sales perspective at least) while growing to a significant scale.

3. Technology for Technology’s Sake. “Many technologies are conceived without a clear, precise notion of the intended use.” Slootman hits on a key point and one that the tech industry has struggled to grasp throughout its history. So many products and companies are established around budding technology with no use case. We’ve discussed Magic Leap’s fundraising money-pit (still might find its way), and Iridium Communications, the massive satellite telephone that required people to carry a suitcase around to use it. Gartner, the leading IT research publication (which is heavily influenced by marketing spend from companies) established the Technology Hype Cycle, complete with the “Peak of inflated expectations,” and the “Trough of Disillusionment” for categorizing technologies that fail to live up to their promise. There have been several waves that have come and gone: AR/VR, Blockchain, and most recently, Serverless. Its not so much that these technologies were wrong or not useful, its rather that they were initially described as a panacea to several or all known technology hindrances and few technologies ever live up to that hype. Its common that new innovations spur tons of development but also lots of failure, and this is Slootman’s caution to entrepreneurs. Data Domain was attacking a problem that existed already (tape storage) and the company provided what Clayton Christensen would call a sustaining innovation (something that Slootman points out). Whenever things go into “winter state”, like the internet after the dot-com bubble, or the recent Crpyto Winter which is unthawing as I write; it is time to pay attention and understand the relevance of the innovation.

Business Themes

1. Importance of Owning Sales. Slootman spends a considerable amount of this small book discussing sales tactics and decision making, particularly with respect to direct sales and OEM relationships. OEM deals are partnerships with other companies whereby one company will re-sell the software, hardware, or service of another company. Crowdstrike is a popular product with many OEM relationships. The Company drives a significant amount of its sales through its partner model, who re-sell on behalf of Crowdstrike. OEM partnerships with big companies present many challenges: “First of all, you get divorced from your customer because the OEM is now between you and them, making customer intimacy challenging. Plus, as the OEM becomes a large part of your business, for all intents and purposes they basically own you without paying for the privilege…Never forget that nobody wants to sell your product more than you do.” The challenges don’t end there. Slootman points out that EMC discarded their previous OEM vendor in the data deduplication space, right after acquiring Data Domain. On top of that, the typical reseller relationship happens at a 10-20% margin, degrading gross margins and hurting ability to invest. It is somewhat similar to the challenges open-source companies like MongoDB and Elastic have run into with their core software being…free. Amazon can just OEM their offering and cut them out as a partner, something they do frequently. Partner models can be sustainable, but the give and take from the big company is a tough balance to strike. Investors like organic adoption, especially recently with the rise of freemium SaaS models percolating in startups. Slootman’s point is that at some point in enterprise focused businesses, the Company must own direct sales (and relationships) with its customers to drive real efficiency. After the low cost to acquire freemium adopters buy the product, the executive team must pivot to traditional top down enterprise sales to drive a successful and enduring relationship with the customer.

2. In the Thick of Things. Slootman has some very concise advice for CEOs: be a fighter, show some humanity, and check your ego at the door. “Running a startup reduces you to your most elementary instincts, and survival is on your mind most of the time…The CEO is the ‘Chief Combatant,’ warrior number one.” Slootman views the role of CEO as a fighter, ready to be the first to jump into the action, at all times. And this can be incredibly productive for business as well. Tony Xu, the founder and CEO of Doordash, takes time out every month to do delivery for his own company, in order to remain close to the customer and the problems of the company. Jeff Bezos famously still responds and views emails from customers at jeff@amazon.com. Being CEO also requires a willingness to put yourself out there and show your true personality. As Slootman puts it: “People can instantly finger a phony. Let them know who you really are, warts and all.” As CEO you are tasked with managing so many people and being involved in all aspects of the business, it is easy to become rigid and unemotional in everyday interactions. Harvard Business School professor and former leader at Uber distills it down to a simple phrase: “Begin With Trust.” All CEO’s have some amount of ego, driving them to want to be at the top of their organization. Slootman encourages CEO’s to be introspective, and try to recognize blind spots, so ego doesn’t drive day-to-day interactions with employees. One way to do that is simple: use the pronoun “we” when discussing the company you are leading. Though Slootman doesn’t explicitly call it out - all of these suggestions (fighting, showing empathy, getting rid of ego) are meant to build trust with employees.

3. R-E-C-I-P-E for a Great Culture. The last fifth of the book is all focused on building culture at companies. It is the only topic Slootman stays on for more than a few chapters, so you know its important! RECIPE was an acronym created by the employees at Data Domain to describe the company’s values: Respect, Excellence, Customer, Integrity, Performance, Execution. Its interesting how simple and focused these values are. Technology has pushed its cultural delusion’s of grandeur to an extreme in recent years. The WeWork S-1 hilariously started with: “We are a community company committed to maximum global impact. Our mission is to elevate the world’s consciousness.” But none of Data Domain’s values were about changing the world to be a better place - they were about doing excellent, honest work for customers. Slootman is lasered focused on culture, and specifically views culture as an asset - calling it: “The only enduring, sustainable form of differentiation. These days, we don’t have a monopoly for very long on talent, technology, capital, or any other asset; the one thing that is unique to us is how we choose to come together as a group of people, day in and day out. How many organizations are there that make more than a halfhearted attempt at this?” Technology companies have taken different routes in establishing culture: Google and Facebook have tried to create culture by showering employees with unbelievable benefits, Netflix has focused on pure execution and transparency, and Microsoft has re-vamped its culture by adopting a Growth Mindset (has it really though?). Google originally promoted “Don’t be evil,” as part of its Code of Conduct but dropped the motto in 2018. Employees want to work for mission-driven organizations, but not all companies are really changing the world with their products, and Frank did not try to sugarcoat Data Domain’s data-duplication technology as a way to “elevate the world’s consciousness.” He created a culture driven by performance and execution - providing a useful product to businesses that needed it. The culture was so revered that post-acquisition, EMC instituted Data Domain’s performance management system. Data Domain employees were looked at strangely by longtime EMC executives, who had spent years in a big and stale company. Culture is a hard thing to replicate and a hard thing to change as we saw with the Innovator’s Dilemma. Might as well use it to help the company succeed!

Dig Deeper

• How Data Domain Evolved in the Cloud World

• Former Data Domain CEO Frank Slootman Gets His Old Band Back Together at ServiceNow

• The Contentious Take-over Battle for Data Domain: Netapp vs. EMC

• 2009 Interview with Frank Slootman After the Acquisition of Data Domain

September 2020 - Women of Color in Tech by Susanne Tedrick

This month we dove into Susanne Tedrick’s new book, Women of Color in Tech. Tedrick provides an excellent overview of the challenges many women of color face when trying to enter into and stay in the technology industry. The mix of real-world advice, personal experience, and industry stories combine to form a comprehensive resource for anyone in technology or looking to enter the field.

Tech Themes

1. The Current State. Tedrick starts the book with uncomfortable statistics. Only 26% of computing roles are held by women; Black women hold 3% and Hispanic women hold 2% of computing roles. In addition, the trends aren’t positive - 26% is a 9% decrease since 1990. According to the Ascend Foundation, a Pan-Asian organization for business professionals, from 2007 to 2015, black women experienced a 13% decrease in professional roles in technology. While distressing, there are some green shoots, a 2012 paper by Heather Gonzalez and Jeffrey Kuenzi pointed out that science and engineering graduate program enrollments grew 65%, 55%, and 50% for Hispanic/Latino, American Indian/Alaska Native, and African American students, respectively. So why is this? Tedrick acknowledges that there is no one single answer, instead, its a combination of circumstances starting at early adolescence. Tedrick introduces the idea of “STEM Deserts” or areas where STEM education is not offered. These deserts disproportionally affect high poverty schools (schools where 75% or more of the students are eligible for free lunch and breakfast). Almost half of these schools contain large Black and Hispanic populations. Once women of color arrive at college it gets harder: “Coupling [student debt] with professor’s biases, a lack of meaningful support at home or within their community, and few to no peers with whom they can identify in their academic programs, many young women of color struggle to get through their programs.” For the few that conquer all of these challenges, the workplace introduces a whole new set of issues. Tedrick cites the Kapor Center’s Tech Leavers Study: “Thirty percent of women of color respondents claimed that they were passed over for promotions and 24% report being stereotyped.” According to a Harvard Business Review article written by feminist legal scholar Joan Williams, “77% of black women report having to prove themselves over and over; their success discounted and their expertise questioned.” When you compile all of these challenges throughout a lifetime, it becomes an incredibly difficult journey for black women in tech.

2. Technical Roles and the Building Blocks of the Internet. Tedrick introduces many key organizational roles in technology including business analysis, consulting, data science, information security, product management, project management, software development, technical sales, technical support, user experience design, and web design. After introducing each one, she provides a prescriptive guide for individuals looking to learn more - hitting on key skills, educational requirements, and the latest trends. While I can’t cover every role here, one underappreciated position / sub-segment of technology Tedrick discusses is computer networking. Ultimately, networking was the benefit that unlocked the internet to the masses. Protocols like TCP/IP, VoIP, and HTTP are crucial to the functioning internet. These protocols offer ways for computers to communicate with one another in a consistent manner. The IP (Internet Protocol) provides basic addressing for computers and TCP provides the continual delivery of ordered and reliable bytes from one computer to another in what are called packets. A packet is a pre-defined standard for sending data. VoIP is an extension of this protocol specifically for transcoding audio and video voice signals into packets. HTTP is the way you request the data found at a location: http://techbookofthemonth.com tells the browser to fetch the website at that URL. A lot of basic networking features are typically baked into the operating system, which for most consumers today is Linux. Linux is an open-source operating system that handles all of the things that makes your computer run: memory, CPU, connected devices, graphics, desktop environment, and the ability to run applications. However, Linux programming is still not a commonly learned skill. Tedrick quotes Tameika Reed, a senior infrastructure engineer and founder of Women in Linux: “We have people who are getting degrees and PhDs and so on. . . . When it comes down to Linux, which runs in 90 percent of most companies, and it’s time to troubleshoot something, they don’t know how to troubleshoot the basics of the foundation. I look at Linux as the foundations of getting into tech.” Red Hat, which was acquired by IBM for $34 billion in 2019, offers an enterprise version of Linux which comes with support, guaranteed versioning, and additional security. While computer networking is not a flashy industry, it underpins so much that it remains very interesting.

3. Technology Skills. Chapter six lays out a great way to assess your own skills and understand where you need improvement. These skills can require additional schooling via college, trade schools, or massive-open-online-courses (MOOCs) like Coursera but other ways to complement this learning include hackathons, conferences, networking, and volunteering. Tedrick wanted to improve her own skills so she volunteered to help set up a conference: “To improve my web design, WordPress, and conference organization skills, I volunteered my services for a leadership conference being held by IEEE Women in Engineering for four months in 2016. I helped to build and maintain the event website using WordPress, as well as helped people with registration and refunds. This experience greatly improved my understanding of web design, search engine optimization (SEO), event promotion, and collaborating with remote teams (I was based in Chicago, while much of the event team and registrants were based in and around Detroit, Michigan). In the process, I learned more about the different fields of engineering and broadened my network with incredible engineering students and professionals.” The book is incredibly helpful for skill-building - it gives you the exact things you need to learn to be successful in specific positions and it even clears up some myths of the technology industry. One common myth is that “Tech Careers Require Constant, Hands-On Programming.” As evidenced by the myriad of roles listed above, the technology industry involves so much more than programming. In addition, Tech careers exist outside of the top five big-name companies like Microsoft, Google, Facebook, Amazon, and Netflix and even exist at non-tech companies too. One critical skill that Tedrick highlights for a number of different technical roles is communication. Communication is not often mentioned when discussing software engineering, but Tedrick picks up on its huge importance, and the necessary ability to communicate to technical and non-technical audiences. On top of sharing with non-technical audiences, engineers need to know how to communicate accurate deadlines to managers and ask for help when unsure of how to implement a challenging new feature. Communication is not just speaking, its also listening and empathetically understanding where others are coming from, to establish common ground and grow mutual understanding.

Business Themes

1. Tedrick’s Story and Grit. Susanne’s personal stories appear throughout the book and perfectly complement the substantial amount of how-to information and advice. Chapter nine talks about the daily challenges of many women of color in tech and their lack of support to solve those challenges. Susanne’s own story is one of incredible determination and perseverance: “My mother had been diagnosed with a brain tumor when I was very young. This initial tumor led to more health issues for her over the years, including a decline into dementia, a loss of some of her short-term memory, and impacted mobility. The latter half of her life was spent in and out of hospitals, having numerous operations and medical incidents. My father was left to care for me and my sister, while also supporting several other family members in one house. Between work and caring for my mom, he couldn’t be around much, and fortunately, some nearby relatives and family friends helped to raise and care for us. As there was only one income (already too high to qualify for most public assistance programs) and my mother needed many medications, there were times where a choice had to be made between eating, having phone service, making critical house repairs, or having the lights stay on. This went on for nearly two decades, up until my mother’s death. It wasn’t until well into my adult life that I realized I was living in ‘survival mode’ and just trying to exist. I was spending most of my time trying to find happiness in my life; having a meaningful and engaging career was not an immediate goal or one I thought was achievable for me.” After working in administrative roles and taking on a couple of different jobs, she managed to attend Northwestern while continuing to work. “I used much of my vacation and holiday time from work not only to study but to attend conferences, interviews, boot camps, and the like. I did homework during lunch breaks or before the start of a full workday, only to go to class for several hours in the same evening.” Tedrick has risen to be an award-winning public speaker, author, and technologist at IBM (oh and she’s also run a couple of marathons). Her story is truly inspirational!

2. Culture, Intersectionality, and Bias. We’ve discussed Clayton Christensen’s Resources-Processes-Values framework before and how they impact the discovery of emerging technologies. Often the processes create a culture and set of habitual routines that can be difficult to change. The culture of big technology has been anti-women for a long time. As Tedrick points out, women of color not only have to deal with this challenge but also repeated racial abuse, microaggressions, and tokenism. Kimberlé Crenshaw called this intersectionality, or the idea that a person's social identities (e.g., gender, caste, sex, race, class, sexuality, religion, disability, physical appearance, height, etc.) combine to create unique modes of discrimination and privilege. Tedrick points out an example of this with Sheryl Sandberg’s famous novel, Lean In. The book became a bestseller and made Sheryl Sandberg a household name (to those that didn’t already know her as COO of Facebook). However, as Tedrick points out: “The central problem with the book, which Sandberg herself later acknowledged, is that it assumed that the reader had certain privileges that many women of color do not have: completely supportive households that don’t require much of their time and attention, work cultures that allow expression of their thoughts without fear of being fired or held back, and access to career mentors to help them become stronger leaders. This lack of understanding of where the reader may be coming from and experiencing caused much of Sandberg’s advice to ring hollow for women of color.” The book ignores the structural challenges that many women of color face. Michelle Obama put it bluntly: “It’s not always enough to lean in, because that shit doesn’t work all the time.” When building culture at an organization, it’s super important to think about how that culture addresses each social identity at the company. Furthermore, it’s not the responsibility of diverse individuals to build that culture. Tedrick sums it up well: “Addressing tokenism, much like addressing bias, unfortunately, is not something that you alone can address. It is also not our responsibility to address this. It is up to organizations and their leaders to correct and address tokenism so that women of color are fully engaged.”

3. Negotiating Compensation. Understanding pay and compensation are critical to understanding any job offer. Frequently job candidates are remiss to ask for additional compensation because they fear retribution like the offer is pulled and given to someone else and worry about sounding greedy before even joining a new company. As Susanne found out after receiving her first traditional job, this can lead to lower salaries, especially when adjusting for location. In addition, Susanne points out the enormous gender pay gap that occurs at organizations: “It’s no secret that women—and specifically, women of color—are underpaid in about every industry, not just tech. While it is on companies to fix their approaches to compensation, it is our right and duty to demand fair compensation for our work.” A study of the technology industry done by job search marketplace, Hired, shows that black women were paid $0.89 on the dollar compared to white males. This is the lowest across White, Asian, Black, and Hispanic men and women in the technology sector. For LGBTQI+ individuals, the wage gap is $0.90 to $1 of compensation for non-LGBTQI+. While pay gap detail for black LGBTQI+ community is under-studied, according to The National LGBTQ Task Force’s 2011, 48% of trans and gender non-conforming black individuals experienced discrimination in the hiring process. Outside of the technology industry, the pay gap is even more stark with Black women earning $0.62 for every dollar earned by a White male. To address many of these challenges, and ensure that candidates get as close to a fair offer as possible, Tedrick lays out a framework for considering a new job, from pay to benefits to location. Tedrick advises individuals to first research local salaries for the role they are taking on. Armed with data, Tedrick suggests candidates try to be confident, respectful, and flexible in all discussions and to emphasize the unique value they bring to the organization.

Dig Deeper

• Work Smart & Start Smart: Salary Negotiation for Women of Color

• Anita Borg and the history of one of the largest professional organizations for women in technology

• How the World’s most prevalent operating system was built by a 21-year old in Finland

• Black Girls Code: Empowering Young Black Women to Become Innovators

• Tedrick’s Twitter, website, and talk with the Women’s National Book Association

August 2020 - Venture Deals by Brad Feld and Jason Mendelson

This month we checked out an excellent book for founders, investors, and those interested in private company financings. The book hits on a lot of the key business and legal terms that aren’t discussed in typical startup books, making it useful no matter what stage of the entrepreneurial journey you are on.

Tech Themes

1. The Rise of Founder Friendly VC. Writing on his blog, Feld Thoughts, which was the original genesis for Venture Deals, Brad Feld mentioned that: “From 2010 forward, the entire VC market shifted into a mode that many describe as ‘founder friendly.’ Investor reputation mattered at both the angel and VC level.” In the 80’s and 90’s, because there was so little competition among venture capital firms, it was common for firms to dictate terms to company founders. The VC firms were the ones with the cash, and the founders didn’t have many options to choose from. If you wanted to build a big, profitable, public company, the only way to get there was by taking venture capital money. This trend started to unwind during the internet bubble, when founders started to maintain more and more of their businesses before the IPO. In fact, as this Harvard Business Review article points out, it was actually common to fire the founder/CEO prior to a public offering in favor of more seasoned leaders. This trend was bucked by Netscape, which eschewed traditional wisdom, going public less than a year from founding, with an unprofitable business. The Netscape IPO was clearly a royal coming-together of technology history. Tracing it all the way back - George Winthrop Fairchild started IBM in 1911; in the late 50’s, Arthur Rock convinced Fairchild’s son, Sherman to fund the traitorous eight (eight employees who left competitor Shockley Semiconductor) to start Fairchild Semiconductor; Eugene Kleiner (one of the traitorous eight) starts Kleiner Perkins, a venture capital firm that eventually invested in Netscape. Kleiner Perkins would also invest in Google (frequently regarded as one of the best and riskiest startup investments ever). Google was the first internet company to go public with a dual-class share structure where the founders would own a disproportionate amount of the voting rights of the company. Marc Andreessen, the founder of Netscape, loved this idea and eventually launched his own venture capital firm called Andreessen Horowitz, which ushered in a new generation of founder-friendly investing. At one point Andreessen was even quoted saying: “It is unsafe to go public today without a dual-class share structure.” Some notable companies with dual class shares include several Andreessen companies such as Facebook, Zynga, Box, and Lyft. Recently some have questioned whether founder friendly terms have pushed too far with some major flameouts from companies with the structure including Theranos, WeWork, and Uber.

2. How to Raise Money. Feld has several recommendations for fundraising that are important including having a target round size, demo, financial projections, and VC syndicate. Feld contends that CEOs who offer a range of varying round sizes to VC’s don’t really understand their business goals and use of proceeds. By having a concrete round size it shows that the CEO understands roughly how much money it will take to get to the next milestone or said another way, it shows the CEO understands the runway (in months) needed to build that new product or feature. It shows command of the financing and vision of the business. Feld encourages founders to provide a demo, because: “while never required, many investors respond to things we can play with, so even if you are an early stage company, a prototype or demo is desirable.” Beyond the explicit point here, the demo shows confidence in the product and at least some ability to sell, which is obviously a key aspect in eventually scaling the business. Another aspect of scaling the business is the financial model, but as Feld states, “the only thing that can be known about a pre-revenue company’s financial projections is that they are wrong.” While the numbers are meaningless for really early stage companies, for those that have a few customers it can be helpful to get a sense of long-term gross margins and aspects of the company you hope to invest in and / or change over time. Lastly, Feld gives advice for building a VC syndicate, or group of VC investors. Frequently lead investors will commit a certain dollar amount of the round, and it will be up to the founder/CEO to go find a way to build out the round. This can be incredibly challenging as detailed by Moz founder, Rand Fishkin, who thought he had a deal in hand only to see it be taken away. There are multiple bids in the VC fundraising process, one called an indication of interest, which is non-binding and normally provides a range on valuation, one called a letter of intent, which is slightly more detailed and may include legal terms of the deal such as board representation, liquidation preference, and governance terms, and then final legal documentation. A lot of time, the early bids can be withdrawn based off of poor market feedback or when a company misses its financial projections (like Moz did in its process). Understanding the process and the materials needed to complete the deal is helpful at setting expectations for founders.

3. Warrants, SPACs, and IPOs. With SPACMania in full-swing, we wanted to dive into SPACs and see how they work. We’ve discussed SPACs before, with regards to Chamath’s Social Capital merger with Virgin Galactic. But how do traditional SPAC financings work and why is there a rush of famous people, such as LinkedIn founder Reid Hoffman, to raise them? A SPAC or Specialty Purpose Acquisition Company is a blank-check company which goes public with the goal of acquiring a business, thereby taking it public. SPACs can be focused on industry or size of company and they are most frequently led by operational leaders and / or private equity firms. The reason SPACs have been gaining in popularity is that public markets investors are seeking more risk and a few high profile SPAC deals, namely DraftKings and Nikola, have traded better than expected. Most companies that are going public today are older, more mature businesses, and the public markets have been generally favorable to somewhat suspect ventures (Nikola is an electric truck company that has never produced a single truck, but is worth $14B on hype alone). VC firms and companies see the ability to get outsized returns on their investments because so many people are clamoring to find returns above the basically 0% offered by treasury bonds. The S&P 500 P/E ratio is now at around 26x compared to a historical average around 16x, meaning the market seems to be overvalued compared to prior times. SPACs typically come with an odd structure. A unit in a SPAC normally consists of one common share of stock and one warrant, which is the ability to purchase shares for $0.01 after a SPAC merges with its target company. The founders of the SPAC also receive founder shares, normally 20% of the business. Once the target is found, SPACs will often coordinate a PIPE (Private Investment in Public Equity), where a large private investor will invest mainly primary (cash to the balance sheet) capital into the business. This has emerged as a hip, new alternative to traditional IPOs, keeping with the theme of innovation in public offerings like direct listings, however, its unclear that this really benefits the company going public. Often the merged companies are the subject of substantial dilution by the SPAC sponsors and PIPE investors, lowering the overall equity piece management maintains. However, given the somewhat high valuations companies are receiving in the public markets (Zoom at 80x+ LTM Revenue, Shopify at 59x LTM Revenue), it may be worth the dilution.

Business Themes

1. How VC’s Make Money. In VC, the typical fund structure includes a general partnership (GP) and limited partners (LPs). The GP is the investors at the VC firm and the limited partners are the institutional investors that provide the money for the VC firm to invest. A typical structure involves the GP investing 1% of their own money (99% comes from LPs) and then getting paid an annual 2% management fee as well as 20% carried interest, or the profit made from investments. Using the example from the book: “Start with the $100 million fund. Assume that it's a successful fund and returns 3× the capital, or $300 million. In this case, the first $100 million goes back to the LPs, and the remaining profit, or $200 million, is split 80 percent to the LPs and 20 percent to the GPs. The VC firm gets $40 million in carried interest and the LPs get the remaining $160 million. And yes, in this case everyone is very happy.” Understanding how investors make money can help the entrepreneur better understand why VC’s pressure companies. As Feld points out, sometimes VC’s are trying to raise a new fund or have invested the majority of the fund already and thus do not care as much about some investments.

2. Growth at all costs. There has been a concerted focus in VC on the get big quick motto. Nobody better exemplifies this than Masayoshi Son and the $100B VC his firm Softbank raised a few years ago. With notable big bets on current losers like WeWork and Oyo, which are struggling during this pandemic, its unclear whether this motto remains true. Eric Paley, a Managing Partner at Founder Collective, expertly quantifies the potential downsides of a risk-it-all strategy: “Investors today have overstuffed venture funds, and lots of capital is sloshing around the startup ecosystem. As a result, young startups with strong teams, compelling products and limited traction can find themselves with tens of millions of dollars, but without much real validation of their businesses. We see venture investors eagerly investing $20 million into a promising company, valuing it at $100 million, even if the startup only has a few million in net revenue. Now the investors and the founders have to make a decision — what should determine the speed at which this hypothetical company, let’s call it “Fuego,” invests its treasure chest of money in the amazing opportunity that motivated the investors? The investors’ goal over the next roughly 24 months is for the company to become worth at least three times the post-money valuation — so $300 million would be the new target pre-money valuation for Fuego’s next financing. Imagine being a company with only a few million in sales, with a success hurdle for your next round of $300 million pre-money. Whether the startup’s model is working or not, the mantra becomes ‘go big or go home.’” This issue is key when negotiating term sheets with investors and understanding board dynamics. As Feld calls out: “The voting control issues in the early stage deals are only amplified as you wrestle with how to keep control of your board when each lead investor per round wants a board seat. Either you can increase your board size to seven, nine, or more people (which usually effectively kills a well-functioning board), or more likely the board will be dominated by investors.” As an entrepreneur, you need to be cognizant of the pressure VC firms will put on founders to grow at high rates, and this pressure is frequently applied by a board. Often late stage startups have 10 people+ on their board. UiPath, a private venture-backed startup that has raised over $1B and is valued at $10B, has 12 people on its board. With all of the different firms having their own goals, boards can become ineffective. Whenever startups are considering fundraising, it’s important to realize the person you are raising from will be an ongoing member of the company and voice on the board and will most likely push for growth.

3. Liquidation Preference. One of the least talked about terms in venture capital among startup circles is liquidation preference. Feld describes liquidation preference as: “a certain multiple of the original investment per share is returned to the investor before the common stock receives any consideration.” Startup culture has tended to view fundraises as stamps of approval and success, but thats not always the case. As the book discusses, preference can lead to very negative outcomes for founders and employes. For example, let’s say a company at $10M in revenue raises $100 million with a 1x liquidation preference at a $400 million pre-money valuation ($500M post money). The company is pressured by its VCs to grow quickly but it has issues with product market fit and go to market; five years go by and the company is at $15M in revenue. At this point the VCs are not interested in funding any more, and the board decides to try to sell the company. A buyer offers $80 million and the board accepts it. At this point, all $80M has to go back to the original investors who had the 1x liquidation preference. All of the common stockholders and the founders, get nothing. Its not the desired outcome by any means, but its important to know. Some companies have not heeded this advice and continued to raise at massive valuations including Notion which has raised $10M at a $800 million valuation, despite being rumored to be around $15M in revenue. The company raised at a $1.6B valuation (an obvious 2x) after being rumored to be at $30M in revenue. While not taking dilution is nice as a founder, it also sets up a massive hurdle for the company and seriously cramps returns. A 3x return (which is low for VC investors) means selling the company for $4.8B, which is no small feat.

Dig Deeper

• Feld Thoughts: Brad Feld’s Blog

• The Ultimate Guide to Liquidation Preferences

• Startup Boards: A deep dive by Mark Suster, VC at Upfront Ventures

• The meeting that showed me the truth about VCs on TechCrunch

• SPOTAK: The Six Traits Marc Lore Looks for When Hiring

July 2020 - Innovator's Dilemma by Clayton Christensen

This month we review the technology classic, the Innovator’s Dilemma, by Clayton Christensen. The book attempts to answer the age-old question: why do dominant companies eventually fail?

Tech Themes

1. The Actual Definition of Disruptive Technology. Disruption is a term that is frequently thrown around in Silicon Valley circles. Every startup thinks its technology is disruptive, meaning it changes how the customer currently performs a task or service. The actual definition, discussed in detail throughout the book, is relatively specific. Christensen re-emphasizes this distinction in a 2015 Harvard Business Review article: "Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents' mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants' offerings in volume, disruption has occurred." The book posits that there are generally two types of innovation: sustaining and disruptive. While disruptive innovation focuses on low-end or new, small market entry, sustaining innovation merely continues markets along their already determined axes. For example, in the book, Christensen discusses the disk drive industry, mapping out the jumps which pack more memory and power into each subsequent product release. There is a slew of sustaining jumps for each disruptive jump that improves product performance for existing customers but doesn't necessarily get non-customers to become customers. It is only when new use cases emerge, like rugged disk usage and PCs arrive, that disruption occurs. Understanding the specific definition can help companies and individuals better navigate muddled tech messaging; Uber, for example, is shown to be a sustaining technology because its market already existed, and the company didn't offer lower prices or a new business model. Understanding the intricacies of the definition can help incumbents spot disruptive competitors.

2. Value Networks. Value networks are an underappreciated and somewhat confusing topic covered in The Innovator's Dilemma's early chapters. A value network is defined as "The context within which a firm identifies and responds to customers' needs, solves problems, procures input, reacts to competitors, and strives for profit." A value network seems all-encompassing on the surface. In reality, a value network serves to simplify the lens through which an organization must make complex decisions every day. Shown as a nested product architecture, a value network attempts to show where a company interacts with other products. By distilling the product down to its most atomic components (literally computer hardware), we can see all of the considerations that impact a business. Once we have this holistic view, we can consider the decisions and tradeoffs that face an organization every day. The takeaway here is that organizations care about different levels of performance for different products. For example, when looking at cloud computing services at AWS, Azure, or GCP, we see Amazon EC2 instances, Azure VMs, and Google Cloud VMs with different operating systems, different purposes (general, compute, memory), and different sizes. General-purpose might be fine for basic enterprise applications, while gaming applications might need compute-optimized, and real-time big data analytics may need a memory-optimized VM. While it gets somewhat forgotten throughout the book, this point means that organizations focused on producing only compute-intensive machines may not be the best for memory-intensive, because the customers of the organization may not have a use for them. In the book's example, some customers (of bigger memory providers) looked at smaller memory applications and said there was no need. In reality, there was massive demand in the rugged, portable market for smaller memory disks. When approaching disruptive innovation, it's essential to recognize your organization's current value network so that you don't target new technologies at those who don't need it.

3. Product Commoditization. Christensen spends a lot of time describing the dynamics of the disk drive industry, where companies continually supplied increasingly smaller drives with better performance. Christensen's description of commoditization is very interesting: "A product becomes a commodity within a specific market segment when the repeated changes in the basis of competition, completely play themselves out, that is, when market needs on each attribute or dimension of performance have been fully satisfied by more than one available product." At this point, products begin competing primarily on price. In the disk drive industry, companies first competed on capacity, then on size, then on reliability, and finally on price. This price war is reminiscent of the current state of the Continuous Integration / Continuous Deployment (CI/CD) market, a subsegment of DevOps software. Companies in the space, including Github, CircleCI, Gitlab, and others are now competing primarily on price to win new business. Each of the cloud providers has similar technologies native to their public cloud offerings (AWS CodePipeline and CloudFormation, GitHub Actions, Google Cloud Build). They are giving it away for free because of their scale. The building block of CI/CD software is git, an open-source version control system founded by Linux founder Linus Torvalds. With all the providers leveraging a massive open-source project, there is little room for true differentiation. Christensen even says: "It may, in fact, be the case that the product offerings of competitors in a market continue to be differentiated from each other. But differentiation loses its meaning when the features and functionality have exceeded what the market demands." Only time will tell whether these companies can pivot into burgeoning highly differentiated technologies.

Business Themes

1. Resources-Processes-Value (RPV) Framework. The RPV framework is a powerful lens for understanding the challenges that large businesses face. Companies have resources (people, assets, technology, product designs, brands, information, cash, relationships with customers, etc.) that can be transformed into greater value products and services. The way organizations go about converting these resources is the organization's processes. These processes can be formal (documented sales strategies, for example) or informal (culture and habitual routines). Processes are the big reasons organizations struggle to deal with emerging technologies. Because culture and habit are ingrained in the organization, the same process used to launch a mature, slow-growing market may be applied to a fast-growing, dynamic sector. Christensen puts it best: "This means the very mechanisms through which organizations create value are intrinsically inimical to change." Lastly, companies have values, or "the standards by which employees make prioritization decisions." When there is a mismatch between the resources, processes, and values of an organization and the product or market that an organization is chasing, its rare the business can be successful in competing in the disruptive market. To see this misalignment in action, Christensen describes a meeting with a CEO who had identified the disruptive change happening in the disk-drive market and had gotten a product to market to meet the growing market. In response to a publication showing the fast growth of the market, the CEO lamented to Christensen: "I know that's what they think, but they're wrong. There isn't a market. We've had that drive in our catalog for 18 months. Everyone knows we've got it, but nobody wants it." The issue was not the product or market demand, but the organization's values. As Christensen continues, "But among the employees, there was nothing about an $80 million, low-end market that solved the growth and profit problems of a multi-billion dollar company – especially when capable competitors were doing all they could to steal away the customers providing those billions. And way at the other end of the company there was nothing about supplying prototype companies of 1.8-inch drives to an automaker that solved the problem of meeting the 1994 quotas of salespeople whose contacts and expertise were based so solidly in the computer industry." The CEO cared about the product, but his team did not. The RPV framework helps evaluate large companies and the challenges they face in launching new products.

2. How to manage through technological change. Christensen points out three primary ways of managing through disruptive technology change: 1. "Acquire a different organization whose processes and values are a close match with the new task." 2. "Try to change the processes and values of the current organization." 3. "Separate out an independent organization and develop within it the new processes and values that are required to solve the new problem." Acquisitions are a way to get out ahead of disruptive change. There are so many examples but two recent ones come to mind: Microsoft's acquisition of Github and Facebook's acquisition of Instagram. Microsoft paid a whopping $7.5B for Github in 2018 when the Github was rumored to be at roughly $200M in revenue (37.5x Revenue multiple!). Github was undoubtedly a mature business with a great product, but it didn't have a ton of enterprise adoption. Diane Greene at Google Cloud, tried to get Sundar Pichai to pay more, but he said no. Github has changed Azure's position within the market and continued its anti-Amazon strategy of pushing open-source technology. In contrast to the Github acquisition, Instagram was only 13 employees when it was acquired for $1B. Zuckerberg saw the threat the social network represented to Facebook, and today the acquisition is regularly touted as one of the best ever. Instagram was developing a social network solely based on photographs, right at the time every person suddenly had an excellent smartphone camera in their pocket. The acquisition occurred right when the market was ballooning, and Facebook capitalized on that growth. The second way of managing technological change is through changing cultural norms. This is rarely successful, because you are fighting against all of the processes and values deeply embedded in the organization. Indra Nooyi cited a desire to move faster on culture as one of her biggest regrets as a young executive: "I’d say I was a little too respectful of the heritage and culture [of PepsiCo]. You’ve got to make a break with the past. I was more patient than I should’ve been. When you know you have to make a change, at some point you have to say enough is enough. The people who have been in the company for 20-30 years pull you down. If I had to do it all over again, I might have hastened the pace of change even more." Lastly, Christensen prescribes creating an independent organization matched to the resources, processes, and values that the new market requires. Three great spin-out, spin-in examples with different flavors of this come to mind. First, Cisco developed a spin-ins practice whereby they would take members of their organization and start a new company that they would fund to develop a new process. The spin-ins worked for a time but caused major cultural issues. Second, as we've discussed, one of the key reasons AWS was born was that Chris Pinkham was in South Africa, thousands of miles away from Amazon Corporate in Seattle; this distance and that team's focus allowed it to come up with a major advance in computing. Lastly, Mastercard started Mastercard Labs a few years ago. CEO Ajay Banga told his team: "I need two commercial products in three years." He doesn't tell his CFO their budget, and he is the only person from his executive team that interacts with the business. This separation of resources, processes, and values allows those smaller organizations to be more nimble in finding emerging technology products and markets.

3. Discovering Emerging Markets.

   The resources-processes-values framework can also show us why established firms fail to address emerging markets. Established companies rely on formal budgeting and forecasting processes whereby resources are allocated based on market estimates and revenue forecasts. Christensen highlights several important factors for tackling emerging markets, including focusing on ideas, failure, and learning. Underpinning all of these ideas is the impossibility of predicting the scale and growth rate of disruptive technologies: "Experts' forecasts will always be wrong. It is simply impossible to predict with any useful degree of precision how disruptive products will be used or how large their markets will be." Because of this challenge, relying too heavily on these estimates to underpin financial projections can cause businesses to view initial market development as a failure or not worthy of the companies time. When HP launched a new 1.3-inch disk drive, which could be embedded in PDAs, the company mandated that its revenues had to scale up to $150M within three years, in line with market estimates. That market never materialized, and the initiative was abandoned as a failed investment. Christensen argues that because disruptive technologies are threats, planning has to come after action, and thus strategic and financial planning must be discovery-based rather than execution-based. Companies should focus on learning their customer's needs and the right business model to attack the problem, rather than plan to execute their initial vision. As he puts it: "Research has shown, in fact, that the vast majority of successful new business ventures, abandoned their original business strategies when they began implementing their initial plans and learned what would and would not work." One big fan of Christensen's work is Jeff Bezos, and its easy to see why with Amazon's focus on releasing new products in this discovery manner. The pace of product releases is simply staggering (~almost one per day). Bezos even talked about this exact issue in his 2016 shareholder letter: "The senior team at Amazon is determined to keep our decision-making velocity high. Speed matters in business – plus a high-velocity decision making environment is more fun too. We don't know all the answers, but here are some thoughts. First, never use a one-size-fits-all decision-making process. Many decisions are reversible, two-way doors. Those decisions can use a light-weight process. For those, so what if you're wrong? I wrote about this in more detail in last year's letter. Second, most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you're probably being slow." Amazon is one of the first large organizations to truly embrace this decision-making style, and clearly, the results speak for themselves.

Dig Deeper

• What Jeff Bezos Tells His Executives To Read

• Github Cuts Subscription Price by More Than Half

• Ajay Banga Opening Address at MasterCard Innovation Forum 2014

• Clayton Christensen Describing Disruptive Innovation

• Why Cisco’s Spin-Ins Never Caught On

May 2020 - Hitchhiker's Guide to the Galaxy by Douglas Adams

We want to recognize the craziness of the world today and the saddening police brutality and systemic racism that continues to occur in the US. This month we opted for a fiction book that may provide a minor break from that current, depressing reality. We want to acknowledge that our reality is messed up, and as a book club we are committed to reading more books about diversity in tech and more books written by a diverse set of authors.

Tech Themes

1. The Computer knows the answer. There is an overwhelming feeling in society today, that the computer should be able to tell us the answer. Predictive models are everywhere, from personalized AI workflows to sports gambling. Society has become accustomed to the idea that computers will solve problems for us. Interestingly, the novel portrays technology in the opposite light. Marvin, the robot on Zaphod Beeblebrox’s ship is so knowledgeable that even the most complex task seems meaninglessly easy. As a result, Marvin is constantly depressed. Deep Thought, the most powerful computer in history, takes seven million years to come up with an answer to the question of what life is all about. The simplistic forty-two answer, prompts the crowd to ask what the question was to which the answer is forty-two. The computer suggests that earth will provide that question. These examples somewhat reverse the expectations of technology to the reader. We normally think of technology as providing the answer, simplifying our lives and dehumanizing us. At the end of the story it is not Marvin’s heroism that saves the crew from being killed by the Blagulon Kappa cops who are after the Heart of Gold, it is his depression. When Marvin seizes control of the cops computer and explains his life-view, they commit suicide. In these instances, the role of technology is reversed - it is emotion and human nature that can help save the world and provide the answers to the universe.

2. Not so obvious, Space Travel and Towels. “A towel, it says, is about the most massively useful thing an interstellar hitchhiker can have.” Something so simple as a towel - which seems relatively unimportant in everyday life - is an absolute necessity for space travel and hitchhiking through the galaxy. Frequently throughout technological history, the simple and unimportant things are overlooked in favor of tackling more complex problems and solutions. The largest data breach in history occurred when Equifax overlooked an expired certificate. During early development of the ENIAC, one of the first computing machines, software was looked at as unimportant and was relegated to early female programmers. Little did these sexist hardware programmers realize that software would become the most important aspect of computing. When the first iPhone released, Microsoft CEO Steve Ballmer laughed at the the device, saying it was too expensive and unable to cater to business customers because it didn’t have a keyboard. The incredibly sad, failed launch of space shuttle Challenger was due to cold temperatures causing rubber joint rings to become too stiff for appropriate sealing. Sometimes the value of a technology or a towel is not inherently obvious.

3. The Guide, the Whole Earth Catalog and the Internet. “The reason why it was published in the form of a micro sub meson electronic component is that if it were printed in normal book form, an interstellar hitchhiker would require several inconveniently large buildings to carry it around in.” The Hitchhiker’s Guide to The Galaxy is a massive electronic guide to help hitchhikers move throughout space. This interestingly mirrors the current state of the internet, which didn’t exist when Douglas Adams wrote Hitchhiker’s Guide to the Galaxy in the early 70s. Prior to the internet, this type of alternative information could be found in the Whole Earth Catalog, a famous magazine that Steve Jobs once called “Google in paperback form, thirty-five years before Google came along.” The Whole Earth Catalog was created by Stewart Brand, a famous writer and technologist, who actually participated with Douglas Englebart in the Mother of All Demos, which featured the introduction of the mouse and video conferencing. Brand wanted a way to publish material that wouldn’t be found in traditional textbooks, including product reviews of the latest technology. When the internet was starting to launch, Brand created The WELL (Whole Earth ‘Lectronic Link) to continue to provide interesting alternative articles and essays. The WELL is credited with being one of the first internet forums, which was originally accessed via dial-up bulletin board system. The internet today very much mirrors the Hitchhiker’s guide to the galaxy: its content is enormous, it isn’t necessarily factual (the Guide is not completely factual either, but based on experience), and its content spans all possible information needed to survive. On top of that, the packaging is described as suspiciously similar to modern smartphones: “He also had a device which looked rather like a largish electronic calculator. This had about a hundred tiny flat press buttons and a screen about four inches square on which any one of a million ‘pages’ could be summoned at a moment's notice.” The internet and mobile computing have come a long way in 50 years; it will be great to watch what happens in the next 50!

Business Themes

1. The Business of Space: SpaceX / Virgin Galactic. Elon Musk and Chamath Palihapitiya are outspoken, visionary billionaires. Elon has an incredible track record of under-delivering but still exceeding most people’s wildest expectations. Chamath was an early employee at Facebook and is now a part owner of the Golden State Warriors. He is CEO of a VC-firm turned “technological holding company” and the creator of three public SPACs, one of which now represents Virgin Galactic. A SPAC or Specialty Purpose Acquisition Company is a blank-check company with no commercial operations. A SPAC is normally led by experts in a specific space like software or real estate and these executives raise money to acquire a company. The money raised in an IPO sits in an interest bearing account until the blank-check company has found a company to acquire. If no deal is completed after two years, the SPAC will give money back to their investors. Chamath purchased 49% of Richard Branson's Virgin Galactic space company in 2019. Space is impossibly big and its natural to think that someone who can develop the technology to unlock that vastness to humans would also unlock a fortune. As the Guide puts it: “‘Space,’ it says, ‘is big. Really big. You just won’t believe how vastly, hugely, mindbogglingly big it is. I mean, you may think it’s a long way down the road to the chemist’s, but that’s just peanuts to space.’” But the business of space is in its earliest days. SpaceX relies almost completely on government contracted work which means the company needs an incredible amount of funding to survive because of the capital investment and the uncertain, non-recurring nature of these space contracts. Interestingly, the development of early commercial air travel, in the 1920’s, also had a similar funding issue, and it was up to the Guggenheim family, rich from mining profits, to set up a fund to exclusively contribute to the development of Western Air Express, the world’s first commercial airliner. Virgin Galactic is taking a piece out of Tesla’s playbook by selling future space rides ahead of any commercial launch. Public markets investors including reddit’s wallstreetbets community is piling into Virgin Galactic at the literal moonshot risk of it becoming the space company (Income statement above). Space has always been a billionaire passion, the question remains - can it be a business?

2. Moore’s Law and Murphy’s Law. Murphy’s law states: “Anything that can go wrong, will go wrong.” Hitchhiker’s Guide to the Galaxy explores this notion repeatedly as Arthur continually finds himself in unbelievably bad circumstances; his house is demolished, his planet is destroyed, he is captured by Vogons, and sure-death missles approach the ship as the crew descends on Magarathea. Arthur continues to survive these dangers with the help of the improbability drive, which the book states is a “a wonderful new method of crossing interstellar distances in a few seconds; without all that tedious mucking about in hyperspace. As the Improbability Drive reaches infinite improbability, it passes through every conceivable point in every conceivable universe almost simultaneously. In other words, you're never sure where you'll end up or even what species you'll be when you get there. It's therefore important to dress accordingly.” In comparison to Murphy’s law, Moore’s Law is the idea that computing power doubles every 18 months. A 2006 Economist article explained Moore’s Law as the opposite of Murphy’s Law: “But his law seems safe for at least another decade—or two to three chip generations—which is as far as he has ever dared to look into the future. As things are made at scales approaching individual atoms, he says, there will surely be limitations. Then again, the law has often met obstacles that appeared insurmountable, before soon surmounting them. In that sense, Mr Moore says, he now sees his law as more beautiful than he had realised. “Moore's Law is a violation of Murphy's Law. Everything gets better and better.” While Moore’s Law has surely reached its current limitations, the question remains where do chips go from here? Some have posited that chips will push towards function specific hardware or purpose built for specific computing tasks like NVIDIA’s graphics cards. The space is large and complex - with companies like Apple licensing ARM technology to build their famous A13 chip while other companies have focused on specific parts of the value chain like TSMC. A big question that still remains is how cloud companies will scale hardware to meet continuing demand from customers. Arthur Dent, like Elon Musk, continues to benefit from infinite improbability - maybe quantum computing is the only way to know if Elon will succeed and what happens next in chip design.

3. Mentorship. Slartibarfast is a wise, old, planet creator who is plopped into the story to provide Arthur with answers to so many incredible questions. Slartibartfast explains the creation of earth and the interaction with Deep Thought. The interactions between Arthur and Slartibartfast are somewhat akin to traditional business mentorship - when you have none of the answers or you have preconceived ideas of how everything came to be, a mentor can quickly dispel your ideas and provide deep answers. Mentorship has been popular in Silicon Valley, with Bill Campbell mentoring Steve Jobs and several others. Bill was also instrumental in several decisions Ben Horowitz contemplated as he took Opsware through its spinout and sale of its managed services division. Mentors help change perspective and provide guidance.

Dig Deeper

• Discussion of how the Whole Earth Catalog pushed 1960s CounterCulture

• List of the Latest OpenAI models for predictive image generation and interaction prediction

• Chamath says “Let Them Get Wiped Out!” when talking about hedge funds during the coronarvirus downturn

• The resurgence of a business model formerly considered fraud - SPACs

• Apple releases A13 bionic chip and it works incredibly fast

February 2020 - How the Internet Happened: From Netscape to the iPhone by Brian McCullough

Brian McCullough, host of the Internet History Podcast, does an excellent job of showing how the individuals adopted the internet and made it central to their lives. He follows not only the success stories but also the flame outs which provide an accurate history of a time of rapid technological change.

Tech Themes

1. Form to Factor: Design in Mobile Devices. Apple has a long history with mobile computing, but a few hiccups in the early days are rarely addressed. These hiccups also telegraph something interesting about the technology industry as a whole - design and ease of use often trump features. In the early 90’s Apple created the Figaro, a tablet computer that weighed eight pounds and allowed for navigation through a stylus. The issue was it cost $8,000 to produce and was 3/4 of an inch thick, making it difficult to carry. In 1993, the Company launched the Newton MessagePad, which cost $699 and included a calendar, address book, to-do list and note pad. However, the form was incorrect again; the MessagePad was 7.24 in. x 4.5 in. and clunky. With this failure, Apple turned its attention away from mobile, allowing other players like RIM and Blackberry to gain leading market share. Blackberry pioneered the idea of a full keyboard on a small device and Marc Benioff, CEO of salesforce.com, even called it, “the heroin of mobile computing. I am serious. I had to stop.” IBM also tried its hand in mobile in 1992, creating the Simon Personal Communicator, which had the ability to send and receive calls, do email and fax, and sync with work files via an adapter. The issue was the design - 8 in. by 2.5 in. by 1.5 in. thick. It was a modern smartphone, but it was too big, clunky, and difficult to use. It wasn’t until the iPhone and then Android that someone really nailed the full smart phone experience. The lessons from this case study offer a unique insight into the future of VR. The company able to offer the correct form factor, at a reasonable price can gain market share quickly. Others who try to pioneer too much at a time (cough, magic leap), will struggle.

2. How to know you’re onto something. Facebook didn’t know. On November 30, 2004, Facebook surpassed one million users after being live for only ten months. This incredible growth was truly remarkable, but Mark Zuckerberg still didn’t know facebook was a special company. Sean Parker, the founder of Napster, had been mentoring Zuckerberg the prior summer: “What was so bizarre about the way Facebook was unfolding at that point, is that Mark just didn’t totally believe in it and wanted to go and do all these other things.” Zuckerberg even showed up to a meeting at Sequoia Capital still dressed in his pajamas with a powerpoint entitled: “The Top Ten Reasons You Should Not Invest.” While this was partially a joke because Sequoia has spurned investing in Parker’s latest company, it represented how immature the whole facebook operation was, in the face of rapid growth. Facebook went on to release key features like groups, photos, and friending, but most importantly, they developed their revenue model: advertising. The quick user growth and increasing ad revenue growth got the attention of big corporations - Viacom offered $2B in cash and stock, and Yahoo offered $1B all cash. By this time, Zuckerberg realized what he had, and famously spurned several offers from Yahoo, even after users reacted negatively to the most important feature that facebook would ever release, the News Feed. In today’s world, we often see entrepreneur’s overhyping their companies, which is why Silicon Valley was in-love with dropout founders for a time, their naivite and creativity could be harnessed to create something huge in a short amount of time.

3. Channel Partnerships: Why apple was reluctant to launch a phone. Channel partnerships often go un-discussed at startups, but they can be incredibly useful in growing distribution. Some industries, such as the Endpoint Detection and Response (EDR) market thrives on channel partnership arrangements. Companies like Crowdstrike engage partners (mostly IT services firms) to sell on their behalf, lowering Crowdstrike’s customer acquisition and sales spend. This can lead to attractive unit economics, but on the flip side, partners must get paid and educated on the selling motion which takes time and money. Other channel relationships are just overly complex. In the mid 2000’s, mobile computing was a complicated industry, and companies hated dealing with old, legacy carriers and simple clunky handset providers. Apple tried the approach of working with a handset provider, Motorola, but they produced the terrible ROKR which barely worked. The ROKR was built to run on the struggling Cingular (would become AT&T) network, who was eager to do a deal with Apple in hopes of boosting usage on their network. After the failure of the ROKR, Cingular executives begged Jobs to build a phone for the network. Normally, the carriers had specifications for how phones were built for their networks, but Jobs ironed out a contract which exchanged network exclusivity for complete design control, thus Apple entered into mobile phones. The most important computing device of the 2000’s and 2010’s was built on a channel relationship.

Business Themes

1. AOL-Time Warner: the merger destined to fail. To fully understand the AOL-Time Warner merger, you must first understand what AOL was, what it was becoming, and why it was operating on borrowed time. AOL started as an ISP, charging customers $9.95 for five hours of dial-up internet access, with each additional hour costing $2.95. McCullough describes AOL: “AOL has often been described as training wheels for the Internet. For millions of Americans, their aol.com address was their first experience with email, and thus their first introduction to the myriad ways that networked computing could change their lives.” AOL grew through one of the first viral marketing campaigns ever; AOL put CDs into newspapers which allowed users to download AOL software and get online. The Company went public in March of 1992 and by 1996 the Company had 2.1 million subscribers, however subscribers were starting to flee to cheaper internet access. It turned out that building an ISP was relatively cheap, and the high margin cash flow business that AOL had built was suddenly threatened by a number of competitors. AOL persisted with its viral marketing strategy, and luckily many americans still had not tried the internet yet and defaulted to AOL as being the most popular. AOL continued to add subscribers and its stock price started to balloon; in 1998 alone the stock went up 593%. AOL was also inking ridiculous, heavily VC funded deals with new internet startups. Newly public Drkoop, which raised $85M in an IPO, signed a four year $89M deal to be AOL’s default provider of health content. Barnes and Noble paid $40M to be AOL’s bookselling partner. Tel-save, a long distance phone provider signed a deal worth $100M. As the internet bubble continued to grow, AOL’s CEO, Steve Case realized that many of these new startups would be unable to fufill their contractual obligations. Early web traffic reporting systems could easily be gamed, and companies frequently had no business model other than attract a certain demographic of traffic. By 1999, AOL had a market cap of $149.8B and was added to the S&P 500 index; it was bigger than both Disney and IBM. At this time, the world was shifting away from dial-up internet to modern broadband connections provided by cable companies. One AOL executive lamented: “We all knew we were living on borrowed time and had to buy something of substance by using that huge currency [AOL’s stock].” Time Warner was a massive media company, with movie studios, TV channels, magazines and online properties. On Jan 10, 2000, AOL merged with Time Warner in one of the biggest mergers in history. AOL owned 56% of the combined company. Four days later, the Dow peaked and began a downturn which would decimate hundreds of internet businesses built on foggy fundamentals. Acquisitions happen for a number of reasons, but imminent death is not normally considered by analysts or pundits. When you see acquisitions, read the press release and understand why (at least from a marketing perspective), the two companies made a deal. Was the price just astronomical (i.e. Instagram) or was their something very strategic (i.e. Microsoft-Github)? When you read the press release years later, it should indicate whether the combination actually was proved out by the market.

2. Acquisitions in the internet bubble: why acquisitions are really just guessing. AOL-Time Warner shows the interesting conundrum in acquisitions. HP founder David Packard coined this idea somewhat in Packard’s law: “No company can consistently grow revenues faster than its ability to get enough of the right people to implement that growth and still become a great company. If a company consistently grows revenue faster than its ability to get enough of the right people to implement that growth, it will not simply stagnate; it will fall.” Author of Good to Great, Jim Collins, clarified this idea: “Great companies are more likely to die of ingestion of too much opportunity, than starvation from too little.” Acquisitions can be a significant cause of this outpacing of growth. Look no further than Yahoo, who acquired twelve companies between September 1997 and June 1999 including Mark Cuban’s Broadcast.com for $5.7B (Kara Swisher at WSJ in 1999), GeoCities for $3.6B, and Y Combinator founder Paul Graham’s Viaweb for $48M. They spent billions in stock and cash to acquire these companies! Its only fitting that two internet darlings would eventually end up in the hands of big-telecom Verizon, who would acquire AOL for $4.4B in 2015, and Yahoo for $4.5B in 2017, only to write down the combined value by $4.6B in 2018. In 2013, Yahoo would acquire Tumblr for $1.1B, only to sell it off this past year for $3M. Acquisitions can really be overwhelming for companies, and frequently they don’t work out as planned. In essence, acquisitions are guesses about future value to customers and rarely are they as clean and smart as technology executives make them seem. Some large organizations have gotten good at acquisitions - Google, Microsoft, Cisco, and Salesforce have all made meaningful acquisitions (Android, Github, AppDynamics, ExactTarget, respectively).

3. Google and Excite: the acquisition that never happened. McCullough has an incredible quote nestled into the start of chapter six: “Pioneers of new technologies are rarely the ones who survive long enough to dominate their categories; often it is the copycat or follow-on names that are still with us to this day: Google, not AltaVista, in search; Facebook, not Friendster, in social networks.” Amazon obviously bucked this trend (he mentions that), but in search he is absolutely right! In 1996, several internet search companies went public including Excite, Lycos, Infoseek, and Yahoo. As the internet bubble grew bigger, Yahoo was the darling of the day, and by 1998, it had amassed a $100B market cap. There were tons of companies in the market including the players mentioned above and AltaVista, AskJeeves, MSN, and others. The world did not need another search engine. However, in 1998, Google founders Larry Page and Sergey Brin found a better way to do search (the PageRank algorithm) and published their famous paper: “The Anatomy of a Large-Scale Hypertextual Web Search Engine.” They then went out to these massive search engines and tried to license their technology, but no one was interested. Imagine passing on Goolge’s search engine technology. In an over-ingestion of too much opportunity, all of the search engines were trying to be like AOL and become a portal to the internet, providing various services from their homepages. From an interview in 1998, “More than a "portal" (the term analysts employ to describe Yahoo! and its rivals, which are most users' gateway to the rest of the Internet), Yahoo! is looking increasingly like an online service--like America Online (AOL) or even CompuServe before the Web.” Small companies trying to do too much (cough, uber self-driving cars, cough). Excite showed the most interest in Google’s technology and Page offered it to the Company for $1.6M in cash and stock but Excite countered at $750,000. Excite had honest interest in the technology and a deal was still on the table until it became clear that Larry wanted Excite to rip out its search technology and use Google’s instead. Unfortunately that was too big of a risk for the mature Excite company. The two companies parted ways and Google eventually became the dominant player in the industry. Google’s focus was clear from the get-go, build a great search engine. Only when it was big enough did it plunge into acquisitions and development of adjacent technologies.

Dig Deeper

• Raymond Smith, former CEO of Bell Atlantic, describing the technology behind the internet in 1994

• Bill Gates’ famous memo: THE INTERNET TIDAL WAVE (May 26, 1995)

• The rise and fall of Netscape and Mosaic in one chart

• List of all the companies made famous and infamous in the dot-com bubble

• Pets.com S-1 (filing for IPO) showin a $62M net loss on $6M in revenue

• Detail on Microsoft’s antitrust lawsuit

December 2019 - The Moon is a Harsh Mistress by Robert A. Heinlein

This futuristic, anti-establishment thriller is one of Elon Musk’s favorite books. While Heinlein’s novel can drag on with little action, The Moon is a Harsh Mistress presents an interesting war story and predicts several technological revolutions.

Tech Themes

1. Mike, the self-aware computer and IBM. Mycroft Holmes, Heinlein’s self-aware, artificially intelligent computer is a friendly, funny and focused companion to Manny, Wyoh and Prof throughout the novel. Mike’s massive hardware construction is analogous to the way companies are viewing Artificial Intelligence today. Mike’s AI is more closely related to Artificial General Intelligence, which imagines a machine that can go beyond the standard Turing Test, with further abilities to plan, learn, communicate in natural language and act on objects. The 1960s were filled with predictions of futuristic robots and machines. Ideas were popularized not only in books like The Moon is a Harsh Mistress but also in films like 2001: A Space Odyssey, where the intelligent computer, HAL 9000, attempts to overthrow the crew. In 1965, Herbert Simon, a noble prize winner, exclaimed: “machines will be capable, within twenty years, of doing any work a man can do.” As surprising as it may seem today, the dominant technology company of the 1960’s was IBM, known for its System/360 model. Heinlein even mentions Thomas Watson and IBM at Mike’s introduction: “Mike was not official name; I had nicknamed him for Mycroft Holmes, in a story written by Dr. Watson before he founded IBM. This story character would just sit and think--and that's what Mike did. Mike was a fair dinkum thinkum, sharpest computer you'll ever meet.” Mike’s construction is similar to that of present day IBM Watson, who’s computer was able to win Jeopardy, but has struggled to gain traction in the market. IBM and Heinlein approached the computer development in a similar way, Heinlein foresaw a massive computer with tons of hardware linked into it: “They kept hooking hardware into him--decision-action boxes to let him boss other computers, bank on bank of additional memories, more banks of associational neural nets, another tubful of twelve-digit random numbers, a greatly augmented temporary memory. Human brain has around ten-to-the tenth neurons. By third year Mike had better than one and a half times that number of neuristors.” This is the classic IBM approach – leverage all of the hardware possible and create a massive database of query-able information. This actually does work well for information retrieval like Jeopardy, but stumbles precariously on new information and lack of data, which is why IBM has struggled with Watson applications to date.

2. Artificial General Intelligence. Mike is clearly equipped with artificial general intelligence (AGI); he has the ability to securely communicate in plain language, retrieve any of the world’s information, see via cameras and hear via microphones. As discussed above, Heinlein’s construction of Mike is clearly hardware focused, which makes sense considering the book was published in the sixties, before software was considered important. In contrast to the 1960s, today, AGI is primarily addressed from an algorithmic, software angle. One of the leading research institutions (excluding the massive tech companies) is OpenAI, an organization who’s mission is: “To ensure that artificial general intelligence (AGI)—by which we mean highly autonomous systems that outperform humans at most economically valuable work—benefits all of humanity.” OpenAI was started by several people including Elon Musk and Sam Altman, founder of Y Combinator, a famous startup incubator based in Silicon Valley. OpenAI just raised $1 billion from Microsoft to pursue its artificial algorithms and is likely making the most progress when it comes to AGI. The organization has released numerous modules that allow developers to explore the wide-ranging capabilities of AI, from music creation, to color modulation. But software alone is not going to be enough to achieve full AGI. OpenAI has acknowledged that the largest machine learning training runs have been run on increasingly more hardware: “Of course, the use of massive compute sometimes just exposes the shortcomings of our current algorithms.” As we discussed before (companies are building their own hardware for this purpose, link to building their own hardware), and the degradation of Moore’s Law imposes a serious threat to achieving full Artificial General Intelligence.

3. Deep Learning, Adam Selene, and Deep Fakes. Heinlein successfully predicted machine’s ability to create novel images. As the group plans to take the rebellion public, Mike is able to create a depiction of Adam Selene that can appear on television and be the face of the revolution: “We waited in silence. Then screen showed neutral gray with a hint of scan lines. Went black again, then a faint light filled middle and congealed into cloudy areas light and dark, ellipsoid. Not a face, but suggestion of face that one sees in cloud patterns covering Terra. It cleared a little and reminded me of pictures alleged to be ectoplasm. A ghost of a face. Suddenly firmed and we saw "Adam Selene." Was a still picture of a mature man. No background, just a face as if trimmed out of a print. Yet was, to me, "Adam Selene." Could not he anybody else.” Image generation and manipulation has long been a hot topic among AI researchers. The research frequently leverages a technique called Deep Learning, which is a play on classically used Artificial Neural Networks. A 2012 landmark paper from the University of Toronto student Ilya Sutskever, who went on to be a founder at OpenAI, applied deep learning to the problem of image classification with incredible success. Deep learning and computer vision have been inseparable ever since. One part of research focuses on a video focused image superimposition technique called Deep Fakes, which became popular earlier this year. As shown here, these videos are essentially merging existing images and footage with a changing facial structure, which is remarkable and scary at the same time. Deep fakes are gaining so much attention that even the government is focused on learning more about them. Heinlein was early to the game, imaging a computer could create a novel image. I can only imagine how he’d feel about Deep Fakes.

Business Themes

1. Video Conferencing. Manny and the rest of the members of the revolution communicate through encrypted phone conversations and video conferences. While this was certainly ahead of its time, video conferencing was first imagined in the late 1800s. Despite a clear demand for the technology, it took until the late 2000s arguably, to reach appoint where mass video communication was easily accessible for businesses (Zoom Video) and individuals (FaceTime, Skype, etc.) This industry has constantly evolved and there are platforms today that offer both secure chat and video such as Microsoft Teams and Cisco Webex. The entire industry is a lesson in execution. The idea was dreamed up so long ago, but it took hundreds of years and multiple product iterations to get to a de-facto standard in the market. Microsoft purchased Skype in 2011 for $8.5B, the same year that Eric Yuan founded Zoom. This wasn’t Microsoft’s first inroads into video either, in 2003, Microsoft bought Placeware and was supposed to overtake the market. But they didn’t and Webex continued to be a major industry player before getting acquired by Cisco. Over time Skype popularity has waned, and now, Microsoft Teams has a fully functioning video platform separate from Skype – something that Webex did years ago. Markets are constantly in a state of evolution, and its important to see what has worked well. Skype and Zoom both succeeded by appealing to free users, Skype initially focused on free consumers, and Zoom focused on free users within businesses. WebEx has always been enterprise focused but they had to be, because bandwidth costs were too high to support a video platform. Teams will go to market as a next-generation alternate/augmentation of Outlook; it will be interesting to see what happens going forward.

2. Privacy and Secure Communication. As part of the revolution’s communication, a secure, isolated message system is created whereby not only are conversations fully encrypted and undetected by authorities but also individuals are unable to speak with more than two others in their revolution tree. Today, there are significant concerns about secure communication – people want it, but they also do not. Facebook has declared that they will implement end to end encryption despite warnings from the government not to do so. Other mobile applications like Telegram and Signal promote secure messaging and are frequently used by reporters for anonymous tips. While encryption is beneficial for those messaging, it does raise concerns about who has access to what information. Should a company have access to secure messages? Should the government have access to secure messages? Apple has always stayed strong in its privacy declaration, but has had its own missteps. This is a difficult question and the solution must be well thought out, taking into account unintended consequences of sweeping regulation in any direction.

3. Conglomerates. LuNoHo Co is the conglomerate that the revolution utilized to build a massive catapult and embezzle funds. While Mike’s microtransaction financial fraud is interesting (“But bear in mind that an auditor must assume that machines are honest.”), the design of LuNoHo Co. which is described as part bank, part engineering firm, and part oil and gas exploitation firm, interestingly addresses the conventional business wisdom of the times. In the 1960s, coming out of World War II, conglomerates began to really take hold across many developing nations. The 1960s were a period of low interest rates, which allowed firms to perform leveraged buyouts of other companies (using low interest loans), sometimes in a completely unrelated set of industries. Activision was once part of Vivendi, a former waste management, energy, construction, water and property conglomerate. The rationale for these moves was often that a much bigger organization could centralize general costs like accounting, finance, legal and other costs that touched every aspect of the business. However, when interest rates rose in the late 70s and early 80s, several conglomerate profits fell, and the synergies promised at the outset of the deal turned out to be more difficult to realize than initially assumed. Conglomerates are incredibly popular in Asia, often times supported by the government. In 2013, McKinsey estimated: “Over the past decade, conglomerates in South Korea accounted for about 80 percent of the largest 50 companies by revenues. In India, the figure is a whopping 90 percent. Meanwhile, China’s conglomerates (excluding state-owned enterprises) represented about 40 percent of its largest 50 companies in 2010, up from less than 20 percent a decade before.” Softbank, the famous Japanese conglomerate and creator of the vision fund, was originally a shrink-wrap software distributor but now is part VC and part Telecommunications provider. We’ve discussed the current state of Chinese internet conglomerates, Alibaba and Tencent who each own several different business lines. Over the coming years, as internet access in Asia grows more pervasive and the potential for economic downturn increases, it will be interesting to see if these conglomerates break apart and focus on their core businesses.

Dig Deeper

• The rise and fall of Toshiba

• Using Artificial Intelligence to Create Talking Images

• MIT Lecture on Image Classification via Deep Learning

• 2019 Trends in the Video Conferencing Industry

• The Moon is a Harsh Mistress may be a movie

November 2019 - Brotopia: Breaking Up the Boys' Club of Silicon Valley by Emily Chang

This book details a number of factors that have discouraged women’s participation and promotion in the tech industry. Emily Chang gives a brief history of the circumstances that have pushed women away from the industry and then covers its current issues - weaving in great insights and actionable takeaways along the way.

Tech Themes

1. The Antisocial Programmer. As the necessity for technological talent began to rise in the early 1960s, many existing companies were unsure how to hire the right people. To address this shortfall in know-how, companies used standard aptitude tests, like IBM’s Programmer Aptitude Test, to examine whether a candidate was capable of applying the right problem solving skills on the job. Beyond these standard aptitude tests, companies leveraged personality exams. In 1966, a large software company called System Development Corporation hired William Cannon and Dallis Perry to build a personality test that could shed light on the right personalities needed on the job. To build this personality test, Cannon and Perry profiled 1,378 programmers on a range of personality traits. Of those 1,378 profiled, only 186 were women. After compiling their findings, the final report stated: “[Programmers] dislike activities involving close personal interaction; they are generally more interested in things than people.” Furthermore, Cannon and Perry’s 82-page paper made no reference to women at all, referring to the surveyed group as men, for the entire paper. A combination of aptitude tests and Cannon-Perry’s personality test became the industry standard for recruiting, and soon companies were mistakenly focused on stereotypical antisocial programmers. Antisocial personality disorder is three times more common in men than women. Given how early the tech industry was, compared to what it is now, this decision to hire a majority of anti-social men has propagated throughout the industry, with senior leaders continually reinforcing incorrect hiring standards.

2. Women in Computer Science. According to the book, “there was an overall peak in bachelor’s degrees awarded in computer science in the mid-1980s, and a peak in the percentage of women receiving those degrees at nearly 40 percent. And then there was a steep decline in both.” It was at this time in the mid-1980s that computer science departments began to turn away anyone who was not a pre-qualified, academic top performer. There was too much demand with a constrained supply of qualified teachers, so only the best kids were allowed into top programs. This caused students to view computer science as hyper-competitive and unwelcoming to individuals without significant experience. Today, women earn only 18% of computer science degrees – a statistic that shocks many in the industry. Researchers at NPR found that intro CS courses play a key role in this problem – with many teachers still assuming students have prior familiarity with coding. Furthermore, women are socialized in a number of ways to achieve perfection, so when brand new code is not working well, women are more likely to feel discouraged. It is imperative to encourage women to try computer science if they have interest, to combat these negative trends.

3. PayPal and Perpetuating Cycles. After the dot-com bubble burst in the early 2000s, several newly minted millionaires did the natural thing after selling a company for millions of dollars, became a venture capitalists. One of the major success stories of the era was PayPal. Among those newly minted millionaires were the PayPal mafia: Peter Thiel, Keith Rabois, Elon Musk, Max Levchin, David Sacks, and Reid Hoffman. Thiel and Rabois have a history of suggesting a meritocratic process of hiring where only the most qualified academic candidate should land the job, not taking into account diversity of any form. Furthermore, in his book Zero to One (which we’ve discussed before), Thiel proposes startups should hire only “nerds of the same type.” The mafia began investing in several new companies, seeding friends who were likely to perpetuate the cycle of recruiting friends and hiring based on status alone. Rabois, who is currently a venture capitalist has remarked: “Once you have alignment, then I think you can have a wide swath of people, views and perspectives.” These ideas seem more like justification for hiring large groups of white males who were friends of PayPal executives than a truly “meritocratic” process, which is not the best way of building a successful, diverse organization. Roger McNamee, founder of technology private equity firm, Silver Lake, suggests: “They didn’t just perpetuate it; they turned it into a fine art. They legitimized it… The guys were born into the right part of the gene pool, they wind up at the right company, at the right moment in time, they all leave together and [go on] to work together. I give them full credit for it but calling it a meritocracy is laughable.”

Business Themes

1. The Women at Early Google. A lot of people know the story of Sergey Brin meeting co-founder Larry Page. But few are aware of when Sergey and Larry met Susan Wojcicki, who is now CEO of YouTube. Sergey and Larry were looking for office space, and through a mutual friend, were introduced to Susan Wojcicki, who worked in marketing at Intel at the time. Though she didn’t jump on board immediately, Susan eventually came around and was instrumental in launching two of Google’s most important products: AdWords and AdSense. Wojcicki would soon be working closely with a newly recruited, Marissa Mayer, who after graduating from Stanford with a degree in Symbolic Systems, joined Google to help build AdWords and design Google’s front-end. Wojcicki and Mayer would soon be joined by Sheryl Sandberg, who came to Google in 2001 as Vice President of Online Sales and Operations. Another now-famous early female employee was Kim Scott, author of Radical Candor, who joined the company in 2004. All of these early, powerful female leaders, with the continued urging of Larry and Sergey (who wanted to achieve a 50/50 ratio of male to female employees) helped build a strong culture of female leadership. But as the Company scaled it lost sight of its gender diversity goals – “In 2017, women accounted for 31% of employees overall, 25% of leadership roles and 20% of technical roles.” Google claims it lost touch as it scaled, when the need for hiring outpaced the ability to find qualified and diverse candidates – but that sounds like an easy cop out.

2. Startups and Party Culture. Atari and Trilogy Software pioneered the idea of a work-hard, play-hard startup cultures. Nolan Bushnell of Atari would throw wild parties and have employees (including Steve Jobs) work late into the night, building for the company. Trilogy, a provider of sales and marketing software, extended this idea even further. It started with hiring, where, according to a former engineer, Trilogy’s ethos was: “We’re elite talent. It’s potential and talent, not experience, that has merit.” The Company regularly used complicated brain-teasers in interviews and attracted swaths of anti-social engineers with young and attractive talent recruiters. Joe Liemandt, the CEO of Trilogy, also moved the company to Austin, Texas; executives likened the tactic to marooning members of a cult. Co-founder Christy Jones remarked: “I didn’t go on vacation. We called holidays competitive advantage days because no one else was working. It was a chance to get ahead.” The Company had a strong drinking and partying culture and bares striking cult-like resemblance to WeWork, except it had a sustainable business model. Other technology companies have mixed constant alcohol and long hours, which has led to numerous assault charges at well-known startups including Uber, Zenefits, WeWork and others. Startup and party culture does not need to be so intertwined.

3. Hiring Practices to Encourage Diverse Backgrounds. Stewart Butterfield, the founder of Flickr (sold to Yahoo for $20 million in 2005), has focused on diverse hiring efforts at his new company Slack. According to Brotopia, “In 2017, Slack reported that 43.5% of its employees were women, including 48% of managers and almost 30% of technical employees – far better numbers than any tech company in Silicon Valley.” Butterfield, who grew up on a commune in Canada, recognizes his privilege, and discusses its not insanely difficult to create a diverse environment: “As an already successful, white, male, straight – go down the list – I’m not going to have the relevant experience to determine what makes this a good workplace, so some of that is just being open but really just making it an explicit focus.” Slack’s diverse recruiting team was given explicit instructions to source candidates from underrepresented backgrounds and schools for every new role in the organization. More companies should follow Slack’s lead and adopt explicit gender and diversity goals.

Dig Deeper

• Susan Fowler’s blog post describing terrible conditions at Uber

• Overview of gender and diversity statistics of major technology companies

• The Sex and Drug fueled parties of Silicon Valley VCs

• A recap of the Google Walkout over sexual harassment allegations

• The Tech Industry’s diversity is not improving

September 2019 - Ready Player One by Ernest Cline

Ernest Cline’s magical world of virtual reality is explores a potential new medium of communication through an excellent heroic tale.

Tech Themes

1. Wide-ranging applicability and use cases of Virtual Reality. Although the novel was written in 2011, Ernest Cline does an incredible job of detailing the complex and numerous use cases of VR throughout the novel. Cline’s 18 year old main character Wade Watts attends school via VR, where you can have a limitless number of students all learn from the same teacher. Beyond that, different worlds and galaxies are easily conjured up with different themes, time periods and technology taking learning and experience to another level: Wade spends time playing old video games in an effort to unlock certain clues about James Halliday, Wade re-enacts all of Matthew Broderick’s part in the movie War Games in an effort to unlock one of the keys, Aech and Wade frequently hang out in the Basement, a re-created 1980’s recreational room with vintage magazines and game consoles. All of these distinct use cases – education, gaming, social networking, and entertainment – are the promise of Virtual Reality. There is a long way to go before that promise is met.

2. The intersection of the online/offline world. As James Halliday writes in Anorak’s Almanac: “Going outside is highly overrated.” Ready Player One does a great job of exploring the conflation of the online and offline worlds. The book weaves together experiences from this intersection into critical moments of the book including Wade’s escape from the Stacks and his imprisonment by IOI. While there is a tangible feeling that online is the much preferred experience for all the reasons discussed above, it’s the offline in-person events that truly shape the heroic ending of the book. This serves as a reminder that the OASIS is very much a virtual reality and explores the need for in-person human connection. Ironically, this is something Halliday sorely missed out on as shown through his unrequited love for Ogden Morrow’s (co-creator of the OASIS) wife, Kira. As big companies move into our homes through Google Homepods, Amazon Echos, Facebook Portals, the human connection element needs to be maintained.

3. The ability to disguise your identity online. “In the OASIS, you could become whomever and whatever you wanted to be, without ever revealing your true identity, because your anonymity was guaranteed.” This quote about the OASIS is largely true of today’s Internet. Through private browsing, Virtual Private Networks, avoiding Google and ad-tagging websites, people are able to stay anonymous online already. But what the OASIS does in addition, is allow you to modify not only your back-story, but also how you appear to others, something that is very important in VR. While there is no question that Wade, Art3mis and Aech are able to avoid insecurities by masking their identities, eventually those insecurities are revealed, albeit with little consequence. Given the myriad of leaks and breaches in the last few years (Yahoo, Facebook, DoorDash, etc.), as the VR ecosystem continues to grow, increasing amounts of privacy will be needed to maintain anonymity.

Business themes

1. What is the dominant revenue model in VR? The evil villains at Innovative Online Industries (IOI) and their army of sixers have tried several hostile takeover attempts to acquire Halliday’s Gregarious Simulations Systems in order to convert it to a paid user model. IOI is the world’s largest internet service provider and just like other three letter named tech behemoths (cough, IBM, cough), fits the classic evil corporation vibe. Dismissing the potential business and technology conflicts (the world’s largest ISP is probably critical in delivering the OASIS throughout the world), its interesting to theorize what the dominant revenue model of VR may be. Facebook recently launched its VR world to complement its Oculus devices and there have been varied attempts to launch similar software worlds like Rec Room. The big discovery Google made early on was that advertising would be the business model of the web. Facebook copied this as it created social networking and as devices transitioned from desktop to mobile, and image to video, advertising continued to be the dominant mode of content monetization. Is there any reason to think VR will be any different? Potentially. The current dominant model for video gaming is subscriber based, freemium (paying for enhanced abilities, character changes, etc.) or single purchase. While there is no reason these ideas can’t be combined with advertising, the idea of a multi-world VR landscape may reduce some of the targeted ROI you receive from very specific ad-targeting on Instagram and Google today. In a limitless world, advertising to specific people will be difficult. Beyond that, porting the mish-mash of complex technologies used in today’s advertising landscape would add even more challenge.

2. The BIG, evil tech corporation. IOI is the quintessential evil technology company. As the world’s largest ISP, IOI could be a reference to Comcast, which is the United States’ largest ISP and often referenced as one of the most hated companies. Comcast, like other ISPs is always facing the challenge of serving millions of subscribers but unlike other companies, they are monopolistic in certain areas where they are the only viable provider for internet, allowing them to raise prices and treat customers poorly. The big, evil technology corporation cliché has been around for a long time and today’s largest tech companies have all spent sometime being that cliché. This dynamic can arise for many reasons. At Amazon, it’s the continued alienation of open source communities, the anti-competitive behavior around its search algorithm and the smothering of small vendors on its marketplace. Facebook and Google have both faced privacy concerns. Google has been sued for manipulating search on mobile devices. Microsoft was sued for anti-trust issues over browsers. As startups begin to dominate their core businesses, unless they continue innovating, they begin acting defensively to maintain their leading position. Facebook feature copied Snapchat stories almost immediately after they came out. IBM had a book written on them in the 1980s claiming they were anticompetitive. There is a reason corporate communications (WeWork lol) are so important and maintaining the image of a positive change for good. Every major technology company has spent time as the evil one, some have just spent more time than others.

3. Difficulty in creating VR applications. Ready Player One stoked a lot interest in the promise of VR, but the actual implementation is incredibly difficult with the hardware and software we have available as tools today. Moore’s law is slowing and some computer scientists have suggested specific chips to address the demands of newer technologies like Artificial Intelligence, Virtual Reality and Deep Learning. After Facebook acquired Oculus in 2014 for $2.4B, funding continued to flow into VR startups. Magic Leap, the highly secretive and most heavily funded VR startup has raised $2.3B on its own, and after years of development finally released its hardware for over $2,000 per device and its unclear if it makes a profit on any sales yet. More recently, several VR companies have gone bankrupt and laid off employees as product development didn’t reach application or end users before the funding ran out. While the software and hardware continues to improve, a lot still needs to be figured out before VR becomes mainstream.

Dig Deeper

• VR Garden in Montreal

• Oculus co-founder Palmer Lucky’s review of Magic Leap

• Augmented Reality and Virtual Reality in Healthcare

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