I wanted to save this article by Robert Frank, a Cornell economist because I thought it introduced an new economic concept for me: the application of Darwin's survival of the fittest to explain the mechanism that drove the excessive leverage, despite Adam Smith's invisible hand. His main point is that Adam Smith's invisible hand is but one outcome from a spectrum of outcomes that are overall driven by Darwin's survival of the fittest. Smith's outcome is the happy one, where individual self-interest benefits the whole community. However, Darwin considered cases where individual self-interest actually could be detrimental to the whole community. Such possible outcomes form the rationale for enacting regulation.
July 12, 2009
Economic View
The Invisible Hand, Trumped by Darwin?
By ROBERT H. FRANK
IF asked to identify the intellectual founder of their discipline, most economists today would probably cite Adam Smith. But that will change. Economists’ forecasts generally aren’t worth much, but I’ll offer one that even my youngest colleagues won’t survive to refute: If we posed the same question 100 years from now, most economists would instead cite Charles Darwin.
Darwin, renowned for the theory of evolution, was a naturalist, not an economist, and his view of the competitive struggle was different from Smith’s in subtle but profound ways. Growing evidence suggests that Darwin’s view tracks economic reality much more closely.
Smith is celebrated for his “invisible hand” theory, which holds that when greedy people trade for their own advantage in unfettered private markets, they will often be led, as if by an invisible hand, to produce the greatest good for all. The invisible hand remains a powerful narrative, but after the recent economic wreckage, skepticism about it has grown. My prediction is that it will eventually be supplanted by a version of Darwin’s more general narrative — one that grants the invisible hand its due, but also strips it of the sweeping powers that many now ascribe to it.
Smith’s basic idea was that business owners seeking to lure customers away from rivals have powerful incentives to introduce improved product designs and cost-saving innovations. These moves bolster innovators’ profits in the short term. But rivals respond by adopting the same innovations, and the resulting competition gradually drives down prices and profits. In the end, Smith argued, consumers reap all the gains.
The central theme of Darwin’s narrative was that competition favors traits and behavior according to how they affect the success of individuals, not species or other groups. As in Smith’s account, traits that enhance individual fitness sometimes promote group interests. For example, a mutation for keener eyesight in hawks benefits not only any individual hawk that bears it, but also makes hawks more likely to prosper as a species.
In other cases, however, traits that help individuals are harmful to larger groups. For instance, a mutation for larger antlers served the reproductive interests of an individual male elk, because it helped him prevail in battles with other males for access to mates. But as this mutation spread, it started an arms race that made life more hazardous for male elk over all. The antlers of male elk can now span five feet or more. And despite their utility in battle, they often become a fatal handicap when predators pursue males into dense woods.
In Darwin’s framework, then, Adam Smith’s invisible hand survives as an interesting special case. Competition, to be sure, sometimes guides individual behavior in ways that benefit society as a whole. But not always.
Individual and group interests are almost always in conflict when rewards to individuals depend on relative performance, as in the antlers arms race. In the marketplace, such reward structures are the rule, not the exception. The income of investment managers, for example, depends mainly on the amount of money they manage, which in turn depends largely on their funds’ relative performance.
Relative performance affects many other rewards in contemporary life. For example, it determines which parents can send their children to good public schools. Because such schools are typically in more expensive neighborhoods, parents who want to send their children to them must outbid others for houses in those neighborhoods.
In cases like these, relative incentive structures undermine the invisible hand. To make their funds more attractive to investors, money managers create complex securities that impose serious, if often well-camouflaged, risks on society. But when all managers take such steps, they are mutually offsetting. No one benefits, yet the risk of financial crises rises sharply.
Similarly, to earn extra money for houses in better school districts, parents often work longer hours or accept jobs entailing greater safety risks. Such steps may seem compelling to an individual family, but when all families take them, they serve only to bid up housing prices. As before, only half of all children will attend top-half schools.
It’s the same with athletes who take anabolic steroids. Individual athletes who take them may perform better in absolute terms. But these drugs also entail serious long-term health risks, and when everyone takes them, no one gains an edge.
If male elk could vote to scale back their antlers by half, they would have compelling reasons for doing so, because only relative antler size matters. Of course, they have no means to enact such regulations.
But humans can and do. By calling our attention to the conflict between individual and group interest, Darwin has identified the rationale for much of the regulation we observe in modern societies — including steroid bans in sports, safety and hours regulation in the workplace, product safety standards and the myriad restrictions typically imposed on the financial sector.
Ideas have consequences. The uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts to reconcile conflicts between individual and collective interests in recent decades, causing considerable harm to us all. If, as Darwin suggested, many important aspects of life are graded on the curve, his insights may help us avoid stumbling down that grim path once again.
The competitive forces that mold business behavior are like the forces of natural selection that molded elk. In each case, we see instances of socially benign conduct. But in neither can we safely presume that individual and social interests coincide.
Robert H. Frank, an economist at Cornell, is a visiting faculty member at the Stern School of Business at New York University.
Saturday, July 18, 2009
Friday, June 5, 2009
Bezos on doing what you should do vs can do
I liked this Bezos quote in the recent Kindle DX article in Forbes:
Most companies pursue linear growth, taking stock of competencies and
determining where those skills might also apply. Tangential growth usually comes
via acquisition. Doing it organically, the way Amazon favors, requires both
vision and discipline. Bezos says it's the difference between doing what you can
do and doing what you should do.
Most companies pursue linear growth, taking stock of competencies and
determining where those skills might also apply. Tangential growth usually comes
via acquisition. Doing it organically, the way Amazon favors, requires both
vision and discipline. Bezos says it's the difference between doing what you can
do and doing what you should do.
"You can always do what you should do if you're willing to put in the time
and energy to develop a new set of skills," he says. "If you only
extend into places where your skill sets serve you, your skills will become
outmoded."
Saturday, October 25, 2008
Joyo competitors
From Todd Edebohls:
18900.com
800buy.com
99Read, 99读书网
Bertelsmann, 贝塔斯曼
Bookuu.com, 博库网 (Zhejiang Xinhua's online bookstore) cnave.com 中国音像商务网
DangDang, 当当网
Eachnet 易趣
eGuo, e 国
http://bookcity.dayoo.com/books/default.aspx 大洋网
Leyou （乐友）
Lijia Baby （丽嘉宝贝）
Lusen.com.cn
M18.com
No 5
Redbaby （红孩子）
Sina.com
Sohu store, 搜狐商城
Taobao 淘宝网
tigercool.com
welan.com, 蔚蓝书店
Yaolan （摇篮）
18900.com
800buy.com
99Read, 99读书网
Bertelsmann, 贝塔斯曼
Bookuu.com, 博库网 (Zhejiang Xinhua's online bookstore) cnave.com 中国音像商务网
DangDang, 当当网
Eachnet 易趣
eGuo, e 国
http://bookcity.dayoo.com/books/default.aspx 大洋网
Leyou （乐友）
Lijia Baby （丽嘉宝贝）
Lusen.com.cn
M18.com
No 5
Redbaby （红孩子）
Sina.com
Sohu store, 搜狐商城
Taobao 淘宝网
tigercool.com
welan.com, 蔚蓝书店
Yaolan （摇篮）
board member compensation
Rich and Peter weighing in on fees paid to directors on boards:
Peter:
Steve see below personally I think the 4-5 year vest seems long depends on stage of co- I would also think .4 is on the low end.
from Rasmussen, Erik erikr@safeguard.com:
Q:What's typical comp for an independent bod member- equity/cash if any and vest on the equity- finally assuming is common stock.
A: 0.4% of co in common stock. Vests over 4 or 5 years. No cash.
Rich:
Q: A friend of mine at Amazon is considering joining the board of a startup and wanted some advice on how startups generally compensate board members for their service. This startup has been self-funded and it is not clear whether the founder is interested in raising VC money. It is also not clear whether the founder intends to grow the company with the goal of a liquidity event (M&A or IPO) down the road or to operate the> company as a closely-held business indefinitely.
In my experience, I've seen startups grant options to non-employee and non-investor board members. In such cases, what % of the company is common and under what vesting schedule? Are options typically granted for each year of service as a board member? How common are annual cash payments? Are there any other forms of compensation that come> to mind?
A: Stock is the only thing I have seen start-up Boardmembers receive (plus reimbursement of expenses).The vesting is usually 3-4 years (with acceleration upon a change of control). I haven't seen more than1/2% for a board member (and that was for a real star). I haven't seen cash payments in private company world (only public). That being said, if this isn't the traditional start-up and may remain closely held forever, I think cash payments may be appropriate(10-20K year seems about right for a private company).
Peter:
Steve see below personally I think the 4-5 year vest seems long depends on stage of co- I would also think .4 is on the low end.
from Rasmussen, Erik erikr@safeguard.com:
Q:What's typical comp for an independent bod member- equity/cash if any and vest on the equity- finally assuming is common stock.
A: 0.4% of co in common stock. Vests over 4 or 5 years. No cash.
Rich:
Q: A friend of mine at Amazon is considering joining the board of a startup and wanted some advice on how startups generally compensate board members for their service. This startup has been self-funded and it is not clear whether the founder is interested in raising VC money. It is also not clear whether the founder intends to grow the company with the goal of a liquidity event (M&A or IPO) down the road or to operate the> company as a closely-held business indefinitely.
In my experience, I've seen startups grant options to non-employee and non-investor board members. In such cases, what % of the company is common and under what vesting schedule? Are options typically granted for each year of service as a board member? How common are annual cash payments? Are there any other forms of compensation that come> to mind?
A: Stock is the only thing I have seen start-up Boardmembers receive (plus reimbursement of expenses).The vesting is usually 3-4 years (with acceleration upon a change of control). I haven't seen more than1/2% for a board member (and that was for a real star). I haven't seen cash payments in private company world (only public). That being said, if this isn't the traditional start-up and may remain closely held forever, I think cash payments may be appropriate(10-20K year seems about right for a private company).
Finders Fees for Private Equity Deals
This is the text of an email that someone on the CBS alum list sent out after receiving a bunch of userful responses to a question he sent:
Several people have asked me to share the replies I received on what typical finders fees were for private equity deals. The feedback was numerous and very helpful. The CBS network is a great resource, and many thanks go to those who responded.
Caveat – I have grouped the many email responses in what I hope will be a logical and useful way, but raising venture capital equity is not my day job. All quotes are direct quotes from emails; in some cases emails have been split into multiple sections if more than one topic was being addressed.
In what capacity are you acting?
Advisor
“If all you are doing is simply introducing one friend or acquaintance to another, and you aren't acting in a formal capacity to market the deal, I’d probably ask for stock or warrants equal to about 2-3% of the amount invested by the people you ‘find’ for them.”
“This really depends on the industry, type of equity that they'll likely get (east vs west coast), etc. No standard here, but if the startup gave you a few % (in shares, not cash) of the cash that you find for them, that's not bad.”
“A better approach might be to ask to become an advisor and to ask to receive some options as compensation. Depending on the stage of the company you might as for anywhere between 0.2% - 0.5% but it's not unheard of to ask for 0.75% if it's very early.”
“Sometimes advisors are given warrants and said advisors help connect the company with investors (among other things). Other times investment banks will take a percentage of the financing if they in fact are able to get the company funded, so I don't see why individuals couldn't do it as well. However, I think you have to be registered as a broker/dealer if you're going to go that route since you'd be in effect offering securities. I'd guess an advisor would get no more than 1% of the fully diluted equity (and I imagine it would be a fraction of that).”
“Finders fees for startups, as far as I know, however, are not very common. It is more a matter of what comes around goes around, and the people that you helped may introduce you to someone that can help you, and so on, and so on, and so on. So I would not be too disappointed if you do not get a fee.”
“You will be lucky to get any fee--surprising how little room there is for fees in deals when you aren’t licensed, and when you are dealing with household name financial enterprises that everyone ‘knows’”
***NOTE***
“There are also various licenses, etc. (NASD/SEC related) that are required to raise money.”
“Finding equity, which is a securities transaction, is an activity regulated by state and federal laws which require one to be a registered representative. This means one needs to become a member of a registered broker dealer and pass several examinations to become registered under the industry regulatory body known as FINRA. If one is not a registered rep. and one still tries to raise the funds, one is running a serious personal liability for serious civil and or penal penalties. Years ago, one could quietly serve as a "money finder" without being registered so long as the raise was small, less than a few million, infrequent, the funding came from qualified investors and the finder was paid as a financial consultant. This is no longer the case; things have been tightened up considerably.”
“Technically you need to be a broker dealer in order to be able to collect a finders fee. Companies frequently ignore this rule but it is illegal and can get the company into trouble. Importantly, these types of arrangements will likely turn off any credible VC.”
A HOW TO EXAMPLE
“Ask for $250,000 and you might get $50,000. A percentage won’t fly—that’s one nexus of determining if you are providing the kind of services for which you need to be licensed. You must be treated as a consultant or advisor, and must be paid a success based consulting fee or a success based advisory fee, in a fixed dollar amount.
“Make sure you have a blue ink on white paper contract (not an email) and a lawyer (they can pay for the lawyer). Also make sure that your contract specifically says that (1) the company (or whomever is paying you) knows that you aren’t a licensed broker dealer, AND (2) that the fee will be paid at closing from first closing proceeds AND (3) that the agreement constitutes a lien over proceeds. Plus you need a standard indemnity and so forth.
“Finders fees work better, and get paid more often, when you turn up a deal/ acquisition/ investment idea rather than a financing source. But get your contract and give it a whirl.”
Banker or licensed broker/dealer
“… A typical banker fee on an equity raise is 6% of the amount raised plus 2% warrant coverage. Depending on what exactly your role is in the transaction below you can scale the fee accordingly.”
“If you were a banker placing the deal, then 5-7% plus warrants or stock would be standard compensation.”
Size of the transaction
Small
“In the deals I've done (with small public companies) it was 6% of the raise cash with 6% warrant coverage as a start.”
Large
“For larger private equity transactions (US$100-500 million) the fees range from a low of 1% to a high of about 2% and the fee is typically cash at closing.”
Stage of the business
Startup/Angel
“For startup stage, I have no personal experience, but I've heard that up to 10% is acceptable, and can be structured in combinations of cash and equity depending on many factors.”
“I was recently trying to source money, and agreed to 5% of funding sourced plus 5% of the shares of equity/membership purchased by the funding. This was for an angel round, so could be a little rich.”
“Broker dealers that work the small equity market covering start ups typically charge a success based fee paid at the first closing of 8% of the raise to be paid in cash and nominal price warrants for 8% of the stock. In this very tough market, if a broker will take the job, 9 plus 9 is a bargain.”
VC rounds
“Personally, I would never pay a finders fee for venture capital. On the other hand, I have invited people to be advisors and board members if I thought their long term association with the company would be beneficial and, in particular, beneficial for raising money through their connections. Those people have received stock options and/or warrants from about 0.25% to 1.0%.
“I think warrants and options are a far better way to go with this kind of thing. No VC wants to see a percentage of the money they invest in a company siphoned off to pay prior debt obligations.”
Alignment of interests
“As far as I am aware, funders will accept a small amount of equity, but are typically reticent to pay a finder's fee in cash, because at that point in a company's development, the company needs cash and it would be counterproductive to divert any to an advisor. There is also a put your money where you mouth is attitude that you should be happy to accept some equity in lieu of cash if the company is as good as you would represent it to be.
In terms of benefit to YOU, if the funders require a different class of share from common (i.e. convertible preferred shares), the best deal you could get would be to be given equity in the preferred share class and not common. This serves two purposes. 1) It perfectly aligns interests between you and the funders, because you both enter at the same share price and with the same rights and preferences and 2) the economics are better for you. Having more preferred shares issued instead of common, of course, is to the detriment of the company and its founders.”
The Lehman Formula
http://www.businessdictionary.com/definition/Lehman-formula.html
Amount raised Fee (%) Fee ($)
≤ $1M 5% $50,000
>1M to ≤ $2M 4% $40,000
>2M to ≤ $3M 3% $30,000
>3M to ≤ $4M 2% $20,000
>4M 1% $10,000
“Use the Lehman's scale for cash compensation. For purely stock, double the Lehman's formula. For a combo, use 1.5x.”
“I have done a few of those at both ends, once as a startup and twice as a finder. I can tell you one thing, the days of the standard Lehman formula are over. Today, the minimum is 10% where 5-7 is cash and the rest is in shares that are granted to you under the same conditions as the investor (preferred shares), the basic rule is that you should be able to make this as flexible as you can. If you truly believe in the idea then you might want more shares. If on the other hand you have your doubts... cash is king.”
International
Fee examples
Several people have asked me to share the replies I received on what typical finders fees were for private equity deals. The feedback was numerous and very helpful. The CBS network is a great resource, and many thanks go to those who responded.
Caveat – I have grouped the many email responses in what I hope will be a logical and useful way, but raising venture capital equity is not my day job. All quotes are direct quotes from emails; in some cases emails have been split into multiple sections if more than one topic was being addressed.
In what capacity are you acting?
Advisor
“If all you are doing is simply introducing one friend or acquaintance to another, and you aren't acting in a formal capacity to market the deal, I’d probably ask for stock or warrants equal to about 2-3% of the amount invested by the people you ‘find’ for them.”
“This really depends on the industry, type of equity that they'll likely get (east vs west coast), etc. No standard here, but if the startup gave you a few % (in shares, not cash) of the cash that you find for them, that's not bad.”
“A better approach might be to ask to become an advisor and to ask to receive some options as compensation. Depending on the stage of the company you might as for anywhere between 0.2% - 0.5% but it's not unheard of to ask for 0.75% if it's very early.”
“Sometimes advisors are given warrants and said advisors help connect the company with investors (among other things). Other times investment banks will take a percentage of the financing if they in fact are able to get the company funded, so I don't see why individuals couldn't do it as well. However, I think you have to be registered as a broker/dealer if you're going to go that route since you'd be in effect offering securities. I'd guess an advisor would get no more than 1% of the fully diluted equity (and I imagine it would be a fraction of that).”
“Finders fees for startups, as far as I know, however, are not very common. It is more a matter of what comes around goes around, and the people that you helped may introduce you to someone that can help you, and so on, and so on, and so on. So I would not be too disappointed if you do not get a fee.”
“You will be lucky to get any fee--surprising how little room there is for fees in deals when you aren’t licensed, and when you are dealing with household name financial enterprises that everyone ‘knows’”
***NOTE***
“There are also various licenses, etc. (NASD/SEC related) that are required to raise money.”
“Finding equity, which is a securities transaction, is an activity regulated by state and federal laws which require one to be a registered representative. This means one needs to become a member of a registered broker dealer and pass several examinations to become registered under the industry regulatory body known as FINRA. If one is not a registered rep. and one still tries to raise the funds, one is running a serious personal liability for serious civil and or penal penalties. Years ago, one could quietly serve as a "money finder" without being registered so long as the raise was small, less than a few million, infrequent, the funding came from qualified investors and the finder was paid as a financial consultant. This is no longer the case; things have been tightened up considerably.”
“Technically you need to be a broker dealer in order to be able to collect a finders fee. Companies frequently ignore this rule but it is illegal and can get the company into trouble. Importantly, these types of arrangements will likely turn off any credible VC.”
A HOW TO EXAMPLE
“Ask for $250,000 and you might get $50,000. A percentage won’t fly—that’s one nexus of determining if you are providing the kind of services for which you need to be licensed. You must be treated as a consultant or advisor, and must be paid a success based consulting fee or a success based advisory fee, in a fixed dollar amount.
“Make sure you have a blue ink on white paper contract (not an email) and a lawyer (they can pay for the lawyer). Also make sure that your contract specifically says that (1) the company (or whomever is paying you) knows that you aren’t a licensed broker dealer, AND (2) that the fee will be paid at closing from first closing proceeds AND (3) that the agreement constitutes a lien over proceeds. Plus you need a standard indemnity and so forth.
“Finders fees work better, and get paid more often, when you turn up a deal/ acquisition/ investment idea rather than a financing source. But get your contract and give it a whirl.”
Banker or licensed broker/dealer
“… A typical banker fee on an equity raise is 6% of the amount raised plus 2% warrant coverage. Depending on what exactly your role is in the transaction below you can scale the fee accordingly.”
“If you were a banker placing the deal, then 5-7% plus warrants or stock would be standard compensation.”
Size of the transaction
Small
“In the deals I've done (with small public companies) it was 6% of the raise cash with 6% warrant coverage as a start.”
Large
“For larger private equity transactions (US$100-500 million) the fees range from a low of 1% to a high of about 2% and the fee is typically cash at closing.”
Stage of the business
Startup/Angel
“For startup stage, I have no personal experience, but I've heard that up to 10% is acceptable, and can be structured in combinations of cash and equity depending on many factors.”
“I was recently trying to source money, and agreed to 5% of funding sourced plus 5% of the shares of equity/membership purchased by the funding. This was for an angel round, so could be a little rich.”
“Broker dealers that work the small equity market covering start ups typically charge a success based fee paid at the first closing of 8% of the raise to be paid in cash and nominal price warrants for 8% of the stock. In this very tough market, if a broker will take the job, 9 plus 9 is a bargain.”
VC rounds
“Personally, I would never pay a finders fee for venture capital. On the other hand, I have invited people to be advisors and board members if I thought their long term association with the company would be beneficial and, in particular, beneficial for raising money through their connections. Those people have received stock options and/or warrants from about 0.25% to 1.0%.
“I think warrants and options are a far better way to go with this kind of thing. No VC wants to see a percentage of the money they invest in a company siphoned off to pay prior debt obligations.”
Alignment of interests
“As far as I am aware, funders will accept a small amount of equity, but are typically reticent to pay a finder's fee in cash, because at that point in a company's development, the company needs cash and it would be counterproductive to divert any to an advisor. There is also a put your money where you mouth is attitude that you should be happy to accept some equity in lieu of cash if the company is as good as you would represent it to be.
In terms of benefit to YOU, if the funders require a different class of share from common (i.e. convertible preferred shares), the best deal you could get would be to be given equity in the preferred share class and not common. This serves two purposes. 1) It perfectly aligns interests between you and the funders, because you both enter at the same share price and with the same rights and preferences and 2) the economics are better for you. Having more preferred shares issued instead of common, of course, is to the detriment of the company and its founders.”
The Lehman Formula
http://www.businessdictionary.com/definition/Lehman-formula.html
Amount raised Fee (%) Fee ($)
≤ $1M 5% $50,000
>1M to ≤ $2M 4% $40,000
>2M to ≤ $3M 3% $30,000
>3M to ≤ $4M 2% $20,000
>4M 1% $10,000
“Use the Lehman's scale for cash compensation. For purely stock, double the Lehman's formula. For a combo, use 1.5x.”
“I have done a few of those at both ends, once as a startup and twice as a finder. I can tell you one thing, the days of the standard Lehman formula are over. Today, the minimum is 10% where 5-7 is cash and the rest is in shares that are granted to you under the same conditions as the investor (preferred shares), the basic rule is that you should be able to make this as flexible as you can. If you truly believe in the idea then you might want more shares. If on the other hand you have your doubts... cash is king.”
International
- “In Europe, it is 1-2% of the amount invested, paid either in cash or in equity.”
- “We are actively raising money for a couple projects now and have retained several fundraising firms in the UK on a non-exclusive, success-only basis. For any funds closed (that they sourced) they get 5% plus 3% warrants in the company/project plus some fees reimbursed (like if we ask them to travel with us to pitch to an investor they sourced).”
Fee examples
- “Usually 1-2% of money raised”
- “0.5 to 1.0% for an introduction. Could be as high as 5 to 7% if you are more involved in closing the deal.”
- “50bps to 300bps depending on level of service, track record, size of account, etc.”
- “Anywhere from 2% to 7% of the fundraise paid in cash or equity is reasonable. Higher percentage given to fundraisers who run a full process, participate in pitch, negotiate docs, etc.”
- “3-4%. Possibly 2% after the 2M mark”
- “5-6% cash fee on equity raised and 3-4% warrant coverage”
- “3-6%, sometimes up to 10% for small raises along with potential retainers per month......”
- “0.5% to 2% of principal, depending on value added/ role taken... you can also ask for some carry if you're bringing in an early or major investor.”
- “Standard fees are 10% of the money raised. However, fess can go to 15% and may include a 5% equity kicker, depending on the circumstances.”
- “It's generally 1% - 2.5% of funds raised; the percentage will usually vary depending on the amount of work done (i.e. helping to negotiate more attractive investment terms, etc.) by the organization that found the deal.”
- “we pay 2% for finding capital for our fund, which is subsequently used to fund private equity deals”
- “0.5 to 1.0% for an introduction. Could be as high as 5 to 7% if you are more involved in closing the deal”
- “1% to 2% of the amount that you help raise is standard.”
Tuesday, June 24, 2008
You Can't Predict Who Will Change The World
[this article by Nassim Taleb published in Forbes]
Before the discovery of Australia, Europeans thought that all swans were white, and it would have been considered completely unreasonable to imagine swans of any other color. The first sighting of a black swan in Australia, where black swans are, in fact, rather common, shattered that notion. The moral of this story is that there are exceptions out there, hidden away from our eyes and imagination, waiting to be discovered by complete accident. What I call a "Black Swan" is an exceptional unpredictable event that, unlike the bird, carries a huge impact.
It's impossible for the editors of Forbes.com to predict who will change the world, because major changes are Black Swans, the result of accidents and luck. But we do know who society's winners will be: those who are prepared to face Black Swans, to be exposed to them, to recognize them when they show up and to rigorously exploit them.
Things, it turns out, are all too often discovered by accident--but we don't see that when we look at history in our rear-view mirrors. The technologies that run the world today (like the Internet, the computer and the laser) are not used in the way intended by those who invented them. Even academics are starting to realize that a considerable component of medical discovery comes from the fringes, where people find what they are not exactly looking for. It is not just that hypertension drugs led to Viagra or that angiogenesis drugs led to the treatment of macular degeneration, but that even discoveries we claim come from research are themselves highly accidental. They are the result of undirected tinkering narrated after the fact, when it is dressed up as controlled research. The high rate of failure in scientific research should be sufficient to convince us of the lack of effectiveness in its design.
If the success rate of directed research is very low, though, it is true that the more we search, the more likely we are to find things "by accident," outside the original plan. Only a disproportionately minute number of discoveries traditionally came from directed academic research. What academia seems more masterful at is public relations and fundraising.
This is good news--for some. Ignore what you were told by your college economics professor and consider the following puzzle. Whenever you hear a snotty European presenting his stereotypes about Americans, he will often describe them as "unintellectual," "uneducated," and "poor in math," because, unlike European schooling, American education is not based on equation drills and memorization.
Yet the person making these statements will likely be addicted to his iPod, wearing a T-shirt and blue jeans, and using Microsoft Word to jot down his "cultural" statements on his Intel-based PC, with some Google searches on the Internet here and there interrupting his composition. If old enough, he might also be using Viagra.
America's primary export, it appears, is trial-and-error, and the innovative knowledge attained in such a way. Trial-and-error has error in it; and most top-down traditional rational and academic environments do not like the fallibility of "error" and the embarrassment of not quite knowing where they're going. The U.S. fosters entrepreneurs and creators, not exam-takers, bureaucrats or, worse, deluded economists. So the perceived weakness of the American pupil in conventional studies is where his or her very strength may lie. The American system of trial and error produces doers: Black Swan-hunting, dream-chasing entrepreneurs, with a tolerance for a certain class of risk-taking and for making plenty of small errors on the road to success or knowledge. This environment also attracts aggressive tinkering foreigners like this author.
Globalization allowed the U.S. to specialize in the creative aspect of things, the risk-taking production of concepts and ideas--that is, the scalable part of production, in which more income can be generated from the same fixed assets through innovation. By exporting jobs, the U.S. has outsourced the less scalable and more linear components of production, assigning them to the citizens of more mathematical and culturally rigid states, who are happy to be paid by the hour to work on other people's ideas.
Let us go one step further. It is high time to recognize that we humans are far better at doing than understanding, and better at tinkering than inventing. But we don't know it. We truly live under the illusion of order believing that planning and forecasting are possible. We are scared of the random, yet we live from its fruits. We are so scared of the random that we create disciplines that try to make sense of the past--but we ultimately fail to understand it, just as we fail to see the future.
The current discourse in economics, for example, is antiquated. American undirected free-enterprise works because it aggressively allows us to capture the randomness of the environment--the cheap Black Swans. This works not just because of competition, and even less because of material incentives. Neither the followers of Adam Smith nor those of Karl Marx seem to be conscious of the prevalence and effect of wild randomness. They are too bathed in enlightenment-style cause-and-effect and cannot accept that skills and payoffs may have nothing to do with one another. Nor can they swallow the argument that it is not necessarily the better technology that wins, but rather, the luckiest one. And, sadly, even those who accept this fundamental uncertainty often fail to see that it is a good thing.
Random tinkering is the path to success. And fortunately, we are increasingly learning to practice it without knowing it--thanks to overconfident entrepreneurs, naive investors, greedy investment bankers, confused scientists and aggressive venture capitalists brought together by the free-market system.
We need more tinkering: Uninhibited, aggressive, proud tinkering. We need to make our own luck. We can be scared and worried about the future, or we can look at it as a collection of happy surprises that lie outside the path of our imagination.
Nassim Nicholas Taleb is an applied statistician and derivatives trader-turned-philosopher, and author of The Black Swan: The Impact of the Highly Improbable.
Before the discovery of Australia, Europeans thought that all swans were white, and it would have been considered completely unreasonable to imagine swans of any other color. The first sighting of a black swan in Australia, where black swans are, in fact, rather common, shattered that notion. The moral of this story is that there are exceptions out there, hidden away from our eyes and imagination, waiting to be discovered by complete accident. What I call a "Black Swan" is an exceptional unpredictable event that, unlike the bird, carries a huge impact.
It's impossible for the editors of Forbes.com to predict who will change the world, because major changes are Black Swans, the result of accidents and luck. But we do know who society's winners will be: those who are prepared to face Black Swans, to be exposed to them, to recognize them when they show up and to rigorously exploit them.
Things, it turns out, are all too often discovered by accident--but we don't see that when we look at history in our rear-view mirrors. The technologies that run the world today (like the Internet, the computer and the laser) are not used in the way intended by those who invented them. Even academics are starting to realize that a considerable component of medical discovery comes from the fringes, where people find what they are not exactly looking for. It is not just that hypertension drugs led to Viagra or that angiogenesis drugs led to the treatment of macular degeneration, but that even discoveries we claim come from research are themselves highly accidental. They are the result of undirected tinkering narrated after the fact, when it is dressed up as controlled research. The high rate of failure in scientific research should be sufficient to convince us of the lack of effectiveness in its design.
If the success rate of directed research is very low, though, it is true that the more we search, the more likely we are to find things "by accident," outside the original plan. Only a disproportionately minute number of discoveries traditionally came from directed academic research. What academia seems more masterful at is public relations and fundraising.
This is good news--for some. Ignore what you were told by your college economics professor and consider the following puzzle. Whenever you hear a snotty European presenting his stereotypes about Americans, he will often describe them as "unintellectual," "uneducated," and "poor in math," because, unlike European schooling, American education is not based on equation drills and memorization.
Yet the person making these statements will likely be addicted to his iPod, wearing a T-shirt and blue jeans, and using Microsoft Word to jot down his "cultural" statements on his Intel-based PC, with some Google searches on the Internet here and there interrupting his composition. If old enough, he might also be using Viagra.
America's primary export, it appears, is trial-and-error, and the innovative knowledge attained in such a way. Trial-and-error has error in it; and most top-down traditional rational and academic environments do not like the fallibility of "error" and the embarrassment of not quite knowing where they're going. The U.S. fosters entrepreneurs and creators, not exam-takers, bureaucrats or, worse, deluded economists. So the perceived weakness of the American pupil in conventional studies is where his or her very strength may lie. The American system of trial and error produces doers: Black Swan-hunting, dream-chasing entrepreneurs, with a tolerance for a certain class of risk-taking and for making plenty of small errors on the road to success or knowledge. This environment also attracts aggressive tinkering foreigners like this author.
Globalization allowed the U.S. to specialize in the creative aspect of things, the risk-taking production of concepts and ideas--that is, the scalable part of production, in which more income can be generated from the same fixed assets through innovation. By exporting jobs, the U.S. has outsourced the less scalable and more linear components of production, assigning them to the citizens of more mathematical and culturally rigid states, who are happy to be paid by the hour to work on other people's ideas.
Let us go one step further. It is high time to recognize that we humans are far better at doing than understanding, and better at tinkering than inventing. But we don't know it. We truly live under the illusion of order believing that planning and forecasting are possible. We are scared of the random, yet we live from its fruits. We are so scared of the random that we create disciplines that try to make sense of the past--but we ultimately fail to understand it, just as we fail to see the future.
The current discourse in economics, for example, is antiquated. American undirected free-enterprise works because it aggressively allows us to capture the randomness of the environment--the cheap Black Swans. This works not just because of competition, and even less because of material incentives. Neither the followers of Adam Smith nor those of Karl Marx seem to be conscious of the prevalence and effect of wild randomness. They are too bathed in enlightenment-style cause-and-effect and cannot accept that skills and payoffs may have nothing to do with one another. Nor can they swallow the argument that it is not necessarily the better technology that wins, but rather, the luckiest one. And, sadly, even those who accept this fundamental uncertainty often fail to see that it is a good thing.
Random tinkering is the path to success. And fortunately, we are increasingly learning to practice it without knowing it--thanks to overconfident entrepreneurs, naive investors, greedy investment bankers, confused scientists and aggressive venture capitalists brought together by the free-market system.
We need more tinkering: Uninhibited, aggressive, proud tinkering. We need to make our own luck. We can be scared and worried about the future, or we can look at it as a collection of happy surprises that lie outside the path of our imagination.
Nassim Nicholas Taleb is an applied statistician and derivatives trader-turned-philosopher, and author of The Black Swan: The Impact of the Highly Improbable.
Monday, June 16, 2008
Kaboose and US Autoparts - Pass
Reviewed US Autoparts and Kaboose today, both are passes.
US Autoparts is a pass because:
1. Poor operating metrics - management has missed guidance two quarters in a row and inventory is increasing faster than sales
2. Poor visibility - it's not clear how it's growing its top line due to obfuscation with the acquisition of Partsbin.
3. Management? - Not clear how Shane Evangelist (a superstar at Blockbuster) will translate to managing autoparts. Seems this is a block-and-tackle job at this point.
Kaboose is a pass because:
1. Really low traffic: Kaboose, the flagship site had 1.5MM uniques, down from a year prior. They spent $140mm acquiring Bounty, a UK site, that had 153K uniques in Apr 08 (per Nielsen UK).
2. Stiff competition: Babyzone (600K uniques) will be going up against Babycenter (2.7mm uniques with higher nearly twice as many pv's per unique), J&J's website.
I don't feel Kaboose has take-out potential, like CNET and Greenfield had. CNET is a bellweather with unquestionably solid traffic, though their forward growth was hazy. Greenfield at the Ciao asset with 50% yoy comp shop growth. Kaboose?
US Autoparts is a pass because:
1. Poor operating metrics - management has missed guidance two quarters in a row and inventory is increasing faster than sales
2. Poor visibility - it's not clear how it's growing its top line due to obfuscation with the acquisition of Partsbin.
3. Management? - Not clear how Shane Evangelist (a superstar at Blockbuster) will translate to managing autoparts. Seems this is a block-and-tackle job at this point.
Kaboose is a pass because:
1. Really low traffic: Kaboose, the flagship site had 1.5MM uniques, down from a year prior. They spent $140mm acquiring Bounty, a UK site, that had 153K uniques in Apr 08 (per Nielsen UK).
2. Stiff competition: Babyzone (600K uniques) will be going up against Babycenter (2.7mm uniques with higher nearly twice as many pv's per unique), J&J's website.
I don't feel Kaboose has take-out potential, like CNET and Greenfield had. CNET is a bellweather with unquestionably solid traffic, though their forward growth was hazy. Greenfield at the Ciao asset with 50% yoy comp shop growth. Kaboose?
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