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The Chenope Blog

We bring more things to light

November 8, 2018
by chenope
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Money can’t buy you love….and maybe not influence either

Tuesday’s midterm elections in the US were unusual in a great many respects.  Usually a snooze-fest for all but the political geeks, this time around the amount of vitriol, money, and just sheer energy spent were historic.  The interesting question is how any of this actually changed the outcome of the election, which in the end was a noticeably milder version of the well-established historical pattern for midterm elections.

In fact, throughout American history, midterm elections have virtually had the same effect: flipping control of the House of Representatives to the opposing party, regardless of which party that happened to be.  The fact that the outcome is so very predictable is one more reason that there is often little widespread public interest in midterm elections. But this time was different.

Record amounts were spent on the campaign overall, and on social media, which anyway went crazy about the election. There was no shortage of bots, nor of accusations of accounts being bots. Predictions and interpretations in every forum imaginable seemed to increasingly diverge based on party affiliation, to hallucinogenic levels. To put this in some concrete perspective, within living memory, $70M might be spent on a presidential campaign; in this midterm election, that amount was spent on a run for a senate seat in Texas – and that attempt was unsuccessful.   As Ed Rogers noted in his column in the Washington Postall of most media-visible and well-funded “blue wave” candidates were unsuccessful.

Given the increasing political polarization of the country, it seems logical that relatively few hearts or minds were changeable – or, if you prefer, manipulable.   In the eagerness of the big Internet companies and their adherents to justify the value of their “likes” and “retweets” no attention seems to have been given to the question of objectively measuring influence, or the changing of opinions.  Lots of people seeing lots of ads does not equate to lots of influence – or perhaps even any. If I don’t like the taste of Coke, no amount of ads for it will make me want one.  I may think a particular ad campaign or brand effort is clever, but that doesn’t make me want to reach for a Coke.  I suppose it is even possible that a Coke ad might make me thirsty – but not for a Coke.

Measuring influence is a meaningful way – the ability of a message to move people from one position to another in a non-ephemeral way – is quite difficult but technically possible.  It requires longitudinal analysis, both in text analytics and social network analysis. Plus the ability to reliably identify “suspect” identities such as bots and trolls, lest they introduce a significant source of error.  Such measurements would also bring with them accountability, which in many cases is doubtless unwelcome.    In the end, perhaps the most interesting question lingering from the midterm elections is when measuring influence will become a matter of course.

May 18, 2018
by chenope
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Terrorists, Street Gangs, and Common Sense

As someone who runs a company that makes its living building technology to study different kinds of organizations, I learned long ago the need to engage with members of the types of organizations of interest.  In some cases, of necessity, these are former members.  For example, a while back, we had an intern who was a former street gang member.  He helpfully interpreted gang-related social media posts that otherwise would have remained a mystery to both to us and our software. For example: “They be wearin your t-shirt” in gangland unpacks to “After you get shot and killed for being so stupid, your friends and family will be wearing the RIP t-shirts that they will have had printed up for you.”  “He know my bus route” similarly unpacks to “I’m really afraid that he will drive by and shoot me while I wait for my bus.” For all the talk about how machine learning can solve every problem, the reality that such comments are statistically fairly rare, and don’t always clearly (or at least quickly) correlate to violent acts.   Further, this intern helpfully explained the gang mindset in ways that helped us better build what we needed to build.   Even though local law enforcement is sometimes quite knowledgable about gang argot and behavior, it isn’t always the case. And when it is, it is exactly because a very conscientious cops took the time to really engage with some of the gang members.

It is no different with terrorist groups such as ISIS.  In fact, if anything, it is even more true.  After all, it is relatively easy to understand why kids in blighted areas of places like Detroit or Baltimore might see advantages to joining a street gang. Physical protection in astonishingly violent neighborhoods is often a key motivation. So is all the money to be made selling drugs and stolen merchandise; some of the gang members who survive long enough actually use the money to go to college.  In contrast, why someone in a Western country would decide to join ISIS – and especially why women would – is far harder to initially understand.  (Given that in France, women or girls have made up ~50% of all jihadist recruits to date, women joining such organizations can hardly be considered as an edge case.)

Common sense suggests that when anything happens a significant number of times, there are reasons for it.  Our research partner in France, CPDSI, (Centre de Prévention contre les Dérives Sectaires liées à l’Islam) has spent years trying to understand these reasons by going one jihadist recruit at a time trying to “turn” them back towards a normal life – more than a thousand of them and counting.  At the risk of oversimplification, the main thing that CPDSI found was that jihadists had incredibly skilled and well-trained recruiters who were able to very compellingly personalize recruitment pitches.  In fact, these techniques are of sufficient sophistication that they are best compared to case officer (professional espionage) techniques.

Given all of this, it should be no surprise that CPDSI took the opportunity to hire a former jihadist recruiter when it presented itself. And not just any former jihadist recruiter, but Farid Benyettou, the one responsible for radicalizing the perpetrators of the Charlie Hebdo attack.    To say that this action provoked considerable hostility in France would be a gross understatement.  But this reaction largely misses the point. The real question that should be asked is whether or not the hiring of Benyettou furthers CPDSI’s mission of deradicalizing radicalized individuals, preventing ISIS and other terrorist organizations from successfully recruiting in France, and improving means of automated monitoring to identify jihadist recruiters – as well as recruits – that are about to turn dangerous.   There is evidence that all three of these things are true.

Fox News recently did an interview of Benyettou on their national nightly news program “Special Report With Bret Baier” highlighting this very point. This may be seen here: https://www.youtube.com/watch?v=m4dKC1pZv30; the video is also elsewhere on our website. Thanks to Fox News, who as always, take the longer (and often contrarian) view.

 

Postscript:  For those of you wondering what analyzing terrorist organizations or street gangs has to do with analyzing Fortune 1000 companies, the answer is a lot more than you might think. Recruiting, and retaining high morale among their members is a necessity for organizations that operate not just outside the law but in opposition to it. For one thing, they have unique issues with turnover, as their leaders have a significant probability of ending up unexpectedly wounded, imprisoned, or just plain dead. Marketing is critically important too: ISIS in particular is all about brand; street gangs that don’t succeed in looking sufficiently scary to other street gangs aren’t likely to survive very long in a harsh competitive environment like Detroit which usually boasts upwards of 100 distinct street gangs at any point in time.  Both gangs and terrorist organizations require ongoing revenue to fund their operations; they also require strategies for increasing revenue in the face of competition.  There are power struggles among ambitious climbers that are no different (at least in the abstract) than what one would see in a boardroom. As in most fields of scientific endeavor, much is to be learned from observing the ends of the spectrum. And the study of criminal organizations certainly serves this purpose very nicely.

 

 

April 8, 2018
by chenope
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How Far Does “The Internet Said So” Really Go?

A few weeks ago by happenstance, I came upon a young couple from a small town in Wisconsin who, seeing an incredibly cheap “all included” travel package to Italy online during the off-season jumped at the chance.  The package cost $1,500 for the two of them, and included a roundtrip flight from Chicago, a rental car, most meals, and a week of hotel stays in smallish Italian towns.  So it was dirt cheap. Moreover, it was only a few clicks to buy – just pick the dates, enter your credit card and hit ‘buy.’ So they packed their bags and off they went. What could go wrong?

If you know anything about Italy, a lot. And a lot did.  The couple’s rental car was broken into, a window smashed, some minor things stolen.  The cops were at best apathetic. However, other cops were not at all apathetic when the couple were twice pulled over for traffic violations that they didn’t understand, and were heavily fined both times.   They found almost no one who could  speak English well enough to communicate with.  As a result, the wife nearly ended up in the hospital due to a severe food allergy.  Nor did the couple  manage to do any shopping, with local merchants lacking the language skills to engage with them adequately. Both of them were seriously freaked out by agitated Italians chasing after them for blocks yelling some unknown thing, on more than one occasion.  In one case, as described to me, it was very likely that the waiter was trying to return a tip because Italian waiters in smaller cities don’t expect tips.

And all of this was only halfway through the trip. By that point, they were understandably dreading the remaining half.

When I mentioned this to an Italian acquaintance he said, not at all unkindly, that it was not a good thing that the Internet made this couple think that coming to “real” Italy (e.g. not just hitting the very touristy areas) would be easy, which is to say just a matter of a few minutes online and ~$1,500.   Problems of language, culture, and just general disorientation are still very real – despite Google translate and a variety of other ad hoc high tech aids.    He noted that while on the one hand it was his dream to send his basketball-crazed teenage son to basketball camp in a place like Indiana, it was obvious to him that no one there would speak Italian and that his son would be “a curiosity, like a zoo animal” for all of his strange Italian ways.  Where was the common sense, he wondered aloud. “Do most Americans really believe everything they read online?” he asked.

It was a logical enough question given the ongoing brouhaha over social media and last U.S. presidential election, fake news, etc. in which exactly this seems to be regularly asserted. But the following is a good example what is so often missed in such analysis.

I asked the couple whether the low price tag made them suspicious that there might be some kind of catch, that for example they were being routed to the Italian equivalents of Podunksville.  They responded that they had read in the newspaper that the Italian economy was badly ailing,  and so concluded that the sweet deal they got was “Las Vegas logic” – in other words a very cheap flight and hotel room offered in the hopes that you more than make it up in the money you spend (or lose) while there.  When I asked why they expected that people in a small Italian town would speak good – or really any – English, the husband, himself a small business owner, replied that if he really wanted American tourist dollars, he would learn enough English to be able to go get it.

Indeed where there are Americans with open wallets, there are sure to be merchants and others who can at least scrape by in English.   In fact, the couple’s only real error lay in the mistaken belief that there would be an appreciable number of American tourists outside of well-known tourist destinations such as Florence, Pisa, or Venice; their analysis was otherwise correct.  It was a costly error to be sure, but not a lack of common sense as had been supposed by my acquaintance, as opposed to a lack of adequate research. Further, by the point I met them, they had already identified the error and were trying to figure out how to best correct.

In other words, they already had an operative, largely accurate belief – that Italy was “on sale” owing to bad economic conditions – before stumbling upon the discount travel package website that leveraged this pre-existing, factually grounded belief to make the sale.  When confronted with real world evidence that was inconsistent with this belief being the full explanation – that Italy might be “on sale” but they had also been somewhat misled – they adapted.   They will presumably be more diligent in future.

It’s a good example to keep in mind while pondering the brouhaha.

 

February 25, 2018
by chenope
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Remembering Dick Oehrle

Our colleague Dick Oehrle passed away this past Wednesday after an approximately 2-year long battle with gliobastoma, a highly virulent form of brain cancer.  Dick was a highly unusual man in just about every respect.   Having been a linguistics professor for many years, at roughly the age of 50, he decided to give up academia in favor of startup-land. The first startup he joined didn’t work out. When he applied at Cataphora,  he had little startup experience, and lived a whopping hour and a half away from the office.  I admit that despite his super-impressive resume, I had to think twice about hiring him.  But his evident enthusiasm for the endeavor quickly brought me to the right decision.

Though Dick worked for me at Cataphora for nearly a decade, during which we had many ups and downs, I only saw him get even slightly angry once. This rare event occurred back in the early days of Cataphora, when the office Nespresso machine broke.   Dick read the instructions and tried to fix the machine, but to no avail. It made a pathetic snorting sound, but no water was pumped, and no coffee was produced.    So Dick was reduced to calling Nespresso tech support.    A very young-sounding woman who was clearly reading from a script started to ask him questions. “Sir, are you sure the machine is plugged in?”, “Are you sure the power switch is set to ‘on’?”, “Are you sure you poured water in the machine?” and so on.  Finally after a few more inane questions, she asked him whether or not he had tried to read the instructions, and if so, whether he was sure that he had understood them.

Even for Dick, this was the final straw.  Hours without coffee, no imminent hope of resolution, and on top of that he was being mightily condescended to – a state of affairs that was surely well outside of his experience.   Although much time has passed, I still remember Dick’s reply: “Madam, I have read your instructions. All of your instructions. I have read them in all seven languages in which you provided them.  I have a PhD from MIT. If I can’t fix the machine with your instructions, who can?” 

I recollect less well what transpired after that. However I believe we got a new machine from Nespresso that was either discounted or free.   And then we bought a spare one too, just to be on the safe side.

Dick built and ran the computational linguistics group at Cataphora. He was one of five key men when Cataphora sold its legal (digital investigation & e-discovery) business to EY.   After a 4-year stint at EY, Dick semi-retired, contributing to Chenope on a part-time basis.  He focused on the critical notion of indexicality, the construct that all language at least implicitly reflects the world view or understanding of the speaker.  For example, to someone who stocks the shelves at night at a large chain store, “upper management” means the assistant night shift manager, and not the CEO of the conglomerate.  This concept has large implications for any serious study of organizations, regardless of their kind.

Even after the diagnosis, Dick continued to contribute.  His encyclopedic knowledge of all things linguistic wasn’t eradicated (or even seemingly significantly compromised,) by the cancer.  Astonishingly, he was even finding subtle errors in the patent that we were working on at the time.   But he would tire quickly, and sometimes get disoriented about things like the time of day, or day of the week.  Yet his memory of things that had gone on at Cataphora even a decade earlier remained sharp and precise.  He outlived the average life expectancy by ~4x.

One of the great rewards of doing startups is the opportunity to work with extraordinary people.  I certainly had that opportunity with Dick, and for that I will always be grateful.

November 1, 2017
by chenope
0 comments

What Facebook, Google and Twitter Could Learn from Herbert Hoover

It is said that when Herbert Hoover* was accosted by a woman who blamed him for the Great Depression, to her astonishment he thanked her for attributing to him so much power.   Displaying such grace, humility, and humor would be smart at this juncture for Facebook, Google, and Twitter.  But it is, alas, not very likely.

All three of them now find themselves between a rock and a hard place.  W.r.t the current furor over Russian use of their platforms to manipulate the public, they can take the position that by any reasonable metric,  such activity was a vanishingly small percentage of their total activity and is therefore much ado about nothing.   Of course, there’s an obvious problem with heading down this path: implicitly it suggests that if the amount of such nefarious activity were much greater, there would be legitimate cause for concern.   They surely must understand that the Russian government (and others) can easily shield themselves from whatever reporting rules might be imposed by congress by doing things like hiring American citizens to promote a particular agenda, and laundering the money as necessary to avoid detection. Ditto for political parties, and other special interests. The specter of large amounts of cumbersome and constraining regulation looms menacingly down this route.

Alternately they could decide to take a page out of Herbert Hoover’s book, and say that really all they are doing is making it easier for friends and family to stay in touch with another, and perhaps to connect with other likeminded people. Thus they are not really influencing public opinion, only drawing people closer to one another within an organic and largely pre-existing social circle or network.  Otherwise put, they may be responsible for increasing the strength of the reality distortion field that surrounds many of these circles, but not creating it in the first place.   By this logic, they are well out of harm’s way with respect to anything to do with the election, since the votes of most of these circles were homogeneous within the circle and largely pre-determined in what was an extremely polarized election.

This would be an eminently sensible position – especially in light of the fact that their collective influence on the president election was not arguably very much: they surely did not want a Trump victory.  But this route also poses a large problem: it calls into question for their advertisers how much influence they actually do have in a variety of contexts.  That could have profound consequences over time.

*= I think it was Hoover – the historical anecdotal is not easily retrievable. If not it was Calvin Coolidge, but either way, the point remains the same.

 

September 1, 2017
by chenope
0 comments

The Aftermath of “The Memo”: Revisiting The Topic of Diversity Issues in Silicon Valley

Quite a while ago, I wrote a blog post about diversity issues in the valley. The motivation at the time was the slew of news stories about whether Marissa Mayer was being unfairly criticized because of her gender.  My point at the time was that there was indeed a giant diversity problem in the valley, but that its root cause was a lack of diversity of thought rather than anything else. Otherwise put, if one strives to surround oneself with very likeminded people, one automatically increases the probability of hiring / promoting / funding people of similar backgrounds, and to a lesser extent, ethnicity, gender, etc.

The number of things that can’t safely be questioned in the valley seems to expand each year.   The list is in fact quite diverse. For example, prior to the last presidential election,  the outcome could not be questioned (which in large part explains why none of the big tech companies failed to accurately predict the outcome, even with their troves of “big data.”)     The influence of the large valley companies on the thoughts, behaviors, and purchasing decisions of the average person can’t be questioned: it is understood to be self-evident (despite there being relatively scant objective evidence of it.)  The superiority of the tech companies over their counterparts in other industries is likewise self-evident, especially in areas such as innovation. Yet, over the years, one hears more and more about “innovations in business model” such as Uber or AirBnB in the tech business rather than groundbreaking technology innovations – the logical consequence of the vast majority of dollars in the valley being funneled into advertising-related applications and the fact that most large companies outside the valley couldn’t afford Uber-style business model innovations that come with $3B losses. Questioning any tenet of political correctness is also right out.

Which brings us to the topic of The Memo.   The Wall Street Journal rightly excoriated Google’s management for firing the 28-year old engineer who opined that there could be biological differences between the genders that accounted for the gender disparity among programmers.  The WSJ noted that in a recent response to a Department of Labor inquiry into whether Google was systematically underpaying women,  Google had itself made some of the same arguments that James Damore did with respect to the relative scarcity of female engineers in The Memo. A WSJ editorial worried aloud about the professional judgment of those who had so much power over information.

Oops.

Clearly Damore did not understand Google’s culture at all, or he would have never hit the “send” button.   Clearly Google’s senior management failed to comprehend the backlash that was sure to arise from firing Damore as opposed to any number of other less severe – and private – disciplinary actions that could have been taken, and which would have quelled any internal screams of tolerating gender discrimination.  But the failures were of very different kinds. Damore failed to understand that expressing a verboten opinion would not be tolerated by his employer. He was simply young and naive, failing to recognize that when you hear no divergent opinions, there’s probably a good reason for it.  Google’s senior management on the other hand failed to understand that independent judgment was still being exercised by many outside the valley, such as the good folks at the WSJ. Even worse, they failed to understand that in this day and age of social media, firing Damore created a first in the annals of business: a low-level, individual contributor employee gaining copious big media air play for writing a memo that exposed no giant bombshell of corporate malfeasance but yet globally damaged their brand.

So is there a diversity problem?  You bet there is.  But gender is the least of it.

 

August 11, 2016
by chenope
0 comments

Oops – World’s Largest Advertiser Determines That FB Targeted Ads are “ineffective”

Billions of dollars of wealth have been generated in the valley in the last small number of years based on the largely unquestioned premise that targeted social media ads work.     Such targeted ads are very arguably both Facebook’s and Google’s secret sauce – not to mention that of the large ecosystem of companies around them.

But is it actually true?  Are these ads truly a kazillion dollar a year secret sauce that merit the premiums that brands pay for them? Not according to the world’s largest consumer brands company and global advertising spender P&G (Procter & Gamble.) P&G is known for being fastidious measurers, for being both a good process company and an innovative one. P&G may not be a household name, and may not be especially sexy, but it is virtually impossible to live in the Western World and not have at least several of their products in your home.  P&G has a large number of brands, everything from shampoos to toothpaste to diapers, soap to toilet paper, razors to cosmetics.

In yesterday’s WSJ, there was a front page article noting that P&G was generally discontinuing the use of targeted ads on Facebook.   The below is a short excerpt from it:

Procter & Gamble Co., the biggest advertising spender in the world, will move away from ads on Facebook that target specific consumers, concluding that the practice has limited effectiveness.

Facebook Inc. has spent years developing its ability to zero in on consumers based on demographics, shopping habits and life milestones. P&G, the maker of myriad household goods including Tide and Pampers, initially jumped at the opportunity to market directly to subsets of shoppers, from teenage shavers to first-time homeowners….

P&G’s shift highlights the limits of such targeting for big brands, one of the cornerstones of Facebook’s ad business. The social network is able to command higher prices for its targeted marketing; the narrower the targeting the more expensive the ad.”

In other words, P&G found that targeted ads didn’t help it sell toothpaste and other daily essentials.   Objectively, there is little reason to think that it would. Facebook may well not know – or be able to infer – what toothpaste you use for example. Nor is there any real reason to believe that you are likelier to purchase a given brand of toothpaste because your friend uses it.

To be fair, P&G isn’t lowering their overall spend with Facebook – at least not for now.  And, as the WSJ article duly notes, some specific, highly directed types of targeting (e.g. expectant mothers for diapers) are effective.  But if the targeting in the general case is no longer perceived as an advantage for which large brands will readily pay a hefty premium, it isn’t clear that Facebook will be able to command either the percentage of advertising spending that they do now. Likewise for Google.

The main thing that is interesting in all of this is how long the assertion that all of this just magically works has been effectively unchallenged, even in the face of common sense and day-to-day experience.  When is the last time that you deliberately clicked on a product ad?  Weeks? Months? Actually bought something that originated with such a click?

Sure, it is true that seeing an ad for a given brand somewhat increases the chance that you’ll buy it – but only if it is a category of thing that you anyway buy, and you don’t already have a strong preference for a competing brand.  But this raises the interesting question of whether the combination of a proliferation of ads, and a generation that spends a good part of its waking hours glued to one screen or another, will result in the latter adapting to the former to such a degree that most of these ads effectively become invisible to them.    It is highly doubtful that anyone is researching such a possibility, since it would be hard to imagine who would fund such a thing.

For all the moaning and groaning about big data and the invasion of privacy, the reality is that most ad targeting that works is of the simple “if single-thing-X then…” variety such as the expectant mothers example above.  Much of the rest really doesn’t work very well, even with the massive amount of data being collected and the billions of dollars spent to analyze it. There are three main reasons for this:

Lack or sparsity of data: Everyone may buy toothpaste for example, but few people talk or tweet about their toothpaste. And the reality is that many more things are at the toothpaste end of the spectrum than the fashion one.    For many types of products, that just may not be a fixable problem.

Limitations of current technology:  To understand how limited the current technology is in many respects, just consider how many of the ads you see are for things that you have already long since bought.   For example, when my coffee maker broke, I bought a new one pretty much immediately.   Most people would do the same. Yet for literally months afterwards I was barraged with coffee maker ads. This might make sense for a luxury purchase that many buyers may ponder for months, but not a commonplace small appliance that many people consider a necessity.  Or a few months ago, when I was looking for a power of attorney form for a particular state, for weeks I got useless ads for attorneys.   I am now getting ads for cemeteries – I truly have no idea why.   I could go on and on. In short, it is still mostly the low hanging fruit that is being picked, even billions of dollars later.

Business Incentives:  Obviously Facebook, Google et al are strongly incented to sell what are tantamount to “qualified leads” to their advertisers.   The more factors that are considered in the targeting, the fewer targets there will be for which to charge a premium.   More targeted ads are more expensive, but that’s irrelevant if the target pool to offer for sale is miniscule. While of course the advertisers have some say over what dimensions and parameters to target, they are limited by tools, by the available underlying technology, and doubtless in many cases by expertise.

None of this is to say that FB, Google, etc aren’t highly valuable advertising platforms even despite this at this point, just that their advantage over other forms of media and platforms is objectively less than what had been claimed. For example,  having comparatively less data about their users for ad targeting purposes was one of the big knocks against Twitter.   I doubt that this overdue revelation will harm the stock price of either FB or Google much, and certainly not to the $20B extent that one of the large pharma companies was punished in market cap for the clinical trial failure of one of its drugs recently. For one thing,  there is not as direct a relationship to revenue, and FB will likely be quick to push customer testimonials that rebut P&G’s findings.  And we are talking advertising, not blood tests: it may not actually matter whether the much touted thing works or not.

 

 

 

May 28, 2016
by chenope
1 Comment

Why The Theranos Debacle Is Likely To Be More Than A Pin-prick For The Valley

There’s an old joke in Northern California about the surest way to make a small fortune:  start with a large fortune and invest it in a winery.   It turns out that running a successful winery is very hard and requires both a tremendous amount of wine-related know-how and real world business acumen.  So it is no surprise that the vast majority of the newly minted wealthy who try it fail.

Of the many hundreds of Silicon Valley venture-funded startups – and by this I mean not only those based in the valley, but also those elsewhere who exist within the local model – the number that have a legitimate business is vanishing small.  By a “legitimate business” I mean one that possesses each of the following 3 attributes:

It is profitable. Or at the very least, is on a clear road to profitability.   And it is profitable in reality, not just on paper.   In other words, not collecting 1/4 of the the revenue officially claimed, as an enterprising journalist at Buzzfeed recently caught the well-known unicorn Palantir doing: https://www.buzzfeed.com/williamalden/inside-palantir-silicon-valleys-most-secretive-company?utm_term=.du2Zl8l8g#.kgWN2p2pv.  (I was once quoted in the Wall Street Journal something to the effect that “real startups don’t run of out money. They just earn more.”   I learned later that at least one startup made a copy of this and stuck it on the wall of their office. Unsurprisingly, they were in the Midwest.  Unlike Palantir, they actually have to collect money from their customers, not just allegedly earn it.)

It is sustainable.   Sustainability often seems like an old-fashioned and even irrelevant concept in the valley, but in the rest of the world, sustainability is an absolute requirement.  It means that your startup doesn’t have “a sell by time it or else” date. Sustainability can be achieved in more than one way of course, but for technology companies, one would really like to see true technology differentiation that is one of the core “unfair advantages,” as legendary author and startup scholar John Nesheim refers to it.   Clever business models are after all far easier to replicate than is some kind of deep technology.    Yet in recent years, the vast majority of the valley companies are the former rather than the latter.

It is organic.   By this I mean that the revenue that it has is real, that the majority of comes from satisfied customers who had a real need that is filled by the startup, and who will spend more with the company in future.  Frequently, when one looks closely it turns out that the vast majority of valley startups’ customers are – drum roll – other Silicon Valley companies.    That should raise red flags: a good product is a good product many places, not just in a 100-mile radius of Google.

Until recently, there was one well-understood – if rarely stated – self-preservation principle that all of the locals held to: stick to stuff that isn’t a matter of life and death, and in which the very worst thing that could happen is a civil product liability lawsuit – which are extremely rare owing to a number of factors including how most commercial software licenses are written.    In short, no matter how extravagant – and usually untrue – the claims of “breakthrough” technology made to attract the all-important venture-funding are, the probability of any serious real-world blowback from them is slim to nil.

Now enter Theranos.  It is no wonder that it attracted as much attention and admiration as it did.  It broke that universal principle. It purported to solve a serious, real-world problem, not just enable you to chat with your friends in a cooler way.   Inexpensive, easy to perform, and accurate blood tests made widely available would almost certainly save a great many lives each year. It would also reduce the cost of care substantially, and increase quality of life for people with conditions that could be recognized early and treated more effectively.  In particular, poorer people who would be put off by the cost of a traditional blood test. And those morbidly afraid of big scary needles, since the Theranos technology required only a very small amount of blood.

Better still, it had a 19 year old, attractive female CEO who was the purported inventor of the revolutionary technology, rather than a bland PhD who had spent a decade or more in a lab and was considered a leader in his field (as would normally be the case with biotech investors, who operate in a very different ecosystem.)  It was backed by one of the name valley firms, DFJ, that had also backed Twitter, rather than obscure biotech funds with more limited cash and connections. It was a modern day fairy tale of what was possible to achieve.    Investors anywhere would salivate at the prospect of such an opportunity.

Yet, as any investor should know, that which seems too good to be true probably is.   Or at least warrants very close inspection.   As recent exposés in the Wall Street Journal and elsewhere have documented, no one outside of Theranos ever was given access to one of the proprietary “Edison” devices to verify that it worked.   No one, not once.  Promises were made by Theranos to provide the devices, but only a limited prototype was provided whose nature was such that there was no real way to benchmark it against traditional devices.

One of the main revelations in the WSJ reporting is that vast majority of the blood tests performed by Theranos were done using traditional machines.   Many of the tests that were performed on Edison devices have now been voided by the company because of accuracy issues.    Outside of the valley, there is a single word to summarize this situation: fraud.

Theranos offers a compelling example of a startup that achieved worldwide fame and a $9B valuation based solely on hype and braggadocio.  Many different venture firms invested in it.   Not only did none of these investors require a neutral expert to evaluate a working machine during the due diligence process,  they failed to notice all kinds of gigantic red flags.  For instance Theranos must have spent a lot of money running all of those blood tests on machines purchased from others and/or outsourcing test results.   Even an investor who understands nothing at all about science should have easily spotted that.

Had they been looking.  The key takeaway here is that clearly no one did.  No one looked because no one cared.   Not until regulators started shutting down Theranos labs, and threatening Theranos executives with a 2-year suspension from the industry.   Now civil – and likely also criminal – lawsuits will be flying, and everyone involved in this particular debacle will be running for cover.  If it turns out that people died because of inaccuracies in Theranos’ blood tests – and let’s hope that this is not the case – it will really get interesting.

The blowback will reach far beyond Theranos as more and more revelations are revealed. Bill Gurley recently wrote a excellent (if long and quite technical) blog post http://abovethecrowd.com/2016/04/21/on-the-road-to-recap/ . Gurley refers to the first WSJ piece on Theranos as “a seminal bubble-popping event.”  The main gist of the blog post is that sensing an impending bubble burst, other unicorns will agree to so-called “dirty” term sheets.  These are term sheets that preserve, in theory, the sky high valuations, but in reality are inserting fairly horrifying terms in return.  The headlines however will be that the unicorn valuations remain insanely high.  The proverbial can will have been kicked successfully down the road.

The real question is whether the number of current startup-related scandals and “emperor has no clothes” revelations – and Theranos is just one –  starts to have any broader impact on the cash-printing machinery in the valley.  That only time will tell.  Maybe though, all involved – including the investors in the various venture firms – should stop to consider that the same types of abilities needed to run a successful winery are also need for a (genuinely) successful tech company.

 

Note to readers of this blog: Sorry for the long absence, but I’ve been too busy to keep up with it regularly. I will try to do better in future.

 

December 23, 2015
by chenope
1 Comment

Why Sylvester Stallone Should Be Inspirational for Start-up People

Sylvester Stallone’s actual real life story is far more improbable and impressive than that of Rocky Balboa, the part that he wrote for himself in the movie that catapulted him from literal poverty to worldwide stardom.

Although it is very hard now to imagine anyone but Stallone playing Rocky Balboa, the part-time mob enforcer, part-time club fighter down on his luck, in fact the movie studios originally wanted the screenplay but not Stallone in the role.   Stallone only managed to obtain the starring role by refusing to sell the screenplay otherwise.  This was no small dice roll at the time, as Stallone was so broke that he barely had enough money for dog food; yes, the dog in original Rocky movie was in real life Stallone’s beloved dog Butkus.   But he doubtless recognized that there would be no better vehicle for him.   So he took the risk, held his ground and ultimately prevailed.

Stallone was himself from the tough Philadelphia neighborhood featured in the movie. No Hollywood actor could have been nearly as authentic. It is in fact the resounding authenticity that really makes that movie.  The characters seem real. Their environment, though dismal and gray, seems real. This makes the fact that Rocky goes the distance against the champ – though he doesn’t win – also seem realistic.

Even once Stallone passed this initial hurdle, he still had a tough row to hoe.   The first Rocky movie was a very low budget affair. Use of the authentic South Philadelphia locations were obtained mostly by groveling.   This I know purely by circumstance. The house which in the movie belonged to Rocky’s love interest, Adrianne, in real life belonged to distant cousins of mine.  Initially bemused when a group of strangers showed up at their door and pleaded with them to use their house, they agreed.  It was a story to tell: “Hey, can you believe some idiot wanted to use our living room in a movie?”  Their living room, as was, was the set, with the exception of a few  knick knacks such pictures of the actors that were brought in by the crew. For the use of their house, my cousins were either paid no money, or a very small amount – I don’t recall.    To say that they were beyond astonished when the movie became a worldwide phenomenon would be a gross understatement.

Since all of the houses in these working class neighborhoods are very similar to one another – there are long rows of literally identical houses street after street, hence the term “row house” – there was by definition nothing at all special about my cousins’ house.  I can only therefore conclude that they were the first people who agreed, but were far from the first people asked.  For all I know, they were the hundredth people asked.   They surely could not have been the first.  It is hard to imagine now that Stallone and his crew went door to door in that fashion just to get the use of a very ordinary living room for a small number of hours to shoot several scenes.   But that is very much part of the universal experience of starting a startup as an unknown.     Even after some initial success has been achieved, it remains hard to get most people to take you seriously.    One must just persevere through that stage, as Stallone did.

Forty years after the release of the original Rocky film, Stallone brings back the Rocky character in Creed, now in movie theaters.   Creed is essentially an updated take on the first Rocky movie: underdog fighter training in the same neighborhood goes the distance against the current champ (but likewise doesn’t win.) Creed is not a great movie, but is a generally good one. It is doing well at the box office.   Rocky Balboa, though seventy, is still clearly the same character as before, just a lot older.   In other words, the branding is unchanged and still is relevant 4 decades later.  That is a claim that very few software companies, regardless of their size, will be able to equal.

December 16, 2015
by chenope
0 comments

Great Example of Why Europeans Fret Over Privacy Issues

Last week when I was interviewed by a member of the German media, I was reminded in just how low esteem many Europeans hold the big Internet companies.  There are of course a number of reasons for this ranging from the well known privacy and antitrust concerns, to the minimal amount of taxes paid in Europe by these companies, their not infrequent public contempt for European law – and of course, envy.

Nonetheless, the privacy issue to most people is by far the most significant.  I was personally reminded of why just a few short days after the interview.

A month earlier, I had been rear-ended at fairly high speed.  I had muscle spasms and some pain and so went to my doctor, and learned unsurprisingly that pretty much all of my ribs were somewhere other than where they should be.  My liver was also a bit tender to the touch.  So my doctor suggested that I take an over the counter liver supplement for a month.

That night I was a bit tired and had a headache.  The extra few keystrokes to run searches looking for a good liver supplement through an anonymizer didn’t seem worth the effort, though it is something I am usually prone to do for anything even remotely health or security-related.  The same night I searched for a power of attorney template for a totally unrelated, routine matter.

Since that night, I have been barraged with ads and spam mails for rehab clinics and for local attorneys.  This has been going on for a couple of weeks now and counting.   In my case, I’m just irked at my own laziness every time yet another one of these pops up. However I could easily imagine how this torrent of emails and ads could do great harm to a junior person or a temporary worker whose boss might jump to the conclusion that the employee (or perhaps a family member of the employee) was alcoholic and maybe even had been involved in a DUI.  Doubtless, a big data app is out there that would connect those dots. Worse still, in most cases, the boss would jump to the conclusion silently; asking questions could trigger ADA problems.    If the employee is at all unlucky, she could easily lose her job and be left to only speculate at the reasons.

This is exactly the kind of thing that sends many Europeans into a froth.  Of course, this is just a consequence of the ad word economy.   However, that does not make it any less myopic.   The more people who have experiences like this, the more anonymizers will be used for searches – and the greater an incentive for new anonymization products.   Likewise the more people will take steps to shield their identity, block cookies and so on.   And above all, it creates the virtual certainty of ever more regulation. Given that advertising is still ~95% of Google’s revenue and essentially all of Facebook’s, this poses a sustainability problem over the long term.  And not only in Europe.