Friday, November 01, 2013

Alfidi Capital at GMIC Silicon Valley 2013's Fusion of Mobile and Everything

I attended the GMIC Silicon Valley 2013 mobile conference last week at Moscone Center.  This is the first I've heard of a "Silicon Valley" event taking place in San Francisco.  That can be good news if the mobile / cloud / Big Data morphing process is producing a dynamic synergy that will boldly reengineer business processes into a new paradigm, or something like that.  I sure hope the VCs in attendance found some mobile startups on the expo floor they want to support before they all transform into wearable startups next year.

I met these Google Android mascots on the first day.  Their cute factor was off the charts.  There were plenty of cute sights to see on the expo floor, and I don't just mean the booth babes.  I focused on those exhibitors relevant to my own interests.  PubliCharts offered a cloud-based engine for stock trading charts.  I could see how their tech would appeal to short-term investors who follow Cramer-type gurus but I'm not a day trader.  Woodside Capital Partners was on hand to drum up business.  I like smaller investment banks that haven't diluted their transactional business model with commercial banking or wealth management.  KOTRA Silicon Valley was promoting the Korean economy and their upcoming K-Tech Silicon Valley 2013 conference down in the valley.  You betcha I'll be there to collect phone numbers of attractive Korean-American women.  AppsFunder is the only crowdfunding platform I've seen that is exclusively devoted to mobile apps.  That's cool because differentiation by sector will make crowdfunding platforms stand out, just as it does for specialized mid-market investment banks.  Progress in Technology Middle East (PITME) had by far the best booth setup thanks to their Bedouin tent and plush pillows decked out like an Arabian caravan.  PITME is an accelerator connecting Silicon Valley's money and tech to startups in the Middle East.   They've got an impressive roster of local mentors lined up and I hope they bring over some hot Middle Eastern women to do some belly-dancing at their events.  Vodafone's Wireless Innovation Project sounds like it could benefit from exposure to the social capital infrastructure around here.  I had little interest in the rest of the booth exhibitors because the world doesn't need another calendar app.

I jumped around a lot between the panels on both days because there was so much knowledge to acquire.  The GMIC founder needs to work on his public speaking skills but he got his point across and we could all use the #GMIC2013 hashtag.  All of the main stage keynotes got off to very late starts, BTW, so someone needs to teach the show organizers how to corral their VIPs early.  The chat with Tencent's exec was more than just a pitch for WeChat and virtual goods.  It seems like their business model is the inverse of US-based social media businesses that chase eyeballs and advertising revenue.  Tencent's free services are loss leaders that entice people into paid services.  Maybe Chinese users really do have fundamentally different preferences.  Instant messaging has fallen out of favor thanks to social media platforms but I think it can resurge if an IM service allowed for modular capability at the user's convenience.  Social media platforms that overtook IM are now facing backlashes from users who feel like hostages to the platforms' data harvesting.  No more will users settle for "take it or leave it."  Next-gen IM will have to allow for app building blocks the users choose, so let's see if an IM startup can build something from an open source API.

Pavel Durov from the Russian VK social network had some kind words for Facebook despite the two services' rivalry.  I noted that the tech media refers to Mark Zuckerberg informally as "Zuck," which is cute.  The audience chuckled at the mention of United Capital Partners and other VK shareholders that are Russian government-backed entities.  I didn't get the joke until the conversation turned to VK's unwillingness to support encryption in its messaging app.  Ah, so the big mama bear in the Kremlin wants a backdoor into its homegrown equivalent of Facebook.  I can already see the walled gardens going up worldwide and the end of globalization in tech won't be far behind.  The journalist from TechCrunch, Alexia Tsotsis, who shared the stage with Pavel endeared herself to me when she pointed out one of the cartoons he used to make a point about VK's social use.  The cartoon showed a woman flashing her overcoat to a bear, and Alexia giggled when she asked what VK would do if the NSA asked them to show Alexia flashing her bear friends.  What a cheeky gal.  I would love it if she flashed me and I certainly wouldn't tell any agencies.  Anyway, Pavel claimed they don't have to comply with NSA requests because they're in Russia.  Like I said, the walled gardens are going up all around us.  Social media will eventually be a national phenomenon.

Paul Graham of Y Combinator admitted in his chat that he only bought a smartphone six months ago and never used his iPad.  Now I don't feel so badly for delaying my own entry into the mobile era.  Paul thinks good startup ideas replace a specific device you carry (i.e., camera, radio) with an app.  He thinks plugging in wearables to charge them won't be a problem.  I disagree!  Multiple wearables will pose a power budget problem.  I see opportunities for disruption in mobile recharging, portable power, and single-person smart microgrid tech solutions!  Consumers will need to power and recharge multiple wearables simultaneously.  Your average tech geek carrying a smartphone, a Google Glass, and a smartwatch that tracks biometrics will need portable power that won't get banned in a Starbucks.  I also think wireless power transmission will boom but the FCC must certify those wireless devices and their spectrum allocations.  We don't want people cooking their insides with microwaves from a wearable device.  I didn't learn much from Paul's talk other than the usual tech startup imperatives.  He mentioned that the combined valuation of Y Combinator's portfolio is US$13.7B as of the GMIC conference and he monitors that valuation daily.  That's one big chunk of change.

I dropped in on one of the mobile education panels as it was ending.  InnoSpring, Pearson Catalyst, and AngelHack were all there.  My main takeaway from these peeps is that a funding ecosystem exists for education startups.  The political operative from Mobile Alliance for Global Good showed up late and someone mentioned FundEdu as a crowdfunding platform for educational needs.  There will definitely be a ton of disruption in the education sector but I don't see it coming from mobile.  MOOCs work on mobile devices but some course material needs larger format displays to handle STEM academic projects.  Real disruption will come when 3D printers plug into MOOCs.

The InMobi thought leader presentation told us we have gold mines in our data.  Mobile generates 10x more signals than a desktop platform and its consumption patterns are fragmented among many portals and apps.  InMobi's assessment of a user's lifetime value (LTV) allows them to use "lookalike modeling" to to target similar types of users.  I don't work in mobile ads but they are my bread and butter, so I'll leave the  use case data up to them.

The next big thing panel on global innovation ecosystems brought forth T2 Venture Creation, the Silicon Vikings, and GGV Capital.  T2's rainforest theme was exactly the right thing to show to government leaders who don't understand the importance of serendipity in an ecosystem that allows messiness, randomness, and unpredictability.  The evolution of design thinking now incorporates human desires and aesthetic needs that government planners don't quite grok.  I can't wait to hear more about this stuff at next year's Global Innovation Summit.  The panel noted that some Silicon Valley innovations like physically open workspaces are becoming startup norms worldwide, but private capital's lead role is still unique to the US.  Silicon Valley people are teaching startup hubs worldwide how to work collaboratively.  They noted that failed ecosystems rely too heavily on government funding of startups, which forces privately funded startups out of business when they have to compete against government-funded peers.  I was not surprised to learn that Mexican entrepreneurs with successful exits often leave that country to escape notice.  Entrepreneurs are vulnerable where the rule of law is weak, and I got that same vibe from Pavel's talk earlier when he dropped hints about kleptocrats in Russia.  The panel observed that US laws allowing equity options incentivize team members earlier, but that US disadvantages in tax disincentives and poor mass transit pose risks that the US will fall behind.

Listen up, international entrepreneurs, for some Alfidi Capital wisdom.  Silicon Valley is often imitated but never duplicated.  The valley's "pay it forward" ethos will be the most difficult thing for non-US cultures to adopt.  It's unfortunate that the US is tying its own hands behind its back with more regulation and less rule of law.  Every new entitlement program America enacts makes its people less inclined to take entrepreneurial risk.

I was looking forward to the Girls In Tech panel for obvious reasons.  I like girls and they can't help but like me.  These gals were all grown up and there's no shortage of women entrepreneurs.  Their evidence clearly shows that startups with more diverse founding teams perform better because they allow for wider viewpoints.  Men and women doing business deals together is still a cultural barrier in many places, and their solution was Astia's model of building trust among mixed-gender teams at multiple levels.  The evidence for universities that have redesigned their STEM curricula to be more inclusive is good but IMHO that will be short-lived once MOOCs take off as an alternative to baccalaureate education.  I think MOOCs will be the ultimate gender-neutral enabler, because no one can discriminate against a student who works alone.

Thought leaders mounted the main stage to propound on the future of mobile, cloud, and Big Data.  If you read me regularly, you know that I believe this supposed convergence is driven by the inability of each sector to deliver value on its own.  These diminished expectations drive VCs to salvage their investments by pushing the three stovepipes together.  I want to see an example of a software development life cycle that proceeds through all three of these modes before I can take this integration seriously.  I didn't get much from the panel's discussion of the tradeoff between security and convenience but it's increasingly obvious to me that users who cut security short are asking for trouble.  Now let me change gears.  The NSA's presence in our digital lives is becoming the major subtext of every data security discussion at every tech conference I attend.  Collection programs now threaten US tech competitiveness because mobile and cloud solution providers are increasingly marketing services that are non-compliant with NSA activities.  "NSA" is now a dirty word in Silicon Valley but I don't think anyone in Washington, DC even cares.  Our country's tech lead will erode and ten years from now policymakers will demand to know who let it happen.  They should look in the mirror starting right now.

The final thought leaders for the first day held forth on enterprise mobile.  IMHO those enterpeise platforms that allow in-system collaboration from startups will grow their own product ecosystems, as does SAP.  The panel said big ERP providers all seek non-US market growth and mobile is now driving much of the growth in ERP interfaces.  The inference is obvious:  IMHO non-US ERP players will be far ahead of the curve in capturing mobile market share.  It's also obvious (at least to my genius mind) that ERP providers have enough aggregate use case data on mobile ERP users to become Big Data providers themselves.  Forget about back doors in your social media and email platforms because those will soon be in your employer's ERP, if they're not there already.  I've seen first-hand evidence of the panel's observation that companies scan achieve $100M+ valuations in largely unknown sectors with very limited verticals like Big Pharma.  The point of knowing that is those companies need very specific ERP solutions.  I wouldn't invest in a startup that pitches a one-off solution for a single large customer because there's no assurance they'll land the business.  I expect back-end ERP disruption in general to be easy but in limited verticals it will be hard.  The panel's endorsement of acquisition goals for managing workflows and enhancing back-end controls were along such lines.

The second GMIC day found me over by the startup stage where some tech stars wanted to talk about crowdfunding your idea right past VCs.  Oooookaaaaay, but I've spent enough time navigating crowdfunding portals to know how limited that has been so far.  Only with full implementation of Title III of the JOBS Act will that really take off.  I already knew that crowdfunding is a way to test-market a product but I did not anticipate that a startup should segment different messaging by customers, journalists, and investors.  The need for a post-crowdfunding capital raise was an understatement.  A lot of these startups will be very disappointed if they think a six-figure crowdfunded seed round will last them through both their entire SDLC and go-to-market phase.  It's also premature for anyone to suggest that successful crowdfunding will give startups the freedom to reject VCs that aren't perfect matches.  I've never seen a Goldilocks situation where an investor and entrepreneur were neither too hot or cold, but just right for each other.  Maybe I haven't lived long enough.

The following panel on the rise of the hardware startup had their own skin in the game for this latest meme.  I missed the concurrent panel on wearables but there's more to hardware than what you can strap on.  Most hardware must be compatible with all of the leading ERP brands.  Hardware form factors must match industry standards.  Evernote is already in the lead on these points.  The panel thinks that no real manufacturing or logistics bottlenecks will prevent a hardware startup from launching anywhere but IMHO they need to account for local zoning.  Your garage is fine for 3D printed limited runs but scaling up means you have to relocate.  I asked my one question of the entire conference when I asked the panel how they handled regulatory issues with OSHA, the FCC, the Consumer Product Safety Commission, and others.  Their answer was simple:  "Handle them head on."  I wasn't satisfied with that answer.  You see, the US has offshored so much manufacturing to developing countries that onshoring it again will rely on lost arts.  The panel's observation that trust is harder with hardware because of safety, testing, quality assurance, and supply chain management just proves my point.  The portion of the American workforce that knows how to solve those problems is smaller than ever because every Millennial wants to be a video game designer and their parents worked in service sectors.  Manufacturing hardware again means people need to get busy with best practices from ASQ and NAM before they even think about sending a product sample to a regulator for approval.  I wonder how many aspiring hardware makers have ever sent environmental impact documentation to a state or federal regulator before starting a production line.  If they have no clue, they can expect EPA fines that will shutter their business.  The EPA has handy set of info on lean manufacturing that looks like a low-impact way to get started making things with little fuss.

Thought leaders had things to say about the Internet of Things (IoT).  GMIC was the first conference where I heard someone mention the quantified self as a business objective.  I've probably seen that phrase before in tech media but I glossed over it until now.  I already knew that the market for broadband home devices will be huge from what I saw at MobileCON 2013 this month.  I'm pretty sure we'll see IoT devices pitched on QVC and HSN pretty soon because they're perfect for homemakers with unfilled emotional needs.  Those TV shopping channels are perfect for products with visual (cosmetics, home decor) and action (hardware, wearables, IoT) qualities.  Thanks, iFabbo Conference 2013, for showing me how those needs are met.  I hear the panelists' pain that some consumers are put off by monthly usage fees but just look at all of the idiots who overpay for the latest smartphone even though their old one works just fine.  They don't mind service fees if they get access to something they can't do themselves.  I'll close this IoT discussion with an observation I've made before on this blog, namely that the smart grid in energy distribution is one of the easiest paths to IoT device adoption.  Form factors matter in energy because IoT devices must match utilities' connectivity standards.  Bluetooth is now the de facto wireless standard for wearable devices.  The utility sector could help the rest of us out by sharing their standards so startups don't have to guess.

Some more thought leaders wanted to tell us how our connected cars would be our largest "mobile" devices.  They had a few showroom models out on the expo floor but I didn't get in one.  I just don't have a need for a connected car at this time.  I did notice a bifurcation in the panelists' opinions on how cars deliver value to users.  The folks who spent their entire careers with automakers were focused on traditional metrics like performance, safety, reliability, and fuel economy.  The software programmers who had begun working with automakers noted that the millions of lines of code in cars support regulatory requirements for safety and fuel economy that are mostly invisible to the car's users.  Car software thus meets the enterprise's need, not the end user's need!  That is mind-blowing confirmation of what I've seen and heard at other conferences about how disruption in mobile / cloud / Big Data will only be possible at the ERP end of integration rather than at the user's end!  The panel's statement that car software will be subject to upgrades separate from hardware repairs further proves the point that connectivity is an ERP function that the user never touches.  I came away convinced that automakers will have to start releasing APIs to developers if they want household IoT devices to be compatible with their cars.  The automaker reps on the panel seemed willing to work with software developers but they obviously didn't know how.  The totally lack the open source DevOps DNA prevalent in leading ERP solutions companies.  They also clearly have little understanding of users' personal data security.  They will be shocked when they find out they need privacy policies.  Personalizing a car to meet user needs demands permission rules comparable to BYOD policies for mobile devices.  Wow.  This panel showed me just how far behind the power curve traditional American manufacturers have fallen.  Just think of the possibilities when cars start interfacing with drones.  US automakers won't think that way but someone else will.  This is why I will not own the stocks of American automakers.  Failed industries don't deserve bailouts.

BTW, it should go without saying that makers of anything - wearables, IoT gizmos, mobile devices - should not pre-announce an unready product and then fail to deliver.  That is one of the hidden gems of wisdom the rest of you can pick up if you go to these conferences or listen to me.  Makers should check out the HAXLR8R hardware startup accelerator in San Francisco when they are ready to embark on their adventure.

The SV Angel guy over at the startup stage had something to say about seed investing in mobile.  He had data that Skype and Google Hangouts capture 70-80% of human in-person communication factors.  This has narrowed the trust gap between founders and investors so much that they can close investment deals remotely now.  I'm not ready to entrust my money to a founder I have not met in person, but then again I'm not yet a power user of either of those two services.  The angel guy also thinks heavily traveled VCs and angels make excellent testers of new mobile tech.  Well, IMHO so do pro athletes, long-haul truckers, mystery shoppers, and anyone else who's not tied to a desk.  I don't have to go all the way to Europe's Seedcamp to find proficient startups from accelerators right here in the Golden State.  I liked the angel guy's observation that survivorship bias gives a misleading picture of successful entrepreneurs, because the success story founders are often misfits.  I'd reword that by saying the ones who make it did everything right that the failures also did, but they way they did it was colored by their unique brain chemistry.  Misfits just have different internal wiring.  Original thinkers can be brash but they attract talent by envisioning solutions to the hardest problems.  I agree with the SV Angel view that governments are better at basic research than picking winning companies, and that the rule of law is a US strength, but I think too many business leaders go astray when they uncritically endorse immigration.  I say the US's economic strength has grown from many unrelated factors.  Consider our large integrated continental market; the deterrence to invasion posed by two oceans; and our vast agricultural productivity on the Great Plains of the 19th century that generated excess capital for investment in manufacturing and petroleum.  Europe in the 19th Century could have had much of the same if not for German dualism and other rivalries.  I'll close with one more disagreement:  No way am I jumping on the VC/angel bandwagon in favor of Bitcoin.  Just because Bitcoin has a startup's attributes doesn't mean it has a currency's attributes.  Renegade cachet does not create a store of value.

Founders who must choose to sell or not to sell face a billion dollar dilemma, and that's the subject the next startup panel addressed.  Long-term thinking is hard.  There's a persistent rumor in Silicon Valley that Google could have sold itself to Yahoo early on for a few million.  The Google founders held on because they thought they had something special.  The VCs on the panel admitted that acquirers don't always win by overpaying and that founders need to assess whether their vertical is big enough to support several billion-dollar valuations before they sell out.  I was surprised to hear them say some startups who sell early (presumably via an IPO) do several SPOs afterward because they keep generating value.  I had always thought SPOs were rare and were used primarily by established companies who found debt unattractive or unavailable.  I just don't get the panel's consensus view that selling out is mainly the founders' call.  If VCs are on the board with big equity stakes then they get votes too.  The VC panelists say founders should keep building their company for a later IPO if they have a strong economic moat and a dominant market position.  Don't sell early if the field is that wide open.  The choice about when to sell gets harder for founders who have little net worth.  If those folks sell early they still achieve a life-changing net worth that makes them comfortable with taking more risk later, paving the way to serial entrepreneurship.  This panel picked up on the misfit genius theme where the last panel left off.  Genius founders can obsess with details and do something meaningful because they are big believers in serendipity, sticking with a startup for the long term until it earns a big valuation.  I did not at all understand this Silicon Valley quote:  "A company is never really sold, it is bought?"  Huh?  I need that one explained.  Anyway, this panel repeated something I learned in my MBA studies back in 2002, namely that acquisitions fail because of post-integration problems and not because of overpaying.  I recall from my studies that most mergers fail because of poor strategic fits, so by definition most acquisitions are an overpayment anyway and post-integration will be a waste of time.

The next startup panel was about going global.  The conventional wisdom struck me as odd.  They said startups should seek customers in global markets similar to their existing customers at home.  Well, all I can say is, good luck with that.  Every other expert panel I've had the pleasure of attending this year has made it clear that cultural barriers exist and tailoring a message matters.  CustDev is just different every time you cross a border.  You have to localize interfaces, user tracking, and ad targeting and even this panel's members got into those specifics.  They also said startups at risk of being cloned should go global to mitigate that, which I think is stupid.  IMHO startups with easily copied business models don't have strong enough economic moats to survive a challenge and going global opens the cloning possibility wide to many more challengers.  I did learn that a WOFE is a vehicle for foreign investors to enter China but I don't see how it offers additional IP protection.

The startup stage closed out with Dave McClure of 500 Startups.  Dave is the type of nutty, passionate visionary who embodies what a lot of these panelists have said about the genius misfit entrepreneur who builds tremendous value.  Read his 500 Hats blog to see how a real innovator thinks.  Entrepreneurs need to be realistic about the long time it takes to raise money through many pitches, and investors need to be realistic that most early stage investments fail.  Investors also need to understand how a startup's legal structure affects its valuation; he didn't come right out and say "liquidation preferences" but that was the first thing that came to my mind.  I hear phrases like "lean startup" thrown around a lot but a true understanding of the concept still hasn't sunk into the Silicon Valley mindset.  If it had, we'd be hearing less about perfect engineering and more about the importance of sales.  Dave cracked up everyone when he pulled a dollar bill out of his wallet and tore it up on stage to illustrate that losing $1 in a startup is not as dangerous as losing leveraged equity in your own home, yet the SEC makes crowdfunding hard while banks make mortgage lending easy.  He got plenty of applause from this risk-tolerant crowd.  It was even funnier when the GMIC moderator grabbed the torn up dollar pieces and stuffed them in his pocket.  You just had to be there.  This is how we amuse ourselves in San Francisco and Silicon Valley when we want to play with money.  I would never throw away money but I have wasted it on unnecessary expenses and calculated risks that went bad.

The final panel of thought leaders brought Dave McClure together with big VCs like Tim Draper.  Tim had some classic insights but Dave delivered knockout punches.  The VC establishment is slowly but surely embracing crowdfunding, recognizing its potential to disintermediate venture investing and bring information efficiencies into mature markets.  Tim wants entrepreneurs to think one level of abstraction beyond an easily duplicated business model because differentiation depends on thinking beyond everyone's obvious solution.  I keep hearing about how the cost of capital is dropping in both hardware and software but disruption in big industries like transportation is still only fundable by only the largest VCs.  Dave got more applause when he said:  "Online marketing will crush every offline business."  Well, I still have copies of dot-com era magazines like Upside and Red Herring that made those promises and offline stuff hasn't been crushed yet.  If you're not sick of startup buzzterms like "lean" and "CustDev," I've got another one called "growth hacking" for you.  It's the next step in applying SEO and web analytics to accelerate customer acquisition.  If your unsustainable growth turns down, your "hockey stick" turns into a "shark fin" and you'll fall into the valley of death.  See folks, hang around Alfidi Capital long enough and you'll be throwing down venture terms with the big shots.  I agree with the panel's insight that startup experience, especially through the Peter Drucker reengineering process of an incubator, is vastly superior to getting an MBA.  I wish I had never obtained an MBA myself.  Dave McClure left us with some final genius wisdom on funding a startup, paraphrased from my memory:  "Don't borrow unless you're cash flow positive based on unit sales, and you can get a line of credit, and you're certain you can pay it back based on metrics."  I missed a few points but I really appreciated Dave's focus on firm KPIs for making decisions.  He didn't quit when the pitchfest finalists came up for their final round of judging.  Dave encourages the pitchers to aggressively attack their established competitors' stupid, obsolete business models.  The guy has what it takes and I hope some VCs in attendance get him involved in more deals.  Talent should not languish in obscurity.  It must be front and center, with attitude.

My readers may have noticed a change in my writing style for analyzing developments at industry conferences.  I used to paraphrase much of what the speakers and panelists said and then add my own comments in italics.  That just doesn't work for me anymore.  Too much of what many "thought leaders" say is repetitive and can be boiled down into a few catchy factoids.  My job as a blogger is to speak in my own voice and add highly original analysis to business topics.  That is why my conference coverage is now almost completely my own wording, with the noted speakers' own comments identified where appropriate to illustrate my own thinking.  I no longer need italics.

GMIC Silicon Valley had everything I needed to see the future of mobile.  Some older hands told me the expo wasn't as big this year but the wisdom on tap was big enough.  Mobile is more than just games and maps on your device.  It's your gateway to cars, homes, drones, shopping, and logistics.