Our Man in Nirvana

Cousins & Strangers: America, Britain and Europe in the New Century

When my wife pointed out that Lord Patten was coming to town to promote his new book Cousins & Strangers, it was time to part with $125 for an annual household membership to the World Affairs Council who were hosting Lord Patten.  After all this was the man who had held, not one, but three of the toughest political jobs over the past decade.  First, he had been the last Governor of Hong Kong presiding over the handover of a liberal state to a communist government.  Second, he oversaw the reconstruction of the Irish Police Force following the entry of the IRA/Sinn Fein into the political process.  Third, he was European Commissioner for Foreign Affairs during a time of membership expansion and sharp disagreement, both internally and externally, over the invasion of Iraq. 

But it wasn't just his wealth of experience that attracted us, but his chosen subject matter too.  He was speaking on the history and future of the transatlantic relationship between America, Britain and Europe.  His central thesis is that America and Europe has greatly benefited from the world order America created after WW2 through a rules based approach and a believe in markets and democracy enacted through vehicles such as the Marshall Plan, IMF and United Nations, and that for both to prosper in the future they both need to return to this balance and work as partners not as competitors.  As an optimist he hopes that the current administration's unilateral tendencies are a mere blip, and that America will return to their previous role of gracious leadership.

Lord Patten's wit and eloquence made the 90 minutes fly by.  One piece of rhetorical magic sticks in the mind when he juxtaposed the mighty political impact made by Pope John Paul II in helping to bring down communism, with the feeble social impact made by Pope John Paul II as the fertility rates in all the predominantly Catholic countries were on the decline, for dramatic impact.

I look forward to downloading the podcast and reading the book.

Google Books: Do No Evil

I attended my second Commonwealth Club event this year on Wednesday for a discussion on the impact of Google Books on the future of the publishing industry.  The five participants were Google lawyer, author, Internet archivist (working with libraries and universities in the Open Content Alliance), IP lawyer, and independent bookstore owner.  So the only stakeholders missing from the debate were i) consumers (but we were in the audience) and ii) publishers.

I was particularly looking forward to the debate because it encompassed both mundane/ everyday issues (how will this impact and how and where I buy/read books?) and esoteric societal issues (what does this mean for knowledge creation and the maintenance of diversity in books?)

The first part of the debate was focused on the "what", getting to what Google Books actually does.  Cutting through the lawyer speak and the media confusion, the essential point is that Google Books attempts to put the contents of books online and therefore make them discoverable, but not to sell them online.  They do this by scanning the books, then presenting the thumbnail and snippet, and links to retailers (predominantly Amazon).  .  This has led to lawsuits from copyright holders claiming massive copyright infringement at the expense of the rights of individual writers.  Hardly surprising given Google's cash hoard.

The second part of the debate was focused on the "so what", assessing the impact of Google Books on the other players in the industry. There has been a great deal of concern that Google Books would put books online and therefore deprive publishers, authors and retailers of their revenues.  The two most interesting comments were from the author and the bookstore owner.  The author was actually hopeful that Google would ultimately, if not immediately, benefit him because it would connect new potential readers to his otherwise hard to find.  For example, his dearly beloved book on the great African American pitcher Leroy "Satchel" Page would now be discoverable, even if it went out of print.  He could also envision one day selling his books directly over the web and bypassing the publishers, although he believes he would need to make more money from appearances given the inevitable losses from copying.  The bookseller was more pessimistic and made the point that the nature of the books produced is inextricably connected to the nature of the distribution.  If Safeway stopped selling books, then the formulaic romance and thriller novels would disappear; if independent local bookstores disappeared, then edgy, vibrant, innovative books would disappear.  He laid claim to being the canary in the coalmine.

The Google lawyer concluded by saying that Google loves authors, publishers and booksellers and their only goal is to make books more accessible to a wider audience.  I would be a little more convinced  by his argument if Google Books was linked to Google Local, thus encouraging potential readers to find books at their local bookstore, rather than primarily directing them to Amazon.  But then again Google make less money on Google Local...

Another $18 well spent.  Maybe it's time to become a member of the Commonwealth Club.

Imprecise language, messy communications

An email popped into my inbox this morning that got my attention because of three intersecting connections.  First, it was from my favoured news source the Economist.  Second, it featured my wife Rachel's former colleague (and our neighbor) Michael Mankins at Marakon Associates. And third, it was on a topic near and dear to my heart - the gap between strategy and execution.  One of my professors at Stanford, Jeffrey Pfeffer, has written cogently on this issue in his book "The Knowing-Doing Gap".

So I read through the email and saw that I was being invited to "to attend an audio webcast on turning great plans into great performance"  Eager to hear the latest empirical findings on this topic my first question was "when is this?".  Strangely, the email was devoid of time/date information.  Frustrated (reminded me of the annoying email evites which don't show the time/date until you click through), I clicked on the registration button hoping to find out more.  I went through the registration process and then another email popped into my inbox with links to the ARCHIVED webcast and an article.  I felt fooled - invited to a great party AFTER the event.

So I went back to the original email, thinking I had misinterpreted the word "webcast" which I had always taken to mean a live audio or video broadcast on the web.  After a quick reference check on Wikipedia, I have to confess it can also mean "archived" so maybe it was my mistake and not the Economist's who are normally so precise in their use of language.  Something was still nagging me though, so I re-read the original email and saw the words " get ready", "online forum", "register" and "exclusive event" which have no meaning for an archived webcast, only for a live webcast.  Clearly the Economist had screwed up their communication. 

So this taught me three lessons

1.  Information clutter is so high that even when an event that is so clearly targetted at me (3 connections), it fails to reach me in a timely manner.  So much for the promise of personalization?

2.  Language to cope with the plethora of new media consumption patterns is messy, ambiguous and evolving.  Don't take for granted that new terms mean the same thing to different people.

3.  Traditional news companies are a long way off figuring out how to build and manage their relationships with their readers given the explosion of formats, patterns and modes of consumption.  The problem is getting harder faster than the solutions are addressing the problem.

Rant of the day over.  Feel better now.

The Changing Supreme Court

Last night I attended a panel discussion on "The Changing Supreme Court" at the Commonwealth Club.  I have listened to the Commonwealth Club discussions many times on NPR and have always been impressed by the quality of the participants and the skill of the moderators to manage the flow.  This was my first time in attendance so I had great anticipation for my inaugural live event.

The participants all had pedigreed credentials for the topic.  Two had clerked for Supreme Court Justices, one had been a California Supreme Court Justice, and one had clerked for Supreme Court Justice nominee Samuel Alito during the now famous Planned Parenthood vs Casey case.

The reason I picked this debate as my first at the Commonwealth Club and shelled out $18 for the privilege was that I had some burning questions that I had not been able to answer through the politicized haze of the media reporting.  I was hoping this debate would cut the simplistic "conservative vs liberal" political divide and help me answer these questions.

The first question was "should I care about the appointment of the current nominee Samuel Alito?".  This was answered resoundingly yes for four reasons.  First, he is replacing Sandra Day O'Connor who has served on the court since 1981 and has been in the majority of more than 80% of the 5-4 splits decisions and thus has been the pivotal voter on the court more than any other justice.  So this nominee is more important than the previous nominee John Roberts.  Second, the Planned Parenthood vs Casey case showed that Alito had a very different position to O'Connor in what was considered an "undue burden" for pregnant women and showed a lack of real world pragmatism.  Of course for healthy marriages founded on strong communication, there is no undue burden for pregnant women to inform their husbands; but for unhealthy marriages, the burden is very great indeed.  Alito seemed to ignore this group of women.  Third, Alto's experience is from the executive, not judicial, branch of government and history has purportedly shown that justices with this background tend to be more deferential to the executive.  Given the current administration's position (we are at war and as commander-in-chief the President's right to defend his citizens trumps all other rights (e.g. habeas corpus)) and the fact that the "war on terror" is unending (unlike the Civil War or WW2), this is an issue that has a direct and real impact on our daily lives.  Fourth, and perhaps most importantly, Justices are not just umpires mechanically interpreting a rule book as John Roberts mischaracterized.  Far from it, Justices only rule on issues where the rules are not clear which is why it's not an issue of intelligence or integrity but how people think, what are their real world experiences, what principles do they revert to in times of crisis or stress.

The second question was "should I worry about the appointment of the current nominee Samuel Alito?".  This question was not answered.  I actually wrote a question for the moderator which did not get asked, so my search for an answer continues.  I want to know whether there has been any work of scholarship analyzing the relationship with the a priori political stance of a justice with their post hoc actual voting record?  I have a hunch that the life tenure and the awesome  (in the true sense) responsibility leads to Justices changing over time, perhaps towards more moderate positions and away from the ideological extremes.  I have seen no empirical evidence to test this hunch so if any one can point me in the right direction to understand this issue, I would be grateful.

$18 well spent.

Nuclear Power, Climate Change, and the Next 10,000 Years

At my wife Rachel's suggestion, on Friday night we attended the discussion titled "Nuclear Power, Climate Change, and the Next 10,000 Years" at the atmospheric Herbst Theater between Peter Schwartz (co-founder of the Global Business Network and the father of scenario planning which he did at Shell) and Ralph Cavanagh (co-director of the Energy Program at the National Resources Defense Council).  The event was hosted by the Long Now Foundation  who are striving to provide a counterpoint to today's "faster/cheaper" mind set and promote "slower/better" thinking.  It was my first exposure to this organization, but I know it shall not be the last given the topics and quality of the participants.

The format was not a classic debate structure. Instead it required each of the speakers to first listen to their opponent state his position, then ask questions of the opponent to refine his position, and then finally restate his opponent's position to the opponent's satisfaction.  The floor was then open to questions from the audience and the moderator Stewart Brand.

Peter Schwartz went first and articulated his position as follows:

1. Continued emissions of CO2 and the inherently unstable nature of the earth's temperature will lead to the risk of civilization coming to an end within the foreseeable future.

2. Continued demand for energy, with the emergence of another 1 billion people coming out of poverty led by China and India, and the decline in oil production will lead to tremendous pressure on other forms of energy (nuclear, wind, solar, biomass)

3. Only nuclear energy has the potential to i) avoid dramatic climate change ii) and fill the demand-supply gap (requires "only" doubling current world wide nuclear capacity of 400 reactors, compared to >70x increase for any other technology) and iii) advances in technology can address the historic safety and waste management issues.

4.  Therefore the US government should show leadership and put nuclear power back on the table as the likeliest energy solution while avoiding cataclysmic climate change

Ralph Cavanagh's position was

1.  Ditto

2.  Ditto

3.  The failure of nuclear power as a viable alternative to coal or oil is clear and unlikely to change - no new nuclear power plants ordered in the US since 1973, lack of cost competitiveness, regulatory tug-of-war over Nevada's nuclear waste dump has dragged on for decades, $150 billion dollars of development and the problem of waste has not been solved, the risk of empowering rogue nuclear states, etc

4.  Therefore the appropriate role for government is not to anoint nuclear a priori as the best solution, but provide a regulatory framework that includes emissions as a true cost and let the competing technologies (coal sequestration, nuclear, wind, solar, biomass) fight it out in the market place.

For those wanting to get the full details of the debate, it will eventually be available for download here.  In the meantime, it made me thankful for my intellectually curious wife, it reinforced our desire to get a Prius (we've made the decision, just waiting for our preferred colour to be available) and learn more about the potential alternative energy technologies, it made me feel good about the Mobius investment in IonAmerica (a company trying to address the commercial power generation market through solid oxide fuel cell technology), and it encouraged us to add the National Resources Defense Council to our potential list of donations.

Not bad for a Friday night.

Serial Persistence - The Great Debate

One of the perennial issues facing the venture industry is whether it's a closed club (i.e. the same VCs generate the top returns through preferential access to the best investments) or whether it is a truly competitive industry (i.e. a new entrant has the same chance of success as an established firm).  This issue is often called serial persistence - namely, do the same funds remain at the top of pile fund after fund after fund. 

"Common wisdom" (please note the quotation marks) dictates that serial persistence is very strong and this results in LPs using prior performance as the main indicator of future performance.  Given the impact on capital allocation practices and the dramatic drop off in performance between top quartile performance and the rest, you would imagine that VCs, LPs and academics would be concentrating time and energy to answer this question.  However, as far as I can tell, when I discuss this issue with colleagues in the industry few are aware of the evidence to support or disprove this "common wisdom", but rely instead on a intuitive belief.  It's not all "head in the sand" behavior though.  There have been some germane posts on this issue notably by Bill Burnham and Paul Kedrosky which inspired me to hunt for evidence on both sides of the argument

This hunt for quantitative analysis and reasoned logic led me to two studies which came to diametrically opposed conclusions.  Steve Bird, a GP at Focus Ventures, is the author of a recent paper which claims very strong serial persistence ("churn of the Top 50 firms over the course of 15 years was only 16%").  Steve Kaplan and Antoinette Schoar of the University of Chicago authored a paper which claims only moderate serial persistence (that the likelihood of a top tercile fund remaining in the top tercile is only 48%, when you would expect it to be 33% if it was truly random).  Given the conclusions are so different and thus the implications (Steve Bird recommends that if an LP cannot invest in one of these top 50 firms, then they should avoid the asset class entirely), I decided to dig into these studies to try and understand the divergence.  I asked myself three questions?

1.  What are the Inputs Being Measured?

Steve Bird used a data set of 8,000 venture financings over a 24 year period.  However he then zoomed in on only two time periods - the PC Boom 1983 to 1987 and the Internet Boom from 1997 to 2001.

Steve Kaplan and Antoinette Schoar focused on funds, not financings, as the unit of analysis including those that 1) have been officially liquidated 2) whose returns are unchanged for 6 quarters 3)  whose reported unrealized capital is less than 10% of committed capital and 4) who had greater than $5M under management in 1990 dollars resulting in a clean data set of 580 venture funds from 1980 to 2001.

2. What is the Output Being Measured?

Steve Bird chooses "percentage of IPO value created" as his output to be measured, rather than the more traditional LP metrics of IRR.  This results in him only counting some of the winners (he ignores M&A value creation) and none of the losers

Steve Kaplan and Antoinette Schoar use IRR and PME (Public Market Equivalent which is a form of IRR adjusted for public market performance over the same period).  This results in all the winners and all the losers being included.

3. What's the Author's Starting Point?

Steve Bird is a GP at Focus Ventures, a venture firm specializing in expansion stage capital for IT companies.  So he is a participant in the venture industry, is well aware of the common or conventional wisdom and has a vested interest in the analysis.  This leads me to believe that Steve could be guilty of subconsciously choosing the date to fit the thesis (nota bene: I do not have first hand knowledge of Steve and have no wish to impune his integrity.  I am merely commenting on the well documented universal human condition of accepting data that fits an already held belief and rejecting data that challenges same said belief.)

Steve Kaplan and Antoinette Schoar are academics and not to my knowledge participants in the venture industry.  As such they pose questions and let the data lead them to the answers.

So in conclusion, after reviewing the data sets, methodologies and potential for objectivity I place greater weight on Steve Kaplan and Antoinette Schoar's conclusions that while serial persistence exists in the venture industry, it is not nearly as strong as either Steve Bird or "common wisdom" claims.

Let the debate continue.

Quality versus Quantity

I was berated this week (once indirectly by my partner Brad, and once directly by Ben Casnocha) for my lack of postings on my "dead" VC blog.  As Mark Twain once wrote, "the rumors of my demise have been greatly exaggerated".  While I understand the comment, I feel Brad and Ben are guilty of confusing quantity and quality.  When I started this experiment of writing and maintaining a blog (and let's be honest it is an experiment albeit one with a duration of now 12 months and counting), I very consciously set out to NOT post frequently but rather to attempt to write less frequent, more substantial articles (1500 to 2000 words) on my perspective on the Art of VC to share my own approach with the wider world of entrepreneurs (and to a lesser extent other VCs and LPs).  I did not want to write a diary (" a day in the life of a VC"), a gossip column ("latest, greatest deals") or a thinly veiled marketing vehicle (" hey, look at the latest thing my great company just did").  That's not to say those aren't valid approaches (Brad in particular has a great eclectic style that combines detail, high frequency, thoughtfulness and a strong sense of personality) but I consciously took a different  path.  One of the many refrains I hear from entrepreneurs about VCs is our ADD (constantly checking our Blackberries, not remembering the last board meeting, always looking for the next great deal, etc) so my writing cogent, longer articles I hoped to show that VCs despite appearances do think deeply about this business.

So how do I feel the experiment is going?  In terms of output, in 12 months I managed to write 6 of these articles (Picker or Builder?, What Do VC and Great Comedy Have in Common?, Kissing a Lot of Frogs, I Was Not Wrong Just Early, Backing Your CEO, All Entrepreneurs are Above Average).  This is fewer than I had hoped, but still a reasonable output of one article every two months.  In terms of feedback, I have reached an audience I would not otherwise have reached who have challenged me and encouraged me.  In terms of personal value, and this has been the biggest surprise, the exercise of articulating what I believe as a VC and exposing it to the world has forced me to sharpen my critical thinking faculties and examine how I operate as a VC , and more importantly, how I want to operate.

So what goals do I have for my blog in 2006?  I'd like to maintain the same level of substantive output (ie 6 articles) but try and mix in some more light hearted but thought provoking commentary.  Brad, Ben - thanks for the feedback, it made me think.