Archive for November, 2012

November 30, 2012

Organic Growth vs Get Big Fast

Fred Wilson shared the talk Joel Spolsky gave to the Y Combinator Startup School session. Joel wrote about it in his popular blog Joel on Software. I think it is one of those important decisions that Entrepreneurs and Investors need to make and understand. I have struggled with my own education on this and believe me it has been hard to convince people that Odds or “Risk” does not matter. Anyways, this presentation has become pivotal to the way I am thinking right now. I believe Iceland needs to be betting all our resources

Source: Stanford Venture Program

Source: Stanford Venture Program

on companies that are in the Get Big Fast category. I am not saying investing in organic growth is bad, I am just saying that I like the odds of betting something that will get big fast. Why do I say this is one of the most important decisions Investors need to make? well, because the metrics and everything else that guides the behavior of the board, the advisors and the market participants relies on this decision. Think about it, if you need to get big fast as Joel says in the post and in the video, you can afford to break things and try new things and learn from your mistakes because you are moving quickly and can pivot, whereas if you are doing an organic growth company and you make mistakes it can kill you. I have come to believe that we as humans make mistakes all the time and why put ourselves into a position where a mistake can kill us. There is a reason why we survived a couple of thousand years despite disease, wild animals much powerful than us humans etc we ensured that we put ourselves out of harms way. A lot of my thinking is based on the arguments Taleb has made, or keeps making. I like the positive white swan argument. If you don’t know what that is read this.

What is the context to Iceland? well, lets think about it. The total amount of money that has been invested in Get Big Fast Companies in Iceland is pathetic if I am being honest. I have the feeling investors in Iceland would rather see companies fail Slooooowly than invest heavily in companies that can grow fast. All this comes to education of the Startup Community. Most investors that I talk to want to invest in Get Big Fast Companies but don’t understand what it takes to get such a company off the ground and competitive on the global market. There is no magic bullet, the community has to invest in it. Lets talk about the Pension Fund system in Iceland, I have written about it and I will say it again, this is a freight train that is going to collapse, unless they start actually putting a small fraction of their money in the Get Big Fast Companies category but according to rules, they are prevented from taking these bets. That is just tragic.

November 28, 2012

Open Source Entrepreneurship

Logo Open Source Initiative

Logo Open Source Initiative (Photo credit: Wikipedia)

Steve Blank has been one of the bloggers, Entrepreneurs and Gurus who has been writing about and teaching entrepreneurship in Stanford and a number of universities all over the world. He has compiled a blog post that has all the resources that any entrepreneur can use in this blog post with the Title “Open Source Entrepreneurship“. I am a big fan and I hope we all can use the wisdom and knowledge that has been aggregated in this blog post.

via Open Source Entrepreneurship.

November 28, 2012

Are you Antifragile?

Have I mentioned to you that Nicholas Nassim Taleb was the man responsible for me to jump into the world of Entrepreneurship and Startups? well, he did. He is by far the most brilliant mind and thinkers that we have in the world today. He has a new book out and I could not wait to get my hands on it, and thanks to Technology and Kindle, I got it the first day it was released. I love the Internet. The title of new book is Antifragile. I have not been able to put the book down, I can really see where he is coming from and his conclusions about Risk and calculating the odds of rare events (which all Risk Managers and Banks tend to do… even today!) is a fools errand. You cannot predict or calculate the risk of failure, the world was not build that way. What is the property that can enable systems to flourish and grow under uncertainty and risk?

Source: Amazon.com

We live in a world that we don’t understand, but we act like we do and that causes the fragility of our systems. I could not agree more to the main theme of the book. I see a lot of lessons for Entrepreneurs, I think as an Entrepreneur one needs to be Antifragile which is an opposite of Fragile. The definition of Antifragile is a quality that I believe every entrepreneur needs to build just like building muscle or fitness or endurance. So what is Antifragile you ask?

Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better. This property is behind everything that has changed with time: evolution, culture, ideas, revolutions, political systems, technological innovation, cultural and economic success, corporate survival, good recipes (say, chicken soup or steak tartare with a drop of cognac), the rise of cities, cultures, legal systems, equatorial forests, bacterial resistance… even our own existence as a species on this planet. And antifragility determines the boundary between what is living and organic (or complex), say, the human body, and what is inert, say, a physical object like the stapler n your desk.

I am halfway through the book but had to write this post. Do yourself a favor and go get the book and read it. Here is the man himself describing the Antifragile:

November 17, 2012

Why Startups Create more Jobs than big companies

Source: Forbes

The malaise that we have started to notice in the world around of the protracted recovery from the 2008 financial crisis will stay if we don’t dramatically change our perspective of the economic world. I had written about the article that Clay Christensen wrote in New York Time a week back, I think once again he is spot on in terms of what is causing this painfully long recovery from the recession. Dr.Christensen talks about 3 types of innovation, they are:

  1. Empowering Innovation
  2. Sustaining Innovation
  3. Efficiency Innovation

In my opinion most Startups should fall in the Empowering Innovation category because they should be actually solving a problem that current businesses are not able to solve, therefore they generate new jobs and as Dr.Christensen says:

These transform complicated and costly products available to a few into simpler, cheaper products available to the many.

The Ford Model T was an empowering innovation, as was the Sony transistor radio. So were the personal computers of I.B.M. and Compaq and online trading at Schwab. A more recent example is cloud computing. It transformed information technology that was previously accessible only to big companies into something that even small companies could afford.

Empowering innovations create jobs, because they require more and more people who can build, distribute, sell and service these products. Empowering investments also use capital — to expand capacity and to finance receivables and inventory.

Unfortunately, many in the investor groups are stuck in the Sustaining and Efficiency innovation mindset and that is the main reason why it is extremely hard to get capital allocated into the empowering innovation cohort even though we have plenty of capital and more being pumped into the economy every day by the Federal Reserve and Central Banks of the world. How simple it would be if our central bankers understood this dynamic. We are stuck in thinking about investment in IRR or ROIC terms. When you are investing in empowering innovation you dont usually know the transformative power of the technology or the innovation and it is hard to measure the IRR or ROIC on them. This is typically the Venture Capital space. We have misaligned our understanding of Risk to say that these investments are risky, I beg to differ. We thought banks were safer investment but it turned out that they were only safe for those working in the banks not for the shareholders.

Coming back to the discussion of jobs, I really like the structural reason that Clay Christensen outlines as the symptoms and recovery of the recessionary periods:

Ideally, the three innovations operate in a recurring circle. Empowering innovations are essential for growth because they create new consumption. As long as empowering innovations create more jobs than efficiency innovations eliminate, and as long as the capital that efficiency innovations liberate is invested back into empowering innovations, we keep recessions at bay. The dials on these three innovations are sensitive. But when they are set correctly, the economy is a magnificent machine.

After the financial crisis in 2008, these dials have been broken by the capital misallocation problem because of the amount of capital that was wasted and had to written off because of the crisis. Adjusting the economy to accomodate that is going to take time but it behooves everyone to understand the above dynamic. We need to dramatically change how we allocate capital, train ourselves and our workforce, disrupt our education system to prepare our next generation to take on these challenges etc. I like all the ideas that Clay Christensen recommends, if implemented I think we will solve a huge incentive problem for the investment community.

CHANGE THE METRICS We can use capital with abandon now, because it’s abundant and cheap. But we can no longer waste education, subsidizing it in fields that offer few jobs. Optimizing return on capital will generate less growth than optimizing return on education.

CHANGE CAPITAL-GAINS TAX RATES Today, tax rates on personal income are progressive — they climb as we make more money. In contrast, there are only two tax rates on investment income. Income from investments that we hold for less than a year is taxed like personal income. But if we hold an investment for one day longer than 365, it is generally taxed at no more than 15 percent.

We should instead make capital gains regressive over time, based upon how long the capital is invested in a company. Taxes on short-term investments should continue to be taxed at personal income rates. But the rate should be reduced the longer the investment is held — so that, for example, tax rates on investments held for five years might be zero — and rates on investments held for eight years might be negative.

Federal tax receipts from capital gains comprise only a tiny percentage of all United States tax revenue. So the near-term impact on the budget will be minimal. But over the longer term, this policy change should have a positive impact on the federal deficit, from taxes paid by companies and their employees that make empowering innovations.

CHANGE THE POLITICS The major political parties are both wrong when it comes to taxing and distributing to the middle class the capital of the wealthiest 1 percent. It’s true that some of the richest Americans have been making money with money — investing in efficiency innovations rather than investing to create jobs. They are doing what their professors taught them to do, but times have changed.

November 16, 2012

Startup Slovenia

Ljubljana, Slovenia

Ljubljana, Slovenia (Photo credit: Wikipedia)

I was invited by Center for Entrepreneurship and Executive Development (CEED) Ljubljana, Slovenia as a keynote speaker for Investor Day event jointly organized by American Chamber of Commerce, Department of Economic Development and Technology and the Public Agency of the Republic of Slovenia for Entrepreneurship and Foreign Investment. It was great to meet with a number of entrepreneurs and the grass root movement that is happening in Slovenia. It was interesting to me because of the perspective of a number of Slovenians that the country is small. The reason I was invited to talk about Startup Iceland and GreenQloud was because they felt that if there was one country that was definitely smaller than Slovenia is Iceland and they were intrigued to hear my story and why I was investing in Iceland and why I founded Startup Iceland.

It is a complicated story how I got to meet Slovenian entrepreneurs and how I got connected with CEED. But it is worth mentioning that one of my favorite blogging tool Zemanta was founded by Bostjan Spetic, and he is Slovenian and his wife Gaja are big fans of Iceland as they traveled to Iceland twice this year. It was through them that I got connected to Slovenia. I was very impressed to see the green shoots of startup culture and critical mass of entrepreneurs wanting to start doing new things and change the ecosystem. Met with some of the leaders who are running accelerators or incubators or looking to start new mentorship driven accelerator like Startup Reykjavik in Slovenia. This event was very interesting for me as I can see the clash between the two groups, the hierarchical organizations and the small network based entrepreneurial organizations.

The main guest speaker of the event was Dr. Alexander Dibelius, one of the leading investment bankers and investment environment connoisseurs, Chairman of the Executive Board Goldman Sachs AG; Head of Goldman Sachs Germany, Austria, Russia and CEE; and Global Head of Goldman Sachs Industrial Group. I really did not agree with a lot of things that Dr. Alexander was saying, but that is for another blog post. The young entrepreneurial community in Slovenia is at the same early stage as we have in Iceland and it was great to connect with this community. There are a number of similarities and challenges, so it was great to compare notes, get inspired and inspire the grass root to start doing things. Here is the link to the presentation that I gave, it was more about how I got started and why I do what I do etc I was humbled to see so many people inspired by the story of Iceland and what Iceland stands for, it gives me great strength to learn that we are on the right path in creating a sustainable startup ecosystem in Iceland and in my humble opinion we are just following what Brad Feld has documented in his book Startup Communities. I recommended the book to anyone who wants to learn how to build a startup community. I also met with a number of media outlets, TV channels and newspapers… it was interesting to learn about the challenges in Slovenia. I am really smitten by this country and I am sure I will come back again as I volunteered to be a mentor to any of the accelerators that would have me as one.

November 15, 2012

Wealth or Value is not created through Debt

The expansion of $100 through fractional-reser...

The expansion of $100 through fractional-reserve banking with varying reserve requirements. Each curve approaches a limit. This limit is the value that the money multiplier calculates. (Photo credit: Wikipedia)

I think I know enough about banking to say that debt creates very little wealth or value. I have often wondered what makes banks better at accessing risk than anyone else. It is even scary to think that people who work for banks take risk with someone else’s money with the illusion that they understand the risk. Time and time again we trust the banks to do the right thing and it leads to bigger and bigger financial calamities, I have written about why I think this problem exists. The whole banking system is built around a ponzy scheme and it continues to give the privilege of creating money to private banks and hope they will spur the economic progress of the city, or state or country. It is romantic thought process but it is flawed from the outset. I believe the way out of this financial mess the world is in is through equity, i.e let Entrepreneurs lead! We had the dot com bubble and it left fantastic value after its collapse like the Internet, Google, Amazon, Ebay, Apple etc but I am not saying that is the only business we need to create all I am saying is give Entrepreneurship a chance. Let us cut the fractional reserve system that disproportionately allocates capital to “Risk-Free” assets which is an oxymoron because you cannot have Return without Risk associated with it. If someone is selling you “Risk-Free” drug, please ask why they are doing that. I believe Iceland has the opportunity to redefine how the Banking System can be restructured. Here is a link to a Paper by Jaromir Benes and Michael Kumhof from the IMF, with the title “The Chicago Plan Revisited“. The abstract of the paper is given below:

At the height of the Great Depression a number of leading U.S. economists advanced a
proposal for monetary reform that became known as the Chicago Plan. It envisaged the
separation of the monetary and credit functions of the banking system, by requiring 100%
reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this
plan: (1) Much better control of a major source of business cycle fluctuations, sudden
increases and contractions of bank credit and of the supply of bank-created money.
(2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt.
(4) Dramatic reduction of private debt, as money creation no longer requires simultaneous
debt creation. We study these claims by embedding a comprehensive and carefully calibrated
model of the banking system in a DSGE model of the U.S. economy. We find support for all
four of Fisher’s claims. Furthermore, output gains approach 10 percent, and steady state
inflation can drop to zero without posing problems for the conduct of monetary policy.

One of my favorite authors, Nicholas Nassim Taleb has written a lot about it and we don’t need complicated models to explain the fallacy of Debt or Leverage on Securities (which includes Mortgages, Government Bonds etc). I blogged about it in my personal blog and I think it is about time we looked for a better way. I think the above plan can be implemented in Iceland. It could pave the way for defining the right way for financial systems to work in an economy. I am sure it is not simple but necessary to debate and review otherwise we will be stuck in this Ground Hogs Day of Leverage if we don’t change something about this system. I wanted to leave you with a couple of documentaries about Debt and leverage.

Inside Job:

Overdose: The Next Financial Crisis

November 10, 2012

StartupVille

I am a big fan of the Kaufmann Sketch series and this is the latest one about building Startup Ecosystems. For those of you who have been reading my blog for more than a year now know that I am committed to building a sustainable and resilient startup ecosystem in Iceland. The above video says it all, Brad Feld has documented it in his book Startup Communities, as he says it is not going to happen in the next year or the year after or the year after that. It is going to take time. I wanted to bring attention to another video by Steve Blank, on the Secret of Silicon Valley… it actually describes what really created Silicon Valley. I am not for once trying to suggest that we need to follow that path, but every crisis is an opportunity and I want to really take this opportunity and create something that is tangible that we can look back to and teach out future generations about Creativity and Mastery, not consumption and destruction. I believe Iceland has a fantastic opportunity to make it right, do things right and invest in the right things. However, it is not going to happen if we loose sight of the road map as described in the above video. Here is the Secret History of Silicon Valley:

November 8, 2012

Tolerance, Inclusion and Prosperity

Español: Logo AIESEC

(Photo credit: Wikipedia)

I had a bit of a disagreement with Fred Wilson, who is one of my virtual mentors through his blog avc.com. But I think Fred is wrong on this argument. I stand by what Fred wrote in his posts Tolerance and Prosperity and Immigration Reform. I strongly believe we have a number of monsters that run in our heads. We are all xenophobic and neophobic, but we need to rise above that if we are to build a better global community. Even Fred, who lives in New York which is suppose to be the melting pot of the world and a Venture Capitalist, took a stab at “Jobs being shipped to India” stance. It pains me to see this argument. Why do we as human beings always want easy solutions that are not resilient or sustainable? The easiest thing to do is close the borders of every country and make everything behind the closed walls, that way we can create jobs, wealth and what not within the Walled Garden… but is that the world we want to live in? I lived in that world and believe me it was not that much fun. India was a closed economy until about 1991 when the country was broke and had to open its economy to get life blood. We had 2 choices for cars, toothpaste, soaps and chocolates… everything.

I am not saying that having limited choice is bad but I am saying we can do better. Closed systems don’t work, they work for a time but they fail miserably on the long run. I think most Politicians like this closed system because it gives an illusion of control, jobs are created because we have limited demand of jobs and better than limited supply for jobs, so wages become high, we may more in tax et cetra et cetra. The problem with this notion is that it leads to sub-optimal or inefficient results. Closed systems maybe needed when there are huge structural challenges like a War or Technological gap (i.e some companies have superior technology or know how that would squash local business etc), but I believe we are passed that phase and it has been made possible by the Internet. However the old school thinking is actually putting cogs on the wheel of Freedom to Innovate. Brad Burnham, who is the partner of Fred Wilson wrote an excellent piece on his blog with the title “Freedom to Innovate“.

I think the leadership of the 21st century is going to be defined by countries and companies that are driven by leadership that subscribe to the age of Wisdom, as Late Dr.Steven Covey describes in his book The 8th Habit. I want to write against this foolish notion that we need to seek out for a Job, everyone of us is a Job Creator. Lets take the example of a startup, and the entrepreneur who started the venture has created something of value and in order to service those customers who want to utilize the value the startup has to create jobs and when you are in a closed system it leads to people fighting for the same resource and drive up the cost of the value creation thereby making the venture uneconomical and ultimately it fails. This is what I see today in Iceland, everyone that I talk to says that it is hard to find people with skills in Web Design or Programming or Software Development or whatever. I have never found that to be a problem, do you know why? because I take chances with people… I don’t have to have every skills checkbox filled to hire someone because I am totally ok with getting someone on board who has some basic skills and then train them on the job. It has worked very well for all the companies that I have worked for where I had the responsibility to build a team. I found the same attitude in GreenQloud, the company had hired students from Germany, Colombia and Argentina through a program called AIESEC and their Icelandic Chapter. I had a chance to meet Armina Ilea, VP Corporate Development of AIESEC, Iceland and I was surprised to hear that Icelandic startups or companies were not taking advantage of this wonderful program. I plan to use this program to get people from all over the world to come to Iceland as interns work with us and if we are able to make the experience mutually beneficial then they stay back in Iceland and become part of the team. I know a lot of people including Fred Wilson and Brad Feld have lobbied very hard to make it easy for Entrepreneurs and Skilled workers to get Visas to the US. I don’t know why every country does not embrace this philosophy? Yes, I am foolishly optimistic person but I never give up on people because when I don’t they surprise me and go above and beyond what is expected of them. Lets build more tolerance and inclusion and in my humble opinion it will lead to Prosperity not just for those creating the jobs but to everyone in the Ecosystem.

November 6, 2012

Culture of Failure

Image representing Steve Jobs as depicted in C...

Image via CrunchBase

I had a very interesting discussion during the UnConference Event, where one of the participants was telling me how she feared how the community would react if her business failed and that prevented her from taking actions that were not in her comfort zone. This is a huge problem in Iceland. I get the feeling that people think that failure is a bad thing. I embrace failure and I am fearless about my business ventures. There is no other way to look at the abyss of Entrepreneurship. I remember Steve Jobs seminal talk in Stanford and I wrote about it many times.

It is impossible to connect the dots looking forward, it was very very clear looking backward 10 years later. Again, you cannot connect the dots looking forward you can only connect them looking back. You have to trust the dots will somehow connect in the future, you have to trust in something, your gut, destiny, life, karma, whatever… because believing that the dots will connect down the road, will give you the confidence to follow your heart, even when it leads off the well worn path and that would make all the difference.

Almost everyone looks at Silicon Valley as this role model of building a startup ecosystem, and I wonder if Silicon Valley would have become such an ecosystem without the leadership of Research oriented organizations and companies that embraced failure as a way to learn to improve on their experiments. Mark Suster had a post about this where he was interviewing Steve Blank and their discussion is extremely illustrative of the nature of Silicon Valley. I believe a Culture that embraces failure and has the buffer to support those who dare to challenge the norm and improve the community need to be embraced. I also believe those who take chances on those type of individuals need to be embraced because without capital the challenges of experimentation is made doubly hard. Here is the video interview of Mark:

November 4, 2012

UnConference, Capitalists Dilemma and Return of the Capital Intensive Startup

Here is a mashup of three ideas that prompted me to write this post. First, I was part of the group that participated in UnConference organized by Landsbankinn a conference without an agenda but the group present decides the agenda and goes on to discuss and get a wrap up at the end of the day. It was very interesting and I also took some office hours during the conference as I volunteered to be a Mentor. Two ideas that I was interested in and we discussed in a small group and maybe we will launch two companies to solve these problems. Let me start with the two ideas that I was interested in:

  1. Building Sustainable and Resilient Startup Ecosystems
  2. Solving the talent problem

The first one I have written about extensively, but the discussion yesterday was centered around how to free up capital tied up in Iceland so we can invest in new and innovative companies to create more value and better community here in Iceland. It is close to my heart as I believe there needs to be an efficient mechanism for investors to exit their successful investments to reinvest their capital. Icelandic capital market is dead and the stock exchange is a very inefficient and archaic model for today’s world. The rules and policy choices of the current capital markets were discussed and I have to say, it is quite obvious it has been made to keep the small investors out. In addition, it only makes sense to go to the Stock Market if one needs to raise substantial amount of capital, which is not needed in the current world. For example, there are companies that are profitable with 15 to 30 team members and are able to grow the business without adding more and more people due the economies of scale offered by the Internet and Software. However, adding more people to adhere to the rules of the stock market will only slow the small and nimble organization. This is a current problem and solving this would enable more fluid flow of capital back into the new and innovative startup companiesthat are creating more value in Iceland.

Source: New York Times

The second problem was little different, Frosti Sigurjonsson led this discussion… the problem was those unskilled people who are not educated, dropped out of school but could still possess some talent that could be utilized by someone to create value. The example that was suggested was, if there was an entrepreneur who wanted to go and collect 10 tonnes of Blue Berries in the mountains in Iceland and sell them to the WholeFoods market in the US. The entrepreneur needs 100 people to help him, it is not easy to get or gather enough people who can facilitate that. What if we had a database that was simple to use, runs on the Internet and does not have the same metrics ie. education, background, university degree etc but more rudimentary skills? i.e I have strength in my legs, and arms, I can do household chores etc Currently, the Unemployment Agency in Iceland has 7000 unemployed people who are on Unemployment benefit but no employer is using that to find the talent they need because the system is unusable and to make minor modifications to it costs the state an arm and a leg. This system was build for the past and has not be brought up to the 21st century. The idea was to create a Internet based system that allows for easy and simple search for talent kind of like a talent search engine. I think there is merit to solving this problem, we could use this in Iceland and given the level of unemployment in mainland Europe, it is bound to have broad appeal. The group decided that we would meet again to discuss how to take this forward.

What is the above two got to do with the Capitalist’s Dilemma and Return of the Capital Intensive Startup? well, the first one is an article that I read in New York Times by Clay Christensen and second is a blog post by Albert Wenger. Both of them from different perspectives are more or less talking about the two ideas that we discussed yesterday. The Global Economy has a problem, we have transformed the challenges but we are still using the same tools and policies to solve them. I quote Einstein generously, and I think the most profound quotes of his is this

The significant problems we face can not be solved at the same level of thinking we were at when we created them

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