Purpose and Mission

In our single-minded drive toward profits, one of the first casualties is sometimes purpose. I long ago observed that passionate people who start out fighting for what they believe in sometimes find themselves believing in whatever they are fighting for. If we're not careful to assess and reassess our mission and how our actions move toward or away from that purpose, we may inevitably drift leeward at the mercy of the winds.

Why are we in this game in the first place, and what do we wish to accomplish? Some would reply: profit, of course, it's only business. Hm. I really wonder, how many people go to their graves lamenting that they hadn't focused enough on making more money, that they hadn't succeeded in increasing their company's profit margins during the last quarter? It seems there must be more to life than that.

Cresswell Walker recently posted a letter from Lagos, Portugal to The Economist, published in the June 16, 2012 print edition. Due to its elegance and concision, I quote it in full:

Would it be too cynical to pose the same challenges for companies that you posed for robots? I thought Isaac Asimov's three laws seemed particularly germane to both: protect humans, obey orders and preserve themselves, in that order. It seems corporations have them in reverse: preserve themselves, obey orders (follow the law) and protect humans.

Failing as we do to elicit moral behaviour from organisations, which are made of people, how can we hope ever to succeed with machines?

It is true that a company cannot accomplish its mission if it falters as a company, just as a politician who fails to get elected forfeits their influence over legislation. Is a politician able to recover from a campaign that compromises principle? Can a company accomplish a worthy mission by sacrificing the humanity of its leaders and employees?

The task is to hold onto principle and purpose, while achieving success. Anything less is unworthy of the effort.

Publish or Patent?

The mantra of the Academy has long been "publish or perish". The April 14th edition of The Economist presents an op-ed entitled Academic Publishing: Open Sesame in which they argue:

Government bodies that fund academic research should require that the results be made available free to the public. So should charities that fund research.

This is a significant issue for those of us who receive government funding to support for-profit R&D (such as the U.S. Small Business Innovation Research awards). A major dilemma for unaffiliated researchers is whether to publish or patent, or in some cases simply stay mum (trade secret, anyone?).

Academic-minded government agencies, like the NIH, NSF, and Department of Education may likely view the lack of peer-reviewed publications by the principal investigator on the subject of their proposed research as a sign that their ideas have low value in that domain, and may thus not fund the research. But publications may foreclose the possibility of patenting an invention or innovation, a death warrant for self-supporting R&D-driven companies. It's a Catch-22 of sorts. But if the end game is to commercialize the innovation, jockeying for the first influx of early-stage funding needs take second seat.

For researchers supported by an academic institution, especially those with tenure, the choice to give freely of their knowledge is an easy decision to make. Their jobs and careers are secure. Yet university technology transfer offices must keep the balance between enlightening publications and enabling ones, to preserve the potential for patents. But the ranks of unaffiliated, world-class researchers is growing as opportunities in the Academy diminish or become less appealing. We simply don't have the luxury of a fully-staffed and accommodating tech transfer team.

While I've asked the question before whether defensive publishing may not at times be worthwhile, it seems the best long-term tack for small businesses and independent researchers is simply to keep quiet, even at the risk of being marginalized by the broader field.

Entrepreneurial Clusters and the Clustering of Entrepreneurs

The word stereotype means literally a strong or firm impression. Entrepreneurs are known to "break the mold" (from which assumedly strong impressions might be cast). One might argue therefore that to stereotype entrepreneurs were a logical fallacy.

Cops in a Donut Shop

Here's an extract from a recent Economist article on the recent Global Entrepreneurship Congress in Liverpool:

[S]erious entrepreneurs want to create big businesses, not multiply small ones. They don’t give a fig about regional development.

Oh wow! I guess the use of the term "serious" might raise the stakes of fallacy to ad hominem status: the corollary of that statement of course being that if you care about regional development, job creation, and may not be obsessed with size and growth at all costs, you couldn't possibly be a serious entrepreneur.

The article goes on to observe the if-you-build-it-they-will-come obsessiveness of many policymakers with Silicon Valley and universities with incubators. They cite Rohit Shukla of the Larta Institute as countering that entrepreneur clusters are more often the product of accident than intention. To this entrepreneur's mind, the best thing that can be done to encourage entrepreneurship is to cease the stereotyping and just let people be people: some of us it would seem are inclined to create our own jobs and jobs for others to boot.

Fetish: Stocks as Collectibles

News this week: Yelp IPOs. Friday's close was $24.58, 59.9 million shares outstanding, giving the company a market capitalization of $1.5 billion. In eight years, I hear, they have yet to turn a profit. So, what on earth are people buying? Shares...

Google sells for $621.25 a share, maket cap of $202 billion.
Apple sells for $545.18 a share, market cap of $508 billion.
Amazon sells for $179.30 a share, market cap of $81.6 billion.

What is the value of those shares? What exactly do you own, when you own shares of Google or Apple, Amazon or Yelp? Each one is worth one ticket to an arena with 59 million, 300 million, or 900 million entries. That's 3,000-45,000 Madison Square Gardens! One vote in an ocean of votes. That's ownership I suppose. What other benefit do you receive? You don't share directly in the profits. They pay no dividends.

Price earnings ratio is often quoted as a means to value shares, with 15 x earnings being a conservative target.

• Apple at a P/E of 15.53 is pretty close
• Google with a P/E of 20.89 is only slightly worse
• Amazon's P/E of 130.60 is rather extraordinary

You can think of it like interest in a savings account. If the companies paid out 100% of their profits as dividends, it would take you 15.53 years to double your purchase price of Apple shares; 20.89 years to double your investment in Google, or a whopping 130.6 years to get out what you paid for a share of Amazon. To put that in perspective, a P/E of 15, with 100% of earnings paid out in dividends would be roughly the equivalent of earning about 5% compound interest on savings, quite attractive in today's market.

But then, that assumes 100% of earnings are paid in dividends, not normally the case. Or it assumes that the earnings will increase dramatically over time, and thus the dividends paid will likewise increase. But in many cases, 0% is paid out in dividends, leaving a shareholder with no direct benefit from owning the shares. Unless these companies at some point begin paying dividends, shareholders' potential benefit only accrues upon selling the shares. Your sole means to profit from owning these shares lies in your ability to sell those shares to someone else at a higher price than you paid. Someone else who would likewise have no ability to share directly in the profits of the company. What is that like? Let's see:

Say it's 1988: Cabbage Patch Kids have been around for a decade. You buy a dozen or so, as collectibles. $15 a pop, leave them in their packaging, with the hope that a few years later, you'll be able to sell them for $25 or $50 or $100 each!

What's the difference? To be honest, I can't see any. To be more direct:

A share's value must be the present value of all future dividends--otherwise stockmarkets would be a giant Ponzi scheme.

--The Economist, March 7, 2009

In the dot.com boom the argument was that young, hot, technology companies were forging new territory, and should be allowed to reinvest in their own growth, which down the road would be translated into profits for the shareholders. But then, Google, founded 1998 is already 14 years old; Amazon founded in 1995 is 17; and Apple, with its origins in the Bicentennial is solidly within Generation X at 36 years old. Just when do you expect they will start paying dividends?

And if never, are you really willing to continue participating in a Ponzi scheme?

For my part, I have every intention to reduce our vesting in the market, which currently stands at about 80%, down to about 40%, strongly preferencing those stocks and mutual funds that currently pay dividends, or whose young companies represent an innovation I believe in (like Tesla Motors). What will I do with the remainder? I think I'll invest in my own current business or start a new one. I was never much one for Cabbage Patch dolls.

Education: Budgetary Strawman

Rep. Paul Ryan (WI-1), Chair of the House Budget Committee, has been recently quoted attacking President Obama as "a pyromaniac in a field of strawmen". Cute turn of phrase. Unfortunately, it characterizes most of our nation's political figures, including Ryan himself. There was an article in yesterday's New York Times entitled "Anti-Federalism in G.O.P. Race Aims at Education". While I might be inclined to dismiss attacks on education as a drive toward insular ignorance, as I read the article I began to think there is surely merit in rethinking our nation's approach to education, and to consider that there might be cause for reducing spending on education without compromising our nation's strengths.

As an "unschooling" dad and entrepreneur, I find that "No Child Left Behind" and "Race to the Top" both overvalue conformity and standardized testing over creativity and innovation. The Economist recently did a profile (without questioning the underlying assumption of validity) showing a global obsession with standardized tests. Perhaps Obama's recent moves to relax the federal education-related requirements on states and locales is a move in the right direction.

But I wondered if calls to reduce or abolish the Department of Education might not have some moment, in this age of austerity. This is a difficult question for me as a research entrepreneur since I have and plan to again propose R&D projects to the DoEd. Reducing their budget necessarily reduces my opportunities. But I firmly believe in supporting the greatest good for the greatest number even when that sometimes counters my own short-sighted self-interest. So I took a look at Third Way's "Your Federal Tax Receipt" to get a handle on just how big the federal education budget is, to determine how much fat might be cut. Um... talk about strawmen!

Over all expenditures for education related items amount to less than 3% of the federal budget, more than half of which is for elementary and secondary education. That still leaves a little room for trimming some of the arguably misguided federal mandates toward conformity and standardization. The push for our children to acquire skills for the workforce sounds a bit too much like the call for maleable assembly-line workers of a century ago. To this entrepreneur, it lacks the drive toward innovation that I'd prefer. Still 2.9% is not a smoking gun. Far from a bloated bureaucracy, DoEd administration accounts for a mere $0.12 per $1000 in taxes collected.

After elementary and secondary education, another 1.1% is accounted for by Pell Grants, special education, and rehabilitation services, which seem worthy enough. Expenditures for "Innovation and Improvement" at $0.29 per $1000, and the Institute of Education Sciences at $0.17 are neglibile as well. Even if Michelle Bachman or Rick Perry were able to shutter the Department of Education, the result on the deficit would be akin to you or me finding a dime on the street once in a while and sending it to the IRS. Put in perspective, the same $1000 in taxes pays for $204.39 in Social Security benefits, $130.67 in Medicare, and $47.06 on operations in Iraq and Afghanistan.

Come on America, isn't time we put aside pettiness, and work together to resolve our nation's ills? Let's make the hard choices, and set our priorities to what will create the most benefit despite our political or ideological leanings. What would be so wrong about rallying behind both Barack Obama's and Scott Walker's efforts to create high-quality jobs? Who cares who gets the credit! Ideologies don't garner results. That comes from rolling up our sleeves and getting dirty together, rather than simply slinging the dirt around.

Patents: good for innovation or stifling?

The August 20 issue of The Economist includes an article entitled "Intellectual Property: Patent Medicine" which discusses many of the problems with the American patent system, most of which were not addressed or redressed by the latest "patent reform" legislation. Here's the alarming statistic:

In recent years, however, the patent system has been stifling innovation rather than encouraging it. A study in 2008 found that American public companies’ total profits from patents (excluding pharmaceuticals) in 1999 were about $4 billion—but that the associated litigation costs were $14 billion.

At times it seems for a small innovative business that the effort and costs involved with preparing and filing patents may not be supported by the benefits that accrue. Retaining ideas as trade secrets, or protected in other ways like via SBIR data rights, may be a better means to protecting a company's intellectual property.

Angels or Demons

Following up on my recent post regarding Angels' reduced appetite for seed and startup investing, the October 2, 2010 print edition of The Economist presents a brief article entitled "Venture Capital: Angels or demons?", which argues the opposite point, describing a category of creature it dubs super angels "who run funds that invest in deals considered too small to be of interest to traditional venture-capital firms.":

Established firms have rediscovered their appetite for seed funding: Greylock Partners, a well-known venture firm, this week said it had launched a $20m seed fund.

So, the question is, which is it? Well, obviously it can be both. One problem we face is what I term the Depth-of-Field Problem. The concept of depth of field derives the world of photography and describes the range of clarity that surrounds a point of focus. The greater our distance from a point of focus, the more things look alike. The closer we are, the greater variety we can distinguish.

This often leads us to stereotype and cluster that which we have the least experience with, as the title of the above cited article implies: angels or demons? Despite entrepreneurs' and investors' possibly differing motivations, it is possible to find common ground. From my vantage, the greatest need in our economy is for seed and startup funds, which often provide the spark to an entrepreneur's kindling. Anyone interested in providing it is an angel in my book.

***Edited to add:
Here's a link to the Greylock Discover Fund, cited above, which anticipates investments from $25k -$500k.

Is China's Growth Unsustainable?

Of course, all things good and bad come to an end. The Economist's Robin Bew is projecting an 8%+ growth rate for China's economy in 2010. But a little talked about statistic may soon end China's hubris. As The Economist reported back in December, the year 2010 will likely mark a major milestone in China's demographics.

Largely a result of China's one-child policy, the percentage of the population dependent on others (mostly the elderly and the young) will begin to rise for the first time in decades. Over the coming years, as fewer and fewer active workers support greater numbers of pensioners, we will see China's economy plateau and then shrink. I wonder what the ramifications of this demographic shift will be on governance? Only time will tell.

Inside Boxes

In an article ostensibly lamenting the collateral impact of increased security for America's borders, the following sentence appears:

Among postdoctoral students doing top-level reasearch, 60% are foreign-born.

Putting aside the implication that native-born doctoral students are somehow subpar, I wonder at the worldview that might make sense of such a statistic. Just what could "top-level research" possibly mean objectively? By what stretch of the imagination might we constrain cutting-edge research into manageable gradations, such that some students' research could be deemed top-level, mid-level, low-level, remedial?

It would seem that such a worldview might in part be to blame for what Commerce Secretary Gary Locke has described as a broken innovation ecosystem. If innovation is stifled in America today, a large part of the blame rests in the assumption that the value of research can be known in advance, that such value can be assigned on the basis of what is already known, rather than on the basis of what is yet to be discovered.

At the risk of repeating myself, it is to support and sustain the discover of new innovations that there is such a need in the economy for seed funding, small pots of money to sustain a spare few researchers testing the mettle of their ideas, and driving the successful attempts to market. The Small Business Innovation Research program (SBIR) is one of the few sources for such seed funding, and just now it's being held hostage to the whims of the House Small Business Committee, in particular the committee's Chair, Nydia Velázquez, and Ranking Member Sam Graves. Their maneuvering has kept the SBIR program from reauthorization for two years now, doling out so far six short-term continuing resolutions. Whatever their motivation, support for innovation and small businesses is not among them!