On Placemeter: Goodness, Power, and Data

Today we announced an investment in Placemeter, alongside some great partners. Very exciting.

What they do, in short:

They have this crazy cool computer vision software that enables them to get really specific data from the most ubiquitous cheap sensors you can find anywhere: closed-caption television. Think about it. How many retail store security cameras, speed trap cameras, urban planning cameras, Shake Shack line cameras etc. are there in New York City right now? A lot, right? Now imagine adding all of the cameras on our old mobile devices, sitting unused in our kitchen drawers. Imagine if you got paid to take your device, turn it on and stick it on your window.

Google changed the world by indexing the digital world. What if you could index the physical world, in real time?

Now, a couple observations that are very interesting to me:

— Obviously, one wonders about Big Brother implications… That was my first thought, after all. To that point, humans never watch the video, ever. They never save the video, period. They don’t collect data from within homes, no matter what. And finally, most importantly, they are very committed to using this tool for good.

— In the spirit of using this tool for good, imagine if you were a software-oriented urban scientist? If you had realtime data about traffic, walking speeds, busy intersections, etc., what could you build? How could you make your city smarter, safer, and more humane? Placemeter is working on a platform so that anyone, from a neighborhood association leader, to an environmental pollution researcher, could build on Placemeter.

— The consumer applications are there, too. Want to know when to go to your favorite no-reservation restaurant? How about whether Dolores Park has any free spots this afternoon? Is the local court running fives while the weather is still nice? You get the picture.

There is something crazy about everyone having a meter on their window. It makes me wonder about all the iPhone photos I have accidentally photo-bombed over the years. There is a live video feed, or audio feed, covering more and more of the world, whether or not I like it. Of course, the sanctity of my privacy is very important, particularly in today’s Snowden/Assange-era, but the technology is there, and working. And lately, it’s often seen as working against us, not for us. This is one of the more interesting experiments about culture, technology, and the crowd, that I can imagine. Insight, well-collected data, and transparency are so powerful. And as with anything really powerful, the tools have no morality, just power.

And so I am so happy that we at Collaborative Fund are backing founders like Alex and Florent who are committed to using technology, creativity and, yes, power to make the world better.

Common vs. Preferred

Yesterday, inspired by a dinner conversation I was having with an old friend, I started musing about the common vs. preferred difference.

He had remarked that, as an employee of a startup, the risk and amount of effort (including opportunity cost) that goes into being part of the success of the business seems to not be commensurate with the incredible amount of rights (voting, information, pro rata, etc) that come along with being an investor. He asked me “why is sweat equity so much less protected than preferred equity, if sweat equity is so much harder, so presumably more valuable?” His instinct was that something about that didn’t seem fair. I had a lot of good reasons for why it’s better for the investor, but didn’t have a good answer for him about why it’s better for the company, or for the employees. So, comme toujours, I took to Twitter for help. Here are some of the thoughts that emerged:

An equity investment is a negotiated contract around future performance. The management pitches that they will do X (based on how they have performed to-date). The preferred ‘bullets’ protect the investor if the management *undershoots* X. If they *outperform*, then common actually equals preferred, because the valuation rises quickly, and the management has optionality in attracting future capital.

— Any human on the planet can sweat. Capital is scarce. This was far more true in the early days of venture capital, when innovative startups were harder to understand, and the capital willing to take a risk on an early entrepreneur was much more scarce. But the convention still holds that smart money is rarer than sweat.

— A return on sweat is harder to value than a return on a dollar. If I, as a founder or an employee, put my time into a startup, I can earn many types of rewards, including friends, a network, a reputation, and learning. If I, as an investor, put my money into a startup, the only accepted return that makes the investment ‘worthwhile’ is more money. So, making $100 after putting $0 in is quite different than making $100 after putting $40 in.

— It’s cyclical. While interest rates are low and institutional investors are pushing capital into funds (and therefore startups), employees and entrepreneurs think this way and push for stronger common stock. But when it’s the opposite, like in the early 2000s they’ll just be glad to have a salary.

If you’re wondering why your investor will get paid in an exit before you do, or why your investor will earn twice their money before the employees earn anything, or why your investor gets to vote on whether your next potential hire should get an offer, above are some of the thoughts as to why. Of course, preferred is a catchall phrase referring to a diverse set of rights, reps, and warrants, which run the gamut from being totally fair to highly unfair. Perhaps more on that later. But I was just wondering about the concept of preferred, in and of itself.

Part of me wonders if the unionization of the entrepreneurial (and early employee) class through YCombinator and other similar guilds will more permanently adjust these dynamics, such that the common stock has more teeth than it previously had. Perhaps, in a post-AWS world, if the capital sources continue to look for yield in this asset class, and as unique founders have more and more control over the fates of their early products, there will be a sea change in how the classes of stock are allocated.

I’m not making a judgment call on whether it is good or bad, so much as wondering about the convention, and if it’s safe to assume that it will stay as it is. As an investor, protecting upside (so, reserving the right to continue investing in the company as it goes well) is an extremely important part of earning returns. And frankly, healthy returns in the asset class — that is, to venture funds — are *critical* to the ecosystem remaining vibrant, and to startups getting risk capital, while they are still figuring out how to make an impact. But it is quite interesting to consider the implications of a stronger common stock class, and what that might do for my job, and for my peers in venture.

How a 10-year fund life impacts your startup

Venture capital Limited Partner Agreements look very similar. The formula goes something like this: 10 year fund, 4 year investing period, 2% management fee and 20% carried interest. The implications of these terms can help explain why venture capitalists work the way they do, and help founders ask the right questions of their investors.

After the 4-year investing period, the 2% management fee, which otherwise kicks in every year, ratchets down to 2% of the invested capital, meaning that investors tend to fundraise for a subsequent fund before the end of the 4-year period, so they can ensure they can continue deploying capital, paying themselves, and keeping the lights on at their organization. Under these circumstances, a venture investor will pitch their next fund *before* they have fully invested the fund before it, much less realized all of the gains in the first set of investments.

What it means for the investor:
Investors pitch LPs on the ‘markups’ and IRR of the previous fund — has there been follow-on investing, at a higher valuation, from their investment? Any acquisitions, mergers, or public offerings?

What it means for you:
If the fund manager has yet to prove herself, and is still early in building out her portfolio, she has a very strong vested interest in your raising subsequent funding at a higher valuation, ideally soon after her funding comes in.

An investor will deploy all of the principal and reserves in the first four years, which means that the companies which have a long road ahead of them, or which are very experimental, might be better investments at the beginning of a fund, so that they have time to mature.

What it means for the investor:
Consequently, those companies that are somewhat later stage, or are in a period of high valuation but also high revenue / defensibility, might be more appropriate for the end of a fund, where the investor has fewer years to show a return to the LPs.

What it means for you:
If you are doing something very ambitious, highly experimental, or not very viral, you may be better off working with investors who are at the beginning of their fund life, because they are willing to ride for a longer time than investors who are making only a few more new investments before they raise their next fund.

Most investors have an expected return of 3-5x over *at most* 10 years, with a preference towards 7 or even 5 years. This fund structure forces liquidity in a timeframe that is almost always sub optimal for the business.

A business should exit based on one of the following:

- When they have an amazing opportunity to combine forces with another team (like Youtube and Google, or Vine and Twitter)
- When the market (IPO or private) is commanding a premium and the management wants to take advantage of it

The last reason to exit should be when the venture investor needs liquidity, or when its fund life is ending. That reason is ultimately based on a decades-old custom, but is not actually aligned with anything relevant to the company. We are working on ways to address this misalignment, but perhaps this is a helpful reminder to founders about what investors have to think about as they make investments.

(thanks craig and nadia for the read and edits!)

"Venture Subsidy" versus "Growth over Profit"

There is a subtle but very important distinction between venture capital “subsidizing” a service-oriented business, and a service-oriented business that has venture financing, negative cash flow, but positive unit economics. Both are losing money, yes, but there is falling and, to quote Woody from Toy Story, falling with style.

The former may be an emperor with no-clothes, in the steady state: maybe there isn’t a there there. Maybe there is a temporary, but ultimately unsustainable, feedback loop between customer demand and growth.

But the latter might just be re-investing every bit of gross margin in customer acquisition, HR, and other growth tactics. Here, a company can conceivably choose to ‘switch on profitability’ by not growing the team as quickly, or by entering new markets more slowly, because each sale has a positive gross margin.

The wrinkle: some companies, at different stages in their growth, may actually go in-between these phases. In highly competitive markets, a company may *choose* to run negative unit economics, selling their product/service at cost or even at a loss, so as to price out the competition, or grow a market. There are risks to this, of course, because the resulting expected rise in demand may be too elastic to stick around when the price rises, unless there is some sort of product lock-in or network effect. 

So consider this nuance before claiming that all of the “Uber for X” economy is simply venture subsidized and unsustainable in major cities, or by indignantly huffing that none of it is.

Required Qualifications

There are plenty of modern job descriptions, for forward-thinking companies, particularly in technical roles, that still ask for specific qualifications: must have demonstrated capacity in scripting languages, or Android front-end development experience, et cetera. Companies fill out teams based on functional skill sets that complement each other, to fit a broader strategy.

As an example, in my industry, venture capital firms often ask for either: experience at a startup, a technical degree (or demonstrated ability), or experience in financial services. They believe that these skill sets will allow for the ideal candidate to solve the types of problems they are likely to encounter in the job.

I was thinking about that as I was reading this computational science paper published by researchers at University of Michigan: http://www.pnas.org/content/101/46/16385.abstract

It asks: “Can a functionally diverse group whose members have less ability outperform a group of people with high ability who may themselves not be diverse?”

It attempts to combine ‘perspectives’ (the internal representations we make of problems) with ‘heuristics’ (the algorithms we use to locate solutions) to measure how well one type of group can solve a problem versus another. What they find is that the randomly selected group — with a basic set of abilities — consistently outperforms a uniform group with higher scores. That is — diversity is an advantage to groups of problem solvers in and of itself.

If you have a homogenous organization, it is far more than simply PR and marketing to aim for as much diversity — gender, race, socioeconomic, sexual orientation — as possible. It’s simply good business. I believe it is JUST as reasonable, then, to put “ideal candidate is a woman of color” in a job description as it is to put “has a computer science or related degree from a 4-year college”. And by putting the former, I guarantee white men will still apply. But more ‘women of color’ will, too. And the data is there that this is good for your organization.

Upside Protection vs. Downside Protection

This is primarily directed at entrepreneurs raising seed or their first round of funding

So often, in deal negotiation with founders, there are disputes regarding a few terms for an investment. Some of these terms are meant to protect an investor’s upside, while others are meant to protect an investor’s downside. I have encountered a number of entrepreneurs who don’t consider the difference, but simply think of each incremental term on the scale of “not founder-friendly” to “founder-friendly”.  

So I think it’s worthwhile to list just two examples below to illustrate the point.

Liquidation preference
If a company is not going to be a home run, where and how the shareholders get compensated matters. A 1x preference means the investor gets their money back, and that’s that. A 2x preference means the investor gets double their money first (before the common stock shareholders — employees — get anything). And so on. I’ve seen term sheets with a 2.5x and even a 3x preference. This is an example of an investor protecting her downside.

Pro-rata Rights
Discussed at length by Mark Suster this week, and followed-up by Fred Wilson today. These rights are what they sound like: allowing an investor to keep their ownership percentage in subsequent rounds of funding. If a company is going out to raise a round at a much higher valuation, the investor has the right to invest more money to keep their percentage ownership in the company the same. Without this right, as a company takes off and takes on more preferred equity, an investor can get diluted all the way down. This is an example of an investor protecting her upside.

Upside protection tends to require more capital infusion from the original investor (hence the discussion referenced above), and is a sign that things are going well, of course. If someone invests in you now, should they necessarily be diluted as you scale? Some entrepreneurs think so, some don’t. But if the investor has the capacity and desire to continue to invest, this allows them to. Some institutional investors don’t ask for pro rata rights, and some angel investors do, but since pro rata usually implies “I will invest more if this goes well”, it’s often the opposite way around. 

This is very different than downside protection, which usually means that the investor gets paid first, or most, when things aren’t going great. Investors who think of each portfolio company as a 1 or a 0 — a home run or not — care less about downside protection. Investors who want to optimize for whatever outcome the entrepreneur ends up with care more. This isn’t as simple as it looks. Many boards of directors have voted down acquisition offers that would have changed an entrepreneur’s life, because they only cared about making a company a home run (even if it meant risking the company’s life). And on the other hand, many investors have extracted cash from businesses that were dying, or walked away with a multiple while the entrepreneur was empty-handed.

If you’re an entrepreneur working on a negotiation, particularly at the seed level, where convertible notes with none of these rights are standard, it’s worth deeply considering the implications of each kind of term.

Eat What You Kill

One of the really interesting outcomes of a firm-based economy — with set wages, central authority, mass production, et cetera — deals with competition and cooperation.

"For the good of the company" is a phrase we all grok, and we have all been faced with a choice where we responded that way before. It means that even though a business decision may not be in my short-term interests, it is for the benefit of the company, which is in my long-term interests. We understand that intuitively, and it’s easy to grasp. But in a free-agency model, that isn’t always the case. 

Think about a purely commission-driven sales team. If you haven’t seen Glengarry Glen Ross, do so, first of all. (Incredible David Mamet play turned into an iconic film with Jack Lemmon, Alec Baldwin, Kevin Spacey, and (an overrated Al Pacino.) These desperate real estate salesmen are competitive to the point of it being detrimental to the company as a whole. Cheating, back-stabbing, and lying may very well help one salesperson close more business than another, so there’s plenty of incentive towards bad behavior. Now, of course, if I am a bad actor while being a salesperson, there is reason to believe that will ultimately be outside my best interests, too, yes, but instant gratification, especially when there is a financial reward attached, is hard to overcome. Of course, this example is extreme, but there are unwanted, anti-cooperative tactics that come along with competitive compensation.

We often talk about the primary benefit to the firm as being the efficiency in production and distribution, but it’s worth noting that there is some efficiency relating to ‘coworker’ relationships, as well. And so, if we have better and more efficient means of production in a p2p, free agency-driven economy, I wonder if the utilitarian benefits to banding together formally need to be adjusted as well… Perhaps one answer to this is a new class of unions and artisan guilds.

Cheat Sheet for Designing Your Life

(h/t Dave Evans)

— EMPATHY
Reflect on the parts of your life where you have felt most inspired, engaged, connected, in a flow state. Just investigate, as if you were looking at a stranger. What do you notice? Write it down. Do it every week, if you can.

— POINT OF VIEW
For example: “Being contrarian and right has generated the most reward in my life” Or “You can never overinvest in your family” This is a placeholder, but try and aim based on what you’ve noticed, on a theme that you could stand behind.

— IDEATE
Throw ideas out there! And I mean more than “join a startup or go to business school” The more radical the better. What would it take for you to join the circus? You always wanted to be a dancer. What’s in the way of your doing that? Leave nothing on the table. “Yes, and” is the only way to respond to any idea in this phase

— PROTOTYPE
Now, this might be the most important part. Among those idaes you’ve generated, don’t choose that which is most ‘useful’ or most ‘important’ or most ‘relevant’. Choose what is most DELIGHTFUL. Which ones jump out at you as the ones that, deep down, are really you? And then go at em! Take a dance class! Spin up an LLC! Bring in some friends and see what you can build! Make, make, make until you are absolutely dizzy.

— TEST
What has changed? Does your point of view tighten? Does it change? Does it withstand scrutiny?

Rinse, repeat.

The Power of Patience

I really enjoyed the fireside chat with Vinod Khosla and the Google founders over the weekend. One thought stuck out to me (and, it seems, to many others).

It’s pretty difficult to solve big problems in four years. I think it’s probably pretty easy to do it in 20 years. I think our whole system is setup in a way that makes it difficult for leaders of really big companies

When someone asked me a few years ago what idea had the biggest impact on me in business, I thought: “beware the local maxima”. And the more time I spend as an investor, the more strongly I feel that way. Quarterly-reporting for public companies puts pressure on CEOs to optimize for short-term revenues rather than long-term, more ambitious goals. But there are many other applications of this concept:

— The investment banker who cuts a corner because it saves him time today, but ends up poorly underwriting a business
— The venture capital investor who invests in a hot category, because she want to juice her IRR, rather than back special founders
— Founder who wants to satisfy the interests of his shareholders today, even though stakeholders are better off if he waited, at least, until tomorrow.

… and so on.

The beauty (and challenge) with the concept “beware the local maxima” stems from two interrelated factors.

— We, as individuals, are highly emotional. Modern economic theory seems to discredit the ‘rational actor model’, which suggests that any individual in a system has a manifested preference for more of a good than less. We simply aren’t rational actors! The instinctive desire for short-term reward is often, in the moment, literally blinding, so we can’t see that one goal distracts from the ultimate goal, even if the ultimate goal is one we know we want.
— In many cases, would we know the “maximum” when we hit it anyway? How would we? Is the concept of an ‘ultimate goal’ flawed in and of itself?

Businesspeople who want to push culture forward, and work on the right things, are presented with a minefield of hard decisions, whose implications are never clear. Sell or not? Hold an IPO or stay private? Cash out early employees? Cash out early investors? Invest early profits in R&D? Build a cash base first? Depending on the circumstances, there simply aren’t easy answers. If you actually unpack the implications of “beware the local maxima”, it is a less obvious directive than it would seem. So what?

The first conclusion I draw, then: great businesspeople are clear about what their values and goals are, so that they can feel confident that they have reached and satisfied them — or, so that they know to wait, even when others think they should be finished. And great businesspeople have educated their emotions, so that their instincts will put patience and purpose above all, because patience is valuable for its own sake.

The second conclusion: for early-stage innovative businesses, the framework for investing in them has been mostly fixed for a while, now (7 to 10 years to create 3-5x returns). This model is meant to satisfy the power law of venture returns, and also the fact that high-growth successes take some time to mature (Facebook founded in 2004, IPO in 2012, 8 years later). But is 10 years even long enough? If patience for patience’s sake really is so valuable, as Bezos and Page both suggest, how can we make venture investing more patient? Because it would seem that we need to.

On The City As Museum

I’m no urban planning expert, but I’m curious!

Short-term rental versus long-term rental seems like a core tension driving the AirBnB question in cities around the world.

For the uninitiated, AirBnB has been conducting an international advocacy campaign to convince municipal policymakers that short-term rentals on their platform don’t actually hurt cities, but instead create incremental income, which is increasingly important in a post-industrial economy. I am an extremely happy AirBnB user. I have both hosted and stayed, preferring AirBnB as a guest because of the uniqueness of the inventory, and enjoying it as a host because of the income it provides. But I admit that I have wondered: what would happen to a world where everybody — owner or renter — AirBnB’ed all the time? While AirBnB offers sublets, I assume short term rentals make up the vast majority of their transactions.* So what would happen if short-term rentals began to dominate the city-living landscape?

It seems as though the pessimistic case for a short-term rental dominated city-living-landscape simply raises housing prices. After all, the conventional wisdom is that renting a space by the day is better business than renting it out by the month. So, presumably, the price per day of any given unit will go up, until it hits a ceiling of “no longer competitive with hotels”. In this case, then, the hotels slowly empty out, and the ‘permanent residential area’ in cities turns into hotels, and the city starts to look like a museum — great to visit, but not much more (except for a very, very select few). And if only owners can rent out their properties, then presumably the ‘very, very select few’ are those owners, and inequality and stratification increases, in the name of some purported “efficiency”. This is, at least, the argument that the detractors and naysayers put forth. And its a compelling one.

But the reality is more nuanced for a few reasons. First, while AirBnB doesn’t necessarily endorse this, many** AirBnB hosts aren’t owners, but are renters themselves, and so they are ‘subleasing’ their properties. And under these circumstances, the economics get more complicated. If every renter can also ‘subrent’ property, then while the price/unit does go up, the revenue/renter also goes up for everybody. And presumably that doesn’t stratify and exclude nearly as much, right? 

Let’s take that thought to an extreme: I have heard of more and more people who have an ‘anchor’ sublet somewhere, but who spend a month in one city, a month in another, and another — and so on and so forth — subletting their anchor to different people for a month, or a week, or a day at a time. In a world where telecommuting, remote working, and ‘working from home’ are more common, does this not mean that while every city becomes a museum, every other city-dweller has a free museum pass? And if I don’t have the money to pay for flights to other cities, perhaps I downsize the apartment in the visiting city, or I visit a less expensive city, and use the excess revenue for travel? Sounds like a pretty fascinating life to me.

This type of reality, while exhausting for some, or biased towards the young, could be a way for people in cities all over to experience the world. But, if I’m understanding the math properly, it only seems possible if AirBnb is more open, not less, if municipalities, landlords, and leases are less restrictive, not more: if the balance of power leans further towards renters, rather than towards owners, right?

Making a city a museum might, on its face, seem like a way to kick people out. But, viewed another way, might represent a more mobile, dynamic future where individuals and families get more access to the world. Eager to hear your POV on this!

*Please correct me if I’m wrong!
** I suspect we’ll never know how many

Considering ‘value networks’

Recently read “The Medici Effect" which I thoroughly enjoyed. Got me thinking.

I worry that value networks aren’t as resilient in the long term. A value network is one that puts the primacy on certain types of values, e.g. “matriarchy” and “religion as the center of family” and “education and job security as the key to a happy life” and so on. They manifest in between the lines of our relationships, transferred psychically from generation to generation, through invisible cues from role models. They are often not intentionally considered, or even if they are, it is done silently, where the impact is more powerful, and participation is more instinctive and automatic. And they tie people together powerfully. Franz Johansson says in the book, your network is what will support you, provide you access to the most resources, provide you with backing in the case of failure, and generally be the tailwind of your career. He also points out, paradoxically, that “networks will promote, support, and highlight ideas that are valued with in it. And it squashes or removes ideas that are not.” This makes sense. After all, a network must strive for self-preservation, in and of itself.

In building a social product for web or mobile, a product designer must consider the set of values that associate with that particular experience, because if the community will start to become sticky and really work, it will be, in large part, because of the value network. In the early days of Twitter, it was very lightweight, and the interactions and behavior that became the most prominent on the site — from the retweet to the hashtag — emerged naturally from the community. Indeed, many platforms will see unexpected behaviors emerge from the community, but Twitter did something really smart in that moment — through the clients that they allowed to flourish — they encouraged that behavior, which suggested that new communication practices on the platform could and would be bottom-up. Now that there are fewer Twitter clients, the platform feels less ‘open’, when Marc Andreessen (and others) Started doing the numbering thing, people claimed that they were “breaking” Twitter. Says who? When the first person did a RT nobody claimed they were breaking twitter, did they? The platform had taken what was an open, experimental, a bit whimsical community, and let it settle into a set of practices which restricted and discouraged behavior that didn’t adhere to those practices. Alas.

As I think about investing, I think about value networks there, too. Looking back on the last dozen or so companies that we have invested in, the majority, with just a few exceptions, were tied to some sort of formal guild or incubator — AngelPad, YC, Techstars, Haxlr8r, et cetera. On the one hand, this is a very good thing for entrepreneurs and the startup community, because those entrepreneurs that have support systems and are organized will have an accelerative effect on each other. They will protect each other from forces outside their network, and they will balance nicely against the capital. But on the other hand, the whole point of transformative innovation is to rewrite rules and innovate in ways that break the mold. While the companies that come out of these value networks are in very different industries, and solve problems in very different ways, perhaps they all think about corporate structure and equity similarly, or about funding similarly, or about hiring similarly — and for true innovative products, shouldn’t those questions be fair game for scrutiny and imagination as well?

I noticed, while trying to sell my piano on Craigslist, that it is an incredibly resilient product, after all these years. My original assumption is that, duh, it’s a liquid marketplace — there are sellers, who attract buyers, who bring more sellers, and so on. Those are very defensible. But my friend Ted suggested that part of the magic on Craigstlist goes further, too: he called it an “open lifestyle marketplace” suggesting that the values that associate all participants on craigslist are dynamic, loose and allow for a lot of flexibility within the form. You can find *whatever* on Craigslist, and you can sell, suggest, and propose *whatever*. A lot of people feel ever-so-slightly uneasy on Craigslist because there is an element of chaos to a platform that is *so* open. But perhaps that’s kind of the magic of it.

Reaching the next 6 billion

Last week, a Forbes article made the news covering Ericsson’s prediction that within five years, there will be 5.9 billion smartphones. That is a truly incredible number, considering there were zero smartphones, to speak of, 8 years ago. But it got me thinking that there is an extraordinary opportunity for the next six billion, and the more I start to think about it, the more excited I am to be an investor. The information economy — and its application and services layer — is part of a tightening feedback loop, and the adoption curve starts to change. Imagine the yellow line to be smartphone adoption in the graph below.

image

When an exponential growth like this one curve covers only 15 years, less than a generation, as is the case with smartphones, there are some odd dynamics that come out of it. First of all, most applications, even the most viral, are on a more traditional adoption curve, spanning a longer time period than the 15 years that we’re seeing with smartphone penetration. As a result, the notion of an early adopter or laggard with respect to any given application is rather confusing. The leapfrog effect is real, and playing out in a couple of industries, as a result.

Over the weekend I thought that this taxonomy would be helpful in understanding the pathway by which the poor and the world’s very poor get access to the world’s resources through the internet. 

Power
First and foremost, access to electricity is the key to the information economy extending to the rest of the world. d.light design has done a wonderful job telling a story about low-cost solar, and angaza design is an exciting new organization that creates financing solutions for solar access. Innovative solutions for access to power will continue to involve solar, but also wind, geothermal, and frankly continuing to mine the oil and gas in the parts of the world where many of the world’s poor are concentrated.

Network

The cellular and internet service providers currently don’t reach the world’s rural and very rural populations, representing 35-50% of the world population (depending on whether you believe the World Bank or Facebook). The economics aren’t there for them, under their current models. Tazca* and a small handful of others like them have taken incredible Skype-like innovations and created last mile networking solutions that will extend the “edge of the network” to every rural cell phone in the world. Drones, low-altitude satellites, and balloons will make up whatever is left over. Facebook has done an incredible job of encouraging big and small companies alike to support this innovative pathway (for obvious reasons). Signals from Djibouti, the National Geographic photo of the year, tells this story.

Credit
Access to capital is one of the greatest challenges of a capitalist system, where the poor are systematically disadvantaged. You need access to information (about how to manage credit) to get access to capital, and you need access to capital to get access to information. Inventure* is breaking the cycle, and creating loan pathways through the mobile device that will allow people to finance cellphones, transportation, and myriad other basic services that give them access to the information economy.

Applications and Services
This is the layer everybody thinks about, but remember that any service can be global from the day it launches, and so thinking about how to attract micro-communities in east Africa, Patagonia, and India all at once represents a fresh set of challenges and opportunities that level the playing field. Fred Wilson’s app constellation idea requires an understanding of youth culture and internet communities that is frankly democratic. There is plenty of reason to think a startup can build an app constellation with as much success as Google, or Facebook.

If you’re a technology investor, you’re crazy not to be paying close attention to this. Peter Thiel said, in his class at Stanford, that there are two forms of progress: zero to 1, and 1 to n. “zero to 1” is vertical/intensive progress: it invents a technology that pushes “man” forward, like a moon landing algorithm, or synthetic biology innovation, et cetera. “1 to n” is horizontal/extensive progress, like putting a laptop in each child’s hand, or extending search technology around the world.

In each of these categories, the technology innovation (zero-to-1) is truly unique and exciting. The future of accounting and credit, adjusting for the explosion of data sets we have access to, the future of energy and power with advances in silicon-based photovoltaics, for low cost distribution, and the “edge of the network” questions, with point-to-point networking hardware and software are all tech. They are intensive and vertical, without a doubt. And with the growth rates that we are seeing with smartphone adoption, and the resulting taxonomy of growth opportunities for the bottom of the pyramid, it’s worth thinking about the fact that you can have “zero and 1” and your “1 to n” at once: you can have your cake and eat it, too!

*portfolio companies!

Community, Community, Community

This is becoming something of a trend for me, which I take to be a good sign for $TWTR: I posted a provocation that I had discussed with someone offline — I don’t remember where — and waited to see what conversation it would spark. I said:

The thinking behind this provocation came from a realization that the network effect seemed to apply particularly to ‘scaling’: that getting big fast, and staying big were two necessary features of it. And as an investor whose thesis weighs heavily on the assumptions around the network, getting big fast and staying big are obviously good things. But community seems different, no?

A community reminds me of the fable of Goldilocks and The Three Bears: my wife and I do not, alone, make a community — too small. The 30 people who live in our apartment do not make a community — too random. The 10,000 people who graduated from our college don’t make a community — too big. It seems there is a unique affinity level, size, and density that is the special recipe to make community. And if a network just grows big and stays big (particularly if its growth and size are a big part of its value), then surely networks break communities, right? 

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Sarah Judd Welch, founder of Loyal, an agency focused on helping communities flourish, jumped in on the thread, and indulged me in a very interesting conversation:

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I thought Sarah’s answer was great, and her later point about the Catholic community hit home very nicely for me. A Catholic only really knows the people in her parish — and even then, only a segment of them. She not only shares faith traditions with them, but also the fabric and minutiae of their daily lives, by virtue of being near each other. That isn’t to say that the greater Catholic community isn’t a community. After all, should I go to a church in another city, I could still do what I would do in my home church and be accepted, whether or not I knew anybody. Same goes for the other ‘scaled communities’ Sarah references. In fact, one of my favorite things about Lyft and Uber driver communities is that a driver can just turn the app on, and so once they are part of that network, they don’t need to get a new job every time they go to a new city.

But my question is this: if communities must fragment at scale, which is where I netted out after this discussion, then there is necessary tension between community and network effects, right? So is the only way to resolve it to intentionally break networks into smaller, denser, affinity groups as they grow, to ensure that the magic of community remains intact? After all, as Facebook has demonstrated, the magic isn’t something that will always happen naturally, but needs to be instrumented with conscious product decisions, and ways for people to create the more local segmentation. Even within the Catholic parish, to go back to that example, there is CCD, and the young couples group, and so forth.

While I feel like I’m part of a “tech community” and even a “venture community”, it is also madly amorphous and really I’m only in community with a small group of people within that community — most of it is geographic, but thanks to Twitter (again) that is less true — and I sometimes I actually feel very little affinity to the greater community.

This nuance is nowhere more stark than in my upcoming move to New York. While I imagine I will be embraced, and I’m incredibly grateful to the people who have already reached out offering to hang and to be friends, I also can’t help but wonder if I’ll have search to find my local ‘parish’, where I’ll be in community, just the way I like it.