By Georges van Hoegaerden


Some days I look at people and feel pity, with as much pity as Captain Paul Watson from the Sea Shepherd felt when many years ago he looked straight into the eye of one of the whales he was trying to rescue, while a harpoon flew over head. He felt pity for humanity. The same pity I feel for people who take the innovations business for an easy ride and kill it by sucking it dry.

Ways to work Silicon Valley

In my thirty years of the emerging business of technology I have seen product marketing managers at one of the fastest growing software companies pick products that sell themselves, and turn them into "geniuses". I have seen sales people at the same company make tons of easy money for the same reason, only for them later in their career be faced with a more sober reality. I have seen people in another Silicon Valley bellwether hop from one division to another, never to be confronted with the outcome of their guidance in each. I have seen people hop from one Silicon Valley company to another, only to pick up valuable equity in each along the way. I have seen people make friends with pivotal "gatekeepers", only to become employed for long enough to get a piece of equity their merit would have never earned them. I have seen those gatekeepers provide endless references to each other, securing them cushy positions through those who get in first.

Too many times have I seen investors loan-shark companies and dilute unsuspecting entrepreneurs into powerless share holders. I found out too late that an angel investor employed, travelled with and otherwise befriended the wife of the company founder, who I was going to straighten out because of his consistent underperformance, false promises and blatant lies. I should have known when I heard the angel was previously dating a friend's best friend, and allegedly forcing her to break up their relationship. I have seen entrepreneurs pitch to "living-dead" VC firms, crushing their dreams. I have seen Venture Capitalists straight out of business school force CEOs to adopt their misguided agendas or otherwise be sandwiched and squeezed out between investor and founding ownerships. I have seen VC artificially segment the industry, putting off outliers of innovation. I have seen VCs lie about the value I, not they created. I have seen VCs work the books so their investment thesis can never be held to account. I have seen Limited Partners play nice with Venture Capitalists knowing that someday they too will join the club that slides them into a much more lucrative salary.

I have seen it all. The foundation of the venture business is a bigger mess than I could ever attempt to describe here, and much more systemic than temporal.

Proud to be difficult and different

For many of the people described above I am difficult work with. Because I simply refuse to erode what I stand for by playing games (that sadly have become so popular). My passion is to build social economic value that touches real people and as a results builds attractive monetization (in that order). I care a lot about money, but only when I feel my participation deserves it. I do what I say and I say what I do. And every product strategy or company I built became an outlier as a result.

To do so one must challenge everything, including oneself.

The hard part is to walk away from investors and entrepreneurs. I have halted an investment at the last hour from a very wealthy family I have know for more than ten years, after I just discovered a string of misconduct and violations of fiduciary obligations of previous board members. The company would have been a blowout success under my leadership. I also declined an investment from another angel and a friend of the lead investor, after I found out that his reasons for investing where not in line with the business strategy I had laid out and executed on with great success as the CEO. In both cases the original founding board could not see beyond some quick money, and are now suffering from significant dilution in ownership and performance, if they are to survive. I challenged my own position from the decisions I made, a clearly different strategy from the self serving and pleasing route most in our business would have taken.

Technology innovation has become the Wild West who's easy days have past and where gold no longer simply washes ashore. We are now stuck with an overhang of gold diggers whose verifiable merit to locate gold hidden a little deeper has become inadequate. The actions of many in our industry have been too self serving, and therefor by default unsustainable.

Doing the right thing is more important than doing what is most popular. Yet doing what is right conserves a unique species we all rely on.

Conservation of a unique species

Whaling has been banned by most governments, but the Japanese keep hunting whales under the "research" exemption and continue to threaten the important role of an endangered species in the ecosystem. The wrong thing to do that will impact us all.

The endangered species in the technology industry are the real entrepreneurs who with great ideas and with diligence and persistence, together with experienced business managers and visionary investors have the integrity to produce groundbreaking social economic value and thus fantastic investment returns. Many VC investors, too busy protecting their own interests and busy concocting elaborate diversification strategies, have lost their ability to recognize and attract those entrepreneurs. And a reduction of VC investors will not fix its dysfunctional investment thesis, and will not cure its systemic disease in which the improper deployment of risk of micro Private Equity has displaced and dislodged venture capital. And don't be fooled again, VC spinning their wheels just like the last ten years with the improper risk deployed will not lead to the recovery of public trust the sector needs.

Circumvention of government regulation proves in whaling and venture capital that government regulation is not the panacea. The only way to prevent the extinction of a unique species is to provide incentive (or de-incentive) for supply and demand, which in technology innovation can be driven directly by the investment discipline of knowledgable Limited Partners.

So, the conservation of groundbreaking innovation is solely in the hands of Limited Partners, who if they open their eyes and get to know their ecosystem still have time to correct course and can continue to reap generous rewards from the massive opportunity in technology innovation that lies ahead.

On most days I still believe I can help Limited Partners fix venture (although some people have discouraged me), just like Paul Watson believes he can still save the whales. I remain optimistic we can save ourselves, but we are running out of precious time.

Tags: Entrepreneurs, Venture, Limited Partners, VC, Silicon Valley, CEO, Innovation

By Georges van Hoegaerden



It is time for a Venture Capital (VC) roast, as I continue to see so many of its General Partners spread the rhetoric that Venture hasn’t performed all that miserably and that it will all rebound, ignoring that the opportunity-cost incurred by a systemic slide from Venture into micro-PE (or what we prefer to call subprime VC) is larger than not investing in Venture at all.

The VC roast

So, let's have some fun and show you what to do when you are a Venture Capitalist and do not want anyone to get suspicious:

- You graduated cum laude from one of the top Ivy League business schools in the U.S. that also invested in your firm as an LP, and discover that none of them have been able to make their endowments in Venture produce a decent return for the last ten years. Oh well, at least your parents loved you enough to give you a great start.

- You copy the Private Placement Memorandum (the business plan of a VC) from a brand-name VC, enter new General Partners in the about section and voila, another VC star is born that Limited Partners (LPs) cannot possibly say no to.

- You start raising new money, four years after your first, making it impossible for your LPs to establish the real merit of your initial investment thesis. You’ve just added another 12 years to your already comfortable existence and enjoy the stability of a more secure job than anyone else in government.

- You are vague in the actual deployment of your investment strategy so you can balance early and later stage investments based on how the vintage of your fund should look on paper and what the marketability of your second fund is four years into your first.

- You tell the world about how holistic your job really is, and how you as a member of the Venture sector are responsible for generating all these jobs, forgetting of course that you are mainly the matchmaker in the process (between the assets from LPs and Entrepreneurs) and it is not your money you put to work but the public’s money (dispersed through LPs to VCs).

- You tell the world that you really need to exist because innovation is crucial to this country. Forgetting that anyone with real entrepreneurial experience and verifiable merit will gladly take your place the minute you get out of the communal hot-tub you refer to as a unique fund.

- You become a member of the NVCA, whose protectionist agenda and lobbyist resources will provide you with plenty of ammunition to LPs and the government as to why your investments thesis, that is so similar to your peers in the industry should be protected at all cost for the sake of innovation.

- You decline to discuss publicly any rounds of funding into portfolio companies and its valuations, because at some point that may actually lead to the discovery of your real knowledge, vision and merit of decision making in Venture, or what a fool you really are.

- You build out your investment firm to a wide global network, so you can have the unique ability to smooth out investment returns and strike up generous stacked management fees in all.

- You tell the LPs that you are investing in “Capital Efficient” companies, omitting that capital efficiency is defined not by how much downside you protect, but how you enable upside.

- You make the world believe that the best companies to invest in start with the discoveries from white males, under thirty, only a technology proposition, twenty miles from Sand Hill Road and built in a garage where you spoon-feed them $250K tranches, minimizing investor downside risk. Ignoring comfortably that the long-tail of viable ideas should just no longer be explored.

- You tell on your blogs how entrepreneurs need to get better in building companies or how to navigate venture constructs, as opposed to spending all your time on finding groundbreaking innovation with enough upside that helps them hire the best.

- You tell entrepreneurs nothing about your knowledge, performance and merit (and ability to invest or not) but expect to the entrepreneur to be fully transparent.

- You demand from entrepreneurs that they realize you will bring more than money, while you will not talk to them directly and provide no substantial differentiation of your investment thesis on your website. It is maybe because you are not that special to begin with?

- You sit in your office searching through piles of business plans, waiting until technology walks in the door that strikes your fancy. How come the visionary in you cannot proactively induce groundbreaking innovation?

- You preach at the many technology “flea-markets” about what constitutes innovation and how to find the outliers, making no one wonder what you are doing at this “flea-market” to begin with.

- For ten years you pushed valuations through the IPO funnel with little value and now, after you’ve squandered public trust, and struck by the impending retribution, you now defer all early risk to entrepreneurs and wait as long as you can to see if something miraculously pops up.

- You add different investment vehicles to your firm, such as PIPEs, annex funds, buyouts so as to further hide your real merit in the demanding venture sector.

- You give speeches to the world about free-markets from atop a comfortable perch of the most closed, dark, unregulated, in-transparent and proprietary market mechanism in the financial industry.

- You write on your blog that Venture is all about relative performance and then compare Venture indices with those of 100-year old asset classes (with nominal greenfield and growth), so Venture still looks like a “star”.

- You act confident that when the economy recovers all boats in Venture will rise again, delivering the evidence that you do not understand that groundbreaking innovation is resistant to economic aberrations, and your boats should be sailing the skies by now (as other custodians of innovation have proven).

- You cry on stage (like a real man) about the nobel cause of improving our climate, after you realize technology investing does not make turkeys fly anymore and you are looking for greener pastures. Giving you the out to turn your venture firm even faster into a private equity firm (compatible with making greentech investments), a perfect slow paced Venture retirement strategy that makes everyone feel warm inside.

- You tell the world that the Venture business is still "the envy of this world", forgetting that the financial system does not create the value, but the unwavering drive of the groundbreaking entrepreneurs you are choking.

- You tell the government that regulation will kill innovation, forgetting that - at most - regulation will kill venture capitalists who cannot stand to have their merit exposed publicly.

- You convince the senate that innovation is not at risk in our country, based purely on the size of its financial system being larger than that of all other economies combined, forgetting that a financial system eleven times the size of production is a very unstable foundation to begin with and how we’ve become a nation of gamblers rather than producers. Act surprised when other nations slowly start to eat our lunch.

- You tell congress that there is no systemic risk in Venture, convincing congressmen that the sum of all investments in Venture (about $2 Trillion the last ten years) should really not have yielded more than 3% ($66B) in IPO value.

- You tell the world that the malaise in Venture has everything to do with the economy, while venture funds have been fully loaded and startups (at best) produce discretionary revenue that is a minute portion of the overall market and thrives on the pressures of change in economies.

- You tell your LPs how you invested responsibly by chopping up available funds into ten levels of bottom-level diversification and get them to nod favorably about the elimination of risk, rather to embrace the risk that separates Venture returns from Private Equity.

- You tell your LPs afterwards that investing is cyclical and that they should have factored that in their equation, especially now that venture capital has turned into micro private equity. You do not need to tell them that Venture has become more risky because the risk you created as a member of the VC demi-cartel.

- You tell others, shhhh..., how LPs are really not the brightest people on the planet and that they should take part responsibility for the demise of Venture. Because you are simply executing on the same “proven” strategy as your peers in the VC business.

- You tell your LPs that your performance is top-quartile, allowing you to specify who you want to be compared with. What better job than to get away with with writing your own report card.

- You say goodbye to Venture based on the lack of liquidity opportunities in Venture, dumping a sector from which you have extracted a “glorious reputation” and income but do not want to be bothered with the hard work of fixing it.

Causal connection

As with all roasts, the underlying message is a serious one. I can write and speak for days about the empirical improprieties in Venture I discovered as an entrepreneur, venture catalyst, CEO and venture capitalist in Silicon Valley. But rather than to debate each one it is more important to realize that they occur because of an incompatible financial system that allows so many people to take it for a ride.

"Mistrust of every kind of authority grew out of this experience, a skeptical attitude toward the convictions that were alive in any specific social environment — an attitude that has never again left me, even though, later on, it has been tempered by a better insight into the causal connections" -- Albert Einstein

We need to fix, simplify and make our financial systems more accountable, in order to erase the behavior that stifles it. Our government needs to play a role in establishing marketplace transparency and instead of trying to curtail the symptoms, fix the disease that produced it in the first place. Limited Partners need to deploy more discipline with people who know the Venture Ecosystem inside-out and better yet, how it should work.

Financial systems are a systemic threat to our economy

The behavior in Venture is very similar to the many improprieties of other financial markets, and simply less overt because of its complete lack of transparency to most marketplace participants. But improper behavior in Venture is like "child abuse" of our growing economy; it cuts off the spirit, zest, fortitude, and vision of young groundbreaking entrepreneurs who have the opportunity to become the new business leaders of our world. We will never be able to recover from the Venture malaise if it persists for too long, other nations are not sitting still.

The real optimist in the face of the malaise in Venture is not the one who continues to milk the dysfunction or walks away in search of greener pastures, but the one who builds a systemic fix for the failure in Venture and helps groundbreaking entrepreneurs define a new compass of innovation.

I have done both.

Tags: Free-market, Limited Partners, Growth, Government, Economy, Einstein, Marketplace, VC, Entrepreneurs, Innovation, Investment, Macro-economics

By Georges van Hoegaerden

I have the utmost respect for groundbreaking entrepreneurs, or better yet all the people who produce great products (or unique services). I love technology and believe we have not even scratched the surface of its macro-economic impact.

And it is those entrepreneurs, with the simple power of their dreams and perseverance, who collectively and unwaveringly hold up the massive weight of an outdated and incompatible financial system eleven times the size of production that keeps this country afloat.

It is for them that I fight to make our financial system more modern and nimble to withstand the test of time.

The writing is on the wall

Unless you have been living under a rock, you should by now be aware that the performance in Venture for the last twenty years has been deplorable. After a fantastic start by people like Bill Draper, and point successes from next generation icons like Vinod Khosla in the nineties, Venture quickly became the stomping ground for anybody with money, not necessarily combined with merit.

Growing numbers of Venture Capital (VC) firms arguably over-invested in their interpretation of innovation that had the majority of even the 90s funds (with vintages in the 2000s) generating no more than 10% IRR on average. Just the last 10 years VCs have generated no more than 3% public value out of all investments made, or specifically lost about $1.7 Trillion in, mostly public, money from their Limited Partners (LPs). And the performance of the current funds does not look much brighter as witnessed by incoming reports from early 2000 funds and the discontent of many LPs I speak with.

And on the mirror

But even if you are not a fan of numbers, which often become the subject of endless debate and can be excused away since they are lagging, not leading indicators, Venture has produced only a handful of viable companies that ultimately created some sustainable value public markets have faith in. Seven-hundred-and-ninety (790) VC firms in the U.S. chomping at the bit producing no more than a handful successes is the billowing smoke that indicates a raging fire. More specifically it indicates "the system" or "the compass" by which Venture is deployed does not work, its systemic approach is broken and only a few outliers in Venture produce the returns that make the headlines for all.

When doing your best just isn't good enough

VCs now hold on for dear life, blaming their lack of performance on esoteric macro "windows" of opportunity (irrelevant to startups), and they feverishly add up portfolio revenues to claim they are still producing value and are doing "their best", all while big corporations frequently beat them to the punch with real innovation that outpaces the market.

VCs attempt to hang on to comparing Venture to 100-year old asset-classes, sectors or segment indices, patting themselves on the back with a relativity theory that is as flawed as comparing apples and oranges. Unlike these old indices that have become somewhat stale because of their age, Venture continues to ride on the information technology platform that continues to grow aggressively (despite the economy) and still leaves a massive greenfield (5/6 of the world's population) underserved. VCs have not succeeded in tapping into that upswing and their best is clearly not good enough to make us proud.

Venture Capital morphed into Micro-PE

Venture Capital, after the irrational exuberance of the early 90s, has quickly and predominantly turned subprime - or - into micro-Private Equity, with most risks deflated and/or deferred to the entrepreneurs. LPs who thought they invested in Venture Capital, by virtue of how they deployed money, instead invested in a more risk averse Private Equity segment, a different thesis with different risk/rewards associated with it. But we ended up getting what we invested in; micro-PE returns. Nothing Ventured, nothing gained.

Looking good spending money

Now, I see some LPs "blindly" renewing their commitment to Venture, which for LPs that have access to prime VC firms that have still produced healthy returns in the last two decenniums makes only nominal sense. If an LP does not have the wherewithal to understand the dysfunction in Venture, it may as well bet on the best horse in the race, even if the race ends up being a Private Equity race instead. Those LPs may make a buck (with a minor part, 10-15% of their total allocation), maybe even outpace other asset classes and care less.

But the wide-open greenfield in technology and the culmination of a fantastic real-time distribution mechanism (the Internet) of technology should have made technology Venture the best performing asset-class, bar none. That is of-course, if one understand the requirements of the sector and deploys the appropriate risk, discipline and market model.

Social Economic Value

Most of the money invested in Venture is (indirectly) public money, such as the endowments and pension funds (CalPERS, ~$17B) which beyond a sheer money making objective also has a strong social economic value attached to it. CalPERS needs the money, but also needs Silicon Valley to be at the top of its game to produce healthy economic spin-out (driving other asset classes as well). The new funds just deployed by the North Carolina and Florida (coming) treasurers also promise to carry the good karma spawned to aid the most important driver of the economy; innovation.

Yet most meaningful innovation, that has the potential to scale big fast, does not start with or in Private Equity, it starts with the unique risks deployed by Venture Capital. And so the importance of what you as an LP are betting on, with the specific knowledge of what is Venture and what is not, is crucial in establishing a healthy conversion from technology to large social economic value, and subsequently public support and trust.

The Insanity in Venture

The systemic failure in Venture to produce returns in line with the wide-open opportunities in technology is the result of the composition of its incompatible financial system. Venture today is an artificially restricted marketplace to which not the outliers of innovation are attracted, but those who are attracted to the commoditized investment thesis of the predominantly subprime VCs.

But even if one knows nothing about Venture, insanity is the descriptor that belongs to the person who believes in a marketplace where the following attributes can consistently produce outlier returns:

• A marketplace that marries the assets of supply and demand, with the arbiter not having - or earning - verifiable merit
• A marketplace that marries the assets of supply and demand, using a single commoditized investment thesis
• A marketplace that hides behind the performance of hybrid asset classes, sectors, segments and stages
• A marketplace that hides behind ten levels of diversification of risk
• A marketplace in which the arbiters do not compete (but syndicate)
• A marketplace which openly engages in price-setting and operates as an innovation demi-cartel
• An in-transparent marketplace that functions like a black-box to most marketplace participants
• A marketplace that appears extremely sensitive to economic aberrations
• A marketplace that has not produced healthy returns in twenty years

No tinkering with micro-economics in the marketplace such as management fees, carries or other micro-incentives can turn a subprime VC, prime. Just like entrepreneurs are born, not created, so are venture investors with their unique intuition for taking risk born, not created.

The marketplace needs to be rebuilt from scratch and embed free-market principles that allows for healthy competition between all participants in the marketplace. Any LP with $1 Billion committed to Venture can do so independently today, and reap the rewards that lies at the untapped and phenomenal foundation of the growth in technology.

We owe change in Venture to those that produce

We owe it to the producers of groundbreaking products and value, to support them with a financial system that is lean and mean, nimble and modern, competitive and transparent, that dynamically establishes, monitors and corrects the merit associated with all marketplace participants. We will dramatically flatten and simplify the marketplace, remove excessive diversification and fragmentation of risk. We, the marketplace, will establish and expose the authentic merit of every participant.

Venture investors with merit and foresight will thrive by ignoring subprime propositions that cannot re-establish their individual supremacy, and instead focus on those innovations that match their authentic competency and skills. Groundbreaking entrepreneurs will come out of the woodworks again once they see the development of a better custodian than their corporate overlords flourish. Limited Partners will be happy because they reap rewards that outperforms their ancient asset classes by a long shot.

Groundbreaking entrepreneurs are the life-blood of this country and we better start treating them with the care and attention they deserve. We need to lift the weight of this incompatible financial system off their shoulders if we want to remain on the leading edge of innovation.

We still can.

Tags: Subprime, Limited Partners, VC, Venture, CalPERS, Macro-economics, Marketplace, Meritocracy, Transparency

By Georges van Hoegaerden

I always love being in New York and last tuesday I attended the AAAIM 2010 Investment Themes event in New York (a fairly closely held affair, thank you Brenda Chai) with a keynote from John Liu, newly appointed New York City comptroller (closely guarded by his security detail) and other luminaries from the New York investment world, including Kelly Williams from Credit Suisse Customized Fund Investment Group, Marcos Rodriguez from Palladium Equity Partners, Jimmy Yan from New York City Employees' Retirement System and Peter Marber from HSBC.

All speakers (and attendees) manage multibillion (double and triple digit) dollar funds and what struck me was how little these top managers know about venture, except to frown or stay away from the sector given its miserable performance and reputation for the last 10 years (we describe in my blog often).

There is clearly more work needed and opportunity to be gained to resurrect the face of venture and to establish new faith and trust. That trust of-course can only come from being honest and critical about past venture performance and offering a clear rational and remedy to resurrect it. Exactly what our focus has been for the last few years.

Now, I am not a journalist and I am not going to go into the many personal conversations I have had with regard to venture investing, yet I do want my readers (specifically those interested in venture) to understand how some of the financial pressures will impact venture directly, indirectly or potentially, as could be surmised from the speeches of the public speakers.

And, the more every venture marketplace participant knows about its dependencies (especially from the Limited Partners at the top of the venture food-chain), the more we can each respond to and secure a better future for a sector that, in my view and with my venture model, deserves much more commitment than 10-15% of overall LP commitments.

The State of the City

Both New York City and New York State have raked up sizable budget deficits. New York Sate has a $7B deficit and New York City as the nations 4th largest government with a budget of $60B has incurred a $4B deficit. If comptroller John Liu has his way the deficit will not be hidden under the rug by borrowing money, but lowered by cutting expenses and/or raising taxes to erase the deficit of about 1/5th of the flexible $25B part of the total budget. The City is looking for creative ways to achieve those savings objectives.

A question from the audience raised about increasing taxation on $25B of newly issued Wallstreet bonuses was quickly and politically sidestepped by forecasting its prospective value to only yield $0.5B, assuming those bonuses were all distributed in liquid form. In addition the comptroller stated he prefers to find more long-term solutions to erase the deficit, essentially leaving the contentious issue of dealing with Wallstreet up to the President.

Limited Partners

John Liu is also custodian/board member of 4 of the New York pension funds (including NYCERS with $35B under management), comprising of $100B in assets. No mention of fund performance (we know from other sources more or less what is going on) but he expressed specific interest in widening the network and making it easier for small new asset managers, with unique industry experience and merit to participate in the deployment of diversified assets.

As you can imagine, after having written for years about the lack of verifiable investor merit at the bottom of the food-chain, I was enthused to hear the comptroller usher rudimentary free-market principles as its new goals in deploying monetary assets. The proof of-course is in the pudding and I hope to meet with his people soon to exchange my macro-economic views on how financial systems aught to work.

Globalization

Another highlight of the evening was a great overview on emerging markets by Peter Marber who runs emerging market investments for HSBC. Peter stressed the need for a renewed focus on emerging markets, supported by some interesting statistics and the use of "The Mac Theory" (I've heard before), not a macintosh this time but a MacDonalds Big Mac. He simplified the value of a currency by comparing the price of a Big Mac in a country with the price of a Big Mac in the US. The difference yields a fairly accurate view of the expense of doing business in the juxtaposed country.

According to Peter, emerging markets cover 6 Billion people who cover 77% of the global landmass. He sees new opportunities in what he calls shifting democracies, with Japan's economy growing at a 4% rate versus a growth rate of 2.5% for the US. Emerging market debt has grown by 171% and global equity growing by 82%, while US equity has declined 24%. BTW: Just yesterday it was reported China's GDP grew a stunning 10.7% in the 4th quarter of 2009.

Peter comes across as savvy asset manager with his feet still firmly planted in the ground, a practicality we can never have too much of. Peter's global viewpoints are well put and he expects that venture will remain (for now) a US dominated opportunity as long as the products we build have (immediate) global market impact. I concur, as long as we free innovation from the choke hold of our current venture system.

New York, your lights continue to inspire me.

Tags: Macro-economics, Limited Partners, NewYork, Investment, Private Equity

By Georges van Hoegaerden

And socialism without merit is a lie too, a hollow lie. So do not even try to juxtapose capitalism and socialism here, not the point. Neither is the "rich" man's black-or-white argument that the mere thought of criticizing capitalism defaults into sudden socialism.

Putting our economies in a box is the last thing we should be doing, it separates us further in an increasingly global marketplace that requires the opposite. The real issue here is how to revive our economy, knowing we have powerful capitalistic assets and an unending innovative drive in our back pocket.

We need to be ready to challenge the status quo, let go (yet not discard) of the past and endure the rigor of change if we want to prevent the bottom from falling out from under our economy or face worse in ten years from now. Hope is not a strategy, change is. So, hang in there with me to redefine economic change.

The Lies We Tell Ourselves

We cannot change our economy for the better if we keep lying. And as a former leader of this country has proven, reiterating lies do not make them come true. The biggest lie is that we claim that we are more free than any other country in the world. As a polyglot immigrant I can refute that argument flat out, that is if we use the same definition of "free".

Freedom is the foundation of free-markets that ensures that every willing-and-able participant can become an integral building block of our economy. While there will never be total freedom, the lies we tell ourselves prevent even rudimentary freedom from taking hold.

Our Freedom Is a Lie

Freedom is not your compliance to your boss's expectation to dress-up to go to work every day, nor your inability to challenge his leadership for fear of losing your job, health insurance, pension contribution and other financial perks.

Freedom is also not a financial system eleven times the size of production that turns running a company into a Las Vegas gamble, demanding a focus on investors that precedes and overshadows the needs of customers. Freedom is also not an aging stock exchange (copied around the world) that promotes the financial agenda of short sellers and forces companies to adopt a short term agenda, rather than to build long term sustainability (or however the company prefers to be measured).

Freedom is not the inability to really say or write what you want, for fear of retribution from a bulging legal system that makes it so easy to file bogus claims, such as defamation of character. Freedom is also not our cunning ability to segregate the rich from the poor, the native americans (in today's indian reservations) from the rest, or blacks from whites (I should know, I am part of an interracial family).

I can go on for a while, but I think you are getting my point. We are lying.

The Freedom To Abuse Freedom

Just because all 400 million of us live in the same country, does not mean we enjoy the same freedom. Many of us are disenfranchised by freedom; the freedom to abuse freedom and to create whatever walled gardens are needed to keep others out. And that is the freedom I am so against.

Our Government's Delicate Role

We cannot really blame Apple that it signed an exclusive arrangement for the iPhone on AT&T's network to yield focus and produce higher margins, but it is the Federal Communications Commissions' (FCC) fault, asleep at the wheel that allowed device-to-network locking before the iPhone was even conceived (device locking was contrary to what the GSM standard was designed to do; I was free to use and roam my european GSM phone on any european network more than 20 years ago).

We cannot blame public companies to drive a short term strategy, as the Security and Exchange Commission (SEC) has implicitly dictated that a string of positive quarterly earnings reports are the predominant way to measure company performance and respectively its CEO. And we should not be surprised that a temporal decline in revenues is then quickly followed by staff reductions to make those quarterly numbers still look good on paper. Are quarterly earnings really an accurate reflection of company performance for a company that has been in business for twenty years or more?

We also cannot really blame Venture Capitalists (VCs) for taking advantage of the blind faith (and now delayed response) from Limited Partners if the SEC continues to treat participants and investments in private companies as under-the-table transactions, hiding important transparency from marketplace participants.

Cure the Disease, Not the Symptoms

But the delicate role of our government is not to regulate the symptoms but to prevent the disease. It is impossible for government to keep tabs on the impurities of symptoms in all marketplaces, but rather it should aggressively work towards enforcing the definition of free-market principles to each domain that poses what it deems a direct or indirect systemic risk to our economy (I can think of about ten depending on granularity, possibly all boiling down to a single driver: our financial systems).

I do not want our government to tell banks how to describe their interest rates to customers, but I do want our government to require banks to file and freeze (for a certain period) their lending terms in a central database, so its customers can query a single website to get the rates from the bank that meet their needs.

The role of government is to establish the marketplace principles, not to establish what is merit. The marketplace participants will sort the latter out quickly.

Relevant Transparency Builds Merit

Transparency is becoming a buzz-word and similar to the buzz-word "experience" means nothing without the preceding adjective relevant. What is relevant is that all participants have immediate access to the transparency of marketplace transactions (between supply and demand) in order for that marketplace to be driven by merit. And that means that the performance of marketplace participants is measured solely by the nature of their unique offering in the marketplace, not a complex myriad of stifling walled gardens and derivatives.

The beauty of relevant transparency is that all marketplace participants become watchdogs. That the signals of impropriety are detected instantaneously by many rather than by a few who choose to pay attention. That must be the reason why the Romans preferred a flock of geese over a single dog to protect their property.

Economic Growth is Defined by the Merit of Marketplace Transactions

No longer will merit be built by the posturing and decibel marketing of the supply side of a marketplace, that without transparency can make virtually any claims it wants. Merit will also not be built by the endless expression of desires from the demand side. What creates economic growth is the merit of the completed transactions between unrestricted supply and unrestricted demand.

So, to come full circle on our financial systems; our stock exchange needs to evolve into a free-market. Where the supply of stock will reflect the strategy by-and-of the company (not by the bourse), and the purchasing of stock is based on investors buying into that strategy. Venture Capital needs to change from a closed market to a free-market in which the transparency allows Limited Partners and entrepreneurs to find VCs who have the merit to pick, build and monetize truly groundbreaking innovation.

Free Ourselves and The Rest Will Follow

Relevant transparency builds free-market principles that leads to merit, in every economic circumstance.

Relevant transparency of our education system will improve the much needed individual merit of teachers and the individual opportunities for children. Relevant transparency of our financial system will improve the merit of investors and the innovative companies they spawn.

Relevant transparency of our economy will improve the opportunity for all people with merit. And all people do have merit. Many people, stifled by the constriction of artificial marketplaces have simply not discovered it yet. Opening up our marketplaces to become more free will allow each participant to discover and hone their own merit and produce better customer value.

The world will be a much better place when every person can participate and validate their own intrinsic merit in a thriving marketplace. So, let's stop lying and demonstrate to the world what real freedom looks like.

Tags: Meritocracy, Entrepreneurs, Free-market, Marketplace, Transparency, Innovation, Government, Wall-Street, Apple, IPhone, Limited Partners, VC, AT&T, Securities

By Georges van Hoegaerden

For the first time I listened in on a live interview by members of Congress with members of the Private Equity and Venture Capital community recently. I was surprised and-then-not that Congress, who closed its eyes and ears to the malaise of our financial systems for so long, is now also buying into the arguments from the participants of that malfunctioning marketplace that there is no systemic risk in Private Equity's Venture sub-sector. Duh!

Massive systemic risk, financial and spiritual

Congress and the majority of VCs are (again) so wrong. Do we really need more evidence to justify change?

1. Less than 10% IRR produced by VC for the last 10 years makes many Limited Partners wonder why they should put their money in Venture Capital, and rightfully so. The result of some of the LP's withdrawal results in a lack of support for the sector, even if miraculously VC would get its act together. The cultural advantage we have to produce an endless stream of innovation is (and has been, some argue) suppressed by an underperforming financial system that sits on top and squeezes the air out of it. Our competitive advantage as a nation is at stake.
2. $2.9 trillion in spin-out revenues (as reported by Polaris Ventures in its public address to Congress) produced by VC over the last thirty years is about to significantly deflate as a result of lack of exits over the last ten years. The Venture business has produced very few real companies in the last 10 years or so, resulting in a massive erosion of spin-out revenues.
3. Roughly $297B in yearly venture commitments is hoping on "external factors" to recover, ignoring that sub-prime (or micro-PE) VC tactics are preventing the intake of truly disruptive innovation that would have had the potential to create significant returns. And that while early stage innovation is very resistant to economic aberrations and in many cases thrives because of it.
4. We agree with some of the titans in the VC business (Mike Moritz, Vinod Khosla, etc.) that Venture Capital has been broken for 20-years, meaning we are steadily amassing a deficit of 40 years of investing in the wrong innovation, further deflating our competitive advantage as an innovative economy.
5. The participants in the venture business (see "How to fix VC once and for all") with real assets, the Limited Partner (money) and the disruptive entrepreneur (idea) are unhappy with the artificial arbitration of Venture Capital, yielding a departure and declining entry of both. So, despite great spin-stories and self congratulatory statistics from VC lobbying organizations (such as the NVCA) we are witnessing the net outcome of a severe decline in venture job creation and value.
6. It is dangerous for Congress to rate our systemic risk low because of the sheer size of our financial system, proudly described by one member of Congress to be larger than that of China, India and Europe combined. I surmise that is because our financial system is bloated with derivatives, currently eleven times the size of production. We have become a nation of gamblers in derivatives rather than direct investors in the creation of disruptive innovation. The size of our in-transparent and mostly derivative financial system is an unstable and unsustainable foundation to our economy.

If I had the resources of The White House at my disposal I could come up with a much larger laundry list of negative spinout from the underperforming venture business for those who still need it.

Does Congress matter?

Clearly Congress does not understand the venture business, as it interviewed in that recent session only the derivatives of the venture business, the VCs who hold no assets. If congress had read my blog "How to fix VC once and for all" as some of its peers in Washington have, it would have invited the real asset holders, Limited Partners (money) and Entrepreneurs (innovation) to verify the actual effectiveness (see "Why do we keep listening to VC as the barometer of innovation?") of the matchmaking service we call venture capital.

Congress has again allowed protectionists to write their own report cards, just like it allowed the auto companies to make false new promises. Maybe we should just not expect real leadership from Congress.

Healthcare reform has been on the books for a long, long time until a new and smarter president (Barack Obama) decided to pull it through the bureaucratic system and deploy free-market principles that expose merit and long-term save us all a ton of money. The (often hidden and recurring) cost of an ineffective artificially arbitrated market is much higher than the cost of transforming it into a free-market once and for all. But there is a cost nonetheless, the cost of change.

I count on the President

It is the same leadership that finally allows us to transform the healthcare system to a free-market and expose the merit of its participants that is needed to expose the merit of the venture business and our financial system as a whole. Our dependency on a bloated financial system, riddled with derivatives and artificial arbitration is what blurs the creation of real value.

I do not believe Venture Capitalists are bad people. But the venture business has simply adopted a financial system, with all its impurities, that overarched it and allowed it to get away with unverifiable merit for too long.

Less regulation is more

As we can learn from Cesar Milan (The Dog Whisperer on National Geographic) that the behavior of a dog is the responsibility of its owner, so is the behavior of our financial system the responsibility of our government. Just like any dog can be rescued, so do I believe our financial system can be. That is, if we have a pack leader.

Our government needs to institute free-market principles (a few simple filing regulations maintained in a central database) as described in my blog "How to fix VC once and for all" so we can ensure that transparency exposes merit. The merit of which VC (by General Partner denomination) is truly the expert in spawning and monetizing disruptive innovation he claims to be and at what expense. The transparency of the investments to all marketplace participants (including Limited Partners and Entrepreneurs), will quickly and continuously separate the weed from the chaff. And like free-markets are known to do, they create unique marriages between the outliers of innovation and the outliers of investors.

When the free-market of innovation is in place, and only then, should we evaluate getting rid of costly regulatory compliance such as Sarbanes-Oxley, FAS and others that were created to curtail the bad behavior of the old artificially arbitrated market. With the erection of free-markets, less regulation can then indeed be more.

A free country is built on free-markets

Capitalism without verifiable merit simply means we are fooling each other, and the bottom is falling out of our economy because of it. I believe we can rejuvenate and re-authenticate capitalism by deploying free-market principles in our financial system, starting with the venture business. In a free-market those who have merit will become the capitalists, who will then be able to discover and support others with merit. The engine of innovation is revving up again.

I am at your service, Mister President.

Tags: GDP, NVCA, Congress, Limited Partners, VC, Innovation, Government, Marketplace, Meritocracy

By Georges van Hoegaerden

I have had several discussions and e-mail conversations with entrepreneurs, journalists and venture capitalists (VC) about the free-market principles described in my blog "How to fix VC once and for all". In that blog I propose to apply free-market principles to the marketplace of innovation, in connecting the assets of the Limited Partner (LPs): money, with the assets of the entrepreneur: ideas.

What struck me most is how few people are familiar with those macro-economic principles that beyond consumer benefits have a significant impact on how an entrepreneur goes to market and how VCs fund them.

VC feedback

Especially eerie, short and dismissive was the interaction with one of the most well-known VC czars of Silicon Valley, who publicly proclaims to be a proponent of free-markets (that is exactly why I contacted him) yet does not seem to understand their basic premise. He brushed off my marketplace-for-innovation plan as just more creeping Socialism.

I am of course the fool, for telling the old-boys club to now support a meritocracy, and dump the walled gardens that made it fat-and-happy in the first place.

I knew that switching to free-markets will unleash the protectionist stance in many VCs. But what worries me more is that the opinions and decisions made by this General Partner (GP) impact startups whose successes are predicated on a firm understanding of macro-economics. His responses mean that this GP would simply brush off platform investments that embody free-market principles (eBay and the Apple AppStore for example) as socialistic movements. History proves that is not a good idea.

And that dear reader, is what the rest of the world (and the majority of Silicon Valley) looks up to. We blindly copy methodologies that no longer work in the hopes that 20-years of underperforming past behavior is not indicative of future behavior. It is all someone else's fault.

Start praying.

Debunking free-market myths

But where there is smoke there is fire (aptly considering the many other fires in California) and it is important for the marketplace participants, LPs (money) and entrepreneurs (ideas) who bring real assets to the table, to get a good understanding of free-market benefits. So, let me debunk some free-market myths:

Myth #1: free-markets are socialistic movements

A free-market is a self-regulatory instrument that ensures that a true meritocracy prevails, destroying artificial walled gardens such as geography, demography, old-boy status, first-mover advantage etc. A free-market ensures that the quality of the authentic value-add by each participant is evaluated based on its independent merit. A free-market therefor is the ultimate in capitalism, those who build earnest value will prevail.

Myth #2: free-markets require a lot of governance

More and different regulation than none, for sure. But the regulation will not come from government but from the marketplace participants (see my blog "Why innovation needs regulation"). When transparancy to all participants (a requirement of free-markets) is implemented, all participants benefit from the exposure and individual merit becomes the governor.

Myth #3: free-market transparency is unwanted

Transparency promotes competition, and competition based on merit is good for LPs, VCs and entrepreneurs. Merit yields better value to the detection of outlyers who lay at the foundation of disruptive innovation. LPs will benefit because in the formation of new funds, they can proactively bid to get in on a VC fund they previously only had access to when approached. New LPs can enter the fray and compete at an equal level. Small LPs can bid alongside large LPs. Entrepreneurs gain precious time in dealing with VC that have proven merit, and achieve more attractive valuations and secure better runway support - reducing the infant death syndrome as a result of investor lock-ins. VCs who are comfortable that money is not the only value they offer should feel confident their role is secured by the merit of their value-add.

But even if you are not convinced that the current VC performance is a systemic risk, a move to a free-market mechanism that (if nothing else) offers the transparency to all participants, is the fastest way to prove the other side of the argument wrong.

My hope is that we, in the venture business, establish these free-market principles voluntarily and without intervention from the government. But the feedback to my query as witnessed by the protectionist answers from VCs does not hold a lot of promise.

With a systemic risk of $2.9 trillion of innovation-spin-out revenues quickly deflating, we face a similar overruling by the government as healthcare, where rather than a voluntary free-market, a free-market with arbitrage from the government will be forced upon us.

Take your pick.

Tags: Meritocracy, Marketplace, Silicon Valley, Innovation, VC, Entrepreneurs, Limited Partners

By Georges van Hoegaerden

The venture business needs an overhaul, and below is my low-burden / high-impact plan for change.

Problem

Venture Capital (VC) is a systemic risk to our innovative culture, to $200B in direct asset allocations and to $2.9 trillion in spawned revenues (since 1970, per IHS Global Insight report). Yet VC has produced less than 10% IRR for the last ten years promoting a fear/flight response by Limited Partners (LPs), on the verge of pulling their money out of the sector and investing it elsewhere.

Top technology and investment experts, like Larry Ellison, Vinod Khosla, Greg Lamond and many other illuminaries now subscribe to the mediocrity of the current state of venture, with Mike Moritz (GP Sequioa) stating venture has been underperforming for 20 years. I agree.

Direct and circumstantial evidence suggests that the venture business needs a major overhaul, to ensure that the assets of the Limited Partners (money) are effectively lined up with the unwavering assets of the entrepreneur (innovation). Just because the intermediary "dating" service (VC) is broken does not mean we should lead to conclude supply (LP) and demand (entrepreneur) side participants are.

LPs are still looking to deploy high-risk/high-yield commitments and entrepreneurs are still coming up with highly disruptive ideas. The economic marketplace where those transactions occur is simply structurally ineffective.

Opportunity

Technology venture should be producing premium returns because of:

• Its infancy, 5/6 of the worlds population is not connected via broadband, exposing a massive greenfield of new unexplored market opportunities.
• Relatively (compared to other sectors) low cost of production, software applications and services require no physical manufacturing.
• Low cost of distribution, the internet distribution is effective and low cost (as long as the product is good enough).
• Immediacy of customer fulfillment, the impact of internet applications is instant.
• Independent ownership of the complete value-chain from idea-to-customer means the risk to success is highly predictable.

I cannot think of a better asset class or sector where the development of an idea can lead so quickly to immediate and widespread customer impact. Unlike biotech or greentech, the attributes of technology venture are such that they will produce returns compatible with the 5-10 year lifecycle of those funds. That is if the market intermediary makes the right choices, guided by relevant experience.

Solution

We can all argue until we are blue in the face as to what is a great venture investment strategy, and I certainly have my opinions. But none of that matters. What matters is to create success for those that put assets to work, financial success to the LP and entrepreneurial success to the inventor. What matters is merit not rethoric.

Venture investing needs to move from an artificially restricted market to a free-market in which the transparency of, and to all participants identifies and perpetuates the ever changing meritocracy of innovation.

That means all participants need to adopt free-market principles so that the merit of their work, not an artificially privileged status distinquishes them from others. Such is the necessary, sustainable and thriving foundation for innovation and capitalism.

No one will be able to hide, and the marketplace as a whole will automatically give preference to those participants and their transactions that build real success. Only capitalism based on merit is sustainable long-term.



Above is a simplified chart that depicts the venture marketplace. For those unfamiliar: LPs invest in VC funds who, by virtue of a lead GP invests in the startup of an entrepreneur. LPs set aside a predetermined commitment to the VC fund and GPs make capital calls when required by their investments into startups. GPs allocate a certain runway for startups and at funding time stage their investment in investment rounds to mitigate risk. At M&A or IPO cash is returned to the VC in exchange for the equity position and VC returns a part of those funds (minus management fees and other reserves) back to the LPs.

Transparency leads to meritocracy

To enable a meritocracy the marketplace needs to enforce full transparency to all of its participants. At the transaction level by GP, not by VC firm. More important than to feed the Security and Exchange Commission (SEC), the marketplace itself (not a government agency) will then govern its own success:

1. LPs need to disclose their commitments, how much is drawn, when, running returns and include the fund maturation date
2. GPs need to disclose which companies they invest in, how much and at what valuation
3. Entrepreneurs need to disclose what exit returns they produce

I realize that type of transparency will get VCs all riled up, they recently testified to congress as such. As protectionists of their current walled-gardens they fear that such disclosure would challenge their competitive stance. Exactly, and that is what we want.

Because today the cartel VCs have formed around their collective wisdom, outdated execution and dismal returns prevent really smart entrepreneurs from participating in venture transactions to begin with. If VCs believe so firmly in the proprietary value-add of their services to the investment process, why would they be afraid to disclose everything but their secret sauce. Investment dollars into a company can be derived from other sources, but is very cumbersome if not impossible to retrofit to the exact origination and source in the marketplace model.

LPs would have less of a problem disclosing such information and many, like pension funds, already do. But they will need to firm up that reporting to the standards of the marketplace, not an incomplete disclosure that does not match up with that of its peers.

Not public is not private

Economically and to minimize abuse, all companies should be transparent to some extent, including private companies at least to meet the above described marketplace requirements.

Not all transparency is created equal, in a marketplace the transparency needs to be provided to all participants; LPs, VCs and entrepreneurs in the same fashion. Not just in case of suspected abuse and post-mortem to the SEC, since that kind of transparency does little to promote marketplace merit.

In the same way banks are supposed to report certain transactions above $5,000 should we disclose the investments in private companies above a certain threshold. In other places outside the U.S. (such as Europe) private companies already need to abide to certain disclosures, paving the way for meritocracy.

Entrepreneurs are often proud to disclose how much money their idea generated were it not for acquirers, who afraid of competition often press for non-disclosure. Yet those numbers will now come out of the new marketplace, and competition as a vital ingredient for exits is re-established as well.

Once we have the fundamental transparency of the marketplace in place, the following benefits will surface almost immediately (especially when we apply this transparency retroactively):

• We will know which VC actually has money to deploy, and entrepreneurs will not be wasting precious cycles
• We will know which VC actually has a reputation of building successful companies
• We will know which GP actually has earned the reputation to sit on a board
• We will know which GP actually has the foresight and credentials to invest in upside rather than downside
• We will know the merit of GP vision, specialties and domain experience
• The meritocracy of investments will support the long-tail of ideas rather than regurgitate its commodization

The merit of all participants will be disclosed, by virtue of their investment in success.

Low burden change, immediate impact

The goal of this plan is to serve the risk/reward needs of LPs and connect that with highly disruptive innovation from great entrepreneurs. No drastic changes need to be made to the current investment model. No drastic change in the investment pace needs to take place until the meritocracy demonstrates otherwise.

Transparency to all participants will act as the dynamic referee in an ever changing venture business. Compared to the past, merit will now closely follow and support the change of innovation, rather than remain stale and outdated. And the meritocracy of the marketplace will also determine whether or not the venture business is too large, too small, or just right. But it would be highly inaccurate and irresponsible to make those decisions based on the workings of the venture business today.

How you can help

I am already working with individual LPs to familiarize them with the specific rollout of this plan, and I invite others to participate (contact us here). I also extend a hand to VCs, some of whom have responded, to become be part of the solution. I would like nothing more for us, as participants to the venture business to solve our own problems, without the need for government intervention.

The venture business is too important to our economy (for the reasons mentioned above) and we owe it to the entrepreneurs (across the world) to build a financial system that supports the merits of their intellectual brainpower.

Join me in this effort and feel free to spread the word, syndicate this blog (with proper attribution and link-back) and retweet. Let's make positive change happen.

Tags: Meritocracy, Macro-economics, Government, Marketplace, VC, Limited Partners, Entrepreneurs, Transparency

By Georges van Hoegaerden

One of the most important traits of a great person, great CEO and great investor is the unrelenting pursuit of the truth and a firm ignorance for anything else. The truth in a world that is full of smoke and mirrors, stemming from an unconnected era in which the creation of heaps of walled gardens would go unnoticed to unsuspecting participants.

Even though we don't like to admit it, we as grownups still play the telephone game frequently, in which a chain of derivatives regularly degrades the truth.

But those days are slowly coming to an end, as the internet with the free-market principles it aims to deploy, and social networking as its unforgiving arbitor is steadily eroding misplaced authenticity and trust (see Trust is the currency of success).

Most people reading this blog will think of derivatives as a financial instrument first, but our world is chockfull of others that invade our lives from every corner. The dictionary definition holds a clue:

• adjective : imitative of the work of another person, and usually disapproved of for that reason
• noun: something that is based on another source, an arrangement or instrument (such as a future, option, or warrant) whose value derives from and is dependent on the value of an underlying asset

Sound decision-making comes from a clear understanding of the difference between fact and derivative. Below are examples of everyday derivatives and the impact they have on their surroundings. Some may be shocking, but I promise will yield incredible new focus and progress if simply ignored.

Markets

Markets don't exist, we covered a whole blog about it. Read it please. Customers do not buy products because they associate or belong to a derivative descriptor of a market. They buy because the marketplace (a mechanism to buy) offers the best opportunity to serve their (often complex) individual needs. So, go ahead and thrown away your industry and market segmentation or market-share leapfrog strategies. They are worthless.

Venture Capitalists

In the investment equation between the assets of a Limited Partner (money) and the assets of the entrepreneur (idea), venture capital is merely a dating service (with no assets to speak of) that establishes the transaction of the marketplace, a financing round. While Venture Capital (VC) behaves as if it is the originator of assets and the creator of value, LPs are actually the ones that deploy the commitments to the creation of value by the entrepreneur. Contrary to their testimony to congress, VCs did not create millions of jobs, LPs did by deploying their monetary assets. While VCs force entrepreneurs to buy into their (steadily commoditizing) investment wisdom, more than 90% of those wisdoms do not pan out. An entrepreneur is better off to ignore VC advice altogether and pursue the creation of real value to its customers. Fundraising is a lot easier that way.

Psychologists

Many people seek solace in the interaction with a psychologist to solve relationship problems or otherwise. While an outside perspective may be liberating at times, a sustainable solution based on a derivative opinion is highly unlikely. Spend more time with the people you have relationship problems with, than your psychologist. Because the stories you tell him are themselves derivatives.

TV Journalists

CNN today is a prime example of a network that has gone from reporting the news (expensive) to regurgitating the news with hordes of consultants (inexpensive), delivering derivatives of the news rather than the news itself. CNN has moved from a real new source to a commodity entertainment channel, eroding and consistently being beaten at its home turf. Ignore the regurgitation by derivatives and you'll save precious time of your day.

The Stock Market

The stock market is an exchange but not a marketplace in the free-market definition of it. As if the performance, long and short, of a company can be derived from something as simple as price-to-earnings ratios. Public CEOs know how to dance the dance, market to those numbers and become short term focused to meet Wall Street expectations. Yet long term and macro-economic differentiation that requires investments (expense) is arguably more important than meeting the quarterly drill of meaningless earnings reports. The performance of stock is a derivative of the short-sellers view of the performance of the company, and by definition inaccurate. And so are the investment decisions derived from them.

Money

The dollar is not worth the paper it is written on. It merely communicates the value of trust attached to that piece of paper. And even though that money can buy you great things, it matters whether it is acquired from a foundation of trust. Cash is not king, trust is. Easy money has a way of punishing its acquirers in un-expecting and fleeting ways, hard earned money amplifies itself consistently. So, money is a derivative of trust, and someone with a lot should not automatically be confused with authenticity and trustworthiness. Earn money the hard way and you'll be rewarded for life. Money can be a derivative of trust, but with financial derivatives eleven times the size of production should not be confused with trust itself.

There are many more derivatives I can talk about. But the purpose of this blog is to make you think. Hopefully the next time you spend time with someone, you will ask yourself the following question: is that person claiming to be the authority of derivatives or the authority of truth. The answer will define your success.

Tags: Commodity, Free-market, StockMarket, CEO, VC, Limited Partners, CNN

By Georges van Hoegaerden

I was delighted to hear Barack Obama yesterday describe a marketplace mechanism as the platform for improving the meritocracy of healthcare, something I have talked about with regards to economies, venture investing and technology products for the last two years. I can only muse that the recent vists from Axelrod and Clinton to our blog delivered some inspiration for the change we need to undergo as a country. Perhaps one of my readers was right, I should be running things in Washington. But enough about me.

Our greatest assets

We should be proud to live in a country that has repeatedly earned its stripes as a staunch democratic and a fierce capitalistic nation at the same time. Each individually breaking new ground in creating building blocks for a more effective economy. We are blessed that way. Not all countries in the world have both assets represented in a single economy and their imbalance makes them more vulnerable.

More vulnerable than we are, for we can quickly swing either way and tap into those resources to correct a temporal imbalance that threatens our economy. With the rest of the world watching over our shoulder, learning from our resolve.

Artificial segregation is our biggest problem

Just like how we are still extremely racially divided (I should know) do we remain politically divided. We act as if we live under seperate roofs on a single property, sharing a bathroom through which we regularly flush the disdain for each other, in subtle and not so subtle ways. Whites against blacks, democrats against republicans, opponents of regulations against proponents of regulation, proponents of gun control versus opponents of gun control, etc. Idian reservations with autonomous rulings are a stark reminder of how we allow segregation to perpetuate.

We often take a hard stance by associating ourselves prematurely to an (artificial) association, without re-evaluting our actual stance based on the acute problem that is being presented. I could categorize myself in any of the aforementioned groups depending on the economic problem at hand and may want to change my mind at any time based on timing and perhaps my deeper understanding of the issue. The timing and situation would define my choices, not a party line.

We are all right

Monolithic democratic societies and monolithic capitalistic societies simply don't work, history has proven that out. Pure democracies (I should know given my country of birth) are known for their endless debates where everyone has a voice that eventually yields nothing but burgeoning baggage of complacency. Pure capitalistic societies are driven by classic neanderthal behavior, where the biggest stick gets rid of everything in its way and drives the majority of less fortunate and lucky to dispair.

For years have we benefitted from the surplus of democratic and capitalistic assets while ignoring the deficiencies in both. Now, the state of our economy forces us to illuminate and evaluate all the pluses and minuses.

Meritocracy = democracy + capitalism

We need our economy to be an organic reflection of the current opinions and capacity of our people, not a delayed distortion field of vintage parties, segments or groups. We need to combine the value of our democratic and capitalistic assets and get rid of the deficits of both.

Mathematically put: opinions plus actions minus complacency minus abandonement equals a meritocracy. And a meritocracy is the product of free-market principles (extensively described in my previous blogs). Free in terms of equal access to all participants, supply and demand.

Just like in the Venture business, politicians better prove that they accurately represent the meritocracy of opinions from the people (all people, not just the ones that vote). If not, replacement and removal of politicians will soon be upon them soon. They better stop bickering about party lines and start worrying about why the majority of people in the US still don't vote (36.8% voter turnout).

Perhaps technology can help shape up politicians by building a ballot marketplace in which for certain decisions, the house of representatives, senate and president can directly tap into the opinions from the people they represent.

Our financial system is not a meritocracy

Barack explained why healthcare is not a meritocracy yet needs to be, and if you read my marketplace blogs you would not be surprised to find that our stock-markets are not meritocracies either. Stock-markets, the way they work today, violate fundamental supply and demand rules associated with free-markets. The foundation of our financial system (copied around the world) is based on the same artificial arbitration as healthcare, posing a systemic risk to our economy.

Testament of the misalignment in our financial system is its size; an exorbitant 11-times the size of the businesses it represents (2008 Wikipedia). That means that the size, performance and characteristics of our financial system is far removed from the size, performance and characteristics of the underlying businesses. It also means we have become a nation built on gamblers rather than on value creators, and that too poses a high risk to our economy.

So, to remove the systemic risk of our economy we need to remove most derivatives (similar to parties and associations in politics) and create a marketplace (which is macro-economically not the same as an exchange) in which the meritocracy of ideas meets with as few financial derivatives as possible. That will re-ignite the innovative culture our country was founded upon, as it tears down the artificial arbitration that prevented a meritocracy of ideas from taking shape in the first place.

We need a transparent, trustworthy and flatter economy if we want to protect its vibrant future.

Tags: Meritocracy, Macro-economics, Government, Marketplace, Capitalism, Democracy

By Georges van Hoegaerden

As regular readers of my blog you are aware of my criticism towards the current operators of the Venture Capital (VC) microcosm.

I often liken todays Venture Capital business to the sub-prime lending business where too many people without the skills to assess risk accurately, put the whole technology ecosystem at risk.

My comments can be perceived as negative, yanking the chain of 700+ U.S. venture capitalists of which many use sub-prime tactics. Or they can be perceived as positive, with the majority of those investors looking the other way now is a great time to start a new investment vehicle (more on that later) that returns to Limited Partners (LPs) the allocation in the technology asset class they were promised.

A new group I see springing up are the people who use the negative interpretation to chastise the US as a whole, extrapolating that the US is "losing ground internationally on multiple technological fronts". That is where, with my international experience (an expat ready to naturalize) in tow, I need to put a full-stop to the criticism against this country.

Here is why:

1/ Not only does the U.S. represent a great breading ground for investing in innovation but more importantly, the US represents a societal curiosity to adopt and purchase those unproven innovations like no other country in the world. Technology investments will collagulate where the early buyers are.

2/ The U.S. has the uncanning ability to bounce back because in essence, every citizen is an entrepreneur (forced perhaps by the lack of safety nets). It may not be easy to bounce back but adaptability is part of this country's DNA - not so elsewhere.

3/ Investors in the U.S. have a short term memory, they need to put their money "to work". Technology remains a very interesting asset class because of its early potential, low cost, quick impact and large scale. So, with new risk assessment criteria for VC funds in place, new investments will flow again quickly. BTW: those investors (LPs) are not just american, the amount of sovereign funds investing in U.S. technology is significant and growing (not in the least because of bullet 1).

The United States will remain at the forefront of technology innovation if it acts on critical opinions that lead to improved self-regulation. We, collectively need to turn the current technology "investment club" into a free-market that embraces the curiosity and meritocracy that this country was founded upon.

The VC business will re-invent itself, either by people like me who aim to expose and correct its current flaws or (a few years later) by the Limited Partners who invested in VC firms with suboptimal returns. Either way, no innovation exists without induction of significant pain or gain.

Have no doubt that like many other innovations globally, the reinvention of the VC business will start right here in the U.S. and produce a whole new batch of disruptive and exciting innovations.

Tags: VC, Innovation, Funds, Free-market, Risk, Subprime, Startup, Limited Partners

By Georges van Hoegaerden

Real innovation relies on a myriad of macro and micro-economic benefits to succeed. The key to a lasting technology business is not just the introduction of snazzy new technology, but more importantly, how well macro-economic improvements address the needs of everyday consumers.

Below are three examples of a misrepresentation of the benefits of innovation that will strike early adopters.

1) Digital Photography
We all instinctively believe the innovation from analog to digital is fantastic, and for some (like me) it is. But when you look closely, the conversion from analog to digital suddenly requires everyday users to tether a camera to a computer, buy and learn about digital asset management systems and figure out which service to use to get images printed (not even a trip to Walmart erases the Do-It-Yourself paradigm). So, rather than a more streamlined process we’ve actually complicated the process, increased the initial cash outlay and forced users to learn, often complicated computing skills for novices.

Kodak’s biggest challenge is to convince users that their camera is not broken when it gives the cryptic message “Error: CF card is full” (check out EyeFi, for another technology “solution” to that). So, the reduction of expenses in printing that digital photography promised, has simply shifted to an upfront expense in computer technology and knowledge that has so far amassed less market penetration than traditional cameras. That, to many, is a step back, rather than forward.

2) Internet Television
Many broadcasters now provide internet based viewing to anyone with a web browser. But the protocols and video players of each of those providers (CNN, ABC, NBC etc.) is different. So, for years the FCC has regulated the creation of a standards compliant way of watching TV with any NTSC television (or PAL in Europe), suddenly, thanks to our border-less innovation we find ourselves with as many video players and playback encodings as there are content providers. While companies like Boxee attempt to provide a TV portal, the playback mechanisms are unique to each source, and thus delivering a confusing user experience. That, to many, is a step back, rather than forward.

3/ Mobile telephony
While GSM (the underling technology for most mobile phones) was designed and implemented in its early days to provide free-market access to mobile telephony network, companies like AT&T (that support GSM protocols), artificially restrict the use of other (competing) networks (such as T-Mobile) by locking the SIM cards that are pre-installed in the phone. As a consequence consumers are restricted to a proprietary brand and narrower network coverage while there is no technology reason to do so. That, to many, is a step back, rather than forward.

Ample other examples exist. The role of technology is to disappear, not to expose itself. Few companies (big and small) achieve that objective today.

As gambling-style exits and IPOs disappear it becomes more important for technology companies to keep both macro and micro-economics in check. More investors should screen companies for these more impact-ful innovations that focus on making technology less, rather than more prominent to consumers. That is where the real big bucks are.

Tags: Innovation, Internet, Investment, Macro-economics

By Georges van Hoegaerden

Silicon Valley is not dissimilar from the politics in Washington DC in the sense that its existence today is regulated by aristocratic people (investors) who are not up for re-election for another 7-10 years and have created an ecosystem that spawns more false positives and false negatives than any politician could ever get away with.

So, it is not without a smile on my face (as I have been preaching and practicing for years) that I quote Barack Obama’s innovative approach to politics that we in Silicon Valley could learn from:

Strong personalities and strong opinions
Obama looks for strong personalities and strong opinions, while the venture business is often afraid to hire people who challenge its popular opinion. Many technology companies over the years have been invaded by managers who akin to the gold-rush are looking for the gold that is no longer easy to find. We need to change too and cultivate managers that have real experience, strong vision and strong abilities to rally a team around achievable results. Let’s get rid of managers that just like politicians prefer to feed their sex drive (my first boss in the US spent his days watching porn-videos as we prepared feverishly for a major launch) and their 401K with the least resistance possible.

Think anew and act anew
Obama is shaking things up. We should too. The really new ideas in technology are few and far between. We need to build and feel responsible for an ecosystem of new financiers that fund technology ideas that do not fit the mold, rather than continue to create clubs that mindlessly perpetuate businesses that copy few successes or popular acronyms.

Extreme transparency
Obama teaches us how the disclosure of governmental documents is the floor and not the ceiling. Compared to that metric, early-stage performance disclosure is probably more than 6 feet under, or in the cellar. We have no transparency in the venture business to discover who has integrity, and who is poisoning the technology ecosystem. We need to deliver transparency in order to improve the trust in technology companies that keeps private and public investor interested.

High integrity and moral
Obama, when moving back to Chicago, took a job doing what he believed in, not what made him the most money. We need to stimulate people in Silicon Valley with a passionate desire to fundamentally improve technology adoption, rather than continue to feed people who hone their skills just to get rich.

Use it or lose it
Obama evaluates and then commits quickly. And then, when the money is forked over, you are expected to make things happen. That’s how real savvy businessmen run their companies, quite different from the puppet role many startup CEOs play to appease their boards, the source of perpetual mediocrity. We need to grow a culture of buy-in and commit, risk and reward that holds people accountable for the results.

Either we regulate the early-stage technology ecosystem ourselves or the market will do it for us - with much less grace. Already, it is predicted that 25% of the VCs will go out of business soon, freeing up LP overhang for a new crop or reallocation to a new segment. Other countries (such as China) are not sitting still, the performance of our technology ecosystem will now be challenged on a global basis.

The only way not to lose grip globally is to hold the values, that made our country vote for Obama high, and aggressively reward integrity, passion and sincerity over greed. Real capitalism rewards the good and punishes the bad. And the American dream flourishes again.

Tags: Innovation, Eco-systems, Economy, Limited Partners, CEO, VC, Startup

By Georges van Hoegaerden

As any economist will tell you, a dollar bill is not worth a dollar. And so the real value of that paper bill is defined by the trust we put in it. The trust that you will receive a certain (yet fluctuating; some days a dollar is worth more than others) amount of goods and services in exchange. Simple right?

So given that, trust is the most important denomination in determining the value of a product or a service. And trust builds from consistent delivery on stated promises, which - in turn - requires the unwavering commitment from people with integrity and honesty....do you feel the slide coming?

So:
1/ Why do many companies make promises they don’t keep?
I evaluate a lot of technology companies (about 60 this year alone, public and private) and most are simply lying about, or overstating (decibel marketing) the benefits of their proposition. Because the majority of potential customers and investors are ill-informed about the pros and cons of this specialized industry, technology companies can often get away with sneaky monetization strategies that take advantage of a lesser informed audience.

In Silicon Valley, “success” is often defined by how skilled you are in fooling customers and sucking up to aristocratic investors (to which few have access), rather than the authenticity of your proposition. A mediocre ecosystem is what still remains after the technology bust from 2001 in which self proclaimed “serial entrepreneurs” and investors have been able to dodge real value creation and sell out short.

Not the VC model is broken, but many of the participants are. That noise is severely eroding the trust in an inherently sound technology industry. We need to enforce more transparency and hold ourselves to higher standards to restore the integrity and trust.

2/ Why do we allow short-selling on public company stock?
First, the performance of public stock says nothing about the actual value or outlook of a company, in the same way the dollar offers no guarantee of what you get for it. Public stocks are already a lousy interpretation of the actual performance of a company, as it merely echos popular opinion (and not the company facts).

So, selling short is really a bet on performance of popular opinion and does nothing but undermine the trust in the longevity of a business and cannibalizes shareholder value. Quarterly earnings reports are an absolute joke as many companies move profits around, claim leadership in a market that is defined by themselves and reduce cost rather than improve their marketplace position in order to make quarterly earnings look good. They also force healthy companies to focus on often unpredictable economic aberrations rather than on their long term and macro-economic leadership position.

The ability to sell short creates unrest and undue fear in a system that requires the opposite. Can you imagine holding the president of the United States accountable on a quarterly basis? That would be bad for our country (in most cases).

We should implement a predetermined holding period for the sale of stock, the expiration determined by the company and regulated by the SEC (which can also prevent some nasty insider trader deals) to build back trust.

3/ Why are some allowed to resell securities?
Reselling securities (which was illegal a few years back) based on finagled credit scores are perhaps the double whammy in the erosion of trust in public companies. Company credit scores that are maintained (and marketed) by commercial companies create profit driven scores and unrealistic prices (up and down) for securities. We simply need to stop the resale of securities and regulate the process of maintaining credit scores (both business and personal) vigorously and immediately.

Regulations do not turn us into a socialistic society, but the reality is that no economy operates without rules to protect trust. Free-markets require a basic set of rules to prevent a few bad apples to create insurmountable fear for the rest of us.

For the technologists amongst us: eBay deploys no less than seven dedicated servers to detect suspicious transactions that could challenge the trust in its free-market model.

In the same way we deploy rigid traffic laws to drive a car, should we deploy rules of engagement to protect our economic serenity. As long as we don’t dictate the destination of our travels or where we place our individual economic bets, we should be just fine in our support of a blossoming capitalistic society.

Trust comes from transparency, integrity and authenticity that builds real value, not from taking advantage of the ill-informed. So, building a successful company does not start with a new product strategy but with a leader who has the drive to win that is larger than his greed. Building disruptive products that truly improve people’s lives will yield personal satisfaction and trust that will keep customers coming back for more.

Trust is the only currency that matters, so stop squandering it.

Tags: EBay, Economy, Eco-systems, Free-market, VC, Stock, Transparency, Securities, Capitalism, Macro-economics, Economy

By Georges van Hoegaerden

With that title I just pulled the pacifier out of the mouths of many marketers...and many of them will start crying.

But smart business people know better. Compartmentalization is very fundamental human behavior, in our personal life and business. In business the definition of “The Market” is the currency that aims to provide quick answers to everyday questions. The problem with market categorizations is that they are often incorrect, irrelevant, stale and frankly, the antagonist of innovation.

Here is why:

1/ People buy products, markets don’t.
No matter what the scenario, in the end people (not businesses) make purchasing decisions. And since people are unique, so are their complex reasons to buy. A unique mix of psychographics and demographics aided by free-market access to the Internet further emphasizes the power of “You” over the power of “The Market”.

2/ Markets are bad type-castings.
Customer surveys show that the compelling-reasons-to-buy rarely match up with the predetermined definition of “The Market”. And since many purchasing decisions rely on factors unrelated to the product (such as budgets, approvals, personal relationships, operational planning, risk mitigation etc.) a prospect qualification or disqualification within that market means absolutely nothing.

3/ Market definitions are bad currencies.
Since there are no rules for defining markets and everyone gets to dream up their own, the value of that market definition is meaningless. Imagine the value of the dollar if everyone gets to define how much it is worth and print theirs at home. Market segmentation and negotiations on market positions with analysts further deflate the significance and trust in traditional market definitions.

4/ Time changes everything (but markets).
Market definitions (in technology) change slowly yet products that attract new buyers change quickly. That means the definition of “The Market” (to which much decision-making is attached) is always far behind the adoption rate of new products and therefor far behind the identification of a new set of buyers. The minute “The Market” is defined, it has become irrelevant and ripe for disruption.

So, where does that leave marketing? Is marketing dead?

No, but it is time for technology marketers to grow up. The pacifier is being replaced by something else. Something more substantial and meaningful. Food becomes the new pacifier and customers will be feeding it to you.

1/ Listen before you speak.
Literally. Forget about what you as the marketer think of the product, early-adopter purchasing decisions are much more valuable in determining how the product is perceived and received. The credibility of new customers counts, more so than the ability of a marketer to spin a story. Spend time with your VP of Sales, in online forums, setup a Google Alert and figure out how to market customer perception.

2/ Manage the promise.
Crucial to the impact of marketing is the credibility of the company promise. Marketing, and specifically Product Marketing is vital in establishing that the promise is fulfilled to the satisfaction of the customer. A few bad words from customers on the internet can cost the company millions of dollars to repair, if it can recover from it at all. So, it is important that the promise to customers does not consist of blatant lies, leads to frustration or bleeds hundreds of support calls. Manage the critical success factors of your promise.

3/ Enable the dialog.
Orchestrate the interaction between customers and prospects and be sure to listen in. They will give you the marketing messages that truly resonate - on a silver platter.

4/ Manage the conversion rate.
Getting crowds to listen or visit the company website is rather simple, getting them to buy the product is more difficult. The company is only measured on the latter and since marketing is usually the scape goat and the first to be questioned when results are down, implementing a mechanism that detects, manages and reports on conversion rates yields invaluable metrics for improvement.

As long as there is macro-economic benefit to using your product, marketing is a very straightforward process. It requires a new class of people that are not afraid to throw the old-class of market definitions overboard and focus on the extrapolation of existing sales success, by simply listening for and consistently reverberating an honest and effective marketing message.

As Don Draper, the biggest ad man at the Sterling Cooper Advertising Agency of the TV series Mad Men explains; I don’t tell stories - I sell product.

Tags: Markets, Marketing, Performance, Promise, Analysts, Google, Psychographics, Demographics

By Georges van Hoegaerden

I received a lot of feedback and questions on my previous blog posting named Building efficiencies in tough times and the embedded presentation posted there. The danger of attaching a presentation is, that as a reader you may miss the rational that built the words.

Because of that I want to explain my sometimes condensed thinking a little further.



It may have appeared that I only care about the product, but nothing is farther from the truth. The diagram on the left of the chart is what I see a lot in technology companies, early and late stage - across the board. The diagram on the right is what I tried to convey with the words in my presentation. Let me clarify:

Many companies develop incremental innovation (to leapfrog their competitors) without a diligent (re-)assessment of the opportunity to change the battle field. Not surprisingly. Real disruptive innovation requires a certain amount of vision, faith and a compass combined with larger commitments and investments, all seemingly based on untested values.

The path of least resistance therefor is to start with an incremental product and throw inordinate amounts of marketing & sales at it, in order to push it beyond its competitors into the marketplace. That is a highly inefficient model (in any economy). But it is a model to which many companies are forced to comply because of risk adverse management and the stale investment criteria deployed by many Venture Capitalists (VCs).

So, it is somewhat ironic that the VCs are now telling their startups to be more efficient, right after they were pushed through the VC wringer of startup-commoditization.

I believe the market for cheap (bootstrap-to-market) technology companies, that yield a large early exit is gone. That model only worked in a bull market of technology (from the 90s that has not dissipated) and the investors that still cling to that model will get punished for it. The new opportunities are for companies that build real macro-economic value.

The starting point of the next wave of innovation, in my view, is to feed a macro-economic need, as depicted in the diagram on the right. That macro-economic need is directly attached to the way we behave as humans (which is relatively predictable). It is our need to express ourselves, live the life we want and be in control (rather than technology controlling us). Think free-market principles, think social, think benefits, think fundamentals.

The fundamental shift in thinking that needs to occur in Silicon Valley, is to develop technology with a fresh mind, looking from the outside in, and serve a larger, less specialized, constituent.

Apple comes to mind as a company that often completely ignores the current state of the technology industry and connects better to basic human needs than any other technology company. But Apple can improve/be beat at the macro level, but I digress.

We simply need to support human behavior with technology.

With “free” distribution of information through the Internet, psychographics - not demographics - matter. Four-hundred year old free-market principles, The Long Tail, and marketplaces like eBay prove that the traditional rules of marketing do no longer apply. In my thirty years in technology I have never met anyone who truly understands markets. And market definitions have changed, they comprise no longer of buyers that fit an artificial model (I cringe when I hear people debate for hours how many users delineates the SMB segment), but because they subscribe to the pain or gain from which subsequently, marketers can extrapolate a larger pool. Bottom-up.

We do not all need to be economists to create the next successful technology company, the material is all around us. All it takes is a healthy interest in the actual behavior of human beings, compare their offline and online behavior and fill in the gaps. So, stop supporting companies that just build nifty technologies, but focus on companies that create larger macro-economic differentiation. More impact to everyday people.

No company will be more efficient by simply cutting cost (as suggested by the recent doom-and-gloom VC messages), it will just take longer to die. The real efficiency comes from a more disruptive value that attaches more people to better technology. On top of that, macro-economic value is very resistant to economic downturns.

Tags: Performance, Commodity, Consumer, Marketing, Markets, Marketplace, VC, Macro-economics, Psychographics, Apple, Distribution

By Georges van Hoegaerden

With the Venture Capital high society dropping doom and gloom economic messages onto the CEOs of their portfolio companies, I wanted to help out and at least do my part to deliver some more operational substance.

Great companies and their resilience is defined by the quality of their products.

Great products make up for an endless amount of sales and marketing deficiencies, but in most cases sales and marketing spend too much time making up for lost product opportunity and becomes an endless money drain. Product definition (from a buyer’s perspective) and quality are the most important drivers for consistent business success, as Larry Ellison and Steve Jobs (both product gurus) have proven time and time again.

But when money is plentiful, yet guarded by aggressive milestones we tend to throw products over the fence early and have sales, marketing and support compensate tirelessly for its in-market deficiencies. Both startups and established companies (trust me, I’ve seen a few) make those same fundamental mistakes. The results are slow sales traction, excessive marketing expenses and runaway support costs. Not things any company can afford these days.

This morning I put together a presentation (in pdf, named TVC_building_efficiencies) that identifies some of the deficiency symptoms, emphasizes the benefits of great products to the cost model, and pulls together new ways to build amazing new products. Thus creating a more resilient company, no matter what the economic conditions.

So, to directly affect company efficiency, keep a close eye on the definition and implementation of the product, its macro-economic impact and how it grows and where it bleeds. Or simply contact us if you need some help.

Update: more on building efficiencies.

Tags: Performance, Consumer, Disruption, Free-market, Growth, Marketing, Markets, Quality, Resilience, Software, VC, Macro-economics

By Georges van Hoegaerden

Let’s look at photography (my hobby), arguably the most important purchasing-driver of computers (after the ability to access the internet) by consumers. Media management (yes, on the desktop) remains more than a Billion dollar market opportunity.

Case in point: new announcements of Adobe Lightroom and Apple Aperture tout enhanced interoperability with third party plugins to manage and edit your photographs. Don’t you feel good about that warm open-source-like karma of interoperability?

I don’t. Both vendors have deployed their next trick to customer imprisonment. And plenty of uninformed customers will fall for it. Here is why you shouldn’t:

1/ There is no need for an additional platform for photo management.
Photo editing capabilites of both applications are mediocre (no layer based editing, no advanced local editing etc.) and their asset management capabilities are little more than a replica of file system capabilities (even photographic attributes such as exposure, aperture and other attributes are maintained by the file-system metadata today). So, except for making nice photo albums and calendars, why else would you slug thousands of photographs in a proprietary asset management format that is less reliable than the underlying file-system and requires seperate backup and archiving strategies to maintain.

2/ Plugins have worked for years on file-system based photographs.
The announcement of the interoperability with plugins is really old news as those third party applications have been working with file-system based photographs for years. This is a platform on top of a platform, designed to milk more money out of customers and locks them into a proprietary technology stack. A prison with the windows open is still a prison.

3/ The operating system needs-to and will evolve faster.
The pace of meaningful innovation of the Personal Computer OS is deplorable. Microsoft has not made the PC operating system significantly smarter over the last ten years and that has opened the window of opportunity for Apple to surpass Microsoft in usability (rather than functionality). The ability to easily create and manage user-generated content such as, Photography and Video, has now become important adoption drivers to the platform, OS-vendors have yet to respond to. Photographic capabilities should be built-in (not priced-on). These days the unique media experience of the platform is the differentiation that sells the computer (since they all do internet quite well).

As a consumer, buying into seperate photography management siloes will cost you significant time and money (as the former CEO of a photo software company, researching the alternatives, I tried). My advice is to wait until an agile vendor steps up and turns media management into a core competency of the computing experience.

In the words of Ray Lane (partner at KPCB and former COO of Oracle) who once said customers are better off skipping some steps of innovation (in his case to skip client-server for three-tier internet architecture), I have just presented you with my reasoning to skip-over Adobe Lightroom and Apple Aperture. Not because I don’t like some of its functionality, but because it is strategically a dead-end street.

The next evolution of media management will soon eradicate the old one and deliver lasting differentiation to the vendor that owns it and provides a much, much better media experience to the consumer.

I am planning on having something to do with that.

Tags: Platform, Photography, Consumer, OS X, Operating System, Innovation, Integrity, Adobe, Microsoft, Apple

By Georges van Hoegaerden

When Facebook decided to integrate new application capabilities that were first available as a third-party application from a marketplace participant, they broke the cardinal rule of marketplace meritocracy. When Getty Images’ staff-photographers allegedly took new pictures similar to previously top-selling pictures from participants they too broke a fundamental marketplace rule. When Amazon.com optimized sales results based on margins requirements they too broke many of the free-market rules as described in “Look, but don’t touch”.

By calling themselves platforms or marketplaces those companies misled their participants and engaged in what I would characterize as false advertising. Not only did the suppliers expect to be treated equally and become successful based on a true meritocracy, buyers expected to get an untainted view of that meritocracy to make informed purchasing decisions.

Technology platforms need to obey to a simple macro-economic marketplace definition:

A marketplace connects unrestricted supply with unrestricted demand through an un-arbitrated and transparent exchange.

Marketplaces thrive because they support free-market principles, and as a result they level the playing field for all participants. No longer are unfair advantages for participants defined by geographic location, subscriptions, volume or other artificial boundaries, but simply by the value and the price of their products.

Here is what platform vendors, to maintain free-market principles and thrive, should stick to:

1/ Don’t employ sales people that sell marketplace content. Sales people give preference to specific content which violates the integrity of the marketplace. Sell the effectiveness of the marketplace mechanism instead.

2/ Don’t market specific content, but market the effectiveness of the exchange. Unfair advantage is an attribute of a premium market not a free-market.

3/ Don’t arbitrate. Anyone should be able to participate, participation fees (that anone in the target group can afford) are okay.

4/ Don’t hide sales results. Transparency of the effectiveness of the marketplace is crucial to invite new entrants on the supply and buy side.

5/ Don’t participate in the marketplace yourself. Clearly seperate yourself from the participants, platform vendors should just build the platform, not the content.

Technology companies that are building platforms should check out our cardinal marketplace rules and investors should measure their platform companies on the compliance to those rules. Investing in a premium market business is fundamentally different from investing in a free-market platform business. Funding requirements and use-of-proceeds differ dramatically.

I’ll make the point again that investors should understand macro-economics impact before they invest.

Marketplaces are not for-free and still support capitalism, but the money will be made by platform owners from a transparent margin on the exchange (and sometimes carefully applied advertising opportunities). Diligent consumer marketplaces achieve winner-takes-all participation levels and massive exchange volumes and revenues. eBay and the Apple AppStore are great examples of more disciplined marketplaces.

Because of the virtually unlimited global reach of the Internet we have an incredible opportunity and obligation to present the world with free-market platforms that treat all participants fairly and with respect.

Let’s stop whining about the authenticity of our presidents, and instead, as the creators of the technology industry show the world how we turn authenticity, embedded in our technology, into a massively sustainable advantage.

Tags: Platform, Amazon, FaceBook, Getty-Images, Photography, Macro-economics, Meritocracy, Marketplace, Markets, Premium

By Georges van Hoegaerden

Photography is a fantastic craft to which now, with the introduction of digital photography, many more people have access. Great photography relies on an ecosystem of factors (technical: shutter-speed, exposure, aperture, depth of field, ISO etc. and non-technical) to turn a simple scene into a compelling vision. Just like in business.

The similarities between photography and business are remarkable:

1/ The Art of Seeing
Great photography starts with an ability to see in the same way great innovation starts with an ability to imagine. Spotting a scene and finding extraordinary simplicity in detail is what lays the foundation for a great photograph and business. More so than the ability to master the camera, time is of the essence. Shoot it - now - with whatever camera, as that scene may never come back. So do the great opportunities in business. Carpe diem.

2/ Establish Focus
Every photograph needs a clear focal point, just like a business. One, and not more than one. But focus is not always obvious and in the middle of the viewfinder. Focus in photography and business is achieved through experience of knowing what that focus yields. In business that defines how you are percieved by your customers. As a photographer, you determine where the focus is and set the right angle. As a CEO you establish the focus and direction.

3/ Set a Composition
Composition determines what you see beyond the focal point. Other objects in the viewfinder compete for attention with your focal point, but a great composition takes your eye on a journey to the focal point and strengthens its attraction. Lines, shapes, curves and contrast establish focal point supremacy. In the same way competition in business strengthens (not weakens) the unique appeal of your business.

4/ Evaluate Exposure
Exposure determines how much light you let in. Too much or too little light washes out great detail. Too much or too little exposure undervalues or overvalues the company, either one turns off customers. Use exposure to enhance great value, not to displace it. Use public relations and marketing wisely. So, locate the real business value before you expose it. Exposures can usually be fixed afterwards.

5/ Measure Depth-of-Field
Depth-of-field establishes what is in the foreground and what is not. What is important and what is less important. In business, razorsharp focus is required to establish a solid bottom-line. But a business without “depth-of-field” is a one trick pony. A great bokeh (a photography term for the background pattern established by an f-stop) determines its longevity and - ultimately - sustainability.

6/ Know Technology
Technology is becoming more relevant in photography and similar is the impact in the business world. Technology determines how the end product can be shared and organically find its massive appeal. Now, through the internet, great photographs and great businesses will find a new audience that was previously unreachable. New, more free, markets are opened up and new opportunities arise.

For me personally, photography is a way to relax, but in actuality it is an extension of what I do in business every day. I am always looking for unique moments in time, taking great pictures and building great businesses, that perhaps - others don’t see.

Tags: Photography, Markets, Free-market, Eco-systems, CEO, Marketing, Experience

By Georges van Hoegaerden

I just came back from a trip to Europe and let me tell you: Belgian chocolate, raw herring from Holland and ficelle from France - nothing is more authentic and delicious.

But few of these travel well or find a large deserving audience in the United States. Much like technology.

The state of the technology industry and the accompanying investment ecosystem in the US are quite a bit more developed than in Europe, 15 years at least.

In the US, roughly $30B per year is poured into early stage companies by some 300 investors in my backyard in Palo Alto, not including Private Equity deals. In contrast, only a handful European early stage VCs exist and the majority of all european investments are late stage investments done by Private Equity firms.

In Europe, early stage VC valuations hover around $1M, compared to $4-7M in the US. As a result desperate european entrepreneurs often default to Angels that show some flexibility, but those investors are often very inexperienced with the technology sector and early stage investing or the combination. They made their money somewhere else. Because of the young history of technology success in Europe, very few european investors (either VC or Angel) have actually had the personal experience of building an early stage technology company from scratch.

To sum it up, european investors (with a few exceptions) take large early equity stakes, provide limited relevant business insight and push those companies to early profitability (even at 250K euro investment levels). Selling a product or a service too hastily, before it is ready to enter a global marketplace delivers NO validation of the business, good or bad. But it is a sure way to slow down its innovation and differentiation.

So, underdeveloped access to quality early stage money makes life of entrepreneurs in Europe quite difficult.

But, let's assume you passed the bar on all the above and your company is on its way to the United States. No one can stop you in the pursuit of the great early exit opportunities only Silicon Valley can offer.

So here are some things to be aware of:

1/ A cherry, picked by an investor in Europe is not always a cherry in the US. Be sure you understand - or seek advice about the timing differences between continents that attract follow-on investors in the US. Some of that timing has to do with technology, but market timing is even more crucial.

2/ Plan ahead. Allocate a larger fundraising runway than you would in Europe. To US investors foreign companies are yet another risk they need to mitigate. By default you are less attractive than a US company.

3/ Modify your operating plan. Change it from a plan to profitability to a plan to market dominance (which could include profitability but can also have other primary denominations as drivers, such as owning a majority of eye-balls in the consumer space).

4/ Move your headquarters to the US. Without it you'll find very few US investors interested.

5/ Assuming you get this far, be open to a recap. US investors understand the equilibrium of shareholdings will provide the best business value, not exorbitant ownership of the initial investor achieved through a low initial valuation. But since the US valuation should increase significantly, the initial investors should not lose too much net value, if at all.

6/ Hire a local management team that understands how to perform in a petri-dish that is quite different from Europe.

My final recommendation is to be prepared before you come over and not put your head in the sand, I can give you a long (and still growing) list of foreign companies that were forced to move back.

For larger US VC firms there is a fantastic opportunity to scout for technologists in Europe and fold them into their US investment model before they've taken in too much local money. I see technologists in Europe building innovation that is at least as good as the in the US. Remember the most delicious chocolates from Belgium?

But, the worlds largest chocolate factory is Hershey's located in the US. The name of the game remains matching sufficient technological capability to a fast growing market, in the same way Hershey's reaches a much larger audience than Belgian chocolates - with a quality that is good enough for most. Market timing, not technology, is key.

Tags: Investment, European, Private Equity, VC, Angels, Marketplace, Markets, Silicon Valley, Palo Alto

By Georges van Hoegaerden

If you've read my previous blog on marketplace rules, you would agree. Amazon.com is a Super Store which, by expanding the relationship with other premium suppliers mimics the appearance of a marketplace. And because Jeff Bezos associates Amazon.com with a marketplace frequently, I stand to correct him:

Marketplace rules.
Rule #1: Failed. Amazon limits the supplier participation to their premium strategy.
Rule #2: Failed. Limited suppliers means limited transactions are available
Rule #3: Failed. Amazon regulates the process of how a transaction takes place, conforming to Amazon pricing models
Rule #4: Failed. Once you book an order from a different supplier than Amazon, all bets are off with regards to transparency, shipping, returns etc
Rule #5: Failed. There is no way for new buyers to see who bought what at what price and equally for sellers who sold what.
Rule #6: Failed. User opinions are irrelevant if they are not borne out of a transaction.
Rule #7: Perhaps not relevant here.
Rule #8: Failed. Amazon is "competing" in the "marketplace" with its suppliers

Amazon will have a much harder time to sustain growth and meet Wall Street expectations, as a lot of growth through premium suppliers will become non-organic (or sell through revenues). Amazon has plenty of opportunity to migrate to a real marketplace without losing its footing, but it better hurry. In the meantime, Jeff, please call Amazon what it is: earth's premium selection.

Tags: Marketplace, Amazon, Bezos

By Georges van Hoegaerden

There is a lot of misconception about marketplaces and I wanted to summarize my response to benefit more entrepreneurs.

Real marketplaces are much more powerful than just a collection of stores. Amazon, for example is a Super Store not a marketplace today. EBay, FaceBook and YouTube represent more fundamental marketplace principles - and as a result - fascinating growth.

Marketplaces are a favorite topic these days, perhaps spawned by sky high valuations for social-media platforms such as FaceBook and Bebo. A social-media platform, you know, is nothing more than a marketplace in which personal attributes are traded (through the use of social applications).

Marketplaces are interesting because, if implemented successfully, provide massive user adoption and winner-takes-all leadership positions. Great traits for any investment portfolio. A marketplace is highly disruptive in a market where the premium opportunity, the Super Store model has been exhausted - or simply does not exist. Some markets, because of their highly fragmented nature, cannot be captured by high margin and proprietary access and a marketplace is the only way to leverage its total size.

I have written extensively about marketplace criteria in specific markets and its origination about 600 years back, so I won't cover that specifically here. But so many other markets are ripe for marketplace macro-economics delivered by technology. Virtually any market characterized by unique transactions between large amounts of sellers and buyers is a candidate for free-market principles. The life-cycle of proprietary markets is dramatically shortened by the Internet, a distribution medium that instantly removes artificial boundaries such as geographic location and limited access.

Here are 8 rules that make a marketplace succeed:

1/ Un-arbitrated participation
No seller or buyer should be banned from participating in the marketplace. A key fundamental of a marketplace is that it grows itself and that the quality of the buyer and seller is a reflection of the market, not controlled by the market. After-all, the purpose is to connect The Long Tail of supply with The Long Tail of demand.

2/ Un-arbitrated transactions
Apart from exchanges that are illegal by law, no transactions should be banned. People come to a marketplace to perform a unique transaction, one they could not act on in a premium market.

3/ Free pricing mechanisms
Pricing models and terms are defined either by the seller or buyer or by both. Not by the marketplace. Pricing models can include such transactions as sell, auction, reverse auction or subscription - or even a combination of those. Pricing, including free, is completely and independently determined by or between seller and buyer, predetermined or negotiated. The marketplace takes a simple transaction fee off of the transaction value.

4/ Predictable behavior
Marketplaces need to establish trust in order to survive and thrive. Pricing models and behavior of the marketplace need to be predictable and follow (not dictate) the goals of buyers and sellers. The marketplace should follow the needs of the market not the other way around.

5/ Transparency of transactions
Marketplaces rely on a vast new influx of sellers and buyers to grow to massive size. That means the marketplace must operate with a transparency that shows new buyers or sellers how to become successful as most of its users are greenfield participants.

6/ Meritocracy builds reputation
Trading favors and segmentation can be established but only based on mechanisms that are derived from real transactions, not plainly from user opinions. Opinions are useless if not supported by a proven reputation within the marketplace. Transactions based reputations provides long-lasting stickiness to the marketplace.

7/ Support for intermediaries
For existing markets moving from premium to a free-market, its existing intermediaries need to be able to continue to represent their sellers or buyers. A new technology marketplace should not want to disintermediate or alienate those agents.

8/ Non-compete
The marketplace cannot itself participate in the marketplace by providing its own transactions or even participate in - or act on behalf of - transactions between sellers and buyers. Apart from the fact that the business models don't jive, a marketplace cannot be trusted when it simultaneously participates and facilitates an impartial exchange.

So, a simple method to determine whether a marketplace has massive market potential is to hold it up against the rules provided here. These rules are macro-economic principles that dictate how markets behave and grow, the technology implementation must support those principles to have a chance of making it big. It's a free world after all.

Tags: Marketplace, Startup, Social Media, Long Tail, EBay, FaceBook, YouTube, Amazon, Transparency, Free-market

By Georges van Hoegaerden

I have received a lot of inquiries from Wall-street personalities and companies due to the gracious blog posting in PE Week Wire on the imaging marketplace, so I wanted to dive deeper to clarify beyond just the financials.

1/ Getty-Images does not clearly distinguish between total addressable market and "market", probably to puff itself up as the owner of the imaging marketplace. More than 50% of (traceable corporate) images produced (by about 17,000 commercial Photography companies in the US) are generated by suppliers making less than $5M in revenues and have less than 10 employees. Very few of those (less than 1%) use Getty-Images as their distribution channel. In fact the majority of images sold in the world are traded offline, yes, offline (Getty-Images started its online presence in 2000, after going public on NASDAQ in July of 1996 and re-listing on NYSE in 1998). In addition, the peer-to-peer exchange of digital images, we estimate, is at least twice the size of the traceable exchange. It is quite irrelevant if Getty-Images is performing better than its peers, but Getty-Images by no means owns more than 10% of the addressable market. The risk for Getty is that a new kid on the block will be more successful in emptying out the market with a new business model, rather than outperform the existing players.

2/ Getty-Images is not a marketplace, it is a Super-Store in the economic sense of those definitions. A large part of the images in their store are produced by their own photographers (organic and non-organic) and sold to their existing, primarily agency customers. But the real definition of a "free-market" marketplace is that customer own their product which they sell, un-arbitrated and completely transparent, to buyers. Getty-Images charges exorbitant commissions (known to be in the range of 60%), which can't hardly be considered a marketplace transaction fee. It is suggested on the internet that Getty-Images plays unfair, even include changing photographs and forcing the original photographers to hand Getty-Images an additional 100% of the delta. True or not, that is not the kind of trust that makes anyone believe that Getty-Images will become a true marketplace.

3/ The photo acronyms are meaningless. Stock photography does not exist. It is an artificial definition, used mostly to identify a low priced photograph. But a "stock" photograph can be sold rights-managed, royalty free or exclusive and in the new world of publishing even be published as editorial. And therefor, being the leader in stock photography means absolutely NOTHING. Did you know an exclusive photograph is really not exclusive (it is only exclusive to a certain usage), that a buyer has no guarantee that the photo does not show up somewhere else. So, the only measure of success is how many photographs the company has sold and how many times over.

4/ Getty-Images has very restrictive policies to let users participate in their Super-Store, another sign it does not meet a true marketplace definition. WIth dSLR sales growing last year at 60% rate and 9B images produced on those cameras (18B cumulative dSLR images since 2003), Getty-Images is clearly not successful in monetizing the exchange of those images (even if you argue the majority of images have no re-sale value). The number of professional photographers is estimated to be around 36,000 according to PPA and D&B numbers. We believe Getty-Images falls short on counting the majority of those as their suppliers. We believe the unincorporated semi-pros that produce at least one sellable image to be much, much larger (cumulative roughly around 9M dSLR have been sold since 2003).

So, regardless from which angle you slice the business, Getty-Images by no means, has amassed critical penetration in the Total Addressable Market of image exchange. But if you artificially constrict the size of the market by calling it stock, rights-managed, royalty free, editorial or creative, perhaps you can swing it. Undoubtedly someone will buy into it.

Tags: Getty-Images, Corbis, Jupiter-images, PE Week, Wall-Street, PE Week, Images, Revenues, Stock, Super-Store, Cameras

By Georges van Hoegaerden

A Puffer Fish is a fish that blows itself up to dramatically change its appearance and size: not unlike Getty-Images (GYI), Corbis and Jupiter-Images (JUPM) in the imaging market. All three have hybrid business models that disguise the money they really make in the exchange of digital photography. But we know better, we've analyzed empirical data and studied their reports carefully.

That does not mean these "Three Bandits" are failures: Getty-Images is very successful as a photography agency (doing about $805M in revenues per year), Corbis is a very rich catalog of historic photographs stashed away in a bunker in Pennsylvania, slowly being digitized at a cost of about $25 per photograph (revenues around $250M). Jupiter-Images is the division of JupiterMedia, formerly a magazine publishing and events company, now morphing into a content acquisition company.

But they are not a successes either. Organic growth of these companies is well below the growth of the image exchange market and their combined market share is less than 10% of the image exchange addressable market. So, while the $1.5B asking price for Getty-Images doesn't sound outrageous (less than 2x revenues), what you're buying is an outsourced photography agency. Getty-Images is in essence a people factory with ever eroding profit margins.

Twenty years ago Getty-Images started with a $20M investment from grandpa Getty and has continued to purchased a wide array of photo agencies (hence the Puffer Fish) and large libraries of photographs that over time become stale rather than increase in value. The average sales price of those, primarily editorial, photographs is declining steadily (more so than creative photography), leaving the company with a large family of complacent celebrity photographers and mainstream content only the a select few publishing agencies are interested in.

With publishers (of all kind) looking for original content, the imaging Super Store approach (as described here) from the Three Bandits is fundamentally flawed. But the reason why we don't believe in the longevity of their business models (and their asking price) is that they ignore and suppress the massive influx of new digital photographers that create phenomenal high quality and original content most publishers would be dying to get their hands on.

So anyone buying these companies will soon find out how small Puffer Fish really are.

Tags: Getty-Images, Corbis, Jupiter-images, Photography, puffer fish, Photographers, Margin, Editorial, Super-Store

By Georges van Hoegaerden

I have received quite a few comments on my previous post (like this) on the imaging marketplace and I am making an attempt to clarify my condensed writing.

The market of selling photographs is fundamentally different than that of selling music, books or other goods. Rather than selling "premium" supply as defined by the number of people that buy the same product, the value of a photograph is defined by how little it sells (just like art). Fundamentally a photography superstore (like Getty Images, Corbis, Jupiter Images and even Digital Railroad) that sell the same image the way Amazon sells books yields the wrong value to the buyer.

A buyer doesn't want the photograph he is about to purchase see appear in deep circulation, yet a reader of a book makes a buying decision based on popular opinion (Oprah, iTunes) and purchases it too. Selling images (and art) requires an inverted superstore that derives its value from the massive distinctive images it sells. Coincidentally the imaging marketplace has changed dramatically from a monolithic market (between agency and pro-photographer) to a Long Tail of supply and demand (between anyone and anyone).

A fantastic opportunity lies ahead to create a new marketplace for photography that caters to new and high growth audiences. Don't get discouraged by the puffer fish of the imaging industry, that portray they own the market. They don't.

Tags: Getty-Images, Premium, Corbis, Jupiter-images, Digital Railroad, Amazon, Photographers, Monolithic, Free-market, Long Tail

By Georges van Hoegaerden

Two weeks ago Digital Railroad (a private digital photo aggregator, funded by Venrock and Morgenthaler) announced it was restructuring, cutting half of its employees and repositioning the company into a photo marketplace. Today Getty Images (GYI) is said to be looking for a buyer at around $1.5B, after its stock price is unable to recover for more than two years. And Corbis, well -- Corbis is being kept afloat by Bill Gates. Swallowing stock photography companies as fast as it can is Jupiter Images' attempt to boost its potential acquisition price, a strategy that didn't work so well for Getty Images. So, why are these companies not growing organically while the dSLR market that produces those images is growing 60% YTY and GMV of the image market is north of $22B.

Here is my take: the imaging markets consists of demi-cartels that produce "premium" supply that does not meet the requirements of an ever growing and changing market of buyers. No longer is the size of the buyer's market dictated by agencies nor is the new seller's market defined by the old definition of pro-photographers. As a result sell side content does not find enough buyers and the only way to make money is to make sellers believe that if their work is good enough, it will sell.....nice promise. Out of desperation most photographers post their images on multiple websites to get maximum visibility, a true testament of an inefficient market.

Getty Images is really a hybrid business, it has about 3,000 photographers on staff and does editorial projects for its main customers and in armored trucks if it needs to, providing news worthy photography on location. The side-business of Getty is the stock photography business which yields ever declining average sales prices for royalty free and rights managed photography. So, in essence, Getty Images was trying to become a "record" company with its own supply while on the side playing the independent party with a transparent image store; i.e. the "free-market" supply is competing with Getty's core business model. Over the years, many photographers have complained of unfair practices that gives better treatment to Getty's images than to the supply from individual photographers.

The Digital Photography market is in the same state as the music industry (albeit condensed in time) , premium supply doesn't turn out to be premium, demand has changed and the "record" companies in this space have no other option but to erode their premier status business model. I was right three years ago, let that be noted.

As for Digital Railroad, I doubt that they'll develop the macro-economic strategies that determine the success of any real "free-market" marketplace at this point. It would take a sizable investment in technology to turn a super-store into a "free-market". Adobe is rumored to be working on an image marketplace, but here too, the devil is in the details.

We don't need another Amazon.com of the photography business but a real free-market in which YOU the photographer and buyer make decisions on what transactions you want to engage in.

Tags: Digital Railroad, Getty-Images, Corbis, Startup, Jupiter-images, Premium, Photography, Amazon, Adobe, Stock

By Georges van Hoegaerden

Many times I am asked to help a foreign (usually European) company to make it in the United States. But the pursuit of the American dream requires that sacrifices be made. Everyone wants to be a star like Elvis Presley, yet few have the real determination to do so.

So, why are US companies so different. The internet is releasing the fictional boundaries of technology, making its usage and its future development available to anyone. Universities in Europe are doing a much better job teaching technology, yet we don't see a significant amount of European companies become successful. What is going on?

While I don't have all the answers, I can offer a few personal observations of why the American way - and - dream is alive and well:

1/ More entrepreneurs are bred by a capitalistic society than a socialistic society. Entrepreneurs with a personal stake and drive for success boost investor deal flow and premium supply. A significantly larger investor pool yields higher valuations for premium supply.

2/ Solid early-stage business acumen. While technology and programming skills can be acquired by virtually anyone, the European petri-dish, the ecosystem that supports the early-stage exchange of technology products and services is missing. As a result people with the business skills needed to bring those early stage products to market rapidly is virtually non-existent in Europe.

3/ Resilient attitude. Young Americans (and ex-pats like me who never felt at "home") are taught to make money and make themselves happy, young Europeans are taught to get a job at a reputable company and be happy. Taking risk and thinking different is a requirement of being a successful entrepreneur, in addition to withstanding a great amount of adversity.

4/ More risk-taking buyers. Customers, partners and acquirers are more entrepreneurial too. Aggressive competitive cultures force buyers to be more entrepreneurial. Technology innovation is accepted as the instrument of differentiation in many US businesses and customers will buy products that give them competitive edge and better quality-of-service.

5/ Continuous focus. Focus on success, short and long. Building a business that goes through several transformations to meet continuous market milestones is crucial to success, rather than a formal majestic plan with many dependencies that never materializes.

So, is there no hope for foreign technologists? Au contraire, I've seen some great technologies that, if unlocked, can find early traction and impressive valuations. It's time to judge a technology not by the country it comes from but the content of its innovation. The american dream is waiting for you. Are you up for the ride?

[In remembrance of Martin Luther King]

Tags: Capitalism, Democracy, Resilience, Entrepreneurs, American, European, Premium

By Georges van Hoegaerden

While Sony, Microsoft and Nintendo show impressive results from a console perspective the game-play market today appeals to a very narrow demographic. Consoles are purchased by an age group 25-40 years old. While that demographic may be most capable of purchasing these consoles, we know from the types of games sold at roughly $50 per game that daddy plays more games than his children.

One could also argue that the most playful age range in our lives is from age 2 to 16 years old, yet the games and platforms provided do not meet that demographic. Fewer than 40% of teenage girls play any games, feeble attempts to turn existing games pink did not yield more sales, according to an executive at Electronic Arts.

So, rather than a deep dive in the existing game-play demographic, with even better graphics of game consoles, vendors should focus on a game-play experience that meets real market demand, removes the negative and vegetative connotation of gaming and instead exercises mind and body.

Nintendo has taken the first step of targeting a new game-play demographic and quite successfully so. Robbie Bach, president at Microsoft (who I recently spoke to) described his initial XBOX objective as building the best performing gaming experience. Sorry Robbie, wrong business objective. Sony is by far the leader in console gaming and has great opportunity; to lose or bolster its lead. Execution will be key, Jack Tretton will have his hands full on that one, but Sony's powerful assets in home entertainment should help.

While the console vendors battle it out on price and performance, we are seeing new entrants prepare themselves to enter the home entertainment demographic with new "game-play" propositions. The console vendors will see competition at a different level, Apple is just one of them.

Tags: Electronic Arts, Gaming, Xbox, Microsoft, Sony, Apple, Entertainment

By Georges van Hoegaerden

Recently I was asked to think about how to improve the phone features and functionality in an ever commoditizing "Terminal market" (an Ericsson acronym). There is a lot at stake here; lots of people buying phones, 2.2B of them to be exact, not enough of them buying the associated internet service.

Improve the specs and make it look good is the easy answer to that question. That is, if you are building a phone not a PDA. In a PDA you can pull technology, services and memory into a bulky enclosure and rely on nerdocrats to buy them; not a large market. So how do you build a phone that is just as smart and fits in the enclosure of a RAZR? Or smaller? Research shows that people buy cool looking phones, rather than bulky ones stuffed with functionality.

The answer in my view is services. Just as the power of the iPod stems from the iTunes library on your desktop connected to the iTunes store, phones should become re-play devices to services provided on the backend. The phone should be an iPod geared towards managing and replaying service data; contacts, calendar items, music, news are pushed out to it automatically, pictures are taken, stored and uploaded automatically to your section of the "store", ready to be shared and, yes, sold. Enabling free market principles to the content distributed by these services, completes the value chain and drives growth of the platform, regardless of phone.

Phone manufacturers need to learn how to build a value chain, not just a phone. Business innovation is just getting started.

Tags: Ericsson, Motorola, ITunes, IPod, Innovation, Apple, Mobile