Author: Blancer

You know what’s awful about every politician blindly saying he or she “supports our troops”? It’s usually a hollow sentiment uttered just to get applause.

You know what’s great about every politician blindly saying he or she “supports our troops”? When presented with something that demonstrably helps the troops, there’s zero political capital in obstructing it.

And hence, Gunnar Counselman may not only have one of the best entrepreneur names I’ve ever heard, he may also have come up with one of the first Silicon Valley-based, venture-backed online education startups that will help students, make money, and not be crushed by the lame-brain education establishment.

Counselman’s company, Fidelis College, does a few things. At a basic level, it will help active duty soldiers get a headstart on college educations. It enables them to do the first two years of general education requirements online while still on active duty. Later, it helps place them at a major university that’s inline with their civilian career goals. And these students won’t fall into the student loan curse, because there’s military tuition assistance during active duty that will help pay for the first two years of credits and the GI Bill to pay for the last two years of college post-discharge.

But Fidelis aims to do a lot more than that. Like Geoffrey Canada’s model of following inner-city Harlem kids throughout elementary school, high school and college to make sure they don’t fall through the cracks; so too will Fidelis stay with ex-military students, making sure they are taking the right classes, meeting the right mentors and steering towards their dream careers. This starts with a month at “fork & knife school” where the basics of civilian social graces are taught. Beyond that, Fidelis closely tracks the students through graduation and helps with career placement.

Inner-city kids and vets may seem an odd comparison, but they share one thing in common: High drop out rates. Despite triple the education resources in the new GI Bill, less than 6% of military men and women use their complete education benefits and only 25% complete the degrees they start.

Counselman argues a lot of this is social. He likes to quote an unnamed US Marine when he pitches the company: “They spent sixteen weeks turning you into a Marine. They spent the next four years turning you into a bad-ass Marine who will kick down any door in Falluja. They spend an afternoon telling you what it’s going to be like to be a civilian again.”

Of course, Counselman knows this all firsthand as a third-generation marine. He served in Operation Iraqi Freedom, his dad served in Colombia, Somalia and Desert Storm, and his grandfather served in World War II, Korea and Vietnam. After his discharge, Counselman headed to Harvard Business School.

There’s not a lot to dislike about Fidelis. It helps people who are defending our country. It mostly uses money they are already getting. It makes sure that government money is spent more effectively. And it gives the colleges students who have money to pay their increasingly outrageous tuition. And Counselman says the average score for the military equivalent of the SAT has been increasing since September 11, when enlisting became something that mattered even to many people who had other socio-economic options. It’s now slightly higher than the general US population; it used to be slightly lower.

More than that, colleges get students with a different life experience. Students who have made life or death decisions in combat. Students who have perspective on America’s place in the wider world. Students who understand more than the latest features on Facebook, but what the struggle for survival is all about. Some might call them the anti-millennial.

Counselman’s dad never pressured him to become a marine; in fact he never spoke much about it. But Counselman was struck one day while studying at Cornell, when a kid started to choke in a restaurant and everyone froze. Everyone except an 18-year-old cadet who sprung into action saving the choking student’s life. Counselman wanted some of that, and some of what his father and grandfather had. He wanted to be the guy people turned to in a crisis. “The military is turning out something special,” he says. “It’s just that it’s not a total fit for the civilian world.”

Not only did Counselman get some of that intangible Marine-quality, but as you can see from a slide in his investor deck, the three generations even look remarkably alike:

Many schools already get this: Counselman was surprised to see that 4% of his HBS class was ex-military. After school, he worked as a consultant at Bain where his bosses would plunk down a stack of military resumes in front of him and ask him to parse through them. They knew there was talent to be tapped coming out of the military, but they had no idea what was an impressive achievement and what wasn’t.

A business like Fidelis would be laudable at any point in American history, but it’s especially smart now for a few reasons. There’s an inflection point in our labor markets: There’s an intense talent-war for certain jobs, while millions more can’t find work. Fidelis can help solve the re-training chicken-and-egg problem the country faces for an important subset of people who risked their lives for the rest of us. It’s all the more important post-recession, when 30% of veterans age 22-30 find themselves unemployed.

There’s also an inflection point in the education market. As we’ve written before, for the first time in recent history there’s a debate raging about whether the cost of education is actually worth it. With our preconceived prejudices stripped bare, online alternatives and different approaches to college education are gaining credibility.

And then there’s market demand: The US is winding down operations in Iraq and Afghanistan, reducing the force size from 2.2 million to 1.6 million. It’s in everyone’s interest to give those veterans the best chance to succeed in the civilian world.

And of course, the founder is always key to the success of any startup. Few people understand the scope of this particular problem and have the skills and contacts to raise venture capital and go solve it. I asked Counselman how many venture capitalists had ever served in the military. He knew of exactly four. It’s a massive disconnect from the years just after World War II when nearly every CEO of a Fortune 500 company was a veteran.

Fidelis has raised just raised $2.5 million from Accel and Novak Biddle, a firm that specializes in education startups. Phil Bronner of Novak Biddle Venture Partners noted that Fidelis is in the middle of a new trend of education companies partnering with prestigious, traditional colleges, but building a for-profit business around it.

It’s a reaction to the University of Phoenixes of the world, where much of the revenues are spent getting students in the door, but the graduation rates are low and the prestige of the degree is questionable. And according to a recent report, those colleges have increasingly been targeting the military, without solving a lot of these more fundamental problems veterans face. “A key difference between Fidelis and the others in the for profit industry is the school from day one is going to be focused on outcomes, rather than focused on an ever expanding enrollment,” Bronner says.

For Accel, the deal was a bit outside its norm. Partner Rich Wong said the firm invested because it was one of the first education deals the partnership had seen that was good for students and made clear business sense. “It’s nice to be able to fund a great idea that’s also the right thing to do,” he says.

I always enjoy seeing science fiction prophecies come true. Last month, Broadcastr. This month, Wolfram Alpha’s WolframTones, modestly subtitled “A New Kind Of Music.” (Yes, that would be the same breathtaking humility that led them to originally price the Wolfram Alpha app at a hilarious $50. Fortunately, they subsequently bought a clue.)

It is pretty cool, in a geeky sort of way: music generated by fractally complex cellular automata, in the style of your choice—classical, dance, rock/pop, hip-hop, etcetera. Every composition is unique, and can be downloaded as a ringtone. They lay claim to the copyright on all the generated music, mind you, raising the interesting question of what counts as “fair use”, but I’ll leave that rant to Cory Doctorow. What sort of saddens me about WolframTones is that it’s yet another nail in the coffin of ten million teenage dreams of musical superstardom.

I don’t know if its creator Peter Overmann is a fan of the great Australian science-fiction writer Greg Egan, but I do know that he’s just recapitulated something Egan described twenty years ago in his book Quarantine, in a paragraph that has stayed with me since:

I flop onto my bed, and switch on the room’s audio system. The controlling ROM I’ve been playing lately, ‘Paradise’ by Angela Renfield, is one of hundreds of thousands of identical copies, but each piece it creates is guaranteed unique. Renfield has set certain parameters for the music, but others are provided by pseudorandom functions, seeded with the date, the time and the audio system’s serial number.

The copyright question leaps to mind because WolframTones is yet another entry in the arsenal of resources that today’s musicians can (and probably will, regardless of the legality) sample and remix. It’s getting crazy-easy to make music these days. Gorillaz’ new album The Fall was recorded entirely on an iPad while they were in tour, and they’ve since even released their own iPad instrument. Imagine what they’ll do with the iPad 2 and its new GarageBand. Meanwhile, numerous sites allow musicians to collaborate online.

Heck, why bother learning how to play? Or sing? Consider Ark Music Factory, the evil masterminds behind Rebecca Black’s Friday. For only a few thousand dollars, they’ll write and record your music, shoot your pop-idol video, and AutoTune your voice. Meanwhile, the music industry is kind of dying, meaning there’s less money to spread across more artists. Sure, touring can still be lucrative – but most of that money goes to those who built their brand before the modern era. There are and always will be meteoric new exceptions, but they’re increasingly rare. Music has grown so fragmented and overpopulated that just finding good new music has become a big problem in and of itself¹.

I keep tabs on the music industry mostly because they tend to be a harbinger for other kinds of entertainment (not least because the music industry released all their wares in a non-DRMed electronic format, also known as the CD, before they quite realized what they had done.) What happens to music will happen to books, and then video games, and then TV/movies. We’ll see fewer and fewer professional musicians, writers, and filmmakers; instead we’ll see vastly more high-quality work created by part-time hobbyists aided by flashy new technology, and fewer and fewer crossover moneymaking hits. This may be great for fans—we’ll see—but I hope you don’t dream of making music / writing books / directing movies for a living. It was never easy, and thanks to all this amazing new technology, it’s getting even harder every day.

¹Full disclosure: I’m currently doing some contract development work for a semi-stealth mode startup named Rexly who are trying to solve that problem.

Roger Nichols died the other day. He was the engineer behind the Steely Dan records, the ones that stood in the great chasm between George Martin’s Beatles productions and whatever is going on today. When I think of what could be of the great realtime stream we’re all building, I hope and trust it will somehow reach toward the quality of that perfection.

It felt like a perpetual motion machine, a unique world inside a glass ball, shimmering in the precision of the world’s greatest drummers’ time machine. Some felt it lacked emotion, settling for cool perhaps. You could say that, but as the years went by, the clock kept quietly ticking — through the rage of the punks, the bloat of the eighties, the decades we stopped counting. Like a Kubrick film, exacting in its architecture, with tinges of humor and slashes of jump cuts.

Today we talk of bubbles, of the hype cycle, of valuations and pre-IPO marketplaces where we can retain control over the precision of our inventions. My favorite bubble is AirPlay, where Steve Jobs’ hobby as he called it is transformed into a gateway drug for the new media. We know what the iPad is good for, but what a surprise awaited us when we started to notice the little icon that connects us back to the time when music and film and even TV kept us in the know about what was important.

Back then music was freed of the tyranny of the cartel’s fear of digital copying. Back then we stole from each other, guilty of the pleasure of honoring those we loved and admired. And the sharing gave back to us this explosion of riches, the feeling of walking among the gods even if we were mere mortals. The sweet insolence of confidence that we were busy inventing the world.

You can see that spirit alive today, as it always is. On Netflix, a Marx Brothers film, not the classic ones but a middle-aged one reusing the Casablanca sets. There’s Harpo with that goofy expression, a glint in the eyes that says everything The Clash would say years later as they rocked the Casbah. The Times obituary quoted Nichols saying he didn’t mind the endless retakes of Becker and Fagan: “It would have driven a lot of other engineers up the wall. In my own way, I’m just as crazy as they are.”

Back then we called them records as they spun slower and slower, from 78 to 45 to 33 and a third. You could lose yourself in the liner notes, the arcana (specialized knowledge or detail that is mysterious to the average person: “knows the arcana of police procedure and the intricacies of litigation” (George F. Will)) of producers and engineers and musicians and doctors and lawyers and thanks to God et al. Like baseball cards or bird watching or the clocksmith tinkering in his inner sanctum, a world where we all took the time to revel in what we were inventing.

There was no concept of users, or the audience back then. We felt like the baseball fan sure that if we turned off the game too soon or failed to wear the lucky hat that day, that our team would lose. If we weren’t in the loop, the bubble wouldn’t exist. Does that sound like the Stream today? It should. Twitter’s power is in our shared assent, our cooperation, our delight at co-writing the liner notes of our time.

Still, the tools rebel at our temerity. Word barfs every time I construct a sentence that dangles, splaying a green line below the fragment but not suggesting a replacement. It’s almost a validation of the choice of fewer words, the flailings of the machine as it debates whether to add the style to the dictionary or continue to obstinately tell us it doesn’t learn. It wants to be helpful, but with a schoolmarmish virtual rap on the knuckles. No, it doesn’t like schoolmarmish at all.

Real soon now they’ll unlock the two sides of AirPlay, the liner notes displacing the default animals on the HD screen alongside the music. I listened to the new Paul Simon record yesterday, produced with another great master of then and now, Phil Ramone. The CD format is too small for the aging eyes, too dark for the underlit room in this turn off the hall light energy crisis $5 a gallon moment. I’d pay for a channel that pushed the graphics and liner notes and pictures and web site with upsell and concert promos and so on. C’mon guys, the iPad is here.

On the record, God speaks (Paul in a close-miked Bill Cosby voice): Big Bang, That’s a joke I made up, Once when I had eons to kill, You know, most folks, They don’t get when I’m joking, Well, maybe someday they will… I found this at my neighborhood record store, aka Starbucks. Simon, who used to be on Warners and Columbia (Sony) with Garfunkel, is now on Hear Music aka Starbucks Corporation. I’m beginning to get that they are joking.

And so I will mourn Roger Nichols with the great pleasure of knowing he did what he set out to do: play in the garden of perfection without fear and with no apologies. Back then, they knew what this world was going to look like, because they invented it. Just because Pan Am didn’t survive until the real 2001 doesn’t mean Kubrick was any less of a prophet. Like Steve Jobs and the inventors of the Cloud, those who dare to be perfect divine our shared future.

As I sit here writing this post, I am on board an American Airlines flight from Chicago to New York City. I consider it a minor miracle that the plane is actually in the air. After two cancelled flights on this trip alone, a seat without a cushion, and some trouble counting the number of people on the plane which made us return to the gate a second time after another minor problem, I’ve lost count of how many errors American Airlines has now made in this comedy that is my travels. Oh, and @AmericanAir also managed to prove that it is an utterly toothless marketing arm of American which fails when it comes to providing actual customer service. I never thought I’d say this as a loyal American Airlines customer who has travelled hundreds of thousands of miles on American over the years, but it may now be worse than Delta.

Yes, this is going to be a rant. If that’s not your thing, avert your eyes. There isn’t any one thing I can point to that makes me never want to fly American again. Rather, it is everything—a succession of flubs and foibles. I like to believe I am a pretty tolerant air traveler, but everyone has a breaking point.

First, a little context. My tale of travel woe begins last Tuesday on a trip to Chicago with my family, which was cancelled due to severe weather. American rebooked us on a flight with a stopover in Minneapolis, but the storms persisted and we were held there for a few hours. By the time we finally landed in Chicago, what should have been less than a three hour direct flight, turned into an 11-hour journey with three small children in tow. But I don’t blame American for that. The airlines can’t control the weather.

At least the weather was cooperating yesterday, when we were scheduled to fly back. Except our flight was cancelled once again. This time it was because the crew—the one that was supposed to fly the plane—was not available. They were either over-scheduled or someone got lost along the way, I don’t know. But American didn’t have enough crew members to fly the plane.

I never got any notification by email or text message that the flight was cancelled. My wife got a garbled voicemail she couldn’t understand, but it was from an 800-number so she figured it had to be from American. I called, and sure enough, the flight was cancelled.

Okay, I told the agent, book me on another flight. All the flights that day were sold out. How about a connecting flight? Sold out. How about on another airline? Sold out. Grrr. It is a holiday weekend, after all, and I needed to get five seats on a new flight. The agent suggested that I take a 6 AM flight the next day. If it was just me, I’d take it. But getting three sleepy kids to the airport that early in the morning was going to be tough. Anything later? The only other flight available was a 6:55 AM flight.

My flight was cancelled and I was pushed to the next day. Never once was I offered a hotel stay, a flight voucher or an upgrade. At this point, I started Tweeting out my frustrations:

@erickschonfeld
Erick Schonfeld

Not only does @AmericanAir cancel my flight because they lost a crew + put me on 6AM flight w/3 kids, don't even offer an upgrade #AAsucks

April 23, 2011 12:18 pm via webReplyRetweetFavorite

I just needed to vent. But then @AmericanAIr, American’s official Twitter account, gives me hope with this response:

@AmericanAir
American Airlines

@erickschonfeld Sry to see this, Erick. Pls feel free to DM specific details and we can look into this immediately.

April 23, 2011 12:32 pm via TweetDeckReplyRetweetFavorite

But they didn’t actually do anything about getting me a better flight. They just didn’t want me bad-mouthing them on Twitter (maybe it had something to do with my 31,000 followers). Virgin America got in on the social media PR fun by Tweeting:

@VirginAmerica
Virgin America

@erickschonfeld As always, we look forward to having you onboard!

April 23, 2011 2:14 pm via HootSuiteReplyRetweetFavorite

Too bad they don’t fly to New York from Chicago. Meanwhile, @AmericanAir got back to me and referred me to the 800-number for AA reservations. Thanks, I already tried them. Not that I should get any special treatment, but don’t offer to help if you can’t intervene on behalf of customers. To me, this really points to where social media marketing fails. It is nothing more than PR unless they can provide actual customer service.

Anyway, the worst was yet to come. We rally the kids in the morning, drag my brother-in-law out of bed and make him drive us to the airport. We get there on time, check our bags, get through security. All is good and light in the world. Then we get on the plane.

One of the crew members looks at my ticket and warns me that my seat cushion is missing. They are getting another one, though, don’t worry. I don’t even want to know what happened to the old cushion that they had to remove it. The plane fills up, and still no cushion. I’m standing in the aisle in everybody’s way. An enterprising stewardess grabs another cushion from one of the few remaining open seats and places it on my seat. Great, problem solved.

Not so fast. An airline maintenance worker comes aboard and informs us that you can’t just move a cushion from one seat to another. They look the same to me and the stewardess. No matter. We put it back where it was. Does the maintenance worker have another cushion with him? No, instead he proceeds to place a “Do Not Occupy” sign on the cushion-less seat. Yeah, I wasn’t going to sit there anyway. A lady switches seats with my son so that we can sit together.

Now we are off to the runway. Uh-oh. We have to turn back because “maintenance needs to check something in the cockpit.” We taxi back, they check out the issue, and we are given the green light. Back to the runway we go. We’ve been sitting in the plane for three hours now. And, oops, we have to go back to the gate once again because of a discrepancy between the number of people on the plane and the headcount at the gate. That’s right, American Airlines doesn’t even know how to count.

Here’s the kicker, when we get back to the gate, they let us off to stretch our legs. Nobody asks for boarding passes when we return. Anybody in the gate area could have walked on that plane. So much for security measures (the stated reason why we had to go back to the gate in the first place).

Well, the plane took off eventually. And at least the WiFi works. You’ve still got that going for you, @AmericanAir.

@erickschonfeld
Erick Schonfeld

OMG, we can't take off now because they don't know how many people are on the plane. there's a "discrepancy." did someone escape? #AAsucks

about 11 hours ago via Twitter for iPhoneReplyRetweetFavorite

Editor’s Note: This is a guest post by Mark Suster (@msuster) a VC at GRP Partners. He blogs at BothSidesoftheTable

There’s a line of thinking in Silicon Valley that you should build product businesses rather than services businesses. This thinking is largely driven by the venture capital industry (and subsequently Wall Street) who are in search of high margin, highly scalable businesses.

It’s nearly impossible to get a services company financed by VCs. You’re a small fish.

So pervasive has this thinking become that on several occasions startup companies with profitable & fast growing tech services businesses have come to me wanting to change their companies to product businesses or to create “spin outs.”

A great recent example of this was a successful group of entrepreneurs who had created a company that will do $10-12 million in revenue at their system integration business in 2011 ($5 million in 2010, $2-3 million in 2009). They feel very confident they can hit $18 – 20 million in 2012.

They have created two internal technology “products” and wanted to figure out how they could turn their services business into a product business that could be financed. This team is talented. They wanted advice. And probably some money.

I gave them advice I don’t think they were expecting from a VC,

“Don’t raise venture capital for this business. Ever. And stop effing around trying to create a product company.”

It is advice I give entrepreneurs often as I have written here on why most businesses should never raise VC.

Why Shouldn’t Most Services Businesses Raise VC?

Well, let’s look at this exact situation:

• I don’t have access to their actual financial statements but let me make some reasonable assumptions. It would not be a big stretch to image a well run service business like this making 15-25% net profit margins. Early in a services business there is usually no profits as the company reinvests in hiring people to grow, but by $20 million in sales the company should at least be pulling in 10% profits (if not more) depending on how much is reinvested.
• So assume that in 2012 the company would do $20 million in sales and $2 million in profits (10%) and 2013 they would do sales of $25 million and $4 million in profit (16% net margin) and then slow growth in 2014 to $30 million and $6 million in profit (20% profit). That is $12 million in profits over 3 years.
• The founders could reinvest this in growth (0% tax, focus on future equity growth) or take the profits of $12 million and divide amongst the founding partners. Assuming there are 3 founders and they own an equal amount (33%) then they’ve just taken $4 million each in profits and note that this is at a qualified dividend tax rate (currently 15%) versus an income tax rate (35%). True, the 15% rates will likely go up in the future, but I doubt they will approach the income tax percentage level.
• The thing is – even if your services business is a smaller scale than this – you have complete control over the decisions about where to take the business. There is no shame in making a few million dollars in profit and paying yourself dividends while still owning a large percentage (if not all) of your business. It’s how things are done across the country outside of Silicon Valley.
• The minute you raise VC you have one option – grow & try to become big. No VC is interested in dividends – they want growth. That’s the right answer for VCs.  It may be the right answer for you. But it might not.
• Trying to turn a successful services business into a product business is getting the cart before the horse. If you really want to do a product business then hire a professional manager for your services company, quit that job and focus 100% on your product company.

Why Build a Services Business in the First Place?
There are at least two types of tech services businesses in my mind:

1. Service as a bridge to a product business – One of the best ways for young startups to finance their business without any dilution is what I call “customer financing,” which is mostly only possible in businesses that target businesses rather than consumers. Customer financing often comes in the form of your company agreeing to build a product with a “sponsor” customer or two and helping them with the rollout / implementation. Often in this strategy you end up giving them the product for free and bill them only services fees. You own the IP you create.

The benefits for the customer are: a mostly custom-built product addressing one of their internal needs, the focus of a very talented young startup focusing on their business need & free product – potentially for life.

The benefits for you are even more clear: you get to build a product raising significantly less external money (if any at all) and therefore no dilution, you get a customer who will help you figure out the real requirements for your business and you have your first real reference client lined up, which should help with future funding and with future sales.

If you set out to build this kind of business you just need to be sure you don’t become a permanent consulting business by default. The “customer-financed” type of tech service business is never frowned upon by VCs – unless you’ve been doing it for 2-3 years with no product business to show for it, by which point they assume you’re the second type of services business.

2. Services for services sake – The type of business that is generally shunned in Silicon Valley is the “pure services” business like consulting, system integration, value-added resellers (VARs), customer support businesses, outsourcing companies, etc.  I have already outlined some of the economic reasons these can be good businesses as well as the one of the most important – retaining full control in you business.

But the broader reason that I often suggest them to entrepreneurs is that they’re much easier to build than product businesses even though they’ll never become Google, Twitter or Facebook. Trust me – it is far easier to persuade a business to pay you for your services (a concept they readily understand) than it is to persuade them to buy a totally new product concept and pay for that product.

“How much is that software really worth? Who else is using it? How much did they pay? Wait, I’m only paying “X” for my Salesforce.com licenses – and you want me to pay “Y” for your product? Who are your competitors – how much do they charge?”

I could go on-and-on with all of the sales-blocking messages you will hear when you try to charge for a product. I’ll repeat: everybody understands paying for services. It’s pure irony. At my first company we would have a product sale of $80,000 where the customer would grind us to get the fee down to $70,000 but would readily pay $25,000 extra for “implementation & post-sales support.”

We were building a VC backed software business so I had to focus on the product business. But this lesson in business was never lost on me. And some of my former teammates are now building really awesome services businesses in the exact same field and they own 100% of their companies.

Even tech blogs know this. You struggle to get advertisers to pay your CPM rates and get your page clicks up in a business where you become a near commodity to ever other website out there. Yet you can run a conference and mint money. If it’s well run, people readily pay for conferences and sponsors readily pay to become platinum, gold or silver sponsors. Tech blogs can theoretically scale, tech conferences are pure service businesses.

But How Do Service Businesses Grow?
I’m not saying the scaling a services business is easy – it’s not. One big challenge is how to grow the company. You end up needing to add staff and take on more risk without knowing what your future demand will be. There are a couple of ways to think about this growth.

1. Start with a network of independent contractors (1099′s)- When you’re a young company with 3-4 people and you land work that requires 7-8 it can be daunting. You don’t necessarily want to take on the extra employees and risks. I recommend that you establish a network of contractors who want to do similar work to you but don’t know how to sell projects or to build a company. They’ll be glad for the occasional extra work.

2. Vendor financing – When you start to win business – let’s say as an implementation arm for tech / business products or as an ad sales team for large tech / media businesses – you can often get financed in a small way by your vendors who are all to happy to have a bigger ecosystem of implementation houses. They won’t do this before you prove yourself but once you hit a minimum scale this is always an option.

3. Angel financing – just because VCs won’t back this kind of business doesn’t mean angels won’t. If you can show a few million in sales and the ability to return dividends in the near-term there are always smart businesses professionals who will consider financing this. What are there other choices these days – money in a bank at 0.5% interest?

4. Bank financing – OK, so this isn’t immediately likely to come from Wells Fargo, but there are tech banks like Silicon Valley Bank or Square1 Bank that are in the business of financing startups. If you can show regular cashflow and are willing to put your profits into their bank you can often fund expansion this way.

Final message on financing – just be careful not to let your fixed costs get too high as a young services business. In a booming tech market like 2011 it’s easy to think your business will always expand. The problem with service businesses is that when the economy turns revenue & profits take a really big and quick hit. Those companies that have a largely variable cost base and make the tough decisions survive for the next boom.

Why Shouldn’t Service Businesses Become Product Businesses?
If you build a true “technology services for services sake” business at some point you’ll likely build technology products as part of your projects where you either own the IP or you own in jointly with your customer or business partner.

This is where many service businesses make mistakes and go pear shaped. They get “product business envy” because they read too much TechCrunch about their product brethren raising money at crazy valuations and getting sold at even crazier ones. So they set out to build a product business within a services company.

A few problems arise. Firstly, they don’t realize how hard product businesses are. They mistake their successes in selling services as a competency in selling products. This is a huge mistake. Secondly, they often ramp up their cost base to accommodate these costs, which when a down market hits they are more effed than those that stay focused. Finally, the focus on the product (envy) means that they take their eye off of their core business, which is services. So the core business suffers.

I saw this first hand. My first career was at Andersen Consulting (one of the largest services businesses in the world). We built a hugely successful global services business yet we never got over our product envy from watching our tech clients. So we created internal software projects and all of the internal consultants on those projects became blowhards who thought they knew how to create software product businesses.

We stunk at every product we ever created. We had no sense for gathering real customer requirements. We over-spec’d products. We built for our over-intellectual selves. I can’t think of any great software tools ever created internally by Andersen Consulting. We were a great services business. Period.

What Should Services Businesses do with Their Product Businesses?
So back to my advice to the company I recently spoke to about spinning out their tech business or raising VC. My advice wasn’t to shut down all product / IP initiatives but rather to be clear on their purpose and how to monetize them.

1. Products as a service sales machine – My dear friend Franck Meudec in Paris knows this best. He has built some internal technology products to support his services business. They are “loss leaders” for his core business. In stead of going in and trying to hold the line on how much to charge for these products he can tell customers, “Sure, we’ll give you our planning software at cost if you decide to work with us.”

His business is booming. These products help him win his core sales. He is not confused about which is the horse & which is the cart. He is building a services business. In stead of owning 1% in options to join a startup tech company he created his own tech services business. He is the majority owner. Higher risk, higher reward than joining as a junior employee somewhere else.

2. Products as a key differentiator – Another important reason for having internal IP in your services business is as a key differentiator against other services businesses. If a customer is faced with two equal choices for companies who can implement Salesforce.com – how do they choose one other than references & price? Imagine if you had build a few modules on top of Salesforce.com that made that product more effective? Even if you didn’t charge for these it would sure increase your sales hit rate.

Tech services business in booming markets are mostly about how fast you can sell, implement, manage quality, hire and sell some more. In a down market IP can become a huge differentiator.

3. Products as a gross margin bump – Finally, it should be said that in a services business often your implementation rate becomes a commodity relative to others in the market. If you can make an extra 10% on each sale by selling your “ad on” products that are at 90% gross margins not only will you increase your win rates but you’ll also add valuable profits to your bottom line.

In summary: I’m not advocating that companies are crazy to try and be product companies. In fact, that’s all that I fund as a VC. But I don’t want the narrow world of venture-backed companies and the trade rags that report on them to dissuade the overwhelming masses of potential entrepreneurs from building meaningful businesses that are both fun and economically rewarding.

Photo courtesy of Fotolio – check ‘em out. Thanks to Ryan Born.

This time last week, I wrote about my backstage tour of Cirque Du Soleil’s KÀ, at the MGM Grand. I also promised to go back and talk to the show’s technical director, Erik Walstad for TechCrunch TV.

In the video below, Erik talks about the technology behind Cirque’s most complex show, and in particular the two gigantic moving stages that form its centerpiece. Then we head to the auditorium to see that technology in action, as Erick’s team reset the show ahead of the night’s performance.

As I wrote last week, a video can’t begin to do the show – or its technology – justice, but Erick’s explanation of how the ‘Tatami Deck’ stage is just like a kitchen drawer is at least better than anything I could possibly write about it.

(And finally, there’s a special feature tucked at the end of the video. Spoiler alert: if you love English narrowboats, you won’t want to miss that.)

As we wrote earlier this year, OneRiot launched a social targeting service for mobile ads, that offers highly targeted ads within mobile apps. Similar to Klout’s social influence score, OneRiot has developed a “social interest score” to define mobile audience segments based on social interest categories.

With the new social targeting service, OneRiot allows advertisers to reach targeted audience
segments on mobile, from busy moms to tech influencers to sports guys to fashionistas. Segmentation and targeting are based on factors such as audience interest profiles, demographics, social influence and realtime conversations. OneRiot’s audience profiles are created by mining and analyzing public big data social streams from services (i.e.Twitter). The company says that this data is derived from users that heavily engage with content on their mobile device that is relevant to their current social activity, including status updates, tweets, photos, advertising and more.

Now OneRiot is opening this segmentation algorithm up to allows users to see your ‘social interest segments.’ The algorithm is based on a number of factors, including follow graphs, interest graphs, influence graphs, and the content behind links that are shared across those graphs. You simple enter a social media user name that you associate with on mobile (e.g. your Twitter handle) and OneRiot returns your “social interest segments” – along with an example an ad we might show you. H

For example, if you follow BBC Top Gear on Twitter, and other friends you follow post links to Auto pages on nytimes.com, then OneRiot would categorize that activity as belonging to the “Auto” category. OneRiot would then work with car brand advertisers like Volvo to help them deliver interest-based mobile targeting campaigns to the “Auto” audience segment on mobile.

Audience targeting isn’t new-it happens in online advertising all the time. But it’s interesting to see what segmentation you fall in as a Twitter user and how advertisers are placing you into a particular demographic.

We have early access to the tool for 140 TechCrunch readers. Those who are interested can send an email to [email protected], and the first 140 responses will get access over the next week.

This is a guest post from Ali Partovi, angel investor, startup advisor and serial entrepreneur. He co-founded iLike, acquired by Myspace in 2009, and LinkExchange, acquired by Microsoft for $265 million in 1998. His portfolio has included successes as far-ranging as Zappos, Facebook, DropBox and OPOWER. He was among the first to recognize the significance of the Facebook platform, and among the earliest to grasp the business opportunity of search.

Around Earth Day, we’re reminded about global warming and pollution, as well as the “green” technologies and consumer choices that may save our planet. We don’t hear as much about agriculture, one of the world’s largest polluters, nor do we appreciate the environmental impact of our diet.

According to research by the World Resources Institute, agriculture is mankind’s biggest contributor to climate change, generating at least 26 percent of greenhouse gas emissions worldwide — more than from all electricity and industry or from all the world’s planes, trains and automobiles. Other estimates suggest agriculture generates 36 percent of emissions.

Feeding the growing world population using today’s practices is increasingly unsustainable. Just as we need new technologies in areas like renewable energy, we need more “renewable” approaches to producing the most primal form of energy: food. Brace yourself for this two-minute video from the University of Minnesota, which summarizes the problem with some startling facts:

As an Internet entrepreneur and investor, my interest in food and agriculture began at home, taking care of my body and my kids. In 2008, my wife and I decided to adopt a healthier and more sustainable diet for our family. We switched to exclusively grass-fed meat and ate a bit less meat altogether, added more vegetables, and began raising egg-laying chickens in our backyard. That enabled our seven-year-old daughter to run a startup selling our egg surplus (image, below).

I was pleased to lose about 35 pounds within six months. But I was also surprised to find how inconvenient, obfuscated, and expensive it was simply to eat healthful, natural foods. I began studying the business and politics of food, convinced there must be investment opportunities that align with improving the system. Surely, I thought, there must be healthful, sustainable, yet scalable and profitable alternatives to our unsustainable food and agriculture sectors.

As a student of the space, I’ve seen enough parallels between food and energy to posit that food may be the next frontier in green tech. Like energy, food and agriculture are big, slow, and highly regulated sectors. But also like renewable energy, there might be opportunities for innovation and profit in “renewable food,” fueled by consumer preference today and by shifts in policy tomorrow.

Within the giant food sector the “organic” segment is growing fast thanks to a combination of consumer consciousness and government support. Organic food has enjoyed double-digit growth in the U.S. for two decades (from $1 billion in 1990 to almost $25 billion in 2009) and is growing to over $100 billion globally by 2015. Yet, organic agriculture still represents only one percent of U.S. farmland today. That leaves plenty of room for growth and opportunities for entrepreneurs and investors, especially given the increasingly apparent ties between food and global warming.

“The Other Inconvenient Truth”

We cannot forever feed ourselves on fossil fuel, deforestation, and greenhouse gas emissions.

Today’s food and agriculture practices consume enormous amounts of fossil fuel for transportation, operation of farm machinery, and chemical production of synthetic fertilizers and pesticides: roughly 10 calories of fossil fuel go into every calorie of food we eat, representing 19% of all U.S. energy consumption.

Agriculture emits greenhouse gases with an order of magnitude worse global-warming potency than CO2, such as methane (from intensive livestock operations and rice fields) and nitrous oxide (from fertilizers and factory farm waste lagoons). Another agricultural emission, nitric oxide, is the main driver of the new acid rain that is killing forests and fish. Run-off of excess fertilizer from cropland and excess manure from factory farms is the primary cause of enormous aquatic dead zones in coastal waters globally, devastating marine life (and ironically, threatening human seafood supply). These marine dead zones in aggregate represent 95,000 square miles (about 20 times larger than the area impacted by last year’s BP oil spill).

Agriculture is overwhelmingly the biggest cause of global deforestation (image, below), driven by livestock and growing Western demand for food commodities like palm oil.

There is hope of mitigating these issues. Via “new” techniques it should be possible for the food and agriculture sector not only to reduce its own emissions, but also to offset emissions from other sectors by removing carbon from the atmosphere. (I say “new” because in many cases the solution involves a return to nature-based, less industrial processes.) More importantly, it should be possible to make money and improve the environment – because the current system is inefficient and wasteful, leaving enormous room to move the needle by eliminating waste.

I’ve encountered promising opportunities, and in several cases personally invested in startups tackling these problems as an angel investor.

Reducing Food Emissions

One way to reduce the carbon footprint of our food is by eating locally grown food, reducing the fuel spent on transportation. However, the practicality of this varies regionally. Here are some companies making local food more widely available.

In the San Francisco area where I live, farmers’ markets and CSA (community supported agriculture) programs enable consumers to buy food from local farms rather than from thousands of miles away. A CSA is a subscription that delivers weekly food from a local farm. Although this offers advantages to both consumer and farmer, such programs are less prevalent in other regions and represent a negligible fraction of the food sector.

A tech startup I invested in, Farmigo,  is stimulating this alternative food system for consumers to purchase directly from local farms, removing middlemen and reducing food transportation. Farmigo’s Web platform enables buying directly from a farm while simplifying logistics for farmers.

What about regions that simply don’t have the climate to produce fresh food year-round? If you live in the East Coast or Midwest, your lettuce and tomatoes have likely spent an expensive week riding thousands of miles in a refrigerated truck from Mexico or the West Coast. Another startup I’ve invested in, BrightFarms, aims to eliminate shipping costs by building greenhouses on the roofs of supermarkets, producing the most “local” food imaginable.

The business model is directly analogous to what’s scaled successfully in solar electricity– and not a coincidence, because both represent techniques of converting sunshine to energy that humans can use. BrightFarms is an excellent example of aligning environmental goals with profit by eliminating waste, because photosynthesis is very efficient, whereas trucking a tomato 3,000 miles in a fuel-guzzling fridge is not.

Transportation aside, agriculture’s carbon footprint includes the natural gas and petroleum consumed to produce chemical fertilizers and pesticides, as well as the nitrous oxide released to the air due to over-application of those fertilizers. A startup named Solum hopes to help on both sides, by enabling farmers to reduce fertilizer usage via more accurate, real-time measurement of soil chemistry. Solum is backed by Khosla Ventures, one of the world’s leading green-tech investors.

Carbon Sequestration

For millions of years, atmospheric carbon was trapped by photosynthesis and stored in the ground. Human agricultural practices have upset this balance.

For example, much of North America, once covered by carbon-trapping grass, has been transformed to grow corn, using fuel-intensive inputs and releasing greenhouse gases into the air from tilling and over-fertilization, largely to feed animals that eat grass in the first place. Cornfields require annual tilling, which releases soil carbon to the atmosphere. They conduct photosynthesis only part of the year, and most of the carbon and calories they capture stay in the kernels, soon to return into the air via digestion. Grass, on the other hand, is a carbon sink, burying most of its carbon and calories in the soil, where it remains.

Americans eat only a small fraction of the corn we produce and much of it in the guise of ingredients like high-fructose corn syrup that aren’t essential for human nutrition. About seven times more corn than what we eat is used to feed livestock like cattle (which can digest grass more easily than corn).

Livestock represents a disproportionate part of food’s carbon footprint. If more sustainable techniques are scalable, they might be among the most leveraged ways available to combat global warming. The Union of Concerned Scientists has recently stated that raising cattle on grass can be a net carbon sink whereas feedlot cattle operations are a net carbon emitter. Studies suggest that grassland sequesters more carbon than a forest. There is also evidence that grass traps more carbon when grazed, provided that the livestock be moved periodically (moderate grazing causes grass to grow back healthier, whereas clear-grazing kills the grass).

This sounds great for the environment, but is it economically feasible? The Savory Institute is using managed rotational grazing (MRG) techniques to restore America’s grassland while often doubling or even quadrupling livestock capacity at the same time.

The premise of MRG is to mimic the behavior of roaming ruminants that evolved over millions of years: a herd chews the grass, stimulating plant and root growth and letting sunlight reach the growth points. Then the herd moves on to greener pastures, leaving behind manure (fertilizer) and hoofprints that soften the soil and help water retention and seed germination. MRG mimics this by moving cattle from one plot of grass to another daily. Wild birds also fit in nature’s cycle: they follow a herd to feed on dung beetles, in the process providing pest control and spreading the manure. A new breed of farms mimics this by raising chickens in mobile cages and coops that are moved into a plot of land once the cattle have left it. Essentially, MRG uses livestock to do the job of fuel-intensive tractors, fertilizers, and pesticides.

Increased consumer awareness is fueling demand for 100 percent “grass-fed” or “pasture-raised” meat and poultry raised using these practices. A growing sustainable food movement, the culinary equivalent of renewable energy, is enabling Bay Area meat and poultry producer Marin Sun Farms (image, right) to enjoy an enviable combination of high-margin sales and exponential growth.

The biggest obstacle impeding Marin Sun Farms’ growth today is inadequate capital. It cannot secure land, water, and animals fast enough to meet the growing demand. This dynamic reminds me of the early days of Zappos, when Tony Hsieh was desperately seeking capital to secure shoes fast enough to meet the growing demand.

One might ask, is this scalable, or is it an anomalous niche? As it was for Zappos, that is the billion-dollar question, and I don’t know the answer. But it certainly makes basic economic sense. Feeding livestock on grass is patently efficient. The animals convert inedible, naturally occurring vegetation to human food, while recycling nutrients to sustain the grass, without requiring costly fuel-intensive chemicals or machinery.

How did we end up with a system so inefficient?

In the U.S., we’ve had decades of corn subsidies that motivate farmers to over-produce corn, resulting in a surfeit of corn that has skewed market dynamics. This has made it artificially “affordable” to feed corn even to animals that were never evolved to digest it (salmon, for example). Such subsidies might have made sense if America’s problems included a shortage of food calories. But today, we face different problems, such as a health-care and budget crisis, a fuel crisis, and a climate crisis. Our policies ought to reward farming practices that alleviate these problems. Consumer consciousness may be enough to make sustainable food profitable in the short-term; but in the long-term, shifts in policy are necessary.

The good news is that governmental policy can be aligned to help in more ways than one. The most elegant but most politically infeasible solution might be to cut corn subsidies. But there are many other regulatory levers. For example, government could offer a “grass subsidy” to reward land use that traps carbon in the soil, aligning with a broader carbon policy. The FDA has suggested that it might regulate antibiotic use in livestock, which would make our food system not only safer but also better for the environment.

Health-based efforts to combat obesity will likely help the environment as well. Carbs in our diet and carbon in our atmosphere are closely linked, and generally lead back to corn subsidies (AKA “carb subsidies”). Lastly, the U.S. Department of Agriculture“Certified Organic” labeling program is a huge marketing boon to environment-friendly practices and can be expanded.

The government could offer additional subsidies to help farmers bridge the transition to organic, or tighten its criteria for animal products to support more carbon-neutral practices. For example, last year, the USDA released tightener standards for organic dairy, requiring that dairy animals be at least 30 percent grass-fed to qualify as “Organic.”

Conclusions

Our food and agriculture system is particularly broken, but we can’t simply wait for the government to fix it. As with clean energy, there are many opportunities for private enterprise to stimulate progress while making a profit. Some of the short-term opportunities in food might be to leverage consumer awareness and build a brand that stands for environmental consciousness, while aligning for longer-term regulatory changes to level the playing field.

Broader consumer awareness of the problem is critical, whether to make the private enterprise opportunities more scalable, or to precipitate political change. This is why I’m personally considering engaging more vigorously on this issue, using my background in social platforms and grassroots marketing to help more Americans discover the truths about their food and to build a movement to fix it. Please check out my one-day-old website FixFood.com and lend your voice there.

We cannot feed ourselves forever on the current system. The time for developing more sustainable alternatives is right now.

Images:

Editor’s note: This post is co-authored by guest contributors Jon Bischke and Semil Shah. Bischke founded eduFire and RG Labs and is an advisor to Altius Education and Udemy. Shah is an entrepreneur interested in digital media, consumer Internet, and social networks. You can follow Jon (@jonbischke) and Semil (@semilshah) on Twitter.

In the debate sparked by Peter Thiel’s “20 Under 20 Fellowship” (which pays bright students to drop out of college), one fact stands out: the cost of U.S. post-secondary education is spiraling upward, out of control. Thiel calls this a “bubble,” similar to the sub-prime mortgage crisis, where hopeful property owners over-leveraged themselves to lay claim to a coveted piece of the American dream: home ownership.

Higher education is another piece of this dream, offering a chance at social advancement and the potential for a high return on investment. During the sub-prime crisis, brokers financed home sales on the belief assets would appreciate. A similar situation is brewing on U.S college campuses, where institutions extract high tuitions from consumers in exchange for degrees and credentials that are thought to be like homes—assets that will always appreciate in value.

An investment in college education has historically been a smart bet. However, in the same way sub-prime housing models didn’t accommodate for potential price falls, the belief that the value of a college degree will always appreciate is potentially flawed. And, if the value of a degree stagnates while its price tag soars, our higher education system will become unsustainable.  Some are going so far as to claim that some university degrees already lead to a negative return on investment.

What is driving this change? Assume, as many economists do, the primary value component of a post-secondary degree is the positive signal it sends to the market. In the 1970s, the economist Michael Spence released his work on labor market signaling mechanisms, which emphasized that a prospective employee’s credential was often a more powerful determinant of whether an employer would hire him, even if the applicant hadn’t yet acquired the relevant knowledge needed for that specific job. This thesis earned Spence a share of the 2001 Nobel Prize.

Today, however, the credentialing provided by universities is becoming decoupled from the knowledge and skills acquired by students. The cost of obtaining learning materials is falling, with OpenCourseWare resources from MIT and iTunes U leading the charge. Classes can be taken online on sites like Udemy and eduFire, either for free or a fraction of the cost to learn similar material at a university, and sites like Veri, which recently launched at TechStars NYC Demo Day, aims to organize and spread one’s accumulated knowledge.

While the “cost” of learning is falling dramatically, the cost of college continues to rise. College costs consist of a wide variety of items including room and board, entertainment, and materials. At least when it comes to materials (i.e. textbooks), start-ups are playing a disruptive role: Companies like Chegg and Bookrenter have changed the paradigm from owning to renting a textbook, and companies such as Inkling, Kno, and Flatworld are betting students will prefer to use digital and/or unbundled course materials.

With all this progress, the toughest nut to crack is tuition. One possible explanation for rising tuition is that universities have long held a monopoly on labor market signaling. Graduating high-school students, for instance, may have been less likely to advance in their careers or society without an undergraduate degree and, increasingly, without some sort of graduate degree. To date, universities have been the only real provider of such signals that young hopefuls need in order to convince employers to hire them.

The tide may be starting to shift. In Silicon Valley, for example, Y Combinator provides a learning environment that looks somewhat similar to an institute of higher learning, but rather than create graduates shouldering debts (which impact their career choices), it produces graduates who learn relevant skills, create companies, and earn money along the way.

The challenge with these new models, however, is that they are not very scalable. At the same time, more potentially scalable models for signaling are emerging. For the past year, certain companies have been hunting for engineers and designers by following projects and reputation metrics of users on Github and Dribbble, as well as Quora and Twitter. In fact, companies have been scouring sites like Stack Overflow to help with hiring so frequently, the company created Careers 2.0, a product designed specifically to pair employers with technical job seekers.

A tenet of Clayton Christensen’s theory of disruptive innovation is that potential disruptive threats are often dismissed as “toys.” If one asks university officials if the academy may face a signaling threat from an online community, the threat may often be dismissed. However, what was once measured through tests and GPAs could conceivably one day be comprised instead of entirely different metrics. This is the new reputation graph where, unlike a university degree, individuals can build a reputation online that doesn’t saddle them with astronomical sums of debt, nor require them to spend a better part of a decade in class during the prime of their lives.

If a scenario plays out where alternative signals begin to rival traditional degrees, this won’t necessarily be a bad thing for universities. In fact, it could be quite healthy by forcing schools to re-think their product offerings and tuition. The days of jamming 500 students into lecture halls supervised by graduate students and charging them several hundred dollars per credit hour for the “privilege” of learning in this fashion may be numbered. Universities may acknowledge that they are not the only stamp of endorsement. The numbers are showing a changing tide: The Economist reported this week that middle-ranking business schools are seeing a “significant decrease in demand” and a Slate article from last month cited an 11.5% year-to-year drop in the number of applicants to law schools.

The fresh cadavers from the shakeouts in the music and publishing industries should provide motivation to presidents, chancellors, and provosts to look seriously at this problem, as many of the same dynamics that disrupted those industries are now at play in higher education. As students around the world start preparing for their year-end exams, it will be interesting to see how seriously leaders of universities prepare for one of the toughest tests that they’ll ever face.

This Q&A with Survivor host Jeff Probst was conducted by guest writer Narendra Rocherolle, CEO of The Start Project. He and his partners hold the curious distinction of selling their company, Webshots, twice.  Narendra is an occasional contributor to TechCrunch, you can read a Q&A with Lance Armstrong here. He is @narendra on Twitter.

The CBS show Survivor is completing its 22nd season—a run with a business and social impact that are reserved for extraordinarily few productions in Television history. Survivor launched the Reality TV genre and has managed to continue to do well during a decade where the very foundations of TV have been shifting. The show’s host Jeff Probst has been a mainstay and a driving force behind the show’s continued innovation in storytelling.  I recently caught up with him to get some unfiltered thoughts.  If you have questions or comments you can direct them to @jeffprobst on Twitter!

What was the genesis of JeffProbst.com?  Can you talk about how all of your social media efforts are tied or not tied to CBS, your contract, etc.? 

I’m fascinated by the major shift taking place that allows for truly global conversation with people all over the world. JeffProbst.com offered the opportunity to own my content and also provided the ability for me to take control of my voice and not have to rely on other outlets to accurately convey the things I want to share.

Survivor is a deceptively complex media property because you have multiple narratives: the game, behind the scenes details, and deeper looks into the actual participants. Building on these narratives, you are now live tweeting during Survivor shows (both East and West coast feeds).  Where did you get the idea?  

I am a big Howard Stern fan and one weekend he tweeted while watching a re-run of his movie, Private Parts.  That was the inspiration for me to do the same thing with Survivor fans.  I wanted to continue the conversation and give them more of what they crave, which is behind-the-scenes information and personal insight. In addition, I learn valuable information about what is and is not working for the show.  It’s a very satisfying, albeit time consuming, effort.

Any thoughts on the Twitter medium in general? 

I think Twitter is just another amazing step in the ongoing transition that will change so much of how we communicate as a world.  Twitter will not be the final frontier but Twitter and Facebook are definitely the pioneers.

Do you feel like there has been adequate production resources to explore these other narratives?

No. I feel we are in the very early stages of this global conversation and almost all of the traditional networks are very far behind when it comes to utilizing social media.  Initially, CBS didn’t know or care that I was tweeting.  Once they saw people tweeting back with comments like “I used to DVR, but now I watch it live” they took notice.  They are on board now but I still think we are in the early stages of what will be a global transformation.

In your mind, how has your role as host on the show changed over time? 

I’m much more involved than I was in the early seasons. It’s been a natural evolution.  As the game has changed, so have I.  I have always had a point of view but CBS wasn’t comfortable including it in the show until around season five, Survivor: Thailand.  At that point things really started to evolve.  It’s a great job in that I get to be myself, say what I’m feeling without any fear of retaliation because I’m not playing for a million dollars.  I have nothing at stake.

Since you know the outcome (to the finalists) for each season, how difficult is it to blog and tweet without accidentally giving something away or unduly influencing perceptions of the story that is unfolding?  

I always have somebody else proof it to make sure I’m not giving anything away, but in general I’ve become oddly comfortable forgetting what happened when doing interviews and just speaking as an audience member about what I see and what I think.

You recently conducted a fascinating Skype video interview with 3-time Survivor participant, Russell Hantz.  It is notable for many reasons (including being a video of a video, 15-minutes long, and having poor lighting).  Yet, It is incredibly compelling because it is the real thing, composed not long after the airing of an episode, and with a participant who is both wildly charismatic and creepy/off-putting.  What were your goals with that video?  

My goal was to have an honest interaction with Russell.  To achieve that I felt it important that we limit the interference as much as possible.  Russell had never skyped before that night so it was definitely a new experience.  We shot the interview on my iPhone and uploaded it about 20 minutes after the interview.  There was great feedback and I would do it again but only with someone that I felt really had something unique to offer.

Is it strange to be producing and creating content that has a completely different quality than the high gloss Survivor shows?  Does this lend to authenticity or does it chip away at the brand that Survivor and CBS has been building? 

I really haven’t done that much, but I’m not worried about chipping away at the brand.  Not at all.  If anything this adds to the experience.  The advent of all the new technology is fantastic in that it lets anybody be a filmmaker or story teller.  Anybody could have shot the interview with Russell and posted it on You Tube.  If your story is compelling nobody cares what it looks like. On the other hand, if your story isn’t compelling then it can be as pretty as a sunset, it won’t matter, nobody will care.

Why choose to have clunky Google ads on your site?  Is there no title sponsor that will step up to the plate? 

Fair criticism.  We are new to this and experimenting.  Agreed.  They are ugly and don’t provide much content at all.  You may be the impetus to lose them all together.

Survivor TV audiences have cracked 20M viewers.  Your YouTube channel has 500+ subscribers.  How does starting from ground zero affect the way you look at the history of Survivor? Or media and distribution in general?  

It doesn’t.  I’m not on a show that will ever attract that kind of attention again.  Our day was 8-10 years ago.  We’re no longer the new kid on the block.  This is a personal experiment for me.  I have no idea how many twitter followers I have and I don’t read the stats for how many people visit the website.  It’s about content and connection.

I am not sure people realize how dedicated you are to these new channels.  You have a heart-felt video talking about people posting spoilers to your blog.  On TV, you appear to be the alpha dog when it comes to controlling the contestants.  Online, that is obviously much more difficult. What are the big challenges you face in trying to both create online content and build community? 

For me it is simply about authenticity.  There is so much hyperbole online that I know I can’t compete.  Everybody vying for our attention.  Celebrities are the worst. So instead I am just posting stuff that interests me.  I am ignoring the pressure that I can sometimes feel to always post new stuff or to “please” people.  You will never win that battle.  I just don’t have the time to monitor it all day.  For that reason alone it will never be a huge site.   But as I said, as an experiment, really fascinating.
Can you also comment on your hope that your blog can grow into a broader discussion forum? How do you measure success in this case? 

Great question.  Not sure how you measure success.  If you have a dialogue with one person and that impacts your life or theirs; does that equate to success?  If you interact with millions and discuss the best cup of coffee does that equate to success?  I really don’t know.  I’m a neophyte.  I do believe a global conversation will be had in the near future and I hope to be involved in some way.

When you are on location how much time or thought goes into ancillary content and future social media concepts/angles?  How has that evolved or changed in the last few years? 

This will be the first time on location with my website, so we’ll see!  I’ve done behind the scenes over the years.  The reason for those was two-fold.  Give fans more insight and give young producers the chance to prove themselves.

Can you talk a little bit about philanthropy and the extent to which your Survivor experience has informed your awareness/concern?

I’ve been involved in many organizations including EGPAF and St. Jude’s.  A few years ago I founded my own non-profit,The Serpentine Project, to help foster youth.  We just merged with The Alliance For Children’s Rights.  It’s been a great journey and a very powerful experience.

How many hours a week have you been spending online dedicated to various projects? 

It really varies.  I do the blog which takes a few hours to write.  I tweet online live on Wednesday nights during Survivor which takes a few hours and then I post stuff occasionally.  The trick is finding the time.  It’s all about how you want to spend your time on the planet.  I strive for balance.  A bit of this, a bit of that.

What do you love about Survivor?  What has kept you at it? 

The study of human nature.  It’s endlessly fascinating to me.  Why we do what we do.  Justifying our ethics.  All of it.  I learn so much about myself through others.

Do you have any specific regrets over 22 seasons about your own performances? 

I always try to move forward and learn from each situation.  There are many things I could have done differently over the years but it’s a live, unscripted show.  You prepare for what you think might happen, do your best and try to learn from it.

While I have you on the spot, a truly pressing question. Over the years you have settled on an incredibly awkward gesture in conjunction with “Survivors ready…Go!”  It is this strange double armed thing where you always look like you aren’t quite sure that you are going to get it right.  What gives?  How about waving a flag or no gesture at all? 

Very fucking funny.  Finally somebody said what I’ve been feeling for years.  It all started on episode one, season one when I had to let the first group of Survivors know when to start a challenge.  They were way out in the water and so I threw up my hand and dropped it as a signal.  It stuck.  Not my greatest idea.  Then again had I known we’d be on 12 years later I might have chosen a different wardrobe too!

If you’re an early stage venture capitalist or angel investor there is no time like the present to declare a bubble, say valuations are out of control and predict the demise of the tech industry in the very near future. Since they’re in the business of buying low and selling high, any angle that suggests that the buy price should be even lower sounds great to them.

If there’s any evidence of said bubble all the press will eat it up. Mostly because they were out buying Internet stocks in 2000 instead of doing their jobs and reporting on the fairly obvious signals that the Nasdaq was about to implode. They won’t get caught with their pants down and their hand out again. Declare a bubble early and declare it often.

And there is some evidence laying around. Valuations on a few select private tech startups are pretty darn high right now. And valuations on early stage “Series A” startups have surpassed the all important $4 million line and are now averaging in the $6 million – $8 million range.

That’s bad for seed fund economics. Which leads to paragraph 1 above, followed by paragraph 2 in the press.

There are a lot of arguments that whatever is happening today in tech is absolutely nothing like what happened in 1999-2000. If you weren’t in the industry then, it’s understandable that you’d be concerned when you see Facebook being valued at up to $70 billion in private transactions. Heck, even I’m concerned when I see companies like SecondMarket holding public auctions for Facebook stock, driving the price ever higher, and private equity firms like Felix Investments out there pitching Twitter stock as a must have to any retiree with a million dollars.

But this isn’t a bubble. It’s more like a Blubble.

A Blubble? Yes, a Blubble. Because there is a lot of whining going on.

The biggest problem in 2000 wasn’t that companies were being formed in triplicate to address the burgeoning pet food home delivery needs of consumers. Or even that billions of dollars was being invested in new ideas, most of which didn’t work.

No, the biggest problem was that no one had any idea how to value these companies. It was clear by the late 90s that this Internet thing had legs. And everyone wanted to be at the party. People flocked to Silicon Valley to take jobs like “Business Development Manager.” Anyone can be a biz dev executive because it’s not a real job. It’s kind of like sales but you usually don’t have any kind of quota. You just work on “deals.”

Business development, marketing and sales jobs exploded. If you had experience selling anything, or were willing to give it a try, there was a hot new well funded Internet startup that would hire you, pay you at least $100k, give you a bunch of stock options and then actually loan you the money to pay for those stock options immediately, getting your long term capital gains period started.

When I left the law firm I was working at I became VP of Business Development the startup I joined, a former client. I was running the sales group too within a few months. I was 29 and had never sold anything in my life. But there I was, doing deals and in the thick of things. My stock options, Morgan Stanley told me, were worth over $40 million.

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That story has a sad ending. I’ll tell you all about it later. Short version is that by 2001 I was basically broke and moved to London where I learned to appreciate drinking heavily at lunch every day because that’s what you did in London.

But back to the Bubble and the Blubble.

The problem in 2000 is that all anyone cared about was revenue. Users and page views were an afterthought. Profit was a pipe dream. But revenue. Now that was something that Wall Street understood and could put a value on. Everything was valued at a multiple of revenue. It didn’t really matter how unprofitable you were. Which is why WebVan, for example, could blow though a billion dollars and be nowhere near profitability and still go public. And then go bankrupt right after investors cashed out big. Everyone lost money on every transaction and nobody cared. Because your stock price was tied to revenue, and when you ran out of money raising another hundred million dollars was nothing more than a fancy powerpoint presentation and a month’s work.

As a lawyer I sat in board meetings for my clients. And in those meetings I saw very well known venture capitalists tell these companies to spend as much money as they could as fast as they could, and then raise a bunch more and spend that as fast as they could. Hire anyone remotely competent who comes in the office, they say, and figure out a way to create revenue. Even, they said, if you have to spend $10 to get $1 in revenue.

A perfectly reasonable 2000 tech startup business decision – spend $10 million on a massive advertising campaign that may bring in $500k in revenue. The “branding” value makes up the difference, and those few new customers will continue to spend money and tell their friends! Grab territory while it’s there to be grabbed, the thinking went. We’ll figure out the business later. Money was so easy to come by, it made sense to some.

Take the startup I worked at, for example, called RealNames. When I was put in charge of sales I was told to get us from zero revenue to $1 million/quarter in revenue. We achieved that goal through hard work and creative accounting. And boom! Morgan Stanley was brought in to take us public. At the first internal meeting for the IPO they told us that we could expect to debut on Nasdaq at a $1 billion valuation, and should trade up quickly to a $9 billion valuation, which was the market price for Ask Jeeves at the time. I had about half a percent of the company in stock. Thus, my $40 million net worth.

That IPO never happened because in March 2001 the Nasdaq crashed. And then all those creative revenue deals fell apart.

In the most innocent cases Company A would buy a bunch of ads or whatever from Company B. Maybe a $5 million deal over 24 months. Company B would then buy a bunch of stuff from Company A. Say $4 million over 18 months. As long as the deals weren’t mirrors and they were separate and binding contracts the accountants were high fiving everyone.

Everyone was doing those deals, particularly the public companies that absolutely had to keep those revenue numbers up to support their valuations. Note that I haven’t said a word about profits.

Some people, many of whom were subsequently convicted of felonies, were forward thinking enough to begin to hide the fact that these were reciprocal revenue deals. They invented “triangle deals” involving at least three companies so that there were no mirror deals between any two companies. AOL was particularly fond of these deals:

The prosecution alleged that Homestore was engaged in “triangular” deals. That meant it would buy goods from a third-party vendor, the vendor would make a purchase from a counterparty, and the counterparty would then place other companies’ advertising on Homestore’s websites and pay Homestore the remaining revenues.

The indictment said Homestore should not have recognized revenue on any of the transactions but listed the money as revenue on its financial statements. AOL, the decision said, served as the counterparty in 17 transactions included in the indictment.

I once sat in a meeting where a Homestore executive pitched me on participating in one of these deals. Even in the craziness of the 90s, it smelled awful.

So to sum up.

2000 Bubble: Raise at least $100 million in venture capital. Spend! Hire everyone (particularly sales people)! Get revenue by any means necessary! Go Public! Sell Your Stock! Run!

2011 Blubble: Drag blubbering angel investors into Series A rounds valuing your company at $6 million instead of $4 million. Hire engineers, lots of them, as many as you can. Don’t hire non-engineers or other overhead people unless you absolutely have to (thus the dearth of VP Biz Devs around). Your APIs are your sales team! Balance fast growth with low burn (through cost controls or profitability). If you happen to have started Facebook, Groupon or Zynga, capitalize on your massive profitability by doing big late stage rounds that value you at something like 30x forward profits (which isn’t that crazy). If you’ve founded Twitter and have no revenue, capitalize on the massive worldwide cultural impact you’ve created instead.

But no one. Absolutely no one, is telling startups to raise and spend money as fast as they can. With the possible exception of Color. I have no idea what those guys are up to over there in crazy picture sharing land.

Image credit!

All week long we’ve been running clips from the Founder Stories interview with the GroupMe Guys, co-founders Jared Hecht and Steve Martocci. In the video above, they answer some rapid fire questions about how to impress startups during an interview (give great product feedback), what do they look for in “social engineers,” and what is the hardest part of running a startup (delegating and hiring).

Host Chris Dixon mentions Paul Graham’s essay on how founders should split up their time into a Maker schedule and a Manager schedule, and how in practice that turns out to be impossible. “Balancing the founder stuff on top of your actual responsibilities” is really tough, says Martocci. (Disclosure: Dixon is an investor in GroupMe through Founder Collective)

The full interview from the past few episodes is below, or you can watch each segment via the related links at the bottom of this post. You can also check out other previous episodes of Founder Stories or subscribe in iTunes.

Related:
(Founder Stories) Who Are These GroupMe Guys?

(Founder Stories) GroupMe: Is Group Messaging The Thin Edge Of The Wedge

(Founder Stories) How GroupMe Won SXSW: Grilled Cheese

At the end of last year, social networking site myYearbook shifted its focus more towards games and introduced a live video chat feature which could have completely backfired. But instead of turning into the next Chatroulette, the site has managed to keep the unwanted live porn vids to a minimum. While Chatroulette still has an estimated nudity rate of 1 in 50 videos, myYTearbook was able to cut its nudity rate down to 1 in a 1,000. In a Q&A with myYearbook CEO Geoff Cook, he explains the strategies he used to get there.

Q: When you decided to add live video chat to your site, what were you thinking? I mean, seriously, what were you thinking?

When we decided to build a Live Video gaming platform, the best example of Live Video at scale was Chatroulette, and it was full of porn. At the time, 1 out of every 10 video streams on Chatroulette was obscene.

Chatroulette was growing in part because it was obscene—it was the accident victim and the public was the rubbernecker. Chatroulette’s traffic peaked in March 2010—the same month that Jon Stewart screamed into the camera “I hate Chatroulette!” to end a segment that would be the service’s high water mark.

While we were bothered by the content, the visceral social experience that Chatroulette represented was compelling. We loved the serendipity of the Next button, and set out to build a service that would allow the promise of the Next button to be realized. A lot of our effort went into matching users based on location, age, and gender in real time while building out a gaming-platform to give them something to do beyond chat. Since launching in January 2011, we’ve grown to 750,000 video chats a day with 100 times less nudity than Chatroulette a year ago.

Q: How did you do it?

The core of our abuse-prevention approach is a system that enables us to capture and analyze thousands of images a second from the hundreds of thousands of daily streams. We sample the video streams of users at random, frequent intervals and then conduct processing—both human and algorithmic—on the resulting images.

Q: What did you find out from this process?

One early finding was that images with faces are 5 times less likely to contain nudity than images without faces. If you’ve ever used Chatroulette, this will make sense as the most common pornography encountered there contains a body part other than, ahem, the face. This is useful information because open-source facial recognition is relatively advanced while other-body-part detection is much less so. As a result, it is possible to use the presence of a face to limit some of the human review problem.

Q: Does the fact that there’s a face in an image mean it’s free of porn?

The mere presence of a face does not make an image clean. In fact, around 20% of nudity-containing streams also contain a face. However, with a lot of effort and additional processing logic including many factors like chat reputation, social graph, motion, etc., we’ve made the presence of a face helpful in determining “safe” images. Of course “safe” images may themselves be a false negative, and so we do human sampling of these images at a lower sample rate than images not marked “safe.”

Q: What happens once a human steps in?

The heart of our human-powered solution is a two-tiered image review organization that enables each individual reviewer to scan 400 images a minute looking for abusive content. Both groups are 24 x 7 x 365. Our goal is to be no more than 5 minutes delayed in reviewing streams.  We have a zero tolerance policy. If two reviewers deem your behavior inappropriate, your account is removed and you are banned from the site forever.  Based on our findings, we believe purely algorithmic approaches to moderation will never provide adequate safety.

Q: How does this compare to what Chatroulette is doing?

As our product has grown, we’ve noticed Chatroulette make some progress in reducing their nudity problem as well.  On a recent night, a review of 1,500 Chatroulette video streams yielded a 1.9% abuse rate—or roughly a 1 in 50 chance of encountering nudity on any click of the Next button. This compares to a less than 1 in 1000 chance on myYearbook.

Q: Why the order-of-magnitude discrepancy?

myYearbook requires a login. While much has been made of Facebook Connect as an identity-layer that will discourage abuse, we don’t believe the identity aspect plays much of a role per se. Someone who is interested in taking down their pants will do it even on their iPhone in the now-banned iChatr app, which was quickly overrun by abuse, despite the fact that every phone can easily identify you uniquely. The more salient aspect is that there be any login.

Q: What difference does a login make?

So long as there is any login, a user’s device can be blocked—and we’ve found people who take down their pants for strangers generally lack a certain je ne sais quoi when it comes to circumventing security systems—unlike, say, spammers. We use a technology called Threatmetrix to fingerprint devices and ban both the user and their physical device when we detect abuse. Threatmetrix helps provide the teeth of our zero-tolerance policy.

Q: Couldn’t you do this with photos also?

Our system for reviewing live video has proven so successful that we are now actively engaged in bringing a similar system to bear on every photo uploaded to myYearbook. In a few months time, we will have perfect insight into every image being posted to the service, and we believe we can make incremental gains there as well by fundamentally turning a report-based system into a pro-active system. Eradicating abuse from user-generated content is a never-ending, human-and-machine-intensive problem that may well spell the difference between success and failure, especially when you are dealing with live video.

Image: Nick Bilton

Thanks to the revolutions happening in the Middle East, our leaders have been touting social media as the new force for democracy. President Obama went out of his way to schmooze Facebook employees this week. He told them that when it comes to solving the challenges our country faces and to precipitating changes in the rest of the world, they were “at the cutting edge of what’s happening”.

It’s great that Silicon Valley is getting all this love and affection. But could this attention end up killing the golden goose? Think about it: if you are an evil dictator, looking for an excuse to block Facebook and Twitter, what better propaganda weapon than a picture of President Obama getting chummy with Mark Zuckerberg? Yes, I know that the U.S. government didn’t invent Facebook or even figure out how to use it until recently; and that it doesn’t control Facebook’s policies. But don’t those pictures and video clips tell a different story?

While the President was visiting Facebook’s campus I was having lunch with Twitter founder Biz Stone. We discussed the pitfalls of entrepreneurs cozying up to government leaders. Biz clearly understands the good that his technology can do for the world, and the responsibilities that potential brings. He said that Twitter had developed stringent policies about what information they would release to any government or authority; the company keeps a distance. Biz believes that Silicon Valley’s role is to develop world-changing technologies, and to leave it to others to effect such change.

I agree with Biz. Rather than leveraging the PR opportunities that Silicon Valley affords, our government should instead focus on removing barriers to entrepreneurship in the U.S. and encourage entrepreneurship abroad.

As I have written in this piece, if the President really wants Silicon Valley to continue to lead the world, he should unconditionally support the Startup Visa (and clear the skilled-immigrant-visa backlog). Right now, the President is saying all the right things about the need for skilled immigrants, but is bundling this legislation in with other bills that have virtually no chance of passage. And he should fix government procurement systems so they are not rigged in favor of big contractors—who charge as much as a hundred times more to build and maintain computer systems and infrastructure than Silicon Valley’s entrepreneurs would.

To encourage the spread of democracy and increase global economic prosperity, the President should apply the principles of Expeditionary Economics—which has been championed by Carl Schramm, president of the Kauffman Foundation.

In a nutshell, expeditionary economics is about reorienting economic development efforts away from the conventional wisdom, which usually fails on one of two bases. In places such as Iraq and Afghanistan, where the U.S. military has (often out of necessity) taken the lead in trying to stimulate economic activity, the approach is typically to focus on large-scale projects, including infrastructure and the revival of state-owned enterprises. The “build it and they will come” mantra has failed, though, even in American urban-revival efforts. The second dismal convention of international development has been on painful display in the revelations this past week about Greg Mortenson, adored author of the book Three Cups of Tea and purported savior of a myriad of Afghan and Pakistani villages. It turns out that Mortenson not only fabricated parts of his story but also misappropriated charitable funds. Whatever comes of this, Mortenson’s work and the accolades he received for it typify the expiatory nature of Western development aid: it is a redemption narrative played out across the world, as sainted Westerners bring relief to the benighted hordes.

Lost in both of these dimensions is precisely what drives economic growth in most of the world: entrepreneurship, and the efforts of individuals to take their futures into their own hands and create something new. The emerging field of expeditionary economics seeks to reorient international development toward the promotion and support of entrepreneurship.

We’ve seen how Silicon Valley can help change the world. Facebook and Twitter were the tools used for fomenting revolutions; a prominent Google employee played a large role in organizing demonstrations in Egypt; advanced cell-phone and security technologies are allowing people to overcome government controls.  Let’s create more of these. But let’s do it without government involvement and without the photo ops.

Editor’s note: Vivek Wadhwa is an entrepreneur turned academic. He is a Faculty and Advisor, Singularity University, Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School, Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University, and Distinguished Visiting Scholar at The Halle Institute for Global Learning at Emory University. You can follow him on Twitter at @wadhwa and find his research at www.wadhwa.com.

The Gillmor Gang — Danny Sullivan, Doc Searls, John Taschek, Kevin Marks, and Steve Gillmor — endured technical glitches and a dissection of the disruption formerly known as TV before settling into a debate about privacy. I know, sounds like the usual nonsense, but this show was high quality nonsense. I forget who brought up the famous iPhone/Android hidden recording file crisis, but things quickly got out of hand when one of us suggested that was a feature not a problem.

It turns out that not that many people are aware that when we are on the Internet, everything is recorded. For those who seem surprised by this, all those free apps are actually there to harvest our clicks, searches, and other gestures of our intent. As Doc Searls pointed out, how else does Google make money except by random clicks on Adsense adding up to billions. It’s only when we can’t figure out how to delete our wanderings that people get upset. Me — I count on being surreptitiously tracked so I can go back and figure out where I was last week.