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Friedman Misses the Point and Economic Reality of Silicon Valley

Thomas Friedman is a very smart man and a very good writer. He’s certainly sold more books than I ever will. But in reading his latest column arguing $20 billion in bailout money should go to VCs not auto companies, one thing was crystal clear: This man doesn’t live in Silicon Valley. Has he even ever visited?

I totally agree we shouldn’t be bailing out “loser” companies and industries. Car companies should be going bankrupt, and their stockholders and bondholders should lose their money for betting on an industry that clearly wasn’t adapting and was spending like drunken trust fund kids. (Trust me, they’re worse than sailors.) Yes, the inevitable job losses will be hard to absorb. But these companies will fail eventually, so you’re really just stalling when it comes to the pain, and inevitably dragging out the recession longer-especially in areas like the rust belt that were hurting before the recession hit.

My above views are precisely why I live in Silicon Valley: A place that not only lacks an artificial reverence for an old stodgy company, it actually celebrates when a younger, nimble startup takes it down. How, could Friedman get why the Valley continually creates strong multi-billion dollar companies and then turn around and propose a government subsidy for us? Investments in agencies like DARPA are one thing, but government subsidies are crutches for non-performing industries. And hit by the recession or no, Silicon Valley doesn’t want or need that crutch.

Before we get into the economics of his argument, let’s start with the facts. Friedman writes, “Call up the top 20 venture capital firms in America, which are short of cash today because their partners – university endowments and pension funds – are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way.” Um, venture capital firms are not short on cash. Far from it. The precise problem with the venture industry is too much cash in fact, especially given increasingly paltry returns.

Yes, investors in VC firms are pulling back and some are even reportedly defaulting on capital calls. But this is after a bubbly run-up where a boutique industry exploded. In the last fifteen years, the amount of money pouring into venture capital has more than doubled. Look at returns: The industry is having a hard enough time investing $30 billion a year. Another $20 billion from the government? Are you kidding?

What’s more, there was never a shakeout in venture firms after the year 2000 crash-it’s only now working its way through the system. So the firms that may be finding themselves short of cash? Those are our own version of the “loser” firms – to borrow Friedman’s phrase-that should be shaken out of the venture economy. Not only do the top 20 venture firms have plenty of money, the top 100 firms could find a way to raise more capital if they needed to. But odds are they don’t, because funds work in multi-year cycles, and not everyone is forced to fundraise in 2009.
In short: The core assumption to Friedman’s argument just isn’t reality. And call me crazy, but if you are throwing my tax dollars after an industry, shouldn’t the so-called “need” be based on– oh, I don’t know– an economic reality?

Point two: Venture capitalists don’t want a bailout. As stated above, they don’t need the money, and startup rule number one is you don’t give away equity for something you don’t need. Friedman proposes VCs would give the government 20% of the proceeds from an IPO or acquisition and keep 80% for themselves. [UPDATE: Apologies, watching Oscars and accidentally swapped the percentages! 80% for taxpayers, 20% for VCs. More of a sucker's bet.] He ignores carve outs for employees and founders in this equation, which cuts down the VC take further.

Given how rare it is to have a bona fide Google-style home run these days as many of the core tech markets that have been the golden geese of venture capital mature-why on earth would a venture capitalist give up 20% of the next Facebook over a silly little thing like needing more capital? As a Facebook (and more recently Twitter) well knows, no matter what the market is doing a scorching-hot startup can always find money. Bailouts are by nature adverse selection: The only people that would take the government up on this deal are companies who are the GM-versions of startups and venture firms.

Friedman further says in the column that “Bailing out the losers is not how we got rich as a country, and it is not how we’ll get out of this crisis.” Agreed. But what country got rich by bailing out winners? Is that even a concept that makes sense? I can’t imagine a greater a waste of shareholder money than giving it to people who don’t need it and aren’t asking for it. At least when it comes to the car companies, we’d be (temporarily) saving jobs.

Most shocking to me, Friedman invoked one of the most repeated Valley mantras to prove his point when he wrote, “Some of our best companies, such as Intel, were started in recessions, when necessity makes innovators even more inventive and risk-takers even more daring.” Mr. Friedman: Read the second half of your own sentence again. The reason recession-born companies are so inventive and daring is because founders are forced to work within constraints, precisely because it is harder to raise capital. Nothing kills a great idea like too much cash. Unless it’s a flood of too much taxpayer cash, because then we all lose.

I think all taxpayers should be grateful that President Barack Obama spends more time in the Valley than Thomas Friedman. I know I am.

Nuance Communications today unveiled Nuance Voice Control 2.0 (NVC2), the Massachusetts-based company’s latest mobile speech platform.

NVC2 is customizable and, according to Nuance, allows operators and handset original equipment manufacturers (OEMs) to speech-enable any feature, application, or network service on any mobile device brought to market with the company’s VSuite integrated into it.

The platform has a number of capabilities. Among them are:

• voice-activated dialing;
• free form voice search throughout the phone and mobile Web;
• navigation; and
• games.

The release of NVC2 is the result of close collaboration between Nuance and its operator and OEM partners. It represents an effort to address a number of fundamental concerns and desires for embedded, on-device speech and was designed from the ground up to meet those concerns.

“The operators basically told us three things,” says Michael Thompson, senior vice president and general manager of Nuance Mobile.

“One, you need to reach millions of mobile users. Mobile search has to reach the masses.  Two, we want to take an approach that’s not just a ‘one-point’ application…we want to voice-enable the entire device, the entire user experience, or at least have the flexibility to voice-enable all the parts that we want to…Three, we need to be on feature phones. Feature phones dominate the world market in terms of volumes and shipments, and all of these voice services need to be available as feature phones.”

According to Thompson, it is this last concern on the part of operators and OEMs that was central to the NVC2 project. To make the software compatible with almost any phone, everything from smartphones to lowly feature phones, Nuance made sure to include a Samsung feature phone from 2006 in its lineup of design phones.

“It was a very low-end phone,” Thompson says. “That was our fundamental design phone, number one. If we could get everything to work on that, it would be incredibly powerful.”

He asserts that these lower-end phones, models that are often given away for free, can do voice-enabled Web search, message dictation, navigation, and “all the potential high-value solutions that operators want to get to market.”

In constructing the new release, Nuance had to be careful to put together something that could rapidly adjust to the growing number of features that are coming embedded in phones, even features that haven’t yet seen the light of day.

“Building mobile phones is a very hard business," he says. "If you just look at the rapid transformation of the mobile handset market in the last 18 months alone—touch screen boom! jumped onto the market—anything that disrupts the process, anything that tinkers, slows things down, drives costs up, and slows innovation will not work.”

To further that end, NVC2 was built to be entirely open-ended with a full command of any given phone’s features. Underlying the recognition technology is Dragon NaturallySpeaking 10. Theoretically, once properly tagged, almost anything on a phone could be activated by voice.

Perhaps most important for Nuance, the collaborative process with the OEMs means that the company has had a hand in the very design of some phones. Some of these feature one-touch dedicated buttons that activate speech capabilities. On Samsung models, Thompson describes the button as having a small head with a speech balloon on the side or as a prominent feature on the first menu of a touchscreen model.

With only 25 percent of all mobile phones users worldwide utilizing the on-board speech—a number that Nuance will argue is both significant and growing—it’s important to expand that demand if the company truly wants to “reach the masses” with its product. A dedicated button certainly might up those numbers, especially if Thompson is right about the usefulness of mobile speech.

“[The voice] capability is incredibly addictive because people use their phones in their cars with their headsets and various things,” he says. “The use of voice dialing [becomes a kind of] religion.”

It takes dozens of microprocessors running 100 million lines of code to get a premium car out of the driveway, and this software is only going to get more complex

Image: Daimler

The avionics system in the F-22 Raptor, the current U.S. Air Force frontline jet fighter, consists of about 1.7 million lines of software code. The F-35 Joint Strike Fighter, scheduled to become operational in 2010, will require about 5.7 million lines of code to operate its onboard systems. And Boeing’s new 787 Dreamliner, scheduled to be delivered to customers in 2010, requires about 6.5 million lines of software code to operate its avionics and onboard support systems.

These are impressive amounts of software, yet if you bought a premium-class automobile recently, “it probably contains close to 100 million lines of software code,” says Manfred Broy, a professor of informatics at Technical University, Munich, and a leading expert on software in cars. All that software executes on 70 to 100 microprocessor-based electronic control units (ECUs) networked throughout the body of your car.

Alfred Katzenbach, the director of information technology management at Daimler, has reportedly said that the radio and navigation system in the current S-class Mercedes-Benz requires over 20 million lines of code alone and that the car contains nearly as many ECUs as the new Airbus A380 (excluding the plane’s in-flight entertainment system). Software in cars is only going to grow in both amount and complexity. Late last year, the business research firm Frost & Sullivan estimated that cars will require 200 million to 300 million lines of software code in the near future.

Even low-end cars now have 30 to 50 ECUs embedded in the body, doors, dash, roof, trunk, seats, and just about anywhere else the car’s designers can think to put them. That means that most new cars are executing tens of million of lines of software code, controlling everything from your brakes to the volume of your radio [see table, "How and Where Is Software Used in Cars? "].

“Automobiles are no longer a battery, a distributor or alternator, and a carburetor; they are hugely modern in their complexity,” says Thomas Little, an electrical engineering professor at Boston University in Massachusetts, who is involved in developing intelligent transportation systems. “The goals to save energy, reduce [emissions], and improve safety have driven the specialization and adoption of electronics in particular.”

I have experienced that complexity myself recently. Last year I bought a new car and was staggered to discover a 500-page manual explaining its operations, along with a 200-page companion manual for the GPS and radio systems. One of the new features touted was the much larger glove compartment, but the size was probably dictated by that of the required manuals.

My new car also comes with front and side passenger air bags. The car’s air bag electronic controller—along with the dozen or so sensors that provide it with data—have to be able to operate for years in temperatures ranging from the dead of a freezing Minnesota winter to the blazing heat of an Arizona summer sun.

Most of the time the air bag system is just monitoring the car’s condition, but if the air bags are triggered by, say, a multiple vehicle collision, the software in the ECU controlling their deployment has 15 to 40 milliseconds to determine “which air bags are activated and in which order,” says Broy.

In the near future, Broy says, air-bag control systems will use more than just crash impact information. For example, BMW has just announced that many 2009 models will be equipped with its BMW Assist system, which features a “risk of severe injury” calculation based on information gathered from the car’s air-bag controller and its other ECUs, which will inform accident response teams not only where the accident took place, but the likelihood of passengers being severely injured.

The current amount of software in cars is pretty amazing, given that the first production automotive microcomputer ECU was a single-function controller used for electronic spark timing in the 1977 General Motors Oldsmobile Toronado. In 1978, GM offered as an option its Cadillac Trip Computer on the Cadillac Seville. The computer, a modified Motorola 6802 microprocessor chip, displayed speed, fuel, trip, and engine information. However, the chip served another function: It was used by GM to test how well a microprocessor could control multiple functions such as port fuel injection, electronic spark timing, and cruise control.

By 1981, GM was using microprocessor-based engine controls executing about 50 000 lines of code across its entire domestic passenger car production. Other car companies quickly followed suit.

Source: TechCrunch

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The Death Of “Web 2.0?

I’m not going to discuss the economic meltdown and its devastating effect on technology companies and internet startups in this post, but rather something that crossed my mind earlier this morning: “Web 2.0? seems to become more and more a void (and an avoided) term. Of course, that’s not necessarily a bad thing, but it is definitely apparent.

So why do I say it’s fading? For one, because the number of startups that contact us and include the term Web 2.0 in the subject line or message is visibly dropping (and that’s a good thing), and I hardly ever see it mentioned anymore on other technology blogs and news sites either. That’s not really tangible, so I took a look at the number of mentions of the phrase across the web, and they seem to be decreasing significantly, reflecting my feeling on this.

Judging by Google Trends, which shows how often a particular search term is entered relative to the total search volume across various regions of the world (and in various languages), the term started being used at the end of 2004 when Tim O’Reilly organized the first edition of the Web 2.0 Conference. Search queries for the term started picking up in the middle of 2005, when TechCrunch was started – with the tagline “Tracking Web 2.0? by the way – and the number kept increasing until the end of 2007. After that, the trend is clearly downwards, falling back to the level it reached in early 2006 today. If the trend continues, there should only be a handful of people left who scour search engines for “Web 2.0? by 2011.

Also noteworthy: take a look at the geographic regions that have generated the highest volumes of worldwide search traffic for the term over the years – it’s Asia, with the top 5 regions being India, Singapore, Hong Kong, Taiwan and Malaysia (in that order). Furthermore, Google Trends pegs the number one language in which people search for stuff related to the topic of Web 2.0 to be Russian before English.

And just in case you’re curious: “Web 3.0? doesn’t seem to picking up much.
Let’s all rejoice.

Google’s “Insights for Search”, a beta service that analyzes a portion of worldwide Google web searches from all Google domains to compute how many searches have been done for the terms you’ve entered – relative to the total number of searches done on Google over time – gives an even better overview:

I’ve never had anything against the phrase “Web 2.0?, but I wouldn’t miss it a bit if it were never used again.

How about you?

(Picture of Tim O’Reilly at Web 2.0 Expo 2007 by Scott Beale / Laughing Squid)

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Edit Google Spreadsheets on Your Mobile Phone

Google just released an updated version of its Google Docs spreadsheet product that finally allows you to edit your spreadsheets on a mobile phone. Now, if you have a G1, iPhone, iPod Touch, or Nokia S60 phone, you can not just browser through your spreadsheets, but actually edit them as well – though with some rather annoying limitations. Documents and presentations remain read-only for now.

At first glance, allowing users to edit a spreadsheet on their phones doesn’t sound like it would be a very hard problem to solve, but the size of these devices does make it hard to develop an interface that is usable, yet still displays enough information.

Every row now features and ‘edit’ button on the left side, and you can sort columns easily by clicking on a box at the top of each row.  As we are working on the web, these changes are also immediately reflected and saved in the standard version of Google Docs.

Good for Text – Bad for Math

For large spreadsheets, the small screen on a mobile phone makes extensive work on your documents rather arduous. The mobile version is also severely limited, as you can’t actually edit any cells that hold mathematical formulas, and when you update a number in your spreadsheet, the results of the formula are not automatically updated. Instead, you will have to reload the page to see the new results.

Because of this, the mobile version of Google Docs spreadsheets is currently only really useful if you just want to edit relatively simple lists of texts.

Zoho, Google’s closest competitor in this space, still doesn’t allow its users to edit spreadsheets in its mobile version, but you can create and edit very simple text documents.

Documents and Presentations?

We expect that Google will also allow users to at least perform some edits on documents and presentations in the near future, but given the current limitations of the supported mobile phones, we don’t expect to be able to create a full-blown presentation on our iPhones anytime soon.

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★ Apple, Google, and Palm

M.G. Siegler has an intriguing report today regarding the lack of multi-touch support in the current Android OS:

Apple, which of course makes the signature multi-touch mobile device, the iPhone, apparently asked Google not to implement it, and Google agreed, an Android team member tells us.

Further, the Android team member went on to say that they were relieved that Google didn’t go against Apple’s wishes, given the legal storm that appears to be brewing between Apple and Palm, which is using multi-touch technology in its new Pre phone. Even if Apple ultimately decides not to pursue legal action against Palm (it’s not yet clear how likely that is, but Apple does have an impressive array of patents), the situation has likely soured the relationship between the two companies. Google, it seems, wants no part in ruining its relationship with Apple.

This jibes with a story I heard several months ago from a source who works at Apple, which is that Google showed Apple legal a pre-release prototype of the HTC G1, specifically to avoid patent-related disputes. According to my source, in addition to multi-touch, the other feature that Apple objected to was using a standard headphone jack. Apple apparently owns a patent on controlling software using buttons connected by a standard 3.5mm headphone jack (at least for music and video playback controls), and would not grant Google a license to the patent. Hence the G1’s use of a proprietary ExtUSB port rather than a standard 3.5mm headphone jack.

My source’s information was third-hand, and I found the idea that Google would show Apple the G1 before it was released a little hard to believe, so I didn’t publish it. (You know there’s no way that Apple is showing pre-release iPhone hardware or software to Google — so why would Google do this?) But now Siegler has an “Android team member” telling a similar story.

Siegler adds:

While the connection between Apple and Palm would seem like it should be strong, given how many former Apple employees now work at Palm, Google and Apple are actually more aligned. Not only does Google specially tailor a ton of its products for the iPhone (both with apps like Maps and Google Search, and specially formatted webpages), but its chief executive, Eric Schmidt, is on Apple’s board of directors. And don’t underestimate the fact that both share a chief rival: Microsoft.

Google and Apple do have a sort of kinship. They compete very little overall — Apple makes money by selling computing hardware products; Google makes money through search advertising. Android-vs.-iPhone OS is the biggest exception, and Schmidt has stated that he recuses himself from iPhone-related matters in Apple board meetings. But Google did not write the iPhone’s built-in Maps or YouTube apps; Apple did. Google and Apple collaborated to some degree on how these apps talk to Google’s back-end, but the iPhone apps themselves were designed and written by Apple. Google’s own iPhone apps, like the Google Search app, have a decidedly Google-ish aesthetic.

Unlike Siegler, I think the large number of recent Apple employees now working at Palm on the Pre suggests that the relationship between the two companies is cold — ice cold. What I heard last month at Macworld Expo is that Palm has a standing offer for engineers at Apple to jump ship, with a starting salary of 1.5 times their current Apple salary. More obviously, Palm’s core business — selling handheld computing hardware — is directly competitive to one of Apple’s core businesses.

I wouldn’t hold my breath waiting for Palm CEO Ed Colligan or former Apple senior VP Jon Rubinstein to get a seat on Apple’s board.

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Get Your Facebook in Your Gmail with Xoopit’s Updated Plugin

Xoopit, the Gmail plugin that helps you rediscover the lost photos, videos, and files in your Gmail inbox has just announced their new “Facebook meets Gmail” feature. With this addition, Xoopit users can both see and set Facebook status messages from within their Gmail inbox as well as view the profile photos and status messages of their Facebook friends while reading their email.

Email has often been referred to as the hidden social network – the idea being that your real-world contacts who you spend the most time communicating with are not necessarily those you’ve befriended on online social networks – they’re the ones in your inbox. So the idea of integrating your online social network of choice (Facebook, of course) with your email inbox isn’t that crazy. In fact, it’s really useful. For the first time, your social networking world can finally be combined with your the everyday drudgery of the inbox…and who knows? You might just find some new friends in there.

To integrate Facebook into Gmail, Xoopit’s new plugin uses a Facebook Connect button that logs you into your Facebook account. Once activated, you can set your Facebook status at any time by clicking the “F” icon at the upper right corner of your Gmail where there’s now a Facebook status update box that displays your profile picture and your current status.

However, the best part of this plugin is that when you email with people who are also on Facebook, those messages will now also include their Facebook profile photos and status messages.These appear in Gmail’s right-hand sidebar. Underneath each person’s name is a link to “Recent Mail” and “More Info.”Clicking on “Recent Mail” takes you out of the message you’re in to a Gmail search for that person’s email address (or addresses). The “More Info” button, though, just expands the box in the sidebar to display the latest attachments sent to you by that person.

These interactions aren’t just fun – they’re useful. Finding past messages or attachments sent is a common email task, so having these quick links available is a great feature.

As before, Xoopit’s plugin also still installs a toolbar which is added to the top of your Gmail inbox and a sidebar widget. With either tool, you can find photos, videos, or files in your inbox. The sidebar widget also has a link that launches various games, perfect for when you can’t read any more email but you just can’t leave the inbox, either.

Although in the past we’ve shared our concerns over any plugin that needs your Gmail credentials to operate, the functionality provided by Xoopit may sway you to put your security fears aside and give it a try.

Note: Xoopit is a Firefox plugin.

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Craig Newmark’s Keynote Unlocks the Secrets to Building a Community

In an era where user generated content is changing our entire culture, rare is the company that can successfully harness the collective creativeness of its community, cultivate loyalty, make money consistently, and continue to flourish. Enter Craigslist. Listed as the tenth top site in America on Alexa and with close to 50 million unique visitors a month according to Compete, Craigslist is one of the few companies that appears to have worked it out.

Yesterday, at the User Generated Conference in San Jose, CA, founder Craig Newmark gave us an insight into what has and what hasn’t worked for the privately held company.

Recognize the Importance of a Feedback Loop

It all began in the fertile dot com era when Newmark, while working at Charles Schwab, realized the time was ripe to begin something of his own.

In early 1995 he started sending out a simple CC list, e-mailing arts and tech events to a small group of interested subscribers. Very quickly, people started e-mailing him with news about jobs and apartments in the hope he would add them to his mailing list.

“From the very beginning,” Newmark said, “I was involved in talking to people; listening to people. And it hasn’t stopped. The idea was that people send me information; I’d ask them about it, listen, try to do something about it – and then ask for more feedback.”

Get Out of The Way

Borrowing from a sixties phrase “lead, follow or get out of the way,” Newmark pointed out that while you may have a great idea, it doesn’t necessarily mean you have the skills to manage it or nurture its growth.

After Newmark had about 240 addresses on his list, it started breaking. He needed a list server and began thinking of ways to move his email folders onto the Web, but what to call it? Anthony Batt, the man behind Buzznet, and clearly part of the original Craigslist community came to Newmark’s rescue. “Hey, we already call it Craigslist, may as well call it that and start building a brand.”

The year was 1995 and Newmark began migrating his email folders over to the new Web site. The move instilled a new drive in Newmark who chose to keep the site personal and quirky. With the support of his loyal community, Newmark ran the site by himself for the next few years.

But by the end of 1997 Craigslist hit three milestones.

• Craigslist hit one million pageviews
• Microsoft approached Newmark with an offer to run banner ads (he said no)
• People began approaching Newmark wanting to help with the site on a volunteer basis

While he tried letting people run the site on a voluntary basis, in 1998 he realized it wasn’t working: “mainly because of lack of leadership on my part,” Newmark explained.

Craigslist was incorporated in 1999, when Newmark decided it was time to make “this thing” into a company. By the end of that year he stopped coding and moved onto customer service and corporate governance full time. “Frankly, as a manager, I kinda suck,” Newmark explained, “but fortunately Jim [Buckmaster] didn’t.” By the end of 1999, Buckmaster was Craigslist’s CEO.

“Getting out of the way is really important,” said Newmark. “A lot of people talk about customer service and staying involved,” he said, “but they don’t keep going.”

Newmark, like others before him, recognized the need to move away in order to see the company succeed. “People that start companies, and lack management skills, they fail.”

Understand We Live in a Culture of Participation

In 2005, Hurricane Katrina struck the New Orleans area with devastating effect. It was reported that more than 1,800 people lost their lives, and damages exceeded $81 billion dollars.

The tragedy was a somber reminder to Craigslist and its founder that getting out of the way didn’t only apply to the internal dynamics of a company; it must also be applied to the community.

New Orleans survivors started repurposing Craigslist. They began to use it to let their friends and family know where they were at the height of the confusion. Within days the site was being used to offer jobs and housing to those who suffered loss during Katrina. “We didn’t care that the site wasn’t being used how we had imagined,” Newmark explained.

It’s this keen understanding that we’re living in what Jay Rosen has dubbed the culture of participation that makes companies like Craigslist so successful.

During a recent interview with The Daily Beast, Jeff Jarvis, author of the recently released What Would Google Do?, nominated the Craigslist philosophy as a key rule of the Google age:

“As Google built the most powerful tool imaginable–the entire world of digital knowledge revealed behind a simple search box–so did Craig build a simple tool that changed society (and newspapers and real estate and more) without prescribing how we should use it. They create platforms to enable us to do what we want to do and then, instead of giving us rules about their use, then they stand back and put us in charge.”

“The Internet is about inclusion,” Newmark said, “on the Net, no one should be left out.”

The lessons Newmark painted yesterday are vivid; no matter how much you may think you know, you’ll never master everything, surround yourself with good people and let them do their job, be ready to step back if you’re hindering the process, and don’t just talk about building community, immerse yourself in it and let them participate in growth. You never know, you just may learn something new.

Of course, we would be remiss if we neglected to add Newmark’s parting words: “Live long and prosper.”