2010 -- A Low Water Mark for Internet Privacy

There were several important controversies around Internet privacy in 2010, including these involving Internet giants Google and Facebook:

• in February, Google's forced retreat from the default setting of Google Buzz that made Gmail address books into public contact lists;
• in May, Facebook's introduction of simplified privacy settings, as part of a forced retreat from an effort to broaden its usage of user data (including making friend lists effectively public); and
• also in May, the discovery that Google had gathered a variety of data from home WiFi networks as part of its Street View project, leading to ongoing controversy for the rest of the year.

It has become clear that these events and this year represent a low water mark for Internet privacy.  It is increasingly difficult for major companies to take such actions with such blatant disregard for privacy.  The above actions failed this year, and similar actions will fail in the future.

Sure, there will be major controversies in the future over use of personal data, and technologies that threaten privacy will become increasingly sophisticated.  But serious players in the online economy are facing clear and increasing pressure to think carefully about handling data in ways that taking privacy into account.  Probably the most substantial reason is pressures from government.  Enforcement of the EU data protection law is becoming increasingly aggressive; and even in the United States, which has shied away from broad privacy regulation, the Department of Commerce has just proposed a Privacy Bill of Rights.

This does not mean that our personal data will become safe from abuse.  Indeed, considering privacy in the traditional paradigm of secrecy and confidentiality, the reality is likely to remain, in the prescient words of Scott McNealy of Sun in 1999: "You have zero privacy anyway.  Get over it."  And wide availability of personal data, combined with Internet technologies and evolving business models, can also have significant benefits for individuals.  

In this environment, rather than rules preventing the spread of personal data, we will instead see a rising tide of increasingly strict rules about how widely dispersed personal data may be used.  It is highly unlikely that this rising tide will in our lifetimes subside to the low water mark of 2010.

EMI and Sour Grapes

Originally posted 05/11/10
I was extremely pleased today that Terra Firma yesterday failed in its lawsuit against Citigroup over Terra Firma’s investment in EMI.  I have been extremely interested in this litigation, both because it is an interesting result of the amazingly rapid damage to the global recording industry from new music distribution models, and more importantly because something would be very wrong if an equity investor could prevail in a “sour grapes” lawsuit simply because it made a bad investment.  Suppose we accept Terra Firma’s core contention that Citigroup lied about the existence of another bidder?  Even if true, lying about bidders in auctions is common behaviour by investment bankers, and was questionable here only because Citigroup was itself playing both sides of the deal by acting for Terra Firma too.  Much more important, any Citigroup lies about the auction process have almost nothing to do with whether EMI was a good investment at the price paid, which is primarily a matter for due diligence, financial analysis and Terra Firma’s investment judgment.  The credibility and viability of the private equity and venture capital investment process would have suffered a huge blow if Terra Firma had won — thank goodness they did not.

Why the UK Has a Poor Record of Successful Technology Innovation

Originally posted 02/07/10

It is widely recognised that the UK has a great record of developing new technologies — particularly at its world-leading universities like Cambridge and Oxford — but a poor record of turning that technology into great companies, by comparison to the United States, China, Germany and Israel to name a few.  Of course, there are exceptions like Vodafone, ARM, Autonomy and others.  There is no single cause for this problem.  Here are a few that contribute:

• lack of a concentration of talent and resources for entrepreneurs (like in Silicon Valley) — the Cambridge region is the closest thing, but is too small and operates too independently of other nearby centres of excellence such as the Oxford and Thames Valley regions;
• lack of an entrepreneurial culture that excuses failure, and serial failure;
• insufficient sources of seed funding and venture capital, at least by comparison to the United States;
• tendency of entrepreneurs to sell out when their companies are big enough to make them rich, rather than waiting until they are world leaders;
• too small a domestic economy (related to the previous point); and
• tendency towards “me too” thinking — the reasonably vibrant London entrepreneurial community has too many people trying to build a new social network (or something like that), compared to those who are truly thinking “out of the box”.

The Big Shift -- Opportunities for Innovation and Risks of Growth

Originally posted 22/05/10

John Hagel III and John Seely Brown have identified a “Big Shift” in the way our economy functions, including the startling finding in a report with Deloitte that return on assets (ROA) of US publicly-traded companies has declined 75% since 1965. Hagel and Brown observe that this change is associated with an increase in competitive intensity related to the spread of digital technology and economic liberalisation.  They also identify an opportunity to reverse the deterioration in ROA for firms that learn how to participate in the knowledge economy.  These conclusions point to huge opportunities for innovation — both to topple existing business models and to create new ones (which are of course flip sides of the same coin).

There is also a more sinister conclusion that could be drawn from the decline in ROA, on which Hagel and Brown do not seem to focus. A decline in ROA can be caused both by a decrease in the numerator (i.e. returns) or an increase in the denominator (i.e. assets).  Given the huge economic expansion in the last 50 years, returns have increased significantly. But total invested assets have increased much faster, driven in large part by innovation in the now enormous financial sector. There are serious questions whether continued economic growth of this nature is sustainable, with probably the two leading concerns being the environmental effects of growth (primarily global warming) and the increasing financial instability caused by the risk structures necessary to sustain growth. For most of human history (until about the last 100-150 years) growth was considered far from the unalloyed good that it is today. We may need to move back towards the philosophy of those slower times to save our planet and our societies for our children.

These cautionary conclusions do not, however, disturb my initial conclusion in this post that this is a wonderful time for innovation, and indeed innovation is not inconsistent with slower growth. Indeed, new technologies and ideas present real opportunities for us to live better with less.

Staying Real

Originally posted 05/03/10
This post is not about innovative technology, but about something more fundamental — the nature of reality and how we react to it (heavy, huh?).  I have been thinking about the fact that most people pay very little attention to reality.  Getting caught up in the pressures of daily activities, and particularly our emotions about them, can easily distract us from an objective view of what is really going on around us.  Unfortunately, reactions that are disconnected from reality tend to be ineffective and often damaging.  Staying real is a good idea.  This occurred to me powerfully on New Year’s Eve 2010, when I considered the changes is my life over the decade since the turn of the millennium, and realized how little daily worries affect the overall direction of my life.  Made me think about staying focused on the things that are really important to my long-term reality.

Doing What You Love

Originally posted 22/11/09
In the seven months since I have made the transition from working most of the time for a large organisation to running my own business, it has surprised me the extent to which people whom I meet seem attracted to what I am doing.  I have concluded that a main reason is that I love what I do, and am broadcasting enthusiasm about it — with the result that my business is turning out to be more successful than I hoped.  So my advice to entrepreneurs is to make sure you do some something that you love.  The benefits — both financial and spiritual — are huge.  (Of course, it is also important to have good business strategy and execution!)

Making a "To Do" List

Originally posted 05/10/09

In a start-up environment, there are many things to be done by a limited number of people, and tasks and responsibilities are often poorly defined.  Start-up management must decide what needs to be done, and execute quickly.  This contrasts sharply with established enterprises, where employees are generally expected to execute on a defined set of tasks.

Dealing with the challenge of what should be on a start-up’s “to do” list is a real challenge even for experienced entrepreneurs.  There is no easy answer how to get this right.  A few things to think about:

• Recognize that there is an extensive list of things that need to be done, and be appropriately paranoid that you are missing things;
• Talk to people with experience to help you identify the holes;
• Prioritize identified tasks based upon both urgency and importance, and don’t waste time on things that are neither urgent nor important; and
• Make sure that priority tasks have a person responsible for them, a defined timeline and appropriate resources.

Watching Cash Overhead and Capex

Originally posted 27/09/09

As a recent founder of a start-up business, I have come face-to-face with the critical importance of managing cash overhead.  A moderate amount of income can go a long way if overheads are watched carefully, particularly with the tax advantages that are available to small businesses.

Of course, investment is needed to grow a business, which may be in the form of overhead or capex.  But there are sometimes non-obvious decisions to be made about how and when to deploy such investment, as a recent conversation with the founder of a leading green technology company illustrated for me.  His company had made the decision to defer capital investment in a major demonstration project for their first-generation technology, in order to focus available funds on development of second-generation technology.  While this decision delays time to market, it allows the company (1) to better weather the current downturn,  (2) to enter the inevitable economic rebound with significantly better technology and (3) to make its demonstration project more likely to be a technological success.  It is not easy (and sometimes unwise) for an eager entrepreneur to delay market entry, but this one clearly made the right decision.

Innovation and Invention

Originally posted 03/08/09

‘Innovation’ and ‘invention’ are not the same thing.  This less than entirely obviously point is made cogently in The Social Life of Innovation (2000), by John Seely Brown and Paul Duguid:

‘Invention produces new ideas.  It requires innovation and organizational coordination, however, to turn these ideas into new products and processes.  But the distance that supports initial invention [i.e. keeping it separate from other economic processes] can hobble its transformation into organized innovation.  People who have gone away to think outside old paradigms may return souding to those within the old paradigm like Mark Twain’s Connecticut Yankee at King Arthur’s Court, babbling of unheard and unintelligible wonders.’

When those of us in the business of innovation meet inventors and inventive ideas, we should aim for both the insight to see opportunities to convert invention into innovation and the discipline to recognize which invention is unlikely to lead to profitable innovation (see my post on Good Ideas With No Business Model).

Energy Efficiency Technology

Originally posted 16/07/09

I attended a presentation yesterday (under the Chatham House rule) that addressed the mathematics of climate change.  The speaker showed that reducing annual global carbon emissions to around 33 gigatons/year in 2030 (from about 50 GT currently) -- which is not even sufficient to meet G-8’s recently agreed goal of limiting global temperature increase to 2 deg C -- will be a Herculean task, largely due to expected growth in India and China.

The speaker discussed the importance of various low-carbon power technologies, but paid much less attention to energy efficiency technology.  It seems, however, that the latter may be the bigger opportunity for small, innovative businesses.  There are a number of reasons why opportunities in low-carbon power may be less than expected: the basic technologies are largely known (solar, nuclear, wind, hydro, etc); much of the rents from low-carbon power will be captured by power companies; and much of the innovation will be through government-funded efforts.  Of course, opportunities in the area are still huge.  But opportunities in energy efficiency (and other aspects of climate change adjustment) may be larger — since the playing field is much less clear, possible technology solutions are more diverse, and opportunities to create entirely new product categories are manifold.

Good Ideas With No Business Model

Originally posted 12/01/09
I have been spending a lot of time thinking about good ideas with no business model.  By a “good idea” I mean innovation that does something clever, something that has a “wow” factor — say, building a completely new kind of mousetrap.  By “no business model” I mean that no one has yet figured out how to make money with the idea.   From an investor perspective, the key question is whether the lack of a business model means that (a) one really does not exist (i.e. end consumers are just not willing to pay enough for products of the idea to produce an adequate return on the capital required to implement it) or (b) no one has yet come up with a business model.  Category (a) includes most (and possibly all) new ideas for mousetraps — there are other ways to kill a mouse than a sensitive trippable spring baited with cheese, but I doubt any of them will ever make money.  Category (b) includes things like the Google search engine when it was first built.  Investors of course should avoid category (a) and jump into category (b), but telling the difference can be very difficult (and distinguishes good investors in innovation from bad ones).  One of the tricky things is that a lot more ideas are in category (a) than in category (b).