I saw another great movie this weekend with the wife and kids called "Akeelah and the Bee". You have probably either seen it or at least read about it in the papers. It is the story of an 11-year old girl from the poorest region in South LA who strives to win the national spelling bee. There is a lot of good stuff in it for both entrepreneurs and for young kids about perseverance, overcoming obstacles and addressing fears. One of the greatest fears that we all deal with is the fear of failure. Whether it is the child preparing for a tournament or test or an entrepreneur launching a business, fear continually nips at your heals. Lawrence Fishburne had an awesome quote on his wall in the movie for inspiration. I thought of all of you future Sergey’s and Jobs’s…

Our Greatest Fear

by Marianne Williamson from her book “A Return to  Love”

Reflections on the Principles of A Course in Miracles 

Our greatest fear is not that we are inadequate,
but  that we are powerful beyond measure.

It is our light, not our darkness, that frightens us.
We ask  ourselves, Who am I to be brilliant,
gorgeous, handsome, talented and  fabulous?

Actually, who are you not to be?
You are a child of God.

Your playing small does not serve the world.
There is nothing  enlightened about shrinking
so that other people won’t feel insecure around  you.

We were born to make manifest the glory of God within us.
It is not  just in some; it is in everyone.

And, as we let our own light shine, we consciously give
other people  permission to do the same.
As we are liberated from our fear,
our presence  automatically liberates others.

"Prediction is very difficult, especially if it’s about the future."
       –Nils Bohr, 
Nobel laureate (yes using this one again!)

Having made the error of writing about politics, I am now going to stick my neck out and make a prediction about our upcoming economy. Many would argue that the best way to make money is to invest under assumptions directly opposite of mine… So, here goes.

I have been trying to figure out what impact falling home prices would have on the economy — recession, deflation, etc. While reading a recent Economist article, it struck me. We are staring into mouth of stagflation driven by rising wage pressures and rising interest rates. Here is my thinking (and a good amount from Mark Faber of the Doom Gloom Boom Report & Barron’s fame).

As home values drop while interest rates rise, people will be able to take less out of their homes. This will put increased pressure on the average household which has seen its real wages fall since 2000. With this buffer source of funding depleted, workers are going to put pressure on employers to raise salaries. Corporate profit margins are at an all time high, so it is unlikely that either productivity or outsourcing overseas will give companies relief.

The US government can not let deflation take over or the over-levered average American will go under. So, it will continue to man the money printing presses. This, along with wage pressure, will begin to drive prices up (and profits down).

Having lived in Southern California during the defense recession of the 1980’s, I saw first hand that housing markets don’t crater. They just go illiquid as people refuse to sell at the lower prices. For sale inventory grows, but only the truly desparate sell. So, housing prices drop moderately and there generally is no wide spread panic of plummeting housing prices, retail collapse, etc.

So, as an entrepreneur, go after labor saving solutions. Don’t go after heavy capital equipment type plays (not good in high interest rate environments). Provide solutions that allow firms to operate remotely or, better yet, virtually so that they don’t need to hire permanently. Peter Drucker predicted that in the next 25 years, most firms would only formally employ 50% of their FTE’s. This will require significant infrastructure to do. It also means that there are tremendous process outsourcing opportunities (vertically focused SaaS plays). Any consumer plays will favor the lowest cost producer since real wages will be under pressure as inflation hits.

Enough said…now build or invest assuming the opposite!!!

The NY Times published a nice overview on the emerging opportunities and challenges of online coupons called "Clip and save holds its own against point and click". It talks about the common theme here of how hard it is to break consumer habits, but how this is inevitable. Google is one of many new attacks on this opportunity.

"When God closes a door, he opens a window"

There are a mulititude of stories of entrepreneurs bouncing back from failure. However, none are as literal as Norman Stingley. Norman was a chemist for a rubber company that made "blow out preventors" for oil wells. He discovered a material and process that failed miserably in its applications on the wells, but had some unique characteristics. When compressed, it stored and released a significant portion of the original energy. After some creative thinking, he shaped the material into a ball and pitched it to Wham-O, the maker of Frisbee and Hula Hoops. It was introduced several months later in 1965 as the Super Ball that our children love to bounce around today…

"There is no class so pitiably wretched as that which possesses money and nothing else."

         — Andrew Carnegie

The world of the entrepreneur or investor can be all consuming. Unchecked, our life becomes one of chasing one task list and fire drill after another. Unless we take the time to step back and look at the larger picture, we will lose perspective. This also means we often focus not on what is important, but on what is most urgent or troubling. We will also put importance on those things which really have no meaning to us in the long run.

When I was a kid, my friends and I would joke about our parents’ efforts to get us to finish our meals (the old "kids are starving in India" bit). In reality, there was some truth (though no effectiveness) in all of this. We had moved so high up Maslow hierarchy that we no longer strived for food or water but got ulcers over what clothes made us fit in or who was invited to what parties.

A friend, Whitney Tilson, wrote a quick blurb that does a great job laying out this contrast. While he is a successful hedge fund manager, his family lives in Africa, helping villages over there cope with life.  He writes:

The New York Times sometimes captures our world  with such clarity and brilliance that there is nothing more to add. Of course,  much of the time, it’s completely inadvertent.

These two articles ran yesterday, the first from  the front page and the second from the front page of Thursday  styles:

Africa Adds to Miserable Ranks of Child Workers In sub-Saharan Africa, more than one in four children below age 14 works, and some are not even paid.  A boy named Alone Banda works in this purgatory six days a week. Nine  years old, nearly lost in a hooded sweatshirt with a skateboarder on the  chest, he takes football-size chunks of fractured rock and beats them into  powder. Lacking a hammer, he uses a thick steel bolt gripped in his right hand. 

In a good week, he says, he can make enough powder to fill half a bag.  His grandmother, Mary Mulelema, sells each bag, to be used to make  concrete, for 10,000 kwacha, less than $3. Often, she said, it is the  difference between eating and going hungry.

Fashions Aims Young  Premium jeans, for instance, an item coveted  by Maisy Gellert, a third grader living in Westchester County, N.Y. "I’m very  particular, Maisy said. Sevens are the only jeans I actually wear."

Like many girls her age, her fashion antennae  are finely tuned, her standards exacting, her desires well defined. "I like  the stuff that’s in style, like leggings and shorts, tank tops and  flip-flops, she said, promptly adding to that list: Gap camisoles that are  white, because I can wear them with just anything. Puma sneakers, pink and  gray — I’m on my third pair — and ballet slippers, but those are hard to find  for my size foot."

Linked In has become the leading networking tool in the business community. How do you leverage it (and do you even use Linked In)? Vote in right rail!

On the last poll, 60% of you thought market drove success more than management (40%).

"All the consumer needs to do it take 15 seconds a day to…"
    — many a dead internet start-up hoping for consumer behavior change

Consumers don’t always behave in the most efficient or logical manner. Many a start up has gone under waiting for the consumers to see the light and change their daily routine. Unfortunately, for most, people don’t like to change their routine and the best solutions involve interacting with consumers while they are doing something they are already doing. Online couponing has been one area that has always held significant promise but failed to deliver.

Online coupons have been an elephant graveyard for the tech
world. You would think that this would be much more useful for
traditional coupon clippers. Tell a service what you like and have it
deliver the relevant coupons to you (web, email, stored value card,
etc). Alas,
Coolsavings, CouponSurfer.com, Coupons.com, CouponBar, eBates, eBay, Entertainment Book, Eversave , Keycode, Valpak.com
have all tried to crack the code but to no avail. It seems that people
don’t want to go through the effort of setting up preferences, visit
their account (or get emails), print them out and take the coupons into
stores. Too much work. They prefer to clip the coupons out of the
circulars.

Google has addressed many challenges in one clean strategy. It will
let businesses offer discount coupons if they use the Google Maps
service. This is a direct assault on both the coupon and yellow pages
business. The benefits are the following:
1) higher redemption/use: consumers are indicating interest when they look up a business or address on the map.
2) adoption:
unlike other coupon sites, it does not require the consumer to change
behavior. They are already browsing for the location and this pops up.
Like with their search ads, this is taking advantage of the consumer
self-identifying interest.
3) more search $’s: Google is
betting that users will increasingly use their local search if they
know they will likely get discounts on products at those stores.
4) more ad $’s: Businesses may spend more money promoting their coupons through the Google ad network.

5) kick-starts local search: Google’s local search business has had limited success to date. This has the potential  to get this scaling much more rapidly.

I
have been waiting for someone to figure out how to get online coupons
to work. Current models have been to invasive and require too much
effort on the users part. In addition to being much more straight
forward, this system is also…free to both consumers and businesses.
Looks like another marketing sector is feeling the wrath of Google.

"Patents are like nuclear bombs, you just got to have some.  I have never seen patents make a business, but I have seen lack of patents hurt a business on many occasions."

     — Fred Wilson VC Cliche of the Week

Entrepreneurs often ask me about how useful patents are (and for what). Many business plans have some claim ("we have seven patents issued on our process") in their "Top Reasons to Invest" list. (It usually sits below "we have no competitors" but above "our market is $10B and the financials are conservative").

I think Fred, a fellow Feedburner investor, sums it up quite well in
his post (as usual). Wikipedia also has a nice overview on the patent
topic in its Patent Entry.  Having seen patents in action across a broad array of industries and companies, I would generically say that patents are useful defensively (e.g. preventing you from getting sued) but have challenges offensively (e.g. using to keep competitors out). I would also differentiate between patents related to software and services versus hardcore material science.

In hardcore scientific applications, patents can play a very key role in keeping competitors at bay. Our company, Imago, has a series of patents around Local Electron Atomic Probes (I won’t digress here as I am certain you are all familiar with the field 🙂  ). These patents have been very effective since they cover the key approach and processes regarding this type of imaging technology. There are few alternatives, so most players are limited in what they can do in this field. This is an example of a key blocking patent. However, it is effective because nature has presented few alternatives in the law of physics to this approach.

That said, even in this realm, they can fail to work. We had one company with $15M worth of patents (covering some 140 claims). It was a massive portfolio. Two global 100 companies, determined to enter the space, managed to create solutions that circumvented nearly all of them.

There are very few situations where such a toll bridge exists. In services and software, there are often many bridges onto the island. Process patents, in particular, while they can create speed bumps, can often be circumvented by slight tweaks to the process used. Additionally, even if you come across an infringer, it is extremely costly and time-consuming to litigate. Instead of building your business, you find yourself dragged into legal procedures. It is even more daunting if the infringer is a large corporation. For every Blackberry decision, there are hundreds that either settled early or were driven out of business trying to finance the challenge.

The downside of patents is that they disclose your secret sauce to the world. If your product takes time to ramp into the market (getting channel partners signed up, etc), your competitors will have time to reverse engineer your product. Several of our companies have filled patents on various aspects of their businesses but have kept their "secret sauce" out of the patent filings, electing instead to treat them as trade secrets (good entry in Wikipedia on Trade Secrets). Trade secrets have no expiration, but, if discovered, do not provide the limitations on use that patents do. One of the most famous "Trade Secrets" is the formulation for Coke. Keeping it secret is the challenge which is where rigorous use of Non-Disclosure Agreements, Non-Compete’s, IP management strategies (keep the components of the IP separated so even if one piece is discovered, it is useless), etc.

You also have to figure out where you want to file your patents and how much to spend. You can file in the US, in Europe, Asia, for individual countries, etc. At $10-25k per patent (and up), they are not cheap. Filing under the PCT (Patent Cooperation Treaty) buys you additional time to file in other countries without incurring the patent fees today.  Filing just in the US protects you against US competitors or foreign competitors that want to sell in the US. However, it does not cover foreign competitors selling overseas.

So, what is my conclusion? Patents are expensive and complex so get good counsel. Patents won’t like keep competitors out at the end of the day (nor create foundation upon which a company is built), but they will create speed bumps and help prevent others from suing you. Investors will give patents some value, but generally they will be looking to execution, management and business model much more. So, don’t expect to wow the crowd with your patent portfolio.

For a venture capitalist, I have a pathetic memory. I can never remember names of people of meetings from even the day before. I cling to my Blackberry (searching calendar, to do’s and email) for my institutional memory. I have limited ROM and use all of these means for scalable RAM.

A very cool product in this realm is Zoominfo (www.zoominfo.com). It spiders crawl bio’s, board listings, etc to pull together, in an automated fashion, consolidated profiles on individuals. It is the largest player in this space and has more than 30 million people summarized in its database. It pulls together the work history, education, current position and other affiliations of these people.

This is very useful if you are trying to remember where someone worked, want to know the background of someone you will be meeting or simply want to know someone’s title for a pitch. It is a very useful sales tool.

Its parsing technology is pretty good though not perfect. If you type in Matt McCall (I am pleased to see I am top of the list!), you will see my education and work history. It also has a number of my board positions though it missed a bit by putting me on the Motorola, Tellabs and Boeing boards (confused by my fellow Atomworks board members).

It was started in 2000 under the name Eliyon as an executive recruiting tool and has spread from there. Check it out…

"The utter stupidity of this is staggering"
       — Michael Arrington, TechCrunch article

When it rains, it pours at AOL. It is becoming a fantastic case study in how tech companies can go wrong. I only pray that they can save the brand. Couple of quick points:

1) read the tea leaves and respond to industry changes aggressively
2) the customer is king. Make the customer happy (profitably) and the rest takes care of itself.
3) take your customer feedback as gospel (no "the customer doesn’t get it…")
4) your strategy is flawed if you have to resort to strong arming tactics to maintain customers.
5) big companies have trouble maintaining innovation and agility.
6) all it takes is one or two really bad customer experiences to undermine a franchise. (avoid public embarrassments on the Today Show!)

Instead of heavy prose, here is the meaty gossip.
— AOL Consumer Data Leak AOL just acknowledged that it released the search history on 20 million web queries from 650,000 AOL users. In addition to violating the customer’s trust/covenant with the company, it is also going to unleash a fire storm both in the courts (ambulance chasers are popping the champaign corks today) and in Congress (round 2 on consumer privacy). It also slams the firms already sunken public image.
— NBC Ferrari Call AOL has rolled out a customer retention program that relies on customer service agents to convince, obstruct or cajole users from canceling their service. This Ferrari video recording is impressive even by most call center standards. Not working. In June alone, they lost 1 million subscribers. This is one reason they went to a free model, supported by ads.
— Even dead people can’t escape AOL Retention part 2…a St. Louis women has fought for 9 months to cancel her deceased father’s account.

This is the nightmare realized by a large tech corporation as well as small ones. Once the blogosphere gets hold of something, it spreads like wildfire. The blogosphere is amazing for its customer acquisition efficiency but it also has this dark side. If you query "Ferrari AOL customer service", you get 330,000 hits. That is a lot of coverage on the story (granted not all are on this story).

Kyptonite had one of the most blatant example of a brand being mashed by a) dumb PR and response and b) the efficient blogosphere. Several years ago, someone realized they could pop a Kryptonite lock with a Bic pen. They wrote the company and it responded defensively and negated the claim. Spurned, the customer made a video and released it showing how the pin tumbler mechanism was susceptible to failure. This spread like wildfire. Not only did it create significant damage at the time, these posts are permanently on the web. Today, if you query Google on "Kryptonite locks", half of top 10 or 20 listings are about this incident. It even has a Wikipedia entry.

Here is a link to the recent AOL article in its entirety:

AOL on Monday admitted exposing the personal search
data of 658,000 people, and issued an apology for what it called a
"screw up."

AOL, a unit of Time Warner Inc., made the information available for download through its research site.
The people were randomly chosen among users of AOL’s search engine from
March through May. Each record was stripped of the person’s screen
name, which was replaced with a number.