Liberating (Innovation in) Mobile

Chris Dixon recently wrote a post about the decline of the mobile web and the shift to apps and how that is hurting innovation. Fred expanded on that theme in his post on the mobile downturn. So it is worth thinking about what we need to get to a model of permissionless innovation in mobile. Here are some changes that might make sense

  1. An unencumbered open source mobile operating system (Android is not that due to the control exercised by Google)

  2. Ability to side load apps / have competing app marketplaces

  3. No private APIs that are accessible by Google/Apple only but not available to other developers

  4. Requiring IPV6 on phones to facilitate direct routing between phones

  5. Requiring ability to mesh network between phones

  6. Allowing resale of last mile residential bandwidth

Only #1 on this list could be accomplished without government help and once it succeeds would make #2 and #3 unnecessary. But given the current concentration in the OS market these should be considered as potential regulatory remedies.

#4 - 6 are all potential regulatory responses to the concentration of bandwidth providers in the US. An interesting entry point to #4 and #5 would be from an emergency response perspective — it could maintain network connectivity even in very large disasters with power outages. #6 would allow a phone mesh to easily connect to the net at the closest onramp.

Posted: 17th April 2014Comments
Tags:  mobile innovation regulation

Wealth and Speculation

At the moment I am writing about why I think the industrial system is breaking down as its main components are no longer functioning properly and sustaining each other. In particular I wrote about the growth and increased concentration of wealth and its relationship to our present day democracy. Today I want to suggest another aspect of the changes in wealth and how it relates to the allocation of capital.

Let us start with a look at what the components of the financial asset side of private wealth look like overall (based on Federal Reserve data, in 2013 Billions)

image

What stands out are the growth of equities and pension claims which together account for almost 3/4 of all private financial assets. Financial assets in turn make up 70% of all personal assets with the remaining 30% consisting primarily of real estate.

Now as we saw in the previous post on wealth and voting, the bottom 90% in the US have only 25% of the total wealth and the bulk of their holdings are pension claims. Conversely this means that almost all of the equity ownership is held by the top 10% of the population. Within the top 10% in turn the bulk of ownership is concentrated in the top 1% of the population (in fact, the top 0.01% alone seem to own as much as 10% of all equities).

Now as I have argued separately, we are living in a deflationary world largely due to the impact of information technology on the economy. Let me be quick to point out that by this I mean a world in which “real” prices are declining based on supply and demand for goods and services. This does specifically not consider some massive potential monetary change, which one cannot rule out given the tremendous amounts of money created.

In such a world we should expect to see many more speculative bubbles. Why? As it gets harder to make money by investing in productive capacity, returns are sought out in temporary price movements even when those are known not to be sustainable. This is entirely rational behavior as each of these bubbles is a redistribution opportunity between those who have better timing and those who don’t. Each bubble itself is a zero sum game though.

Now there is strong anecdotal evidence of this. We had the dotcom bubble. Then we had the housing / mortgage bubble. As it turns out this increased volatility shows up very clearly in the overall private wealth data. Here is a chart that I put together based on the same Federal Reserve data with a measure of 10 year volatility

The volatility measure is the sum over the absolute year-to-year changes for the preceding 10 years divided by total wealth that year.

For the time being I expect more volatility ahead given the reasons above. My point here is not that we should address speculation or the problem of wealth and voting each in isolation. Quite the opposite, I am suggesting that all of these are connected to each other and are part of the breakdown of the industrial system.

Posted: 16th April 2014Comments
Tags:  finance wealth capital speculation

Writing Software Applications In-House

There is something very exciting going on in the world of software: a shift towards developing new application software in-house (as opposed to relying on third party offerings). For instance, at USV we have developed the linksharing on usv.com and our new analyst application process. Why does that make sense now? Because writing small applications has become so easy that it is today’s equivalent of writing an Excel macro.

Chris Dixon has a good post yesterday where he describes some of the trends that have made this possible, including on demand infrastructure, lots of API based services, open source libraries and scripting languages. I would add to that a database layer that makes it easy to deal with semi-structured data, such as MongoDB (we are investors).

As a result the tradeoff has shifted from using a complete third party application to building it yourself for many projects. What you gain is fine grained control over design, functionality and integration with other systems you are using. What you pay is having code that you need to maintain. So if you are going that route there is a real premium on keeping your code short and super readable.

I am fully aware that we have gone through phases like this before. For instance in the early days of the PC that’s how I first earned money — writing in house software for the personnel department of the local Siemens branch in my hometown.

Still it feels like this time the in house approach will be here to stay and if anything be extended to non-programmers through services such as IFTTT. One of the key drawbacks of the in-house move during the PC days was the fragmentation of data. That is largely eliminated today as the data resides in the cloud in any case.

In addition to the cost and complexity of in-house development having come down massively there is another crucial reason for the shift (which also makes me believe it will be longer lasting): software plus data is increasingly the key competitive differentiator.

PS Back to my posts on the economy tomorrow

Posted: 14th April 2014Comments
Tags:  software in-house strategy

Wealth and Voting

Earlier this week I started writing about wealth and financial capital as part of examining how the various components of the industrial system are beginning to break down. I will have more to say about the financial capital portion of wealth in upcoming posts but wanted to first provide more data and more context. As was pointed out in the comments Thomas Piketty provides a lot of data that he and others collected and form the basis for his book “Capital in the 21st Century" (which I just started reading). So here is a wealth graph that goes all the way back to 1770 and also shows population growth

What this comparison shows is that much of the total wealth in existence today has been generated post 1900, which supports my claim that the industrial system wasn’t really fully in place until then. In fact from 1920 to 2010 the population grew by less than 3x and wealth grew by more than 15x.

The distribution of this accumulated private wealth is extremely uneven, with just 0.1% of the population controlling 20% of all private wealth in the US today. And the top 10% of the population account for 75% of wealth. But in terms of ability to use wealth the picture is even more lopsided than that when you consider what the wealth for the remaining 90% consists of as the following chart by Emmanuel Saez and Gabriel Zucman shows image

Essentially the wealth of the bottom 90% consists of pension claims and housing both of which are highly illiquid (something we will revisit in the context of changes to income).

Now why does all of this matter? One crucial way it matters is that the governance portion of our current system is based on voting with an original idea of equal representation. This was written into the United States Constitution, Article One, Section 2 which sets up the apportionment of seats in the house of representatives and establishes the decennial population census. The initial exclusionary definition of who was to be counted was later expanded with the Equal Protection clause of the Fourteenth Amendment. As late as the 1960s the Supreme Court upheld these basic tenets with several “one man one vote” rulings.

More recently though two changes have come together to undo this principle, resulting in representation based on money instead of individuals. First, the cost of attention has been rising steadily and has exploded with the advent of the Internet. The cost of Super Bowl advertising is a good proxy here as it measures roughly how much it costs to get a minute of attention in the US. Here is a chart the Business Insider put together

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Second, changes in legislation have made it easier for money to be spent by politicians and individuals / groups supporting them to buy attention. This goes as far back as Buckley vs. Valeo in 1976 which took much of the bite out of the Federal Election Campaign Act. It really gathered steam with the Citizens United decision in 2010 which removed limitations on corporations and the recent McCutcheon case which did away with any aggregate limitations.

Do the effects of this show up in the election data? The following chart put together by represent.us shows what happened in 467 district races. The headline sums it up: the candidate who spent more money won 91% of the time.

image

For one possible legislative attempt to counteract the power of money you should check out the American Anti-Corruption Act.

There is also an interaction between the distribution of wealth and income that impacts the nature and size of the demand for products and services. I will tackle that in another post. Before that though I may dig into the composition of wealth to show the role of financial capital.

Posted: 9th April 2014Comments
Tags:  wealth statistic voting

Heartbleed: Social Change and Decentralized Identity

While gathering up additional data for the next post on wealth, here are some thoughts on the Heartbleed security vulnerability. At USV we sent out a notice of the issue to all the heads of engineering as well as all of the CEOs. This was easy to do since as part of the USV network we have these groups pre-defined. It was immediately clear based on the severity of the issue that this requires CEO level attention. For an example of an excellent response from one of our portfolio companies, here is a detailed disclosure by Twilio.

I have posted frequently in the past that crypto alone is not the answer to questions of privacy and security. Whenever I write along those lines someone shows up with a “but math defends us” argument. Well, cryptography math isn’t something abstract. It lives in code. And that code can and will have errors. There will inevitably be endless arguments about bounds checking and programming languages and so on focused on how the particular bug could have been avoided. Again this misses the point. Systems todays are layers upon layers and cryptography will never be the only answer. We need to focus as much if not more on protecting people rather than data and systems.

If we want to have a debate on the code and technology side it should be around the future of certificates and how they are issued, distributed, verified, revoked and used. There is a current mass process happening (hopefully) in which companies are scrambling to replace potentially compromised server keys which requires that they obtain new certificates. The certificates bind the public key to the identity of the company / service. This mechanism is build on a web of trust that goes back to root certificates. This seems like an area where block chain type solution could provide a truly decentralized solution. If I am being vague here it’s because I don’t know what the exact mechanism would be but this seems very worthwhile looking into. As part of that we can hopefully get a broad mechanism for tying keys to individuals (not just organizations) in a decentralized identity system. We had an early start on that with client side certificates in browsers which unfortunately eventually got abandoned.

For both the political and the technological debate I hope that Heartbleed serves as a wake up call especially to technologists. Again, the two key issues I would like folks to focus on are (a) the importance of political and social changes in preventing the abuse of data that has and will be leaked and (b) the necessity for a truly decentralized identity-key mapping infrastructure. 

Posted: 9th April 2014Comments
Tags:  heartbleed security identity

Wealth and Financial Capital

Last week I introduced my view that the various interlocking components of the industrial system are beginning to break down. The first one I mentioned was that “financial markets have been allocating capital into vast asset bubbles instead of into productive investments.” To dig deeper into this claim a good starting point is to look at wealth. The following chart shows the growth of private wealth in the United States, where private wealth is the sum of household and nonprofit organizations. The difference between the asset line and the networth line are liabilities. 

image

The amounts are in constant 2013 billions, using the CPI to adjust for inflation. The source data for the chart is published by the Federal Reserve (thanks to Dina Lamdany for compiling it). 

Several features stand out. First, private wealth has grown more than 8x during that time period (for comparison, US population grew roughly 2.3x over the same time from 140 to about 319 million). Second, growth in private wealth accelerated significantly around 1995. For the fifty year period from 1945 to 1995 the compound annual growth rate was about 3%. From 1995 to 2006 it accelerated to 5%. Third, the crash of the financial markets in 2008 stands out clearly. Equally clearly though private wealth has now exceeded the pre 2008 levels and has grown extraordinarily from 2012 to 2013, expanding by 12%.

One of the to dos here is to try to bring this data all the way back to the 1780s. Why? Well, at the time of the drafting of the US constitution there were fewer than 4 million Americans. The population has grown nearly a hundredfold since then. It would be interesting to know by how much wealth has changed over the same time period.

Thanks to research done by Emmanuel Saez and Gabriel Zucman we know in increasing detail how unequally distributed the growth in wealth has been in recent years. They recently published the following chart showing the percentage of wealth held by the top 0.1% of the population in the US (which requires greater than $20 million in networth)

image

So at the same time that wealth has grown significantly overall, the share of it held by the very rich has increased substantially and is now back at levels last seen in the Roaring Twenties. Again, it would be interesting to see if one can come up with estimates for what this looked like even further back.

Here is how this translates into absolute numbers, focusing on the period of growth. In the mid 1970s the share bottomed out at about 7.5% of a total private wealth of about $22 trillion for a total of $1.6 trillion. By 2013 it had climbed to 22% of about $70 trillion for a total of 15.4 trillion (the reason I am saying “about” is that I don’t have the exact decomposition of private wealth into households versus nonprofits). That is almost a 10x increase and a staggering number overall.

I will come back to the implications of this growth in concentrated wealth in subsequent posts. But first I will start digging a bit deeper into the composition of wealth which is also intriguing.

Posted: 7th April 2014Comments
Tags:  wealth statistics

The Industrial System: Not the End of History

Francis Fukuyama’s book “The End of History and the Last Man” identifies liberal democracy in combination with capitalism as the winning way to organize society. Fukuyama wrote in 1992 at a time when the data seemed to support that conclusion. The book also presents a historical framework based largely on Hegel to argue why this has to be so and why it represents an end state. All of this now looks like a premature victory march. For reasons that will become clearer in future posts, I will refer to the “industrial system” instead of using Fukuyama’s terms.

The industrial system has a bunch of interlocking (complementary) components. Financial markets that support the direction of capital to productive opportunities. Firms that put together the capital assets required for production. Employees who are earning wages and spending them on goods. Markets with competition and properly determined prices. Elected politicians who pass laws to enable a civil society. These laws are enforced by unbiased regulators, police and courts. Schools that educate people to participate in the labor market and the democratic process. This is certainly not meant to be an exhaustive list but it’s a good start.

This is a system has worked at some level miraculously well. I am typing this on a MacBook Air that is beautiful, powerful, connected to the rest of the planet. I have a high live expectancy. I don’t need to worry about marauders. And so on. I will have more to say about the measurement of progress which is a whole can of worms unto itself, but suffice it to say that I personally have been a big beneficiary of all the system has to offer and am happy to be alive today rather than at an earlier time period.

When I say these are complementary components I mean that having one makes the others more valuable (on the margin — this is captured mathematically by supermodularity). For instance, having competitive product markets means that the additional dollar of salary your earn goes a longer way as prices come down and product innovation gives you larger choice. Or having companies that gather up productive assets works better in the presence of well developed financial markets. Because of complementarities systems are hard to change and have a lot of inertia. You can’t just change one part as it won’t fit with the rest. And small cracks in a part will tend to get patched so as to preserve the system as whole.

Now, however, multiple components and their interactions are breaking down simultaneously and the patches we have applied are no longer good enough. Our financial markets have been allocating capital into vast asset bubbles instead of into productive investments. Firms themselves are hoarding capital and moving it around the globe. Earnings are highly concentrated among fewer employees with many others using debt to finance expenses (credit cards, student debt). Markets have fewer and larger companies that exert market power (sometimes in quite subtle forms such as planned obsolescence). Rich individuals and incumbent corporations exert undue influence on politics. Regulators are captured by their industries. Higher education is leaving students deeply in debt.

But there is more. At the same time that the system is slowly breaking down we are facing both threats and opportunities that it is not designed to address. The most prominent threat is environmental impact in general and climate change in particular. The existing system doesn’t address it because we are largely dealing with externalities that are unpriced, such as pollution of the air or overfishing of the oceans. The biggest opportunity comes from the increasing importance of non-rival digital goods. Wikipedia, Khan Academy, etc have the potential to help educate everyone on the planet at virtually no cost. The existing system underproduces such goods as it is more driven by profit than by consumer surplus.

Over the coming days I am planning to push deeper into all of these components — both how they fit together and how they are now falling apart. I am likely going to start with a bit more about the importance of complementarities both for understanding societies and history but also as a tool for thinking about strategy.

Posted: 3rd April 2014Comments
Tags:  industrial system capitalism history

What’s Ahead: The Information Age Transition

As promised (threatened?) I am going to use Continuations to think out loud about what I believe is the beginning of a transition away from an industrial age to an information age. I know those terms aren’t perfect but that will be part of the discussion itself. Why am I doing this?

First, I believe that this transition will be as important to humankind as the previous transitions that have taken place from the forager age to the agricultural age and from there to the industrial age. Those transitions were extremely violent in large part because we didn’t really understand what was happening. We now have a lot more history to learn from, so it would be tragic if we repeated the same mistakes.

Second, much of the current policy debates in education, finance, healthcare and so on are largely arguments about whether the deck chairs on the Titanic should be a bit more to port or to starboard. They are fierce debates about making relatively marginal changes to a system that is fundamentally breaking down. We need to stop wasting our energy on them and instead collectively invent the future.

Third, I can’t think of an intellectually more fascinating project. My interest in this goes back three decades to when I first got excited about computers. I can’t claim that I saw then what I see now but I had some kind of inkling, which is why I studied both economics and computer science as an undergraduate and as a PhD student. 

Fourth, this transition is highly relevant to what I do as a partner at Union Square Ventures. For instance, when I first learned about Etsy I had a very positive reaction because it fit with my thinking about what is happening to the economy and to society. The same goes for Shapeways and many other companies in our portfolio. So I expect that exploring the transition more will lead to new investments.

This is obviously a big topic and one of my weaknesses is that I am generally tempted to start with foundations and lay out all parts neatly step by step. But not only does that make for boring reading it also pre-supposes that one has it all figured out, which I definitely haven’t. In the end my goal is to have something coherent and hopefully even publish that as a book (yes, books themselves may seem kind of quaint but I love reading them so writing one seems like a good idea — I will need a great editor!).

Here are some of the pieces that I will be grappling with in the coming days and months

1. The massive cracks that are appearing in the existing system. In particular, the industrial system is built on people selling their labor and using the proceeds to buy goods (and services). But the price of labor is under tremendous pressure from machines and from globalization. Other cracks include the increasing importance of non-rival information goods and the missing prices for the environment.

2. The early signs of what a different system might look like. As I mentioned above, these include many of the USV portfolio companies. But they also include projects such as Polymath and not for profits such as the Freelancers Union and the growing cooperative movement.

3. The nature of mankind, which admittedly sounds awfully pretentious.  But our views about our own nature are at the heart of what systems we believe can work. For instance, if you conceive of people as fundamentally selfish and greedy and prone to violence then your outlook will be very different than if you believe in curiosity, altruism

4. History and systems. These may seem like an odd pairing but I have a good reason for it. Systems sustain themselves through complementarities between their components. We tend to be too obsessed with trying to pin change on a single force whether that’s technology or policy or individuals.

5. Ideas about what we can do as individuals and organizations to help shape the transition.

6. The relationship to existing philosophies and schools of thoughts. I have come to realize that both capitalism and Marxism are essentially rooted in industrial society. They are like the proverbial generals fighting the last war. We need to get past both of them.

Along the way I am looking forward to lots of poking at my thinking from readers and a gradual process of collaboration and contributions. I have not yet figured out what the best way for that is, so for now, please comment!

Posted: 2nd April 2014Comments
Tags:  information age

Kenya: Impressions (Cont’d)

Since our trip to Africa was a family vacation and I really didn’t want business to intrude I wound up not spending time with startups in Nairobi. But I did talk to a lot of people we encountered about their use of technology.

Mobile communication is almost everywhere. Only when we went into more remote Samburu territory did we not have a cell signal. Many people are still using feature phones but Android is making rapid headway. An iPhone is considered to be a real luxury item and very few people have one. I took a picture of downtown Nairobi that shows a big LG and an even more prominent Samsung ad (admittedly not a great picture so you have to search a bit).

M-Pesa, the mobile payment system, is used incredibly widely. It has had some very positive effects, such as being able to pay women who work directly as is done for example by the Leakey Collection who work with Maasai women. That in turn has had a dramatic impact in reducing domestic violence against women. Somewhat surprisingly though, the use of M-Pesa has not reduced corruption. In fact you can now bribe folks using electronic payment instead of cash and some people think that the added convenience has increased corruption. It seems that there is an important tradeoff between adoption and enforcement. If you started to track electronic transactions on M-Pesa as a way to crack down on corruption you might stunt growth of electronic payments (people would be a lot less likely to use EZ Pass if they got speeding tickets from it).

Another big surprise for me was how relatively underdeveloped solar energy is. In fact the official Kenya government policy we were told is to invest more in grid development and fossil fuels which if true is bizarre at best. Distributed solar generation has huge promise in Africa. Fortunately, there are now startups such as M-Kopa, that are focused on helping finance the acquisition of solar devices. We saw one solar lamp in particular that doubles as a mobile phone charger and is very affordable.

We also went to visit a school that is supported by the Lewa Conservancy. One of our kids had done a small fundraiser prior to our trip and bought school supplies. When I first looked at what he had bought — paper, pencils and other very basic supplies — I thought this couldn’t possibly be what they needed. But it turned out to be spot on. When we went to the school we found it had 640 students and 18 teachers. The classrooms had 30-40 students in them with a teacher and a whiteboard. Basic supplies where exactly what was most needed.

Kenya has apparently announced a one laptop per child initiative. Based on our school visit though it would seem that subsidizing smartphones would be a much better route. Many of the kids walk long distances to school and it seems unlikely that they could carry a laptop back and forth. A phone in fact would make that walk safer. Also phones could have direct cellular data connectivity obviating the need for maintaining a local network. The school could add solar panels for charging the phones.

Overall I came away with a sense of optimism about the potential for Kenya. One of the most interesting questions though is what kind of society a country such as Kenya should be aiming for. I will have more to say about that as I shift my writing on Continuations to focus on my thoughts about the Information Age. I believe there may be an opportunity to leapfrog the industrial model.

Posted: 1st April 2014Comments
Tags:  kenya technology

Kenya: Impressions

We just got back from nearly three weeks in Africa spent mostly in Kenya and a bit in Tanzania. I have tons of great photos of animals and nature which I may eventually post elsewhere but for Continuations I figured I would share some of my impressions.

William Gibson once wrote that “the future is already here — it is just not very evenly distributed.” That quote stuck in my mind as we experienced an enormous gradient between the bustling city of Nairobi (with 4 million or so inhabitants) and the traditional tribal villages of the Samburu little more than an hours flight north. Many Samburu still live as nomadic pasturalists moving every 6 months or so and consuming a diet of mostly milk.

Changes to these societies are a lot harder than they appear at a distance. For instance, helping them drill a well for access to clean drinking water turns out to be a bad idea in isolation. Why? Because they will then stay in one place which results in overgrazing, which in turn leads to soil erosion and makes them much more fragile with respect to droughts. I don’t know to what degree an organization such as Charity Water already takes that into consideration but it was an important new insight for me.

Something similar holds true for the conservation of elephants. At one point in an area called Buffalo Springs we were amidst close to 200 elephants which was an amazing experience. They move nearly silently and were happy to ignore us. But they are also devastating for trees between knocking them over while scratching them, eating their bark (which causes the tree to die) and devouring young saplings. The difference in vegetation between areas that have lots of elephants and those that don’t is striking. So in order to preserve elephants enough land is required so that trees have a chance also. Some areas such as Lewa which try to protect other animals have erected fences to keep elephants out.

All three of these are things one can probably read about as well but seeing them first had on the ground provides a powerful impression. I will continue tomorrow with some thoughts about technology, education and energy. 

Posted: 31st March 2014Comments
Tags:  africa kenya conservation

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