Tag Archives: silicon valley

Why Facebook is Killing Silicon Valley


We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win…

— John F. Kennedy, September 1962

Innovation
I teach entrepreneurship for ~50 student teams a year from engineering schools at Stanford, Berkeley, and Columbia. For the National Science Foundation Innovation Corps this year I’ll also teach ~150 teams led by professors who want to commercialize their inventions. Our extended teaching team includes venture capitalists with decades of experience.

The irony is that as good as some of these nascent startups are in material science, sensors, robotics, medical devices, life sciences, etc., more and more frequently VCs whose firms would have looked at these deals or invested in these sectors, are now only interested in whether it runs on a smart phone or tablet. And who can blame them.

Facebook and Social Media
Facebook has adroitly capitalized on market forces on a scale never seen in the history of commerce. For the first time, startups can today think about a Total Available Market in the billions of users (smart phones, tablets, PC’s, etc.) and aim for hundreds of millions of customers. Second, social needs previously done face-to-face, (friends, entertainment, communication, dating, gambling, etc.) are now moving to a computing device. And those customers may be using their devices/apps continuously. This intersection of a customer base of billions of people with applications that are used/needed 24/7 never existed before.

The potential revenue and profits from these users (or advertisers who want to reach them) and the speed of scale of the winning companies can be breathtaking. The Facebook IPO has reinforced the new calculus for investors. In the past, if you were a great VC, you could make $100 million on an investment in 5-7 years. Today, social media startups can return 100’s of millions or even billions in less than 3 years. Software is truly eating the world.

If investors have a choice of investing in a blockbuster cancer drug that will pay them nothing for fifteen years or a social media application that can go big in a few years, which do you think they’re going to pick? If you’re a VC firm, you’re phasing out your life science division. As investors funding clean tech watch the Chinese dump cheap solar cells in the U.S. and put U.S. startups out of business, do you think they’re going to continue to fund solar? And as Clean Tech VC’s have painfully learned, trying to scale Clean Tech past demonstration plants to industrial scale takes capital and time past the resources of venture capital. A new car company? It takes at least a decade and needs at least a billion dollars. Compared to IOS/Android apps, all that other stuff is hard and the returns take forever.

Instead, the investor money is moving to social media. Because of the size of the market and the nature of the applications, the returns are quick – and huge. New VC’s, focused on both the early and late stage of social media have transformed the VC landscape. (I’m an investor in many of these venture firms.) But what’s great for making tons of money may not be the same as what’s great for innovation or for our country. Entrepreneurial clusters like Silicon Valley (or NY, Boston, Austin, Beijing, etc.) are not just smart people and smart universities working on interesting things. If that were true we’d all still be in our parents garage or lab. Centers of innovation require investors funding smart people working on interesting things — and they invest in those they believe will make their funds the most money. And for Silicon Valley the investor flight to social media marks the beginning of the end of the era of venture capital-backed big ideas in science and technology.

Don’t Worry We Always Bounce Back
The common wisdom is that Silicon Valley has always gone through waves of innovation and each time it bounces back by reinventing itself.

[Each of these waves of having a clean beginning and end is a simplification. But it makes the point that each wave was a new investment thesis with a new class of investors as well as startups.] The reality is that it took venture capital almost a decade to recover from the dot-com bubble. And when it did Super Angels and new late stage investors whose focus was social media had remade the landscape, and the investing thesis of the winners had changed. This time the pot of gold of social media may permanently change that story.

What Next
It’s sobering to realize that the disruptive startups in the last few years not in social media – Tesla Motors, SpaceX, Google driverless cars, Google Glasses – were the efforts of two individuals, Elon Musk, and Sebastian Thrun (with the backing of Google.) (The smartphone and tablet computer, the other two revolutionary products were created by one visionary in one extraordinary company.) We can hope that as the Social Media wave runs its course a new wave of innovation will follow. We can hope that some VC’s remain contrarian investors and avoid the herd. And that some of the newly monied social media entrepreneurs invest in their dreams. But if not, the long-term consequences for our national interests will be less than optimum.

For decades the unwritten manifesto for Silicon Valley VC’s has been: We choose to invest in ideas, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win.

Here’s hoping that one day they will do it again.

Read more Steve Blank posts at www.steveblank.com.

When Founders And Investors Split Over An Acquisition Offer


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Editor’s note: Tomio Geron is head of content at startup Exitround. This is part of a series of posts on the tech M&A market. Follow him on Twitter @tomiogeron.

For one founder who recently sold his startup, it was the culmination of a long journey. At the same time, the founder, who spoke to me on the condition of anonymity, had problems during the acquisition process, feeling bullied by a venture investor.

The investor argued against a sale of the startup, and then after agreeing to the sale, proceeded to call the buyer and yell about terms of the deal. The investor also pushed for certain terms that the founder felt were unfair and benefited the investor.

The founder was pleased with the outcome but felt powerless to stop this investor from essentially steamrolling the process.

“They didn’t want to sell because, for them, the deal was too small,” the founder says. “Eventually our investors inserted themselves into the negotiations. They actually screwed things up for us because they demanded more and actually offended the buyers.”

This type of story rarely gets publicly told in Silicon Valley, since founders and investors don’t want to reveal how the sausage is made in negotiations — and more importantly don’t want to criticize each other in public and break Silicon Valley’s unspoken rule of positivity. But because of how venture capital is structured (more on this below), and because of the many startups that will need to sell without being able to raise more funding in the current environment, these types of situations are bound to come up.

Negotiating with a buyer is a challenge for founders in an acquisition. But negotiating with one’s own side — the investors — can be just as difficult, if not more so. These disagreements typically arise when startups get an offer to sell and the founders and venture investors disagree about what to do. These offers, even if relatively small in Silicon Valley terms — say $10 million or $20 million — can be “life-changing” for founders. But for venture investors, particularly with big funds ($300 million, $400 million or even $1 billion), smaller exits are not appealing. To explain why, we need to look at how traditional venture funds are structured.

Fund Economics

VCs typically want a good venture fund to make 3-5x their money. In other words, a fund with $250 million invested would have to return $750 million to $1.25 billion from the fund’s companies that are acquired, IPO, or are otherwise sold off in some form. A 4x return would net about a 2.5x distribution to the fund’s limited partners after fees to the general partners. So VCs depend on massive “home run” exits. For a $250 million fund, VCs would require at least three to four exits of $1 billion or 10 exits of $400 million. (This assumes a VC fund would get 20 percent of the exit price.)

As a result, smaller sub-$100 million exits aren’t that attractive to most large VCs, particularly if they have made a large investment. Many would rather not sell, and instead they roll the dice and hope for a larger outcome. “VCs often look at return on their money as opposed to IRR (as a metric). The fact that they made 4x (return) on $5 million over nine months on a $500 million fund: who cares?” says Villi Iltchev, EVP of corporate development at LifeLock.

To be clear, I’m not saying that all VCs are mistreating startups or behaving badly. I’m not even arguing that the investors’ actions described above are necessarily wrong. (Though it does explain why some founders privately complain about VCs.) And of course, unlike the investor described above, many investors do let their founders make the call on acquisition offers without pressuring them at all.

Aligning Interests

So while many VCs don’t like to talk about it, their immediate economic interests can diverge from their startups, particularly in smaller acquisitions, Iltchev says. “For founders, especially those who are not independently wealthy, their tolerance for risk is usually lower. VCs are in the business of managing risk on a portfolio basis. For founders an exit can be a once in a lifetime chance to change their life for their family. For investors the same transactions may be immaterial.”

This isn’t to say VCs (or founders) are necessarily at fault. The different economic interests are inherently part of the venture model. Other structures may evolve but this is now the dominant model. That certain investors don’t adhere to these fund economics and let founders make their own decisions is a credit to them and their long-term thinking to try to keep founders coming back to them for future investments.

There are also things that venture firms have done to better align interests of founders and investors. Founders Fund created Series FF stock, which gives founders more flexibility to sell shares. And many venture firms now allow founders to take a small percentage of “money off the table” in a secondary transaction to reduce the financial need for founders to sell early.

Different Investors

Of course, not all investors have the same interests. The larger a VC fund, and the more of their money they have invested in a company, the less likely they are to like a smaller exit. Smaller seed investors or micro-VC funds, which are proliferating, don’t need billion-dollar exits to return their funds, so they are happier with smaller exits — what Dave McClure calls a “Moneyball” model. This makes sense, since about 88 percent of tech acquisitions in the last five years with announced prices were less than $100 million, according to Capital IQ. Also, sites like AngelList and FundersClub enable more individuals to invest, and these individuals typically don’t push for massive exits.

Despite the potential conflict of interest I’ve described (i.e. founders want to sell but investors don’t), some venture investors will help negotiate a deal. Particularly for younger, less experienced founders, investors will get actively involved. And some smaller angels or micro-VC investors have less incentive to oppose smaller acquisitions so there can be less of a conflict. For example, seed stage investor Manu Kumar, founder of K9 Ventures, has negotiated acquisitions for a number of his startups.

Psychology

For founders it can be difficult to disagree with an investor on a sale. In particular, first-time founders often feel indebted to investors for taking a chance on them. So to turn around and say, “No we don’t agree with you,” can be hard to do.

Many VCs have rights they can use to try to block an acquisition. But most rarely use them, particularly if a founder makes a good case for a deal as the best possible outcome for a company. VCs do not want to be known as  “not founder friendly,” even if they hate a deal and feel it is unfair. But they’ll complain privately. Like the anonymous founder mentioned above, Iltchev has received calls and been yelled at by investors who are unhappy with a deal.

Buyer View

For buyers, of course, it’s complicated when sellers and investors aren’t on the same page. Buyers don’t want to negotiate with multiple parties in the same company. On the other hand, if a VC is calling a buyer, that can mean the founder has already decided to take the deal. “If the investor is calling me to negotiate terms, it is probably because they have already lost the battle with the founder and they are just trying to beat me up,” Iltchev says.

At top Silicon Valley buyers, it is standard to treat investors well, even if they don’t technically have to. For example in an acqui-hire – where a buyer just wants the team but not the product or IP — a buyer could just hire a startup team and not pay the investors anything. But most big Silicon Valley buyers want to stay on good terms with investors — who, after all, send them companies to buy — so they will try to make investors happy by paying back their original investment, if not more. (Non-Silicon Valley buyers do not necessarily play by these rules.)

I will be extremely cautious before ever accepting VC investment again and would only do it on my terms.

Founder Choices

The anonymous founder mentioned above, reflecting on the experience, says, “My advice would be to make sure you have someone who will stick with you not just when things are going well, but during the inevitable struggle that all startups face. It’s fine to have a strong investor who pushes you and fights for what they think is best for the company, but hopefully it’s not just what’s best for them. That said, I will be extremely cautious before ever accepting VC investment again and would only do it on my terms.”

For founders the best way to avoid these problems is to choose the right investor. Vet your investors and have honest conversations before they invest. Ask them what their return profile is and what kind of exit they’re expecting for your company, says Ursheet Parikh, former CEO of StorSimple, which was acquired by Microsoft, and a new partner at Mayfield Fund.

“Some investors may not appreciate you talking to any large companies early because they are concerned that these strategic buyers may either be a distraction or try to buy you early on the cheap,” he says.

That’ll give you an idea of what you are expected to deliver and whether you’re ready to accept that money and the strings attached. And have an honest conversation with the investor about what would happen if you disagreed with him or her on an acquisition offer. The more honest and transparent they are with you the better. Ultimately the more you prepare while choosing your investor, the better position you’ll be in when acquisition offers come in.

Image by Shutterstock

http://techcrunch.com/2014/02/22/when-founders-and-investors-split-over-an-acquisition-offer/

Plan To Make Silicon Valley Its Own State Gets Green Light To Collect Votes


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Back when we first found out about investor Tim Draper’s plan to break California into six different states (including one for Silicon Valley), we weren’t sure how far the unorthodox plan would go.

But, just this week, Draper got the green light from the state to go ahead and collect signatures to put his plan on the California ballot.

To be sure, he’ll still need to gather about 800,000 signatures to put it before the voters; and, even if it were successful at the ballot box, it could face opposition from federal authorities.

Without a groundswell of support, Draper will have to pay an army of signature gatherers to stand outside grocery-store parking lots and bus stations to wrangle residents for their approval. Such campaigns can pay $3 a signature or more to signature gatherers (a.k.a. the folks that sit outside grocery stores with a clipboard), but Draper told me that he’s willing to put money into a campaign to see this project through.

Earlier this year, the state of California put out an official analysis of what would happen to California if Silicon Valley became its own state. Given the Valley’s high concentration of wealth, a lot of funding for schools and social services would be stripped away from the less financially successful parts of the state if it somehow succeeded.

But Draper says that California has become too unwieldy in its current form and needs to be decentralized. Specifically, the proposed six new states are Silicon Valley, West California, Jefferson, South California, Central California and North California.

It’s still a long shot, but Draper seems to have made it through the first hoop.

http://techcrunch.com/2014/02/21/plan-to-make-silicon-valley-own-state-gets-green-light-to-collect-votes/

Facebook Investor Peter Thiel Calls Technology A “Scapegoat” For Inequality


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Early Facebook investor and noted Silicon Valley libertarian Peter Thiel thinks that too many Americans have mistakenly blamed technology for rising inequality. “Technology is an easy scapegoat,” he argued, in a big-think discussion put on by political lobby, FWD.us.

In a wide-ranging discussion with MIT professor Andrew McAfee, the two duked it out about technology’s role in social ills. “I think technology has helped,” Thiel said. “You have things like Facebook, like Google–technology has helped to offset some of the brutal effects of globalization”.

While globalization has flooded the low-skilled job market with ultra-cheap outsourced labor, technology has relieved the beleaguered middle-class with services in health, education and leisure that were once the exclusive domain of the wealthy, Thiel asserts.

Indeed, he partly blamed the failure to recognize the contributions of technology on an American mindset that is “anti-technology.” For instance, he notes, there was no financial industry-like bailout of Silicon Valley during the first dot-com bubble. He also notes that the nation’s general animosity toward tech can also be seen in the movie industry, which inundates the masses with tech super villains from “The Matrix,” “Avatar,” and” The Terminator” in a period of high tech hostility (compared to more tech-friendly movies, such as “Star Trek” in the ’60s and “Back To the Future” in the 80s, which is when he thinks the U.S. was less anti-tech).

As a self-avowed libertarian, Thiel wasn’t thrilled about the government bail-out of the financial industry. But he shocked the crowed when he openly supported more taxes in exchange for less regulation.

“I wouldn’t mind paying more in taxes if I could do anything I wanted to do with the rest of the money, which I’m largely restricted in what I can do, from the FDA on down to the San Francisco zoning department.”

San Francisco has an infamously restrictive policy on new housing developments, which has contributed to sky-high rents and evictions. Thiel’s comments were a transparent nod to the protests in front of Google’s private commuter buses, which have become a convenient symbol of the wealthy high-tech workers who have the free cash to cause upward demand pressure on San Francisco rents.

In other words, while protestors blame technology, Thiel hints at other causes — namely government.

For McAfee’s role in the discussion, he towed the traditional economist line on technology and financial disparity. “The observed rise in inequality across both developed and developing countries over the past two decades is largely attributable to the impact of technological change,” wrote a team of economists for International Monetary Fund–a sentiment widely shared in the academic community.

According to the economists, as technology automates jobs, it concentrates labor in a small slice of high-skilled workers.

Thiel rebutted this line of evidence by arguing that computers are complementary to people: they augment workers; they don’t replace them. “LinkedIn does not replace job recruiters,” he said.

Though he does admit that once computers begin to replicate humans (i.e. robots), he begins to get “scared” for the future job market.

Overall, it was a very thoughtful discussion; it was nice to see politically powerful techies lay out their contentious views on inequality for the public.

As soon as the video of the full discussion is available from FWD, we’ll embed it here.

[Image Credit: TechCrunch 50]

http://techcrunch.com/2014/02/21/facebook-investor-peter-thiel-calls-technology-a-scapegoat-for-inequality/

From the Archives: On The Bubble


Note: I am gathering some of my better essays from the past and collecting them on Medium, as they are easier to store here than my Tumblr.

This one was written April 2, 2011. The Chris Dixon article, and bubble talk are obviously somewhat dated, but people often ask for a link to this for its analysis of the digital ad economy as a whole.


Okay, a few more thoughts on this Chris Dixon article and whether it’s a bubble, since going and reading the article, I am surprised to see Dixon arguing that not only is it a safer bubble (private investors, discussed in my last entry) but that perhaps it’s not a bubble at all.

That, to me, seems incorrect. It’s a bubble. Absolutely no doubt. Some thoughts on his arguments for it not being a bubble:

First, Dixon points out that bubbles are the decoupling of valuations and underlying economic fundamentals. This is true, definitely, but bear in mind it is the decoupling of individual companies, or assets valuations and the individual company’s economic fundamentals, not the economy’s as a whole. A strong or growing economy doesn’t make this less true. It’s on an asset by asset basis. Dixon correctly points out that it’s hard to pin the value of the current crop of assets, so he can’t say whether or not they’re overvalued. However, this lack of ability is actually a characteristic of a growing bubble. I don’t know Facebook’s economic fundamentals (aside from rabidly reading the rumors) but I would still love a piece of it. That should be of concern.

The argument that bubbles can’t happen so long as the economy is growing, because there’s always someone left to hold the bag, is incorrect. Bubbles, almost by definition, decouple from the rest of the economy, and you can very much have a bubble burst when the rest of the economy is doing just fine. In fact, this is more or less what happened in the first dot com bust, though like many bubbles, it got so big it effected the rest of the economy. This is an important distinction. This last housing bubble was inextricably tied to the economic meltdown that occurred in the banking sector. The two were linked, so it’s easy to say all bubbles are that way, but it’s totally not true. The 91/92 real estate bubble bursting (mainly in the south) was not tied to the larger economy. The Japanese asset price bubble in the late 80’s. The 97 financial crisis. In fact, by and large, bubbles happen in improving economies.

Okay, second point, where perhaps my trade and job might shine a unique perspective. Dixon says:

“The forces that drive the internet economy are strong and will probably only get stronger. I argue this regarding online advertising here so won’t repeat it. Since I wrote that post we’ve also seen a number of tech companies emerge that are generating significant revenues through non-advertising means — “freemium” (e.g Dropbox), paid mobile apps, virtual goods (e.g. Zynga), transaction fees (AirBnB), etc.”

I’ll leave the freemium/non-advertising revenues off the table since I’m no expert, but I get the strong sense they are still ancillary. The online advertising economy growing issue, however, I believe, is a red herring. And one I know a bit about.

Brands don’t actually want or need any more media channels. As far as they’re concerned, the internet can stop now. We have enough channels. We were happy when we had like seven (TV, print, outdoor, radio, in-store, direct and theater), got a little interested in the first few new ones. Urinals? Uh, okay. Banners? Interesting. Google? Yes. Groupon, Farmville, GroupMe? OKAY I AM GETTING TIRED NOW. Silicon Valley seems to think that advertising’s appetite for new media channels is unending. It is not. Marketers are changing. They are not the daft old man who doesn’t understand the new thing but knows he needs it and spends money on it. It’s a woman and she is getting smarter. Even she knows there’s a point where they’re reached their customers enough.

And yes, every time I talk to a Valley person about this they go on about how marketers want more data and they’ll pay for it, and they want to know everything about a person and oh man do you know how much advertisers would pay for this data? Well, yes, I do. But I guarantee you, YOU DO NOT KNOW. They have fixed budgets. I could tell you EXACTLY how much they will spend, because I spend that money. It is not bottomless.The endless quest for advertisers to know everything about their customers may never end, but its budgets will not increase forever. We will pick the best 3-10 data sources and stick with them. And in the meantime, the VCs will have effectively funded a massive R&D effort to radically improve those sources (THANK YOU) but in the end, we’ll still be paying about the same amount a year for the same 3-10 (say 100 if you’re P&G or WPP).

Then there’s the media money. The money agencies spend on placing ads. Though the valley can’t usually articulate it, this is the other big batch of money they’re going for, because it’s what Google and Yahoo! did. They got big brands to spend some of their giant media money on them instead of yellow pages or newspaper ads. You look at Google, and you think to yourself “oh man you can make a giant business out of advertising!” This line of thinking is usually accompanied by a chart showing the migration of advertising money from traditional channels to online channels, and they say “look how much more there is! It’s moving over at the rate of $6 Billion a year!”

Okay, stop. No it’s not. This is going to level out eventually. Do I have a chart to prove it? No. But it’s just common sense. Advertisers are going to stop advertising on Glee? Mad Men? American Idol? Viewership erosion has ebbed, TV has stepped up to the new competition and started making awesome shit. The first, easy places for innovation — yellow pages, classifieds — are levelling out, and while brand advertising spend is growing online still, it will never get all of it, since, well, the net still sucks for brand advertising* compared to TV and Outdoor. Pew Internet will track the changes now between web and tv in media consumption habits over years and decades — nothing will move fast enough to have an impact on this bubble.

Next, the olds. And that’s the other chart these people usually trot out — some chart showing how many old people are on the internet now. No they’re not. And they’re not going to be any more than they are right now any time soon. Look at the rate they’re increasing their use of the internet. It’s not increasing. It’s holding steady, yes, but there’s no big shift in the immediate horizon.

Plus, even if there was, the olds cost less to advertise to. Ads on Glee cost about $272,000for 26 million viewers. Penny a viewer. Those ads on 60 minutes cost $92,000 for 14 million viewers. two thirds of a cent per viewer. Daily show? $28,000 for 3 million viewers or so. .93 cents per viewer. And that’s cable. Advertisers spend less on advertising to the olds on a per viewer, per show basis.

Do you know how much those Facebook ads targeted to you cost vs those targeted to the olds? EXACTLY THE SAME. At first you think, “hey great, when they advertise on the web instead of TV, we’ll make more!” But no, it doesn’t work that way. First, it is a massive disincentive to migrate that advertising spend to the web, and secondly, it means we already got the good part of the spend. There is no reason to think that advertisers won’t just keep spending on the olds on TV until they die, then advertise on the web to the next set of olds who will be on the internet. But either way, nothing’s gonna happen with it in any big way in any time frame that’s going to impact this bubble.

I’ve mentioned this before, but I believe strongly that as money migrates from traditional to digital it will decline. Part of it is due to what I outlined above. Part of it is because of the perceived lack of inventory limitation. And part of it is because we told marketers for years we were cheaper.

It gets worse. IF (big if) Silicon Valley ever actually delivers on the snake oil dreams of perfect information and perfect targeting that they promise the ad world (and, by the way, for the record, I doubt I’m alone in advertising when I say I don’t want it, and I don’t need it, but that is totally a different article), why would I need to buy a bunch of ads on the 1,000 or so new ad-funded startups to reach my audience? The very efficacy of the products the Valley is building will utterly disrupt the economics they are purporting to claim will sustain them. Will it work for the better for the Valley or the worse? Just because it worked for the better for Google does not mean it has to happen that way again.

You know what? Fuck it. Hey Silicon Valley. You can have EVERY SINGLE PENNY the US spends on advertising. $200 billion. Forgive me, I’m mixing figures here, but it will still be broadly be true. You know what? TAKE THE WHOLE WORLD. Hey internet, take every penny spent on advertising in the whole, wide world. $450 billion. You already havejust over $100 billion of it. You only get 350% more growth. At all. Ever. Google’s revenue? Let’s call it $36 billion. YOU ONLY GET NINE MORE GOOGLES. Worldwide. If you get it all. And you will not, ever, get it all. Yes, the world economy will grow, yadda yadda, and ad spend will increase as the world economy grows, but not at the rate to make one bit of impact on this bubble, and not at any rate comparable to putting your money in a savings account.

If every penny of advertising in the world came to Silicon Valley, out of these thousands of new startups, there would be only nine Googles. Worldwide. In China. In Europe. It sounds like a lot, but how many companies are out there being funded on this premise?

One last way to look at the baked in absurdity: say everything I’m saying is too negative and every year, like clockwork, SIX BILLION DOLLARS of advertising spending arrives in the internet economy. I think that figure is off by an order of magnitude, but so what. Six billion bucks. That’s it. How many companies can that fund? How many are going to get their piece of that pie? We are fighting over a pie that is roughly the size of the cupcake industry.

I will leave you with a final thought, that’s really best for another post. Despite the Valley’s obsession with advertising, they still massively misunderstand it. They think it can be solved with algorithms, and not people. They also thought this about lawyers at one point. LegalZoom is doing great I hear, but so are lawyers. Not every penny of advertising will ever go to computers.

Okay, okay, I am done. But to recap:

1) A solid economy does not mean a bubble can’t happen

2) Marketers aren’t going to pay much more than they do now for all this awesome new customer data

3) TV ad money will not turn into internet ad money at the same revenues

4) The worldwide ad spend is not enough to fund a hundredth of the companies that are being funded to pursue it.

Happy weekend!

* this was an edit — it used to say “brand marketing” but I meant “brand advertising,” asNoah pointed out. Thank you.

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Business As Usual In The New Silicon Valley


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Now here is one spectacular tale. A company, with little PR or marketing, grows in just a handful of years to connect half a billion people around the world through a simple messaging app. The company gets acquired for a hefty sum; in this case, the largest sum ever in the history of venture-backed startup acquisitions. Billionaires and millionaires are created almost out of thin air.

And yet, the story is so banal.

There were, of course, interesting threads in this particular version of the tale. We have a thread about immigration and secret police forces behind the Iron Curtain. We have a rags-to-riches tale of a founder moving from food stamps to the uppermost strata of wealth. And we have a story about rejection and later finding the ultimate redemption. But beneath these human-interest stories lies a far more simple message: the Silicon Valley of the past, which developed the awesome technology we use everyday, is simply dead. And it isn’t coming back.

My friends in Palo Alto and Mountain View have often groused to me about all those social media companies up in San Francisco. I can still hear the echoes in my head of the “idiots” who “waste their time” building social networking apps, instead of working on deeply technical products in areas like in-memory databases, advanced wireless technologies, or genetic analytical tools. There was, of course, always an air of intellectual superiority in these discussions, which is now deeply ironic, since those same social networking companies are now getting acquired for billions, while my friends are still grinding at their products.

Venture capitalists have long ago discovered that social media is where the money is. Facebook remains the largest technology IPO of all time, and WhatsApp is the largest venture-backed acquisition of all time. And they are hardly exceptional. In the last few years, we have had Twitter, Tumblr, Instagram, and Viber, with more potentially on the way (Snapchat, Whisper, maybe even Secret). WhatsApp’s acquisition is simply business as usual in today’s Silicon Valley.

The attraction of these kinds of startups is not just their enormous exits though, but also their risk profile. Communications apps are not particularly challenging products to manage, given that their features haven’t changed all that much in the last two decades. They don’t require a lot of recruiting, since engineers enjoy scaling advantage given that these products have such limited features. The messaging category is evergreen, because there is always going to be a novel way to communicate or a new device that needs its core communications app. And these products have definitional virality that makes user growth practically free.

For VCs, these companies are like shots of cocaine. And we need our next hit.

In all honesty, how can a founder of any “hard technology” startup look a VC in the eye and talk about the benefits of working on a difficult challenge when the money can be made so easily somewhere else? I know founders trying to solve cancer, improve medical records, develop next-generation databases, and invent new 3D-printing tools who have had an enormously difficult time finding backers for their startups. Yes, there are VCs and others who will invest out of interest, but they are few and far between, particularly in later funding rounds where financial performance is prime.

Historically, we are walking in new territory. Just take a look at the earliest investments of prominent VC firms. Kleiner Perkins’ earliest investments included Genentech (which pioneered recombinant DNA technology) and Tandem (which developed fault-tolerant computers for finance). Sequoia Capital’s included Apple (which invented the personal computer), Cisco (which developed network routers), and Atari (which popularized video games). All of these were smash hits, and helped define entire product categories.

One of the problems here is that the cost of building a great company has increased – approaching an average of $200 million for the typical $1 billion valuation business. Why embark on a project with prodigious levels of technical risk and work and then end up making fewer returns?

In this way, I am distinctly reminded of Hollywood, where the creativity of the big studios has taken a back seat to remakes of popular franchises. Have you seen the top 20 highest-grossing films of all time? Sixteen of them are sequels or part of multiple movie franchises, almost all of them from the last decade. Hollywood has tended to become more conservative with blockbusters due to the ever-increasing costs of bringing a feature film to market. Sound familiar?

But there are other lessons to glean from WhatsApp’s acquisition than just how quickly companies can make billions in the communications space. For all the talk of design in Silicon Valley, it is interesting how little WhatsApp paid attention to such flourishes.

Its logo is boring, its name uninteresting, and its basic chat theme quite unappealing. In some ways, WhatsApp is more typical of the Silicon Valley of the past than the current incarnation that is obsessed with pretty pixels. Even more, the WhatsApp team appears to be dominated by engineers who actively shunned the limelight and focused on pure utility. That focus is perhaps why they had an 11-digit offer in the end.

While the classic Silicon Valley may have died, it doesn’t mean that innovation is going to just disappear. On the contrary, I think that Silicon Valley’s addiction to these sorts of companies offers the best hope for other regional innovation hubs like Austin or Boulder to thrive. There are wide markets out there that are underserved due to the way that the Valley conducts its business, and any one of these markets could form the basis for a strong startup ecosystem.

For Silicon Valley though, we have to take a moment and pause at this achievement. Even in a world of clones, WhatsApp was far and ahead of the pack. The team has built something truly remarkable, with a product roadmap that will be interesting to watch over the coming years. Now let me open XCode and get going on that email app.

http://techcrunch.com/2014/02/20/business-as-usual-in-the-new-silicon-valley/

The Danger of an Arrogant Valley


I arrived in Silicon Valley in 1997, in time to witness the dot-com boom. By the end of 1999, the Nasdaq was up around 400% from the time of the Netscape IPO just 4½ years earlier. Palo Alto restaurants were crowded with people talking about their startups and flaunting their paper wealth. While waiting for a table at Buca di Beppo in Palo Alto, I saw a man hit on a woman by pointing to his friend and saying, “Do you know who this guy is?” It turns out he wasn’t anyone notable, but he did have pre-IPO shares in a dot-com! That alone, in 1998-1999, was considered success. There was a sense of entitlement and arrogance—that, simply by showing up, you had won.

By 2000, the inevitability of wealth came into question and stocks plummeted. The Nasdaq had its largest single day drop in April 2000, falling almost 10%. It then fell a devastating 75% over the next several years. Fucked Company, a site dedicated to chronicling the demise, had daily reports about layoffs and bankruptcies. Friends who had millions of dollars on paper lost everything, sometimes bankrupted by tax laws that wanted to tax them on gains that had evaporated. People with impressive sounding VP and CEO titles were out of work and moving back into their parents home. The good times ended as quickly as they started.

The people who stuck around Silicon Valley after the crash loved technology, loved building businesses, and didn’t care so much about getting rich. Many of the people who were looking to get rich left for finance jobs in New York (yes, they left one bubble and walked right into another).

The era of opulent parties and people bragging about their paper wealth was over. In its place was an era of thrift. It was a return to the garage culture that existed when Silicon Valley first began. People were bootstrapping their companies. Flickr famously avoided outside financing and sold to Yahoo for what at the time seemed like a terrific exit (in retrospect it was a humble amount, about 5% of what Instagram was able to get from Facebook in 2012).

That sense of thrift has receded in recent years, replaced by a mood of unlimited money and easy wins. There is a dangerous sense that arrogance is replacing prudence. Startup salaries have increased 50% from the humble days of 2003. Startup CEOs are asking for $200,000 a year to run a company that has only a few million in the bank and no revenue. Parties are being thrown to celebrate funding announcements rather than product milestones.

Would you spend money this way if you knew raising your next round would be difficult? It’s easy to raise money until it isn’t. Paul Graham put it best: “Apparently the most likely animals to be left alive after a nuclear war are cockroaches, because they’re so hard to kill. That’s what you want to be as a startup.”

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A Vision for the Philippines’ Innovation Economy, & a 4-Point Plan to Achieve It


And why it does not include venture capital

There’s an area that cuts through Makati City in the Philippines that is home to the densest concentration of emerging startups and financiers in the country.

This corridor starts at the west end of Ayala Avenue. As you head east, you’ll have easy access to parts of Legazpi Village (where the offices of Hatchd, A-Solutions, Spiralytics, Lazada, GrabTaxi, and Bridge are located) and Salcedo Village (AVA, Lenddo, LevelUp’s 1st office, TasteCentral, Pormada, and a ton of BPO companies).

Once you hit the middle of Ayala, you’ll be near the daily deal giants (MetroDeal, CashCashPinoy), Signal Data, and PLDT’s Ideaspace incubator. BPI — who is quietly building a mobile payments infrastructure with Google — is worth a mention. Of course, Tower One is just around the corner, where Jaime & Fernando Zobel are hatching innovations at Ayala Corp — such as low cost private schools.

Make your way to Buendia and you’ll hit the new Google office in the Zuellig building, and eventually Kickstart Ventures at 55 Paseo (with 15 portfolio companies, including Kalibrr — the first Filipino startup in YCombinator. Kickstart’s #raidthefridge events could be a startup in itself). Detour to Jupiter and you’ll be at the old The Spa building — now home to Rocket Internet’s Zalora. Run up the flyover to the Fort and you can visit 500 Startups-backed Payroll Hero.

Economists call this a cluster. There is empirical value to being in close proximity to each other — attracting and growing talent, accessing capital and early customers, and building a shared culture. And I daresay that the future of the Philippine innovation economy (no disrespect to our neighbors in Ortigas and QC — you are doing awesome stuff) will be centered around Makati City.

We’re still at Day Zero, though. With the Philippines ranking 90 in the Global Innovation Index (lower than Uganda or Mongolia!), what is the future of the Innovation Economy?

I can’t forecast the future better than you can — but I can postulate on what it should NOT be. It’s not about ‘replicating Silicon Valley’. It’s sexy to hear, but this is lazy thinking and reductionist logic. A truly Filipino innovation economy doesn’t need enormous government spending. And surprisingly, it has nothing to do with companies either. The main locus of analysis should be on PEOPLE.

Let me briefly touch upon these competing logics.

One thesis calls for massive amounts of government spending around research universities. Bring the bling and founders will sing, is how the logic goes. But as we’ve seen from the below-expectations performance of Skolkovo in Russia, Singapore’s Biopolis, and Malaysia’s Cyberjaya, this won’t cut it.

Does the private sector have the answer? Probably not. In the 1970s, New Jersey got Frederick Terman — known as the Father of Silicon Valley — to catalyze the state’s innovation economy. The plan was to build an innovation engine like Terman did at Stanford, backed by local companies. But RCA would not work with Bell Labs and so forth. Competitors didn’t want to collaborate.

Silicon Valley can’t be copied. Full stop. Many have tried and came up short. It took a unique combination of the people around Stanford — simultaneously competing and collaborating — with copious job hopping, information exchange, and an unbelievable tolerance for failure. The rise of the Valley is a Black Swan event.

If top-down government spending doesn’t work, and companies can’t be relied on, what can we do to jump start the innovation economy? Note that I don’t necessarily confine this piece to technology-driven solutions, as we’ve seen the ability of seemingly low-tech solutions (call centers, social enterprises like GK, etc) to contribute to the local economy.

We may never be a Silicon Valley, but what the Philippines does have is a unique set of problems that other emerging markets share: extreme poverty, high inequality, rapid urbanization, institutional voids, poor infrastructure and education gaps. These problems can give birth to innovative solutions with cross-country applications. That will be our own brand of innovation. And you know what? Problems like these excite the smartest people around the world.

So if there is one thing that can tie together our work, it can be this vision:

An innovation economy that focuses on scaling solutions across emerging markets.

We are a microcosm of emerging markets. And with our English fluency, know-how, and huge overseas population, there’s no reason why local solutions can’t scale to solve emerging market problems. If GCash was the inspiration for M-Pesa, it can’t be too farfetched to imagine how a flood-information app can help Bangladesh, how Kalibrr can also empower India’s BPO industry, or how Hapinoy can help retail supply chain logistics in Myanmar. How can we do this?

This is my humble thesis: focus on a 4-point plan that puts People, Integration, Market Access, and Process at the focal point. Yes, you saw that right — that list does NOT include venture capital. And yes, the acronym of this plan is PIMP. Let me share a broad overview.

PEOPLE Entrepreneurship is in our blood. Despite the oligopolistic economy, it’s worth reminding ourselves that everyone who settled these islands — from the Sultanates of the Middle Ages to the European colonists are entrepreneurs. Rizal’s dabbling in ophthalmology, writing, teaching, history, architecture, and woodcarving make him probably one of the first serial entrepreneurs. The Katipunan was essentially a startup — its purpose was to solve a huge problem, it attracted top talent & investors, and it went viral in a relatively short time. We lost a lot of ground to rent seeking monopolists and politicians through the decades, but this doesn’t change our history nor our appreciation for it.

I’m borrowing a lot from Brad Feld‘s work in building startup communities: put the entrepreneur first. The goal: build a pipeline of talented founders — whether they’re pinoy or not. This is a long term goal. We’re talking a generational time frame here: 30 to 40 years long.

  • Bring in entrepreneurs from overseas. Free up immigration and business-formation policies to make it easy for any foreigner to set up shop. I’m seeing leading indicators: three years ago, startup events were mostly attended by locals. Now, up to half of some events are attended by expats. That is a GREAT thing because it spurs innovation, creates competition, and transfers know-how. This uses colonial mentality to our advantage: the more local pinoys see expat founders, the more entrepreneurship gets sexy. (Don’t believe me? Check in with the Younghusbands and local football).
  • Self-select the right entrepreneurs by highlighting the huge problems we face. This sounds counterintuitive, but the best founders are motivated by problems, and this is what this country has. I postulate that the multiplier effect of bringing in one amazing entrepreneur who can build a great company is greater than the impact of bringing in 1,000 tourists from the “It’s More Fun” campaign. And we have the basic macro story: 100 million people, fastest growing GDP in Asia, double digit internet user growth, the biggest English-speaking internet market in East Asia, and the #1 social media market in the world.
  • Create a massive 10-year program to bring overseas Filipino skilled professionals back home. Give preference to those working in the sciences and engineering.
  • Spread access to tech education like crazy. Drastically revamp our computer engineering programs because only 1 out of 10 IT grads are employable. And with cheap tablets on the horizon, increasingly free resources like Coursera and Code Academy, and the generally cheap cost of tertiary education (unlike the US), there’s no reason this can’t happen .
  • Sustain inclusive grassroots events. We’ve got lots of bootcamps, hackathons and Startup Weekends. But where we need to do a better job in is making them more inclusive. For instance, despite being a high-gender equality country, we don’t see a lot of women founders. I meet a lot of talented entrepreneurs in the fashion and retail industries. But they rarely show up in startup events. To them, it’s a different world. It’s time to bridge the divide.
  • Build our management pipeline. I’m starting to see this problem creep up. Entrepreneurs often don’t make great managers. And 4 to 5 years into a startup’s life, having a solid management team that can execute will become a bigger problem. This solution: educate our top managers from the best local companies on the opportunities in the innovation economy and get them seconded to promising startups. We need our Sheryl Sandbergs and Eric Schmidts.
  • Get people to understand the nature of EQUITY. Equity is the biggest wealth creator in a startup but most people don’t ‘get’ that. When I was recruiting a potential founder-CEO for a startup idea last year, we made a generous offer: 70% of the candidate’s salary PLUS a double-digit % stake in the company (at no cost). Nobody took it. I am effing serious. Everyone wanted a premium of at least 20% to their current salary. People need to understand the nature of equity and how to make tradeoffs vs salary and short term perks.
  • Celebrate failure. We have TONS of awards ceremonies recognizing top entrepreneurs. A simple change for next year: make a HUGE failure be a part of the criteria of celebrating our best entrepreneurs.

INTEGRATION (domestically and internationally) Building our talent pipeline isn’t enough. We need to get our people connected with the rest of the world. William Gibson, who coined the term cyberspace, once said “The future already exists. It just needs to be evenly distributed.” The future is outside the Philippines. We need to bring it here. The success of initiatives such as Hack2Hatchd demonstrates the benefits of integrating with the global startup community. It’s time to scale this up.

  • Establish R&D centers anchored by tech giants. Revise DTI’s mandate in Silicon Valley. Instead of focusing on getting BPO clients, let’s have them focus on getting tech companies to start R&D centers in the Philippines. This is a mobile-obsessed country. Why can’t we have a large scale mobile R&D center here anchored by Facebook? Payments are huge problem here. Why can’t Square set up a research facility? (I believe the answer partly lies in our lack of investor marketing over CNN or CNBC — Indonesia does a remarkable job in this). Ernest Cu of Globe is helping change that and his new partnership with Facebook is a great example.
  • Create massive founders-abroad programs. Imagine hundreds of Filipinos each year spending 3 to 4 months working on products in Palo Alto, New York, Boston, or Singapore. They’ll gain new technical skills. Meet new people. Benchmark their products vs the best startups in the world. Maybe even work for some of the best startups in the world. Learn the tacit rules of engagement. MassChallenge already does this with Israeli startups, with winners of a local competition spending months working out of the MassChallenge facility in Boston. No reason that Filipinos — with our ability to assimilate to new communities abroad — can’t do this.
  • Launch a content marketing campaign to share our story. When I met with a partner from Kleiner Perkins last year, she correctly observed that there was a lot of social media traffic from the Philippines: virtually every top social network from FB, Twitter and Instagram was seeing HUGE traffic growth from pinoys. So she asked some basic questions. What’s going on there? What’s the population of the Philippines? That dawned an insight: we haven’t been particularly great in selling the story. That’s changing. The Philippine Startup Report is a fantastic example. And I’m amazed it took someone like Ron Hose — and not local pinoys — to crystallize how special this story is. Another great example: Singapore Sessions uses a lot of content to evangelize.
  • Get Ateneo, UP and DLSU to WAKE UP. I’m focusing on Ateneo here because it’s the university I’m most familiar with. I love alma mater and I want it to succeed, so I’m calling it out here: the stories of internal squabbles that prevent the science and business schools from collaborating are shameful. There’s been no sustained effort to support tech innovation and Ateneo’s concept of entrepreneurship is setting up food businesses. Rationalize pay. I heard of an absurd rule in Ateneo that professors in the liberal arts need to have same salary grade as science & engineering professors — preventing the school from attracting the best educators. And I bet you that more money is spent on the Blue Eagles and Green Archers than on the Ateneo Innovation Center.

MARKET ACCESS I believe that the biggest opportunities lie in platform businesses that can fill institutional voids. Think about sectors where there are enormous inefficiencies in providing opportunities for producers and sellers to interact. Market access — and the empowerment it seeds — must be the overriding problem that local entrepreneurs should focus on. Sulit did this by bringing classifieds to everyone, vs paying a hefty price for a newspaper ad. Ayannah does this by creating stronger connections between overseas Filipinos and those back home. Rappler is doing this by helping people access the best news and journalism. AVA empowers design brands who have a hard time finding retail space by helping them sell online.

At this point, I hope it’s becoming clear why spurring venture capital is not a focal point of this 4-point plan. VC investments are a by-product of talent and powerful ideas. 90% of VCs are herd investors — they will dive in only when they see leading indicators of financial returns, and talent is often a leading indicator. Create an ecosystem of alpha leaders and the herd will follow. Money is like water — it’ll find its way to the best ideas.

PROCESS This is worth mentioning again because it’s the most common feedback that founders have on company formation. I’m not even talking about foreign ownership restrictions — there are a number of fixes that can be done without changing the constitution:

  • Simplify taxation and reporting burdens.
  • Allow for LLC-type structures to be formed at the SEC
  • Easy entrepreneur visas
  • Consistent implementation and interpretation of labor laws
  • One a one-stop shop for all regulatory approvals for tech startups, regardless of municipality.

Going back to the Makati tech cluster: As with any plan, we need milestones. Here are some sensible ones:

2016: 500 innovation-oriented companies in Makati. Facebook & Twitter establish mobile R&D centers.

2020: 2000 innovation oriented companies in Makati. SSS and insurance companies start allocating large sums of institutional funding to local VCs.

2023 (10 years from now): The first billion dollar IPO from this cohort of companies.

2030: Technology revenues = 20% of Philippine GDP.

2035: A company from this cohort acquiring a dying local conglomerate, in what could possibly be the biggest triumph for this generation of entrepreneurs.

2034 Elections: A Philippine President from this generation of founders.

It’ll be interesting to see how this story unfolds. What else does this plan need? Happy to hear your thoughts.

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  • Tech Entrepreneur, CEO of AVA, Author of Passion & Purpose from HBR Press, Harvard Business ‘10

    Published October 27, 2013

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Secret revealed: inside the most scandalous social network


Article Original URL: http://www.theverge.com/2014/2/17/5419814/open-secret-how-two-google-refugees-built-the-next-big-thing-in

Will anonymity make Secret essential reading — or become its undoing?

By Casey Newton on February 17, 2014 02:58 pm Email @CaseyNewton 61Comments

Late on a Saturday evening in San Francisco, at a party filled with tech workers, people keep retreating to odd corners to stare at their phones. This happens at every party these days, of course, but what’s different here is that the partygoers are all staring at, and talking about, an app called Secret. Lately it’s been topic number one among Silicon Valley tech workers, venture capitalists, and the media who cover them. All around San Francisco, people are devouring their Secret feeds, with their unpredictable mix of sex, drugs, and industry gossip. Valentine’s Day threesomes, photos of your best weed, blow jobs in the restaurant kitchen — it’s all here, maybe true and maybe not, but guaranteed to get you guessing about who posted it.

The secrets have all been posted by your friends, though you’ll never know which friend: Secret is “anonymish.” It’s a feed of gossip created by the contacts in your iPhone, but labeled only as being from a “friend” or “friend of a friend.” (Popular secrets from elsewhere around the world also surface, labeled only by their point of geographic origin.) Who said this? Is it true? I think I might know who this is talking about. Secret is Facebook as a masquerade ball, Twitter without the self-promotion, Google+’s private sharing done right. It’s the curiosity gap as a social network, and it also serves as a critique of all the others. Elsewhere you are inauthentic and dull, it seems to say. Secret is a place to be yourself.

Secret is a place to be yourself

Originally, Secret wasn’t supposed to be a social network at all. David Byttow, who previously built software at Google and Square, was originally interested in the idea of anonymous feedback. How do you chide someone for bringing a cellphone to a meeting, for example, without attaching your name to it?

For fun, Byttow sent an anonymous love note via text message to his girlfriend, who was then living in Paris. She called him immediately. What is this? Is this you? The anonymity of the message had given it an unusual power. “I knew there was something there,” he says. Soon after, Byttow sent an email to his friend Chrys Bader, who would soon become his co-founder. “It said I had a secret,” Bader recalls. He clicked a link that took him to a simple black web page. White text faded in. It read: “A new form of communication is blossoming in your hands.”

But anonymity is a double-edged sword. It brings out the best in people, as when nameless donors give millions to worthy causes. But it can also bring out the worst, as it has in a number of social-networking apps that users have turned into weapons for cyberbullying. Whether Secret proves to be more than a fad rests largely on how its founders manage that tension. “What we like to say is, we want our users to be on the edge — but not cross the line,” Byttow says.

It may be easier said than done.

A perfect circle

Secret’s co-founders worked on traditional social media networks for years before deciding to embrace sub rosa sharing. Bader previously developed Fliggo, a social network for video, and Treehouse, an early take on mobile photo sharing. Byttow helped build the original version of Google+, where he built the +1 button. They began working together at Google after the company recruited Bader from Treehouse to work on photo tools for Google+.

Like Secret, Google+ launched as an effort to make people feel more comfortable in sharing more privately. Its idea was to ask users to build lists (called Circles) of friends and acquaintances, and choose which lists to share with each time they posted. “The problem is that it doesn’t work that way,” Byttow says. “Social circles and social norms are ever-expanding, changing, moving around. It’s very fluid.” To make the average person truly comfortable sharing more private thoughts, you had to let them do so without letting the post follow them around forever.

‘Anonymish’ apps are gaining momentum

It’s a realization that has been gathering momentum in Silicon Valley since the surprise success of Snapchat, which popularized the idea of sending picture and video messages that self-destruct after a few seconds. Fast-growing Whisper, which drew inspiration from the old PostSecret website, created an app where anyone could post a confession anonymously and interact with the person who posted it; the company raised $21 million last year, and users reportedly spend 30 minutes per day using it. Whisper, like Secret, has proven surprisingly addictive: it’s especially popular with teenagers, which helps explain why its feed is so earnest. “I have always wanted to date a girl who thinks badly of herself to show her that she’s perfect,” goes one popular recent Whisper. “I got kicked out of Barnes & Noble for putting all the Bibles in the fictional section,” goes another.

The fact that Secret posts come from your friends lends it the immediacy of Snapchat while preserving the anonymity that has made Whisper successful. But it only turned out that way after Byttow’s original idea — one-to-one messaging — proved too limited.

Byttow and Bader began working in earnest on the app in August 2013, just after Bader left Google. The original version limited users to sending anonymous, self-destructing messages via text message and email. But beta testers found few occasions to send those messages, and the founders were determined to create an app that people would open every day. One day while walking through San Francisco’s South Park neighborhood, Bader and Byttow hit upon the idea of letting users broadcast their secrets to all of their friends. The app would use your contacts to match you with other people you had shared your phone number with, sparing you from having to add friends. “It kind of clicked,” Bader says.

On November 15th, the founders looked at data from the new app they had given their friends and found that they were opening it every day, spending far more time browsing secrets than they had sending messages. “There was a clear difference,” Bader says. They polished the new app over the holidays, and put it in the App Store on January 30th. In the days that followed, it reached as high as no. 2 in the social networking category, all without ever being featured by Apple.

Secret-bench_copy

The thing about superpowers

Content is king, as the saying goes, and the content on Secret is more compelling than most. It’s hypnotic in the way Facebook once was, before it became crowded with advertising and posts from distant acquaintances. Browsing through the feed each day, I’ve seen credible rumors’ about tech founders’ infidelity and workplace behavior. I’ve seen paeans to marijuana and cocaine that would be unimaginable on any other social network. I’ve seen patently false rumors of impending company acquisitions, and oddly sweet mash notes to anonymous friends and lovers. Over the weekend an unknown friend confessed to having oral sex in a bar that I go to sometimes, and immediately I drew up a list of suspects in my mind. I narrowed the list to two, and texted one of them. “It’s true one of us posted the secret, but no blow jobs were actually had,” came the reply. I didn’t know whether to believe him or the original secret.

Secret can also be mean-spirited

But Secret can also be mean-spirited, in the way that anonymous messaging often leads to. PostSecret killed off its own app in 2012 after developers found it impossible to manage the malicious posts. Last year, the Latvia-based question-and-answer site Ask.fm caused an uproar after one of its users committed suicide and her father attributed the death in part to bullying she faced from anonymous users. Ask.fm had replicated the experience of its model, Formspring, which also had encouraged anonymous messaging only to see a spate of users commit suicide.

Secret likely would not be the first choice of a would-be cyberbully: there’s no way to message a user directly, or even know for certain that a target has seen your post. Still, several Silicon Valley personalities have already come in for abuse on the site. The social network Path and its founder, Dave Morin, were frequent early targets. TechCrunch founder Michael Arrington, AOL CEO Tim Armstrong, and the investor Shervin Pishevar have also been subjects of abuse. “Anonymity breeds meanness — the internet has proven this time and time again,” the investor Sam Altman wrote last week in a post about why he had already deleted Secret from his phone. “Anonymous social networks have been (thus far, anyway) in the category of services that get worse as they get bigger — unlike services like Facebook or Twitter that get better as they get bigger.”

The founders’ thinking aligns with that of Chris Poole, aka moot, the founder of the anonymous message board 4chan. Poole recently posted on his blog that anonymity “enables creativity like none other.”

“It’s ideas, not reputations, that shine here,” he wrote of 4chan — and the same could be said of Secret.

“It’s not really a superpower if it can’t also be used for evil.”

The founders believe that if they keep users’ worst impulses under control, the network will thrive. “Any good product should feel like, to the person who receives it, that they have a superpower,” Byttow says. “But by my definition, it’s not really a superpower if it can’t also be used for evil.” Secret is aggressive about removing flagged content, and will only get better at it over time, he says. “We take a lot of measures to make people feel safe in this environment. They can say what they mean, they can be themselves — but don’t make other people not feel safe. Don’t be a jerk.”

On to Austin

The perils of anonymously posted content is only one of the challenges that Secret faces as it grows. The founders say they their top priority is to break out of the Silicon Valley bubble. To that end, Byttow and Bader will be taking Secret to this year’s South by Southwest Interactive festival, which previously helped Twitter and Foursquare break out to a national audience. What are they doing, exactly? “It’s a secret,” Byttow says.

Secret is working on unspecified new tools that they say will make users feel more confident about what they post. According to the Wall Street Journal, the company is raising a new round of venture capital. And it’s working on ways to let users be more expressive when they post, adding to the colors and textures that are available now.

And like any Secret power user, the founders are spending hours a day glued to the feed. “I had a no-cell-phones-in-meetings rule until I invented Secret,” Byttow laughs. He looks down at his phone, and keeps scrolling.

http://www.theverge.com/2014/2/17/5419814/open-secret-how-two-google-refugees-built-the-next-big-thing-in

You Don’t Have to Live in Silicon Valley to Start a Company


By  |  February 17, 2014, 2:34 PM

Berlin has emerged as one of Europe's startup magnets. (Image via Shutterstock)

Berlin has emerged as one of Europe’s startup magnets. (Image via Shutterstock)

Just about every city in the world is now teaming with young people (and some older ones) who are starting companies with ambitious and tech-savvy aims. This good essay by a former Facebook European executive underscores how pointless it is for everyone to compare their own region or city with Silicon Valley. Yes that hub will remain potent, but with tech transforming the entire planet there is ample reason for confidence that numerous other places can become vibrant hubs. The bigger challenge for Europe is the continuing prejudice in many countries against entrepreneurship and risk, and labor laws that frequently become punitive. They can unnecessarily increase the risk that an entrepreneur faces in starting something, raising the cost of failure substantially. (Many countries require ongoing unemployment payments for lengthy periods to a fired employee.) What’s amazing is how many great startups emerge in Europe regardless.

Read more at The Guardian

http://techonomy.com/2014/02/dont-live-silicon-valley-start-company/