Archive for the ‘government’ tag
For thousands of years, cultures were separated by communication difficulties enforced by language barriers. But today, communication barriers have little to do with native tongue, as English has become the common language of international business, academia and government. Rather, the communication barriers of the 21st century are our differing familiarities with communication technologies. As technologies evolve, these “cultural” differences will become just as powerful as language barriers.
Just this week, I was speaking with a New York State employee who had called me in an attempt to get a corporate issue resolved. I had a complete a form, and part of the conversation went something like this:
Me: How do I find the form?
Her: Are you near a pen and paper?
Me: No, I’m walking. Can you email me the URL?
Her: We can’t use email. I have to spell it out to you.
Me: Okay, but I’m not near a computer or a pen. Can I call you later today?
Her: I don’t have a direct number. I’ll call you.
Me: Okay, so then I mail you the form? What’s your address?
Her: We prefer fax.
I’ve discussed the government technology gap before — clearly, there is a disconnect in native communication platforms between my company and New York State and likely a comparable disparity between myself and this employee. But this is not simply a hierarchy of tech savvy. For instance, while both an average American teenager and I are technologically competent, we live on different platforms — I live on email and Skype and am occasionally annoyed whenever someone sends me an important note via Facebook or over a text message. We communicate in a different technological language.
As communication evolves at an ever-increasing rate, my native platforms will continue to diverge from both the teenager’s and the NY state government employee’s. By the time New York State, for instance, adopts email, I will probably have moved on to a totally different communication platform. But at the same time, new technology quickly yet unevenly spreads across our society, leaving us in the position of being unable to communicate effectively — not across cultural or linguistic barriers, but across technological ones.
On a related note, I have seen several examples of employers making hiring decisions based on a potential employee’s presence on the social web — not in the negative sense that you hear about in the news, but rather to ensure that a new team member participates in the same communication platforms as the rest of the team: Facebook, Twitter et al. This has become a big piece of the “cultural fit” that so many companies — especially startups — talk about.
Communication barriers tend to amplify over time. This is how species are created and languages are formed. If it is difficult for Group A to understand Group B due to a slight language difference, they are less likely to communicate. But with less direct communication between the groups comes a continued divergence of language, which can eventually lead to an entirely new language being created — and the groups totally unable to understand each other. While the opposite process has been happening for the world’s languages, I worry that divergence will begin again on top of technological barriers.
I’m not sure there is an effective solution here. “Education” is one answer, but in reality the problem is rarely an unfamiliarity with technology in general — it is either a lack of comfort with particular platforms or regulatory barriers that prevent its effective use.
I had the opportunity to spend Thanksgiving week in Costa Rica, which was a welcome change in scenery from Manhattan. I’m not much for hanging out at the beach, so I found some time to talk to a few people involved in Costa Rican real estate and finance while I was traveling around the country. I was particularly curious about the startup community, which seemed to be totally absent throughout the country.
The difficulty I heard from everyone in Costa Rica was the same: while the country is one of the world’s oldest democracies and most stable Latin American nations, its legal system is frustratingly unfair and unpredictable. Property laws are Byzantine, and squatters have powerful — albeit vague — rights. Costa Rican citizens are explicitly favored in all legal disputes. Tax law is complicated and seems to be made up as you go along. Despite Costa Rica being the most developed country in Latin America, the uncertainty injected into the system by needless legal complications has made technology innovation extremely difficult.
Reports of the United States’ death as the startup capital of the world are greatly exaggerated. Our embarrassing lack of startup visas, bureaucratic burdens and high cost of labor are small inconveniences in comparison to the quality of the States’s legal system, which is largely fair and — most importantly — consistent. In the United States, I have a pretty good idea of what will happen in almost any legal situation. If my company goes bankrupt, there are centuries of precedent governing what creditors can and cannot do. If I want to sue someone, I know the costs and risks. Insurance is available for everything imaginable — mostly because our legal system is so sound.
Consistency is the most underappreciated driver of success in a product or service. This isn’t just about legal structures. Great brands are built through the delivery of consistent and predictable experiences as much as PR, pricing and growth strategy. As a consumer, Apple, Starbucks, Wal-Mart, McDonald’s and dozens of other successful brands will each give me exactly what I’m expecting to get from them. I simply don’t have to worry about the risk of getting something different or unexpected. Humans are naturally risk-averse creatures, and we’d much rather take something guaranteed than something that might be 25% better or 25% worse.
By removing the uncertainty around business law, the state of Delaware has prospered, generating over $750 million in revenue in 2009 from corporate services alone. The majority of entrepreneurs I know send Delaware a sizable check every year for doing nothing other than having less uncertainty around corporate law than other states — and anywhere else in the world. If this isn’t an example of a brilliant hack, I’m not sure what is. For doing something without any fundamental cost — providing a consistent legal framework — Delaware has created a massively successful business.
Ironically, having a stable, un-disruptable legal system around our entrepreneurs gives them the power to disrupt industries and aging business models. Until other countries develop the kind of legal infrastructure that will give innovators the certainty to know that their creations and profits are protected from corrupt officials, greedy politicians, populists and nativists, the United States will continue to produce and host the vast majority of innovative, billion-dollar companies and entrepreneurs.
As more and more people look to the startup community to save our nation and our economy, it is only reasonable for things to get way more political. As more former bankers and teachers and rodeo clowns start companies, we’re witnessing the emergence of entrepreneurs as a political bloc.
But we are influenced by a different set of issues than the average partisan — H1B visa reform, patent reform, regulatory streamlining, et cetera — some of which haven’t yet been divided along partisan lines. In fact, it’s extremely difficult to assign the “entrepreneur’s agenda” to a traditional right-left spectrum. But this makes it even more interesting to attempt to arrive at some conclusions about the unique political beliefs of entrepreneurs.
However, some challenges. First, it’s notoriously hard to generalize anything about an entire industry. You can say that auto dealers and doctors tend to be conservative while teachers and scientists tend to be liberal, but technology-focused entrepreneurs are an even more diverse bunch. I’ve met founders who are die-hard socialists and others whose neo-conservative beliefs would make Glenn Beck blush. Second, politics is something that many founders simply don’t discuss in public. It’s tends to have a pretty poor risk-reward ratio.
However, I’ve seen a couple broad, fairly common threads among the political beliefs of startup founders, investors and early employees. I summarize them as “Libertarian Populism”, combining two political philosophies rarely seen together in the wild:
Libertarianism: A strong belief in individual freedom of thought and action. See the broad-based support for patent reform, creative commons licenses, regulatory reform (often de-regulation) and immigration reform.
Populism: The belief in the struggle of the people versus the “elites”, commonly represented by large corporations, specifically Wall Street. This tends to be particularly strong in developer-centric communities like Hacker News — most of the articles I’ve written that have hung on the front page for a while have had a strong populist streak.
But it’s more than just the independent adoption of these beliefs. Rather, libertarianism and populism are combined into a desire for freedom from all institutions, with little distinction between government and large corporations. After all, government and larger companies are both things that can (and do) harm small businesses. In many cases, government and big companies seemingly collaborate to attack startups: modern US patent policy, for instance, gives a massive advantage to enterprises with hoards of cash and lawyers.
Many entrepreneurs — especially the more common, cash-flow-focused entrepreneurs creating lifestyle businesses — consider their actions to be a declaration of independence of sorts from institutionalized corporate America and 9 to 5 drudgery. Yet the government’s rules tend to be written with the assumption that all companies are big companies, and the resulting administrative headache creates an antagonistic relationship between entrepreneurs and governments. Add to that the fact that big corporations — say, a health care provider — have similarly unfriendly rules, and the entirety of mainstream American institutions are thrown into the same bucket. Thus, libertarian populism.
This all has interesting implications. For instance, I’ve lately seen entrepreneurial populism leveraged to attack VCs. Take Chris Dixon, for instance, who has done a remarkable job leveraging his audience’s populist streak to paint VCs as the “other”. In reality, Chris is probably wealthier than most VCs — but he doesn’t have to answer to LPs, who are easy to lump into the government/corporate mob (and often justifiably so).
As our nation’s expectations of the startup community grows, expect the politicization of entrepreneurs to only deepen.
The House recently passed a bill to tax carried interest at the higher income tax – rather than the lower capital gains – rates. This has generated considerable consternation and debate in the venture world and somehow led to Chris Dixon asking Jim Robinson to go fuck himself . In brief, taxing carried interest – the “profit share” that money managers take from any positive returns they make – at income tax rates would increase the tax burden on VCs and possibly lead to changes in the way VC funds are structured. Some smart people think this is a good thing, as it seems a bit silly for money managers to receive a government subsidy at a time when there are so many money managers.
Let me add some thoughts into the mix . First and foremost, I don’t really buy the argument that taxing money managers at a higher rate will directly lead to a decrease in capital flowing into funds. Pension funds, endowments and high net worth individuals still have lots of money, and they’re willing to pay someone to manage it. I may be wrong here, because I don’t pretend to understand all the subtleties of the system, but this is not the argument that speaks to me.
But I do believe that people respond strongly and (fairly) efficiently to financial incentives. Over the past two decades, some of our nation’s smartest people have gone into banking and private equity because you can make great money there. If science and engineering had the same compensation structure and magnitude as high finance, we’d have a lot more scientists and engineers.
Fred Wilson uses this argument as he writes in favor of taxing carried interest at a higher rate. If it were less lucrative to be a money manager – the result of this tax increase – fewer of our best and brightest would become money managers. On the surface, that seems like a good thing. And it may be. But one of the things that makes the American startup scene great is the number of smart VCs out there. Sure, VCs come in many flavors – some are brilliant folks dedicated to supporting entrepreneurs, and others are idiots. But the last thing we need is to turn VCs into mutual fund managers – the bottom of the financial hierarchy with minimal alignment with their investors or incentive to perform. Mutual fund managers don’t take carried interest, just a management fee. Because of this and other factors, mutual fund management is one of the least lucrative executive positions in finance and is staffed accordingly.
I don’t want to see venture capitalists without significant carried interest – timid, risk-averse and totally misaligned with the interests of entrepreneurs and LPs. This will inevitably lead to lower returns – and an eventual decrease in money flowing into venture capital, and by association, startups.
Money managers are given the task of allocating the free world’s capital. Their decisions of where to put that capital to work have an overwhelming effect on our nation’s growth, development and standard of living. There’s a strong argument to be made that they’ve been doing a terrible job of late – rather than investing the past decade’s excess wealth in infrastructure, science and technology, they decided to build houses in suburbia that now lie vacant, rotting in the Sun Belt summer. There’s a growing body of research showing that this choice will have a significant impact in our nation’s economic growth and competitiveness for decades to come.
I want the smartest people in the world deciding which companies have a chance to succeed or fail. There’s a problem in money management, but I’m not sure increasing taxes on the managers’ incentive to succeed is the right answer.
 Matt Mireles’s post on this exchange is totally worth reading.
 I don’t really have a dog in this fight. Tipping Point doesn’t manage a fund of outside capital, and thus we don’t make any money from carried interest. I don’t personally invest in venture-fundable companies, so I’m not secretly hoping that VCs get weaker so I have access to better deals. I really just want to see a thriving startup ecosystem that leverages technology to drive fundamental change.
The creation of an extra-national currency has long been a libertarian dream. Fiat currency, after all, ties our assets to the wills and whims of a central government. At times — and many people argue that now is such a time — poor government decisions can dramatically debase the value of our income and savings. Thus, the need for a widely-accepted currency uncoupled from the politicized decisions of a national government.
While we haven’t lacked for attempts to create a new currency, pretty much all have fallen by the wayside. The biggest selling proposition of these currencies — freedom from backing by government fiat — is way too obscure for most people, and the logistics of backing issued currency with precious metals is daunting and expensive.
Could Facebook coins be the first successful extra-national currency? There are several factors going for it:
– Facebook’s huge audience and deep presence across the web
– The audience’s clear need for a standardized and trusted currency
– The ability for people to (often inadvertently) “socially endorse” the new currency to their friends
– A pool of merchants — e.g., Zynga — poised to accept Facebook currency
– Simple and seamless integration and exchange with mainstream currencies via the web and mobile makes switching between currencies less of a hassle
To be clear, there have been other virtual extra-national currencies. WoW gold and Linden Dollars are two examples. But these haven’t even touched the mainstream, even in online purchases — try paying for a book on Amazon in WoW gold. These currencies’ value is dependent on an ability to exchange them for dollars — not terribly different from the “regional currencies” that pervaded America in the early 19th century. If you were traveling in South Carolina with paper dollars backed by a bank in Massachusetts, you had to find someone who would exchange them (likely at a steep discount) for a local currency.
But Facebook coins seem fundamentally different. The audience is huge and hundreds of millions of Americans have experience using virtual currencies on Facebook. Right now we’re buying virtual cows and guns, but is it much of a leap to use virtual currency to buy online goods with real-world impact, such as subscriptions to digital content? And once we’re there, it’s a natural step to move that digital subscription into the real world — and even expand into necessities like gas and groceries. They already sell virtual currency cards in grocery stores. The relationships are there. Soon we’ll be using those cards to buy groceries.
So what could this all mean? First, it’s important to draw a distinction between the libertarian fantasy and the reality of Facebook’s extra-national currency. Most libertarians desire a value-backed currency — as in, gold- or silver-denominated – rather than fiat currency. Facebook coins are still a fiat currency. It’s just a corporate fiat rather than a federal one. Facebook coins are only valuable if it can convince buyers of the coins’ utility as a medium of exchange and (possibly) a store of value. But I don’t see any issues with Facebook making this happen: at least initially, there will be a large and defined pool of merchants ready to accept coins via Facebook apps, and exchange with mainstream currencies will be simple.
Of course, this is assuming that Facebook doesn’t throw up barriers to prevent this from happening — namely, if they forbid any part of the buying, selling and transferring ecosystem that makes a currency market successful. The market won’t work if they (for instance) prevent an app developer from exchanging Facebook coins directly with the user or p2p transactions using coins. This doesn’t mean that they have to float the Facebook coin against the dollar — although that would certainly be a fascinating turn of events for economists and currency traders alike.
If Facebook can create a true extra-national currency, it will make more money than any other company in modern American history. Entrepreneurs and VCs often talk about successful companies “printing money”. But Facebook has the opportunity to literally print money within the next five years.
As an entrepreneur, a big part of my job is figuring out what people want and building products that meet those needs. Even if I think a product is really cool, I’m not going to invest time and money making it better if the market doesn’t seem to care. There’s a slim chance that I’ll fiddle around with the product long enough that I can get people to understand what they didn’t know they needed, but such is a fool’s errand unless there’s a clear path to success.
Unsurprisingly, people with backgrounds in iterative software development aren’t running education in America. It’s a shame, really, because I think consumer web startups could provide some good lessons to improving K-12 science education. Let me start with one premise: Our nation’s cultural values, especially in middle and high school environments, are strongly aligned against science and technology. And most distressingly — and has Dean Kamen has recognized — this is contagious. When a student’s most respected peer is the football captain, they are likely to realign their interests away from science and education and towards things that are less productive to society.
Yet like an entrepreneur without a good grasp of the audience, we continue to focus on shifting the product — fiddling around with different ways to present information — rather than the market. While there’s certainly value in iteration and superior presentation, I can’t really envision a secular change in performance and output taking place without a fundamental change in the market’s attitude toward science. We have to make science sexy to high-potential K-12 kids. All the product iteration in the world is for moot unless we can figure out a way to make smart students actually care about science, math and engineering.
Logically, there are two ways to make this happen:
Change the attitudes of society as a whole. This is Dean Kamen’s strategy with FIRST — turn science into a sport, engaging larger segments of the populace by framing science students in the same verbiage as football players.
Change the attitude of a subset of society, and immerse qualified science students in that subset. This is a controversial one, and — other than a few specialty schools such as TJHSST — isn’t commonly employed in a meaningful way.
While I love what FIRST is doing, I’m not convinced that the former is feasible. Getting hundreds of thousands of high school students engaged in competitive science — as FIRST has done — is awesome. But it’s not changing our culture’s attitude toward science as an unpopular, unsexy, geeky, male-dominated field. And there’s a decent argument to be made that such stereotypes are hard to dispel because they’re true. Fixing that problem — well, that’s another debate. Regardless, I don’t see brilliant science students gaining the fame, notoriety and sexiness of their peer athletes in my lifetime. And if you rely on the societal change model, this is a massive problem: science and engineering students have been promised a reward in exchange for their work that they’re not going to get. In other words, FIRST could be selling a lie.
Disturbingly, our best bet to stay competitive as a nation may be to ghettoize high-performing students, placing those with real potential to be our nation’s next generation of scientists and engineers in environments where their interests won’t be misaligned by the skewed perspectives of a nation fascinated by D1 college football and Justin Bieber. There are a lot of downsides to this proposition — namely, the fact that a majority of students are stuck in downward-spiraling groups of non-qualifying kids. But is this significantly different than our nation’s current private school structure, except with academic performance as opposed to financial means as the selector?
Regardless of the method used, I’d love to see our nation’s policymakers and educators focus a bit more on the market they’re trying to reach.
As anyone who has tried to raise angel capital knows, there are strict restrictions on taking money from individual investors. Unless, of course, those individuals are Accredited Investors as defined by federal securities law. That is, unless they are rich enough. If you don’t have more than $1 million in assets or income over $200,000 per year, the law reasons, you aren’t sophisticated enough to understand private equity and should thus be banned from making those investments.
But this goes way beyond startup fundraising. In fact, securities law as it is currently written represents one of the largest transfers of wealth in human history from the middle class to the upper class and is against the principles of our society.
First, some (simplified) background. There are two types of equity (stock) investment: public and private.
Public equity is stock in companies that are “publicly traded” — typically, on stock exchanges. Most of the big companies the average American knows (Google, Apple, Coca-Cola, Boeing, et cetera) are public companies, and their stock is public equity. Mutual funds, options, futures and most other derivatives contracts are forms of public equity. Anyone can buy public equity.
Private equity is stock in companies that are not publicly traded. Facebook, for instance, is a private company, and there are major restrictions on who can invest in such companies. While there are exchanges for this equity — such as SecondMarket — purchases must be tightly controlled to comply with securities law. “Private Equity” also includes the funds that invest in private companies, including venture funds, buyout funds, growth and distressed capital funds and a menagerie of other stuff. With a few exceptions, only accredited investors can invest in private equity.
Yet private equity, as a broad-based asset class, has traditionally outperformed public equity. Data around this is difficult to capture, since private equity is a complex field and there are no requirements for firms to report returns. However, State Street’s Private Equity Index is a good place to start, and they have regularly reported private equity markets outperforming public.
And how were those returns generated? Often, at the expense of publicly traded securities — whether it’s a venture fund selling its interest in a private company to a public entity via an acquisition or a hedge fund creating outsized returns by shorting the market or making algorithmic trades. These abnormally large returns must — by federal law — accrue to wealthier individuals.
The argument for the accreditation requirement goes back to the inherent riskiness of private equity. But given the catastrophic losses individuals have repeatedly taken in public markets, there is simply no longer any logical reason behind the distinction. From John Maudlin‘s testimony to Congress in 2007:
“Why should 95% of Americans, simply because they have less than $1,000,000, be precluded from the same choices available to the rich? Why do we assume those with less than $1,000,000 to be sophisticated enough to understand the risks in stocks (which have lost trillions of investor dollars), stock options (the vast majority of which expire worthless), futures (where 95% of retail investors lose money), mutual funds (80% of which underperform the market), and a whole host of very high-risk investments, yet deem them to be incapable of understanding the risks in hedge funds”
I couldn’t have said it better myself. But at least both public and private equity asset classes have positive internal rates of return — the government actively sanctions lotteries, casinos and other means of fiscal speculation with a negative IRR. In fact, the government actively targets lower and middle class individuals with these schemes — just see all the ads for the New York lottery in the subway. Federal and state governments are telling the lower and middle classes “You aren’t smart enough to understand private equity. Why don’t you put your money in the lottery instead?” This exacerbates the gap between rich and poor, further eroding the middle class.
Not only is this a massive transfer of wealth from the middle to upper classes, but it is fundamentally at odds with a mobile and meritocratic society. Why should the government restrict access to a certain class of investments by wealth? Lots of things are financially risky, like quitting your job and starting a company. Should the government save us from ourselves by requiring everyone to meet certain asset requirements before we can form an LLC, or even quit our day jobs? To take an example from outside of finance, driving a car is extremely risky. The government manages that risk by making all prospective drivers take a test to verify their driving skills. Perhaps those wishing to take part in high-risk investments should take an SEC certification exam such as the Series 7, which is required for those selling securities.
But that is still an imperfect analogy. If a clueless driver is on the road, they put everyone else at risk. If a clueless investor is buying and selling equity, they risk only themselves — especially if they are a smaller player. But at least an exam is meritocratic in nature, whereas an asset requirement is simply oligarchical.
Yet not only will the accreditation requirement be kept, but it is likely to be raised to a minimum requirement of $2.5 million in assets, stripping access to private equity from even the upper middle class. This is clearly a bad piece of legislation, and there are a lot of people betting it will change. Given our leadership’s tendency to respond to specific problems with ham-handed reform, I’m not holding my breath.
My girlfriend had the unenviable task of going to the DMV this morning. I’ll spare the gory details, but I think we can all get behind the premise that the level of technology adoption (user-facing as well as internal) within governments lags well behind the level of adoption in the private sector. You see it everywhere, with a recent hot article about NYC spending $722 MM on a doomed payroll system making the rounds. But I would argue that not only is the gap bad, but it is getting worse and it threatens the very nature of our relationship with government.
It’s Getting Worse
An interesting case study is child welfare IT services, as (a) it is typically run at a state or local level, not federal and (b) its failure directly impacts the most vulnerable members of our society. In brief, child welfare caseworkers need to record what they are observing in the field — where are at-risk children, who is threatening them, and who is taking care of them. At a purely logical level, this requires a complex — but not overwhelmingly so — software application.
Before computers, all this information was recorded on paper. But in 1993, the Feds passed laws providing (monetary) incentives for states to adopt software for recording child welfare information. The software had to meet fairly specific specs in order for states to be eligible for the incentives, and states were forced to repay their incentives if they later abandoned those systems. It all seemed pretty logical to everyone at the time.
Fast forward seventeen years, and states are now running the entire child welfare systems on software that was built in the early ’90s. While rebuilding the system to reflect modern standards would in itself be a major cost, that cost is increased by orders of magnitude by the fact that the states would also have to repay the incentives they received in the early ’90s to re-architect these systems. Meanwhile, systems integrators (Accenture, Unisys and IBM, to name a few) continue to suckle from the teat of the taxpayer, knowing that a multimillion-dollar contract is to be had every time any modification needs to be made.
Meanwhile, technology in private hands is not only moving forward, but it’s moving forward at an ever increasing pace. Not only is the first derivative positive, but so is the second derivative — and likely the third as well (e.g., it is accelerating at an ever-increasing pace). Yet government seems to adopt technology as a step function, with steps significantly separated in time and limited in scope. Thus, the separation between public and private technology is quickly becoming a gulf. And the further government IT gets behind, the harder it will be to catch up, as adopting dramatically different modern technologies can require significant shifts in procedure, policy and overall thought. Five years ago, governments were operating native software and mainframes, while private entities were using SaaS platforms. Today, governments are still operating native software and mainframes while everything goes social and collaborative. How big of a leap can governments make in order to catch up, or are we now stuck?
It Threatens Our Relationship With Government
As more of our lives are dependent on interactions mediated by computers, citizens are becoming more alienated with a government that can’t adapt to our preferred media. I dread picking up my snail mail, as I know it is nothing but (a) spam and (b) stuff from financial institutions and governments. In other words, communications from people who either don’t care about how I prefer to be reached (email) or are too slow or bureaucratic to use that media. And if you fit into either of those categories, I probably don’t want to hear from you.
And as web technologies become more accessible to the masses and an entire generation of tech- and new media-savvy people enter the “real” world, the lack of modern technology and media usage by institutions designed to serve us is becoming far less acceptable. When the web was an esoteric world and it took millions of dollars to build an app, it made some sense that government didn’t have a major presence. But now it’s becoming common knowledge that a kid with a couple months on his/her hands can make a site that would take a government years and hundreds of millions of dollars to complete, if at all.
This kills the relationship between a government and its citizens. If I can’t trust my government to communicate and interact with me using technologies that even vaguely resemble the stuff I use on a day-to-day basis, how can I trust that government to provide services, spend tax money, or educate my children? Why would I support any expansion of government or its services, even if those services are (in theory) a good idea? If the DMV is using technology from the Reagan era to process my forms, why would I entrust my money, information or children to the care of the state?
I wish I could end this post on a positive note, but I’m struggling. I don’t see the American government dramatically changing their outlook on technology adoption, as this is ultimately not a technology problem — it’s a policy problem at best and a political problem at worst. And if the Obama administration — the regime of the “Geek President” — can’t effect this political change, who can?