Friday, August 08, 2014

Alfidi Capital at AlwaysOn Silicon Valley Innovation Summit 2014

I attended the AlwaysOn Silicon Valley Innovation Summit (SVIS) last week for the first time.  This conference has a long tradition of sorting through the most promising startups in multiple hot tech sectors.  My first taste of the show was the pre-opening social event, where remote operators entertained us with their mobile screen avatars.  That's what Silicon Valley types do for fun.  You can see one in action below.

I spent the next two days at the Computer History Museum receiving the wisdom of the Valley's all-stars.  Tony Perkins has been tracking tech trends since the 1990s dot-com boom when he launched Upside and Red Herring.  I still have a couple of hard copies of those mags in my archives.  I also have hard proof that I attended the show, in my typical name badge photo.  The bolded comments are my original action items, for any of you enterprise folks who are need a clue.

Satjiv Chahil let us all know that the world is not flat after all, as Thomas Friedman once wanted us to believe.  His work with the American India Foundation develops the digital and physical infrastructure of rural India.  The foundation uses street theater to advertise their developments in India in a native twist on Silicon Valley's guerrilla marketing styles.  Satjiv advised innovators to think of the cost structures in the rest of the world.  I think I know how that applies . . . cheap labor is everywhere but immature infrastructure complicates product delivery.

The discussion of new opportunities in data analytics covered the the changing real-time information that data fusion culls from formerly static sources.  I agree that data users are starved for real-time info and I believe the proliferation of APIs allowing data manipulation is just getting started.  I was not surprised to hear them say "Chief Data Officer" and "Chief Analytics Officer" are emerging enterprise titles.  I suspect that the CDO/CAO should work with the CKO under the COO, not the CIO, which would cement BI as a KM function.  Follow the acronyms to victory.  These guys got me thinking about KPIs, which tends to happen when I hear something thought-provoking.  IMHO those verticals that are the fastest adopters of real-time KPIs will be those that must integrate the most data streams.  The sheer number of discrete data streams flowing into an enterprise will drive analytics solutions, rather than gross data volume.

The venture capital outlook for 2014 implied that current tech funding is a boom and not a bubble.  I was stunned that most of the audience (82%) in the live poll thought startup valuations were not in a bubble.  Come on, people, the Fed's ZIRP stimulus has made everything a bubble by driving normally risk-averse investors to seek yield in riskier assets.  I would hate to be in some VC's shoes in a couple of years when they have to explain their cratering venture funds to institutional investors.  Anyway, I appreciated the panel's assessment that the amount of capital needed to start a tech company is at a record low, but scaling it up requires a record high amount.  High-valuation exits in some verticals like social media are easier because they're cheaper to scale.  I did not know that the M&A market in tech is twice as big as the IPO market, mainly because big tech companies like to grow with acquisitions.  These VCs are among the few I've heard who admit that the crowdfunding movement is on fire.  I can't wait to see the crowdfunding portals with the largest numbers of accredited investors get acquired by brokerages.

Online education is at some inflection point, according to the next set of experts.  MOOCs that assemble distributed content in playlists will resemble online music stores.  The challenge to universities is clear, but I believe the panelists' expected shakeout of failing colleges will be delayed as long as low interest rates keep student loans widely available.  Bad models can survive longer than they should even with poor content, but I agree with the panelists who expect distributed content to reign.  They introduced the term "knowledge portfolios" defining the marketable skill sets people will port from more scalable education models.  I see a role for the US Department of Education in helping to accredit MOOCs and develop universal standards that make their content portable, once said Department loses its rationale for funding soon-to-be-gone campuses.  I see their optimism for course offerings favoring entry-level job skills with an immediate ROI, and I'll raise them the next step in educational innovation:  disrupting state-run K-12 schools.

The "top company presentations" were actually pretty compelling at SVIS.  A lot of such pitches at conferences leave me with little hope that entrepreneurs have a clue.  That was not the case at SVIS.  I'll offer up a few random observations as blind items, since much of what the presenters offered was proprietary.  APIs allowing data collection and aggregation should be monetizable, especially since they show promise in replacing advertising servers and accelerating lead generation.  Data-source agnostic computing is great but it must allow for virtualization, and virtualization in turn can solve a lot of cloud collaboration problems.  Exchanging consumer rewards points on exchanges makes me think arbitrage will be possible.  One app doing both visual messaging and photo sharing is not an elegant solution because those are two very different functions.  I am very impressed with automated analytics that deploy results using visualization tools, because it's perfect for Peter Principle middle managers who would otherwise have to hire expensive outside consultants just to understand their own data.

Tony Perkins probed the CircleUp guy for crowdfunding insights.  They discussed the higher IRR for consumer retail startups, which IMHO is counterintuitive given the earlier panel's observation that scaling up is costlier than ever.  I would like to see consumer product startups address obvious gaps like urban "food deserts" underserved by grocery stores.  I get CircleUp's model of charging startups a commission and taking part in their warrants, and I think other portals can tweak this by adding revenue streams from investors who participate in a raise.

Jay Samit gave a brilliant lunchtime keynote on decoding disruption.  His mantra for cannibalizing one's business in favor of disruptive product development would be lost on Microsoft and other big firms notorious for product managers defending their turf.  I was one of the audience members who chuckled when he sketched out the post-literate world's penchant for communicating with images.  Wait until the images have embedded geodata, Jay, when they'll be more data-dense than ever.  Jay thinks smart shoes are on the horizon because walking recharges batteries, and Apple does have a patent for shoe sensors.  I will spend the next year or so examining tech startups through his social / location / mobile lens, which will probably bring me back to the geodata hint I dropped above.

Tony Perkins followed Jay's act with his own keynote.  Alvin Toffler's "infobesity" means saving steps in what people already do will build billion-dollar companies.  Got it, Tony, and lots of people working at Facebook agree with you.  He pitched the AlwaysOn model connecting its subscribers to emerging trends, and it sure worked because, hey, I attended, and I'm "always on" hot trends.  I like their crowdfunding platform concept . . . but I'm pretty sure they'll have to register it as a broker dealer given emerging SEC and FINRA rules.  This will challenge their ownership structure and I'm not sufficiently knowledgeable of securities law to say whether this portal should be a separate entity.  The business profiles they plan to publish for clients strongly resemble IPO "tombstone" ads, which are traditionally in the SEC's lane.  I'm pretty sure they can iron out the legalese to fulfill Tony's vision of disintermediating venture investing from the human gatekeepers on Sand Hill Road.

The Big Data panel enlightened me on how in-memory computing is a huge leap ahead in database order processing by creating a new layer in the software stack.  They admit that selling enterprise-level Big Data deployments is a challenge.  I knew that from several previous conferences.  It's a challenge because the solutions are pretty much the same price regardless of seat counts, which means the price doesn't scale along with the tech.  The panel thought that opportunities also come from layering apps and and blending data science with business domain knowledge.  I already knew that too, thanks to my attendance at Decision CAMP 2013, and you'll know it too once you read my blog article on that event.  I say the KM / DM / BRMS confluence is still the ultimate Big Data opportunity.  Cloudonomics calculations will validate the ROI of cost savings from business process improvements.  The panel wants business analytics to replicate VCs' pattern recognition abilities to help identify winning business models.  There's already plenty of historic data on startup failure for them to aggregate from the NVCA, National Science Foundation, and other sources.  I must disagree with one panelist who said privacy concerns will be a future trend.  I believe that people don't care as much about privacy as they say they do.  The whole concept is an anomaly of the first two Industrial Revolutions and it will not survive much longer as Big Data erases anonymity.

The social enterprise panel reveled the audience's displeasure with the amount of time spent communications tech.  One consensus point was that enterprise power users are in non-techie business domain functions who prefer simple tools.  I'm pretty sure the growth curve in social enterprise solutions will slow if business domains can't prove these things generate results.  Corporate treasuries aren't unlimited, people.  Where are the CKOs and COOs in all this?  Are they ever going to figure out that crafting enterprise KPIs is their job?  I know it's hard in fragmented organizations but it's worth the effort to grab project leaders and shake out their team-level KPIs.

Bill Gurley demonstrated his genius in his fireside chat on the instant economy with Tony Perkins.  His take down of the dot-com stock analysis algorithim was brilliant.  No one should assume an implied CAGR over 100% for several years running.  He also thinks it's a mistake to assume future bubble peaks will asymptotically match some previous bubble peak.  Yeah, this bubble peak has already surpassed the previous several.  The good news is that corporate VCs are the dumb money in the room, timing their investments poorly and ramping their buys prior to market highs.  I'll be sure and tell any startups I meet to pitch to corporate VCs in the best of times.  I learned from Bill that long-term, high square foot leases were a major reason for startup bankruptcies and recapitalizations in the 1990s dot-com bubble!  Wow.  That means the commercial real estate sector's health in major tech corridors is a pretty good leading indicator for tech bubbles.  I now feel sorry for anyone working at a VC-backed tech startup with its own gourmet food court; those luxury amenities add unneeded costs to their leases.  Here's a classic Gurley line:  Discounting long term risk makes us comfortable, "like a boiling frog."  Awesome!  Imagine it spoken with the remnant of Bill's original Texas accent.  Bill is amazed that privately held startups can raise $1B in capital without profits.  I'm amazed that the Valley can see the same phenomenon and still think venture funding isn't causing another bubble.  Bill also sees that startups launching variants of success stories is a sign of a market top, overfunding, and too much comfort with risk.  He nailed the missing link in Big Data analytics:  Pareto optimization.

I have to disagree with Bill Gurley on two points before I move on.  I don't share his thoughts on Uber or the effects of market corrections.  First, he said Uber's ease of use redefines its local driving use cases beyond the TAMs of the taxi and limo market historical sizes.  Okay, but I still say Uber's TAM is still limited urban, upper middle class transport.  The outsize use of Uber in San Francisco is probably a phenomenon of tech workers and their funded ecosystems (consultants, media people, nannies, gourmet cooks) living inside the new tech bubble!  Secondly, Bill thinks the 2009 market correction wasn't as painful for startups and VCs as the 2001 correction.  Hey Bill, the Fed lowered rates so quickly after the 2008 crisis that risky things looked a lot safer than in 2001.  Hardly anyone in the Bay Area can see the Fed's bubble now . . . except me.

Here comes the wearables boom, according to the next crop of luminaries on stage.  The panelists think software is the key to viable wearables, but frankly the ones I've seen at tech fests have no shortage of analytical horsepower.  These things need to have physical and visual appeal just like jewelry, because ordinary folks will be proud to show off a status symbol.  The coolest thing  learned from these experts was about regulatory loopholes applying to consumers who take control of their own data.  Medical privacy focuses on transmission confidentiality.  Voluntary patient use of medical wearables IMHO opens up a an indemnification can of worms for health care providers even with the devices' obvious benefits.

The team from 451 Research crunched the numbers for a look back at last year's top 250 startup picks.  The AlwaysOn SVIS show is one of the few conferences I've attended that holds itself accountable this way.  Several of last year's top picks went to IPO at valuations over $1B.  Apps, e-commerce, and mobility were the most active acquisition segments.  Analytics was a big common denominator.  Strategic buyers were the vast majority of acquirers.  The most important conclusion is that AlwaysOn's companies have exit valuations at premiums (measured by multiples of trailing revenues, both average and median) to most startup exits.

Cloudera got a special fireside chat as the summit's company of the year.  Their talent bench is pretty deep with people who worked at Google, Yahoo, Facebook, and Oracle.  I agree with their CEO that a salesperson with a technical background can easily be seen as a client's trusted advisor.  He's in the school of thought that startups raising lots of capital gain a flexible IPO date and create a secondary market for any early investors seeking an early exit.  His observation that most popular management books merely restate common sense reminds me of my undergraduate days when "reengineering" and the "learning organization" were the hot ways for consultants to make a buck.

Tony Perkins kicked off the second day of SVIS with a segue from app and smartphone dominance into a keynote from Smaato.  These guys are understandably fond of the freemium model for apps because it allows advertising penetration.  Mobile ads have scaled rapidly, certainly beyond my own expectations.  The latest hot term for big sites like Facebook is data management platform (DMP), which encompasses both users data and ad network data.  The Smaato dude must be reading my blog or something, because he noticed that the smartphone is becoming a hub for other wearables.  I've been blogging about that since late 2013.  Wait until the smartphone becomes the power management hub as well as the data warehouse and connectivity platform for wearables.  Here's another game-changer I'll throw at the world.  New programmatic ad pattern buys can address bids for similar demographics in parallel.  This means ad buyers pay more for precise demographic targeting, and users still get free content.  Smaato is catching on to this potential by doing both RTB and SSP.

The next panel addressed the multi-billion dollar mobile ad opportunity.  I get the difficulty of measuring how ad spending drives revenue, even for SMBs running location-based ads, and the integration of RTBs and SSPs into DMPs is supposed to make that seamless.  I wanted to hear more from the panel about how shortening a sales cycle makes the ROI of ad spending instantaneous but they moved on pretty quickly.  IMHO ad buyers are slowly recognizing the power of mobile ad spending combined with geolocated user data to drive campaigns that quickly clear out unwanted inventory.  The panel thinks about 50% of brand ad spending is wasted but marketing analysts don't know how to identify that waste, thus they pay twice what they should to build brands in target markets.  It wasn't always obvious (at least to me) that mobile ad gurus would figure out how to translate ad form factors from print to the various mobile platforms, but they have certainly succeeded.

Will cybersecurity really get worse before it gets better?  The next set of experts on stage at AlwaysOn said the mobile threat landscape is small but persistent.  I do not think making mobile OSs more secure will solve security problems at the user level as long as app developers are not building security into their apps.  The three legs of security, convenience, and performance in mobile computing mean one factor must diminish if another is to be enhanced; so far this is a zero-sum game.  Enterprises have methods to manage the risks of tradeoffs between these areas, and not just from a Cloudonomics perspective.  I've addressed enterprise risk before and my readers know what I would do.  Constructing a 2x2 matrix of severity versus probability allows plots of security incidents in each quadrant, and the risk profile for each quadrant should include Six Sigma estimates of their impact on operations.  I can lead horses to water on this blog but I can't make them drink.  Security is always an afterthought for product designers because they build for functionality first.  Performance and convenience are the factors that meet market opportunities because "security" is only a pain point for a savvy subset of each market segment.  The IT/OT convergence means security must catch up.

The "last-second economy" panel said Uber's success leveraged Bill Gurley's network multiplier effect, but I'm not sure the sharing economy qualifies as a back-end process.  That philosophy is not some internal part of the enterprise, folks.  It's common knowledge that Millennials are driving early adoption of instant economy concepts.  We have not heard the last of sharing commodified services.

Bill Cleary was up next to address Apple's market dominance.  He sounded like a pretty cool dude.  I never thought of Apple's top brand as a compelling narrative on its own until Bill positioned it that way.  The cool, hip ad images Apple uses are part of that narrative.  Apple's genius is seeding its brand into pop culture channels so that it's not seen as solely a techie image.  It was totally awesome to hear bill ridicule Google Glass, Amazon drone delivery, and driverless cars.  Someone finally has some great insights into unworkable tech that gets undeserving praise.  I offered my only question of the conference when I asked Bill whether Apple would make a 3D printer for the desktop manufacturing revolution.  Bill said not yet because it's too early; Apple needs to focus on other things first.

Other panelists spoke on how growth companies can leverage the cloud.  Customer demand for speed and performance means startups will have to go to the cloud to scale up.  Delayed page loads cause incremental revenue losses and caching content in other time zones is not a universal solution.  IaaS is a good solution for pre-populated caches.  The next amazing developments we can expect in the cloud are hybrid cloud brokering, data security partitions by nation, and ubiquitous cloud services as reliable utility-type background activities.  I repeat all of this cloud thinking uncritically because I want to see how it shakes out.

The Expensify dude easily had the best keynote of SVIS, with spontaneous applause.  He ripped apart the financial metrics that so many tech followers throw around as conventional wisdom.  If valuation is more than revenue and a multiple derived from a "vroom model," then ROI must be more than LTV divided by CAC.  This made his point about the difficulty of attributing sources of both costs and revenues.  Nouveau enterprise valuations are not quantifiable by traditional metrics.  We need new economic concepts to replace unquantifiable estimates.

The video boom panel noted how online video is now a completely personalized experience.  Every enterprise wants to create video because it is the most emotionally manipulative medium, but creation means nothing without distribution.  I just don't see how video startups can succeed by incentivizing viewers to watch videos simultaneously with their networks of contacts, given the medium's personalization.  No one wants to see their friends making faces on a screen while they're watching a movie.  Viral videos are sharable because people watch them individually at their convenience, no communally.  I'm pretty sure a whole bunch of venture investment money is about to be wasted on sharable video features that no one will use.  Multi-channel networks (MCNs) are figuring out how to use YouTube to distribute content and capture shared ad revenue.  The panelists made some bold predictions about how Google could enable video distribution in Gmail and how pervasive video will become in our lives.

The final panel covered one topic that provides me with no end of blog fodder . . . Bitcoin.  Yes, the cryptocurrency I love to ridicule has a whole slew of experts ready to sing its praises and raise venture money.  Listening to them gave me several OMG moments.  So many things they claimed about Bitcoin were nonsense.  Transactions are not at all frictionless given the market's illiquidity and the unreliability of Bitcoin exchanges.  Bitcoin does not ignore national borders because some nations do treat it differently; look at China's outright bans and the US's IRS tax treatment rulings.  Come on, people.  I almost went slack-jawed when one guy said he was proud to accept Dogecoin with a straight face.  Wow.  The dude also praised Silk Road as a "great use case" for Bitcoin's privacy.  Wow.  In case you missed it (ICYMI), Silk Road was a online market for illegal drugs that the FBI shut down, and Bitcoin did not shield any of its particpants' privacy because they caught the "Dread Pirate Roberts" dude who owned the site.  None of these panelists had any user advantages in mind.  None could explain why Bitcoin transactions are a better value than national currencies.  All of these thought leaders resorted to easily disproven claims and cargo cult wishful thinking about a "knowledge economy."  I'll give kudos to one guy who debunked the power of the "network effect" to speed adoption.

Any of you who are unfamiliar with my thinking on Bitcoin must read my extensive blog history on the subject.  Claims to marry cryptocurrency and trusted computing will always ring hollow.  Device hardware securing a private key does nothing to restore a key if the hardware is stolen.  Losing the hardware storing a private key means losing the Bitcoin if the private key isn't backed up.  One dude told me during one of the breaks that he thought Bitcoin was the greatest thing he's seen in forty years of trading currencies.  His rationale was that machines and bots could use it to trade with each other.  Ooookaaaay.  Folks, automated trading already happens in the hedge fund world with conventional currencies, and it adds zero liquidity to the global economy.  People pushing for the Internet to have its own currency don't understand that the Internet is not a sovereign government.  Using Bitcoin as a remittance mechanism for overseas expats makes no sense at all because Google Wallet already allows currency transfer as an email attachment.  A lot of people pushing cryptocurrencies will learn some very hard lessons about the real world.

Those of you who need more than my very faithful paraphrasing of what these speakers said can check out the SVIS 2014 archived videos on the AlwaysOn network.  This conference was a very valuable use of my time.  They had real honest-to-goodness expert speakers who have actually accomplished important things in the tech sector.  The lists of top 250 startups they keep generating are terrific coincident indicators of tech funding trends.  I'll see them next year for the next 250 great things.