I have had this continuing concern for human isolationism. I observe with so much frequency the noses of us all buried in our iPhones sending and receiving messages to and from anyplace but here. We are physically in the same room but our minds and souls are elsewhere.
I have so many times adjudged our iPhones to be the tipping device that has sent us to a place far away from the way we should be-connected in the flesh. I have wondered why we have suddenly embarked into adjacency and what the magic of the iPhone device may have been.
And then it dawned on me: this device did not cause any sudden metamorphis - we were aleady trying to achieve escape velocity. It is very difficult to change human behavior much less do it en masse. The great popularity of iPhone isolationism can thus only suggest to me that the device did not change human character but rather revealed it. Behavior and the human tendency is magnified. It was something people were already doing but wanted to do better, to do more deeply.
This raises an interesting frame for investment thesis-find things that tap into deep social trends and unleash them. So in a way we [venture investors] would not be technology investors but rather social psychologists that tempt our vices. This actually sounds like it could be a good business.
Sunday, May 9
Thursday, April 22
iPad in Between
I have been fiddling with an iPad for about two weeks now and my initial judgment is that it lies someone between an iPhone and a notebook computer and it replaces neither. It overcomes some of my "wouldn't it be great" wish list for my iPhone such as screen and keyboard size (are too small) and does the same for my notebook such as (I wish it were smaller and I don't want to lug around a mouse).
The interesting thing to me about the iPad is not so much the device itself but the strategic aspects of the device in the context of overall positioning of Apple in the market. When I heard the early rumors of the coming iPad I sort of supposed that it would diminish the role of the iPhone. I have also wondered about the likely impact of Google's cell-phone-based operating systems (android) and the pressure it would apply to the iPhone market stature. Then came the iPad.
I think that Apple employees would not be offended by my initial judgment of the iPad (between iPhone and Notebook). I think that Apple purposefully left applicability of the device to the eye of the beholder rather than saying it is a this or it is a that and thus, would not be uncomfortable with my descriptive latitude. The reason Apple can avoid defining the Product (without confusing the customer) is that the device already has a large developer community behind it via the iPhone. The applications produced by the developer community makes the device serve many different roles.
So here is where we get to the strategic implications of the iPad (work with me here): The iPad has range because it has a large embedded developer community which stems from the iPhone. Applications enable the device to do many different things. If I am a developer, the more markets I have for my products the happier I am. Since the iPad and iPhone application development frameworks are close I can basically take the same application into both markets. The result of the iPad is that the developer community sees more life than before (the iPad) in a relationship with Apple products. He thinks to himself, "Hey...I can keep selling my products for years to come!". This in turn is good for the iPhone because (a) the developer community doesn't abandon the iPhone and, (b) the community will actually grow as more persons are willing to dedicate themselves to developing on apple products. And the final result is this: the iPhone's position is strengthened relative to anything powered by Google. So I am making the argument here that the iPad may have negatively impacted Google's cell-phone ambitions.
Here is the other thing: I think touch computing now actually has a chance. With the iPad, I can actually touch the screen and compute. This is going to require that application development think differently. That application development submits to the notion that meaningful things can be done at the press or touch of a "button". How many times before over the past ten years have we tried something other than a mouse and a keyboard and found these "alternatives" falling short of the star trek version of computing? Big ignition, no rocket lift off.
I really think we are seeing the dawn of something new. Something that will, in fact, stay with us. I have never observed so much hope in a single device during my investment career. Folks seeing me with this device asking me what the experience is like. Everyone wants to know and their instants are right. This may be it.
The interesting thing to me about the iPad is not so much the device itself but the strategic aspects of the device in the context of overall positioning of Apple in the market. When I heard the early rumors of the coming iPad I sort of supposed that it would diminish the role of the iPhone. I have also wondered about the likely impact of Google's cell-phone-based operating systems (android) and the pressure it would apply to the iPhone market stature. Then came the iPad.
I think that Apple employees would not be offended by my initial judgment of the iPad (between iPhone and Notebook). I think that Apple purposefully left applicability of the device to the eye of the beholder rather than saying it is a this or it is a that and thus, would not be uncomfortable with my descriptive latitude. The reason Apple can avoid defining the Product (without confusing the customer) is that the device already has a large developer community behind it via the iPhone. The applications produced by the developer community makes the device serve many different roles.
So here is where we get to the strategic implications of the iPad (work with me here): The iPad has range because it has a large embedded developer community which stems from the iPhone. Applications enable the device to do many different things. If I am a developer, the more markets I have for my products the happier I am. Since the iPad and iPhone application development frameworks are close I can basically take the same application into both markets. The result of the iPad is that the developer community sees more life than before (the iPad) in a relationship with Apple products. He thinks to himself, "Hey...I can keep selling my products for years to come!". This in turn is good for the iPhone because (a) the developer community doesn't abandon the iPhone and, (b) the community will actually grow as more persons are willing to dedicate themselves to developing on apple products. And the final result is this: the iPhone's position is strengthened relative to anything powered by Google. So I am making the argument here that the iPad may have negatively impacted Google's cell-phone ambitions.
Here is the other thing: I think touch computing now actually has a chance. With the iPad, I can actually touch the screen and compute. This is going to require that application development think differently. That application development submits to the notion that meaningful things can be done at the press or touch of a "button". How many times before over the past ten years have we tried something other than a mouse and a keyboard and found these "alternatives" falling short of the star trek version of computing? Big ignition, no rocket lift off.
I really think we are seeing the dawn of something new. Something that will, in fact, stay with us. I have never observed so much hope in a single device during my investment career. Folks seeing me with this device asking me what the experience is like. Everyone wants to know and their instants are right. This may be it.
Friday, March 26
Energy Supply Chain
The energy supply chain is unique. It is unique in that it can not be well timed, it can not be automated, and it is comprised mainly of people who do things rather than parts.
Because it involves mainly people who do things it is difficult to mathematically identify elements of the chain that can be reengineered to improve the process. The human process is so variable that process improvement opportunities do not reveal themselves to the casual eye.
It is difficult enough to get employees of the same company to reorganIze in such a way as to improve what they are doing much less get employees of multiple companies working in such a way as to improve. Where is the incentive to improve the whole? It is not there. Who gets paid if they work together better? No one. Each party is trying to grab their piece of the pie. The cyclicality of the industry is too great to fuel focus on collaboration improvement. This is the history of the industry. So what are we to do? Where one man sees problems another sees opportunity.
Because it involves mainly people who do things it is difficult to mathematically identify elements of the chain that can be reengineered to improve the process. The human process is so variable that process improvement opportunities do not reveal themselves to the casual eye.
It is difficult enough to get employees of the same company to reorganIze in such a way as to improve what they are doing much less get employees of multiple companies working in such a way as to improve. Where is the incentive to improve the whole? It is not there. Who gets paid if they work together better? No one. Each party is trying to grab their piece of the pie. The cyclicality of the industry is too great to fuel focus on collaboration improvement. This is the history of the industry. So what are we to do? Where one man sees problems another sees opportunity.
Sunday, March 21
Healthcare Reform
This morning I am watching Face The Nation and the topic is healthcare reform. When I think of healthcare reform I think of three primary points of focus: access, quality, and price. This posting is regarding the issue of price.
We have an investment in a telemedicine company. The company provides primary and specialty care medical services. It contracts directly with corporations and uses the telemedicine model so that its doctors can be in several places at once. The standard of care is high, the patients are happy, and the price is right.
In this model, the patients get all the doctor attention they need for a fixed price (paid by their employer) and the doctors are not limited to what tests they can run or plans they can implement. The billing process is extremely simple: one employer, one bill with one line item, no insurance company.
In this model employers are buying healthcare directly. The employers are paying the doctors. Now the employees don't have the freedom of choice they do under conventional plans but for no cost to them (paid by employer 100%) they are not arguing. And by the way, this cost the employers about half what they would otherwise pay via the insurance model.
Here is the other part: in this new model, the doctors make money, the employers make money (via huge savings), and investors make money. The only party not making money is the insurance company. Now certainly insurance companies prevent abuse in billing but it seems to me the complexities created by the insurance companies have run past the benefits of their original charter. So maybe what we are really talking about is "Billing Reform". This would suggest that the problem is not in healthcare practice but rather how the money moves around.
I am certain an insurance executive would have a myriad of counter arguments but it is difficult to argue with the actual results in the field of our own services provider.
Before we involved ourselves in this investment, we spent two years studying a larger version of the company which had been operating for more than ten years. The larger version was the University of Texas' Correctional Managed Care operation which provided all-inclusive health services to the State of Texas prison inmate population. This population was 119,000 patient lives and the daily fee of $8 per inmate per day covered everything. By everything I mean doctors, surgeries, pharmaceuticals, dental, vision, disease management (HIV, diabetes, etc), psychiatric, autopsy, burial....everything. The quality of care exceeded what most insured Americans receive and the operation made money. All on $8 per day and costs have not risen in seven years. The difference here as compared to the conventional model is that the provider is trying to save money and the person trying to save money is trying to provide the best care. This leads me back to the same conclusion because only thing missing was an insurance company.
We have an investment in a telemedicine company. The company provides primary and specialty care medical services. It contracts directly with corporations and uses the telemedicine model so that its doctors can be in several places at once. The standard of care is high, the patients are happy, and the price is right.
In this model, the patients get all the doctor attention they need for a fixed price (paid by their employer) and the doctors are not limited to what tests they can run or plans they can implement. The billing process is extremely simple: one employer, one bill with one line item, no insurance company.
In this model employers are buying healthcare directly. The employers are paying the doctors. Now the employees don't have the freedom of choice they do under conventional plans but for no cost to them (paid by employer 100%) they are not arguing. And by the way, this cost the employers about half what they would otherwise pay via the insurance model.
Here is the other part: in this new model, the doctors make money, the employers make money (via huge savings), and investors make money. The only party not making money is the insurance company. Now certainly insurance companies prevent abuse in billing but it seems to me the complexities created by the insurance companies have run past the benefits of their original charter. So maybe what we are really talking about is "Billing Reform". This would suggest that the problem is not in healthcare practice but rather how the money moves around.
I am certain an insurance executive would have a myriad of counter arguments but it is difficult to argue with the actual results in the field of our own services provider.
Before we involved ourselves in this investment, we spent two years studying a larger version of the company which had been operating for more than ten years. The larger version was the University of Texas' Correctional Managed Care operation which provided all-inclusive health services to the State of Texas prison inmate population. This population was 119,000 patient lives and the daily fee of $8 per inmate per day covered everything. By everything I mean doctors, surgeries, pharmaceuticals, dental, vision, disease management (HIV, diabetes, etc), psychiatric, autopsy, burial....everything. The quality of care exceeded what most insured Americans receive and the operation made money. All on $8 per day and costs have not risen in seven years. The difference here as compared to the conventional model is that the provider is trying to save money and the person trying to save money is trying to provide the best care. This leads me back to the same conclusion because only thing missing was an insurance company.
Saturday, March 13
V.I Lenin Slept Here
Many technology vendors regularly laud the solution they propose to bring to the market: "We have this solution and that solution and you should see our solution that solves stuff using our solutions approach".
In early stage investing I think it is in error to believe that technology vendors are selling solutions. For there to be a solution, there must first be a problem. Many times a prospective customer does not even know he has a problem (and many times he actually doesn't). The point I am making here is that early stage companies generally must convince the market that there is, in fact, a problem. The attributes of the problem must include that its resolution is meaningfully beneficial and that resolution is possible. This process of "selling the problem" to the prospect is fraught with many points of potential failure. Let me explain.
As humans, we long for personal security. The process of automation generally depreciates human relevance and value around the process automated. The human is increasingly commoditized by automation and, as a result, and his wage rate is made to decrease. He becomes a form of appendage to the revised, automated process. Thusly his, "I feel secure barometer" reveals lower-than-normal pressure.
When the eager "solutions" vendor appears at the doorstep of the would-be affected labor pool, this labor pool perceives that something perilous is afoot. "We are about to be commoditized by the machines", they chant and they withdraw inward into problem avoidance. The labor pool is knowledgeable in this regard because it has its own history of dislocating some predecessor process and labor pool in some prior revolution where a now deceased labor pool put up its own fight.
Extrapolated to a larger scale this is the same type of "revolutionary" dynamic that has permeated history disguised as political change - the war between the old ways of making money vs. the new ways. Lenin knew all about this and would have likely been the all-time master of software sales.
As humans, we long for personal security. The process of automation generally depreciates human relevance and value around the process automated. The human is increasingly commoditized by automation and, as a result, and his wage rate is made to decrease. He becomes a form of appendage to the revised, automated process. Thusly his, "I feel secure barometer" reveals lower-than-normal pressure.
When the eager "solutions" vendor appears at the doorstep of the would-be affected labor pool, this labor pool perceives that something perilous is afoot. "We are about to be commoditized by the machines", they chant and they withdraw inward into problem avoidance. The labor pool is knowledgeable in this regard because it has its own history of dislocating some predecessor process and labor pool in some prior revolution where a now deceased labor pool put up its own fight.
Extrapolated to a larger scale this is the same type of "revolutionary" dynamic that has permeated history disguised as political change - the war between the old ways of making money vs. the new ways. Lenin knew all about this and would have likely been the all-time master of software sales.
Successful early-stage technology companies should many times be viewed NOT as technology companies per se but rather highly competent group psychologists. They are psychologists who can untangle problem avoidance and convert it into a purchase order. They can manage around the labor forces that might fearfully resist change. "Fire good, Trog like fire!" Once groups of people believe they have a problem and it is sucking income out of their wallets they generally will stampede to find a solution (sometimes they try and kill the solution and anything that may be a threat). The stampede runs fast and buying the solution happens in a hurry. On the other hand, selling the problem takes time. Studied through this lens my perception of what is in play at an early stage technology company is definitely altered.
Friday, February 12
I said "No Tomatoes Please"
It is very easy to get lost in the language of technology. It is easy to falsely believe that you understand the language of technology and its underlying subjects.
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Act II: Applying the Metaphor
It is easy for one to look at SMH Private Equity Group as a vehicle for "technology investing." It is not. It is actually a vehicle for investing in process improvement. We invest in things that modify conventional business practices making them less complicated and easier to understand. I used to think that the Energy Industry was this small thing. The amount of money it spends each year to keep the lights on is staggering. The amount of avoidable waste incurred in doing so is equally staggering.
___________________________________________
Act I: Supply Chain for Dummies
Yesterday I was standing in line at one of my favorite sandwich shops - Subway. Subway runs an assembly line form of sandwich making using three individuals to produce and one more to manage financial settlement.
My custom sandwich order required ten different components to be assembled over a stretch of approximately six feet of assembly line. I was asked many different questions during the process such as what bread I want, toasted or not, do I want pickles, do I want mayonnaise, is it to-go? I noticed that during assembly of my custom order, there was one manufacturing error and twice I was required to repeat the names of different desired components (so as to avoid more errors).
This process of component requisition and assembly can fairly be described as "supply chain." It is my sandwich supply chain where I am interacting to obtain different components in a particular order to a desired construct at an agreed-upon price. This is easy...I understand it...I think most people can derive from this a working concept of supply chain. There are a lot of moving pieces here and any of us who have walked the Subway assembly line have endured mistakes: one sandwich, six-feet of travel, four persons involved - regular mistakes.
This process of component requisition and assembly can fairly be described as "supply chain." It is my sandwich supply chain where I am interacting to obtain different components in a particular order to a desired construct at an agreed-upon price. This is easy...I understand it...I think most people can derive from this a working concept of supply chain. There are a lot of moving pieces here and any of us who have walked the Subway assembly line have endured mistakes: one sandwich, six-feet of travel, four persons involved - regular mistakes.
Act II: Applying the Metaphor
Now listen to a broad description of producing oil spoken in "sandwich metaphor". Sandwich design requires various scientists to agree on where and how to build a sandwich, the process of building a sandwich requires that all the ingredients be shipped to a place nobody has been to before, building a sandwich takes several months to years and requires hundreds of workers and tasks. Many times the workers have never worked together before. The chances of making a mistake here are very significant as are the costs.
What I am trying to do here is help the reader make the jump from an every-day supply chain encounter (Subway) to the complexities faced by those involved in the supply chain of the Energy Industry.
Act III (Dramatic Finish): "Big Deal...and So What?"
The big deal and so what is this....there are many ways to lower the cost of energy...(a) bring on more alternatives to fossil fuels., (b) improve the methods of locating and extracting fossil fuels lowering the overall cost to manufacture a unit of energy, (c) quit using error prone and inefficient methods for business and support processes around manufacturing a unit of energy.
The largest industry in the world still relies primarily on clipboards and isolated spreadsheets to complete one of the most complicated manufacturing processes in the world. This fascinates me. What we see is that the industry unnecessarily does things in ways that other industries ceased years ago. As a result, we see a lot of opportunity for process improvement (i.e. lowering costs). Simple things that the rest of the world did years ago - e.g. using telemedicine to take healthcare to the rigs instead of taking workers off the rig (pretty basic).
Fortunately for me (as a fund manager)...most people in the technology investing world believe the Energy Industry is a niche industry that happens somewhere in the Southwest United States to the east of El Paso, Texas. There are so many problems present in the Energy Industry's methods of getting work done that most experienced investors would view it as Sutter's Mill for investing in things that counter those problems.
What I am trying to do here is help the reader make the jump from an every-day supply chain encounter (Subway) to the complexities faced by those involved in the supply chain of the Energy Industry.
Act III (Dramatic Finish): "Big Deal...and So What?"
The big deal and so what is this....there are many ways to lower the cost of energy...(a) bring on more alternatives to fossil fuels., (b) improve the methods of locating and extracting fossil fuels lowering the overall cost to manufacture a unit of energy, (c) quit using error prone and inefficient methods for business and support processes around manufacturing a unit of energy.
The largest industry in the world still relies primarily on clipboards and isolated spreadsheets to complete one of the most complicated manufacturing processes in the world. This fascinates me. What we see is that the industry unnecessarily does things in ways that other industries ceased years ago. As a result, we see a lot of opportunity for process improvement (i.e. lowering costs). Simple things that the rest of the world did years ago - e.g. using telemedicine to take healthcare to the rigs instead of taking workers off the rig (pretty basic).
Fortunately for me (as a fund manager)...most people in the technology investing world believe the Energy Industry is a niche industry that happens somewhere in the Southwest United States to the east of El Paso, Texas. There are so many problems present in the Energy Industry's methods of getting work done that most experienced investors would view it as Sutter's Mill for investing in things that counter those problems.
___________________________________________
Epilogue:
It is easy for one to look at SMH Private Equity Group as a vehicle for "technology investing." It is not. It is actually a vehicle for investing in process improvement. We invest in things that modify conventional business practices making them less complicated and easier to understand. I used to think that the Energy Industry was this small thing. The amount of money it spends each year to keep the lights on is staggering. The amount of avoidable waste incurred in doing so is equally staggering.
Tuesday, January 5
Multicar Crash into the Wall on Turn Three
A fairly smart individual recently reminded me to consider the positive side of every negative. If one has the luxury of stepping back from the problems they bear (and contemplate their essence and consequence), there is a chance that opportunity might reveal itself. Maybe.
Currently the crowd is betting against venture capital and the crowd has good reason to do so. The venture industry has been overrun by cheap imitations and everyone is to blame. Nonetheless we find ourselves in a situation where many venture firms are dying and their limited partners have henceforth sworn off venture fund investment allocation. So what is the positive side of this negative?
In a phrase..."substantially less competition." And what happens when there is substantially less competition? Specifically:
Currently the crowd is betting against venture capital and the crowd has good reason to do so. The venture industry has been overrun by cheap imitations and everyone is to blame. Nonetheless we find ourselves in a situation where many venture firms are dying and their limited partners have henceforth sworn off venture fund investment allocation. So what is the positive side of this negative?
In a phrase..."substantially less competition." And what happens when there is substantially less competition? Specifically:
- Lower pre-money valuations;
- Better concentration of management teams (there are fewer places for them to work); and,
- Fewer "me too" competitors which reduces market confusion and shortens product sales cycles.
Less money to make higher returns sooner.
Companies that struggle to get one term sheet today would have received three term sheets back in 2005 (these are my own observations). The number of software deals completed each quarter in 2005 averaged 220. The number of software deals completed in the 3rd quarter of 2009 was 128 (per NVCA). This reflects a decline of 41.8%.
To put the decline rate into perspective...complete the following exercise with me: Look around your place of operation...see the people that cause the operation to move...now imagine that 4 out of each 10 of them simply vanish and are not available to the business. This is the magnitude of things underway in the venture industry. My sense is that we are now in the second half of an industry purge. My other sense is the magnitude of the pain incurred today can be proportional to the prosperity of tomorrow. To paraphrase a famous investor..."When other people get scared..you should get greedy."
To put the decline rate into perspective...complete the following exercise with me: Look around your place of operation...see the people that cause the operation to move...now imagine that 4 out of each 10 of them simply vanish and are not available to the business. This is the magnitude of things underway in the venture industry. My sense is that we are now in the second half of an industry purge. My other sense is the magnitude of the pain incurred today can be proportional to the prosperity of tomorrow. To paraphrase a famous investor..."When other people get scared..you should get greedy."
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