Venture Capital: A Part Of The Ecosystem, But Not The Ecosystem

from the understanding-vc dept

This happens every so often, but in the last week or so, there's been a spate of "VCs are bad" types of discussions happening on various blogs. It kicked off with a blog post from Jason Fried at 37Signals, blaming VCs for pushing Mint.com to sell to Intuit. VC Fred Wilson did a nice job responding to that charge by pointing out the usual calculus in figuring out when to sell. Amusingly, very few people seem to notice what Fred was basically saying in his post. The undercurrent was that Mint.com likely wasn't doing nearly as well as its cheerleaders have assumed -- and thus, selling out made a lot of sense, not from a VC perspective, but from the founders' perspective.

Still, it's pretty popular in Silicon Valley to knock VCs, and TechCrunch has a post from Vivek Wadhwa pouring on the VC bashing, complaining about VCs taking way too much credit for innovation. Now, I'm a big fan of Wadhwa and his research on startups and innovation, and I'm among the first to bash VCs when it's warranted (and, yes, there are plenty of times when it's very, very warranted), but I think Wadhwa's piece goes too far. He's right that it's a little silly that the the National Venture Capital Association (NVCA) seems to be taking credit for all of the revenue and jobs created from any startup that has ever taken any venture money, but that doesn't mean that venture capital is meaningless in innovation.

While I'm actually a huge fan of building companies without venture capital (and am doing that myself), I think what people need to realize is that venture money is quite useful in enabling certain types of businesses. The problem is when people (very often Silicon Valley people) get into the mindset that raising venture capital is an end goal in itself, rather than looking at the overall business and seeing if it even needs venture money. During the dot com bubble, there was a time when people looked at venture capital like revenue -- the more you raised, the better you were doing, rather than recognizing that it really meant you just had a bigger hole to dig yourself out of. However, in some cases, where a company really does need investment capital to take a business to the next level, smart venture money can be a great help.

The nice thing today is that more and more businesses can be started, built and can scale without that need. That doesn't mean that there's anything wrong with venture capital. In fact, it's better if it's easier to build businesses. But that also doesn't mean that VC is somehow bad or isn't really a key part in accelerating certain innovative businesses. Venture capital is a part of the ecosystem, and that's a good thing. There are times when people give it too much credit, and there are other times when it doesn't get enough credit, but the real trick is just in understanding where and when it makes sense.

Filed Under: innovation, silicon valley, venture capital

Arizona Dumping Redflex Cameras... But Giving Redflex An Award For Innovation?

from the and-what-kind-of-innovation-is-that? dept

Arizona has become ground zero with the backlash against redlight cameras, with plans to get rid of them across the state. And yet... Dave Records alerts us to the news that the annual "Governor's Celebration of Innovation" includes a variety of companies nominated for awards... including Redflex, the redlight camera maker who was just complaining that its revenue was dropping due to public opposition to such cameras. Oops.

Filed Under: arizona, innovation, redlight cameras
Companies: redflex

Sneaky UK Attempt To DRM Television

from the not-this-again dept

Danny O'Brien over at the EFF has the details on how the entertainment industry is attempting to push through an attempt to DRM TV in the UK. It's not quite a "broadcast flag," but close enough. In the last few years, since the original fight over the "broadcast flag" ended in "failure" for Hollywood, they keep attempting to sneak it through in other ways. In the US, it's been via "selectable output control," or SOC. Over in the UK, it's a bit different, but no less ridiculous. Basically, there would be some encoded metadata with all digital TV channels, and the algorithm would be kept "secret." As Danny notes, this has nothing to do with preventing copying, and everything to do with giving the entertainment industry yet another "veto" on innovation (similar to the anti-circumvention clause of the DMCA):

In Britain, as in the United States, this proposal isn't about piracy. It's about creating a rightsholder veto over new consumer technologies in DTV.

No British commercial digital TV manufacturer would risk any innovation that might invalidate their "metadata compression parameter" license, and leave them open to litigation. And competition between devices would be limited by the byzantine requirements that DRM requires (it's notable that the BBC says the rightsholders demands came via the Digital Transmission Licensing Administrator (DTLA), a DRM consortium who would clearly benefit from mandatory adoption of its own system.)

But, of course, in an era of copyright moral panics, we'll hear over and over again about how this is all about stopping "piracy" -- even though it actually does nothing to prevent unauthorized copying.

Filed Under: broadcast flag, control, drm, innovation, uk

Andy Grove On Patents: You Should Use 'Em Or Lose 'Em

from the good-for-him dept

Earlier this year, we wrote about a rather thoughtful analysis of the problems of the patent system by Intel founder and former CEO Andy Grove. His view was that patents separate the important part (the actual innovation) from the "asset" (the patent), and that allows for bad behavior. He compared it to mortgage-backed securities, where the underlying mortgages were completely separated from the "asset," and bad behavior ensued. Apparently, he received a lot of criticism for this view -- but he's not backing down (if anything, he appears to be getting more aggressive). The Economist's tech quarterly issue includes a fascinating look at Grove and his views on innovation as a whole, and the wider economy. He mocks the idea that the gov't should ever prop up failing business models, noting that it stalls innovation. At the very end, he's asked if he believes what he said earlier this year about patents, and he not only defends his earlier statements, but makes an even stronger one:

"You can't just sit on your ass and give everyone the finger."

Unfortunately, with today's patent (and copyright) system, you can.

Filed Under: andy grove, innovation, patents

Is There Any Innovation That Hollywood Won't Try To Kill?

from the can-you-say-moral-panic? dept

It's well known how the MPAA tried to kill of the VCR (well, Betamax, originally), with Jack Valenti declaring: "The VCR is to the American film producer and the American public as the Boston Strangler is to the woman alone." As William Patry's new book details, Valenti and the MPAA have been masters of creating moral panics -- bogus, hyped up threats to make legislative response seem not just palatable, but desired -- that do nothing more than try to protect an old, decaying business model from innovative competition. Given that history, it's worth pointing out that it appears to be happening again with Redbox, the DVD vending machine business, that's taken the video rental market by storm. We've covered this story since last fall, when NBC Universal tried to figure out a way to stop Redbox from renting its movies. It gave Redbox a long list of ridiculous ultimatums, and told distributors not to sell to Redbox. In return, Redbox sued Universal. Since then, 20th Century Fox and then Warner Bros. joined in. Sony and Paramount are the only studios enlightened enough to do deals with Redbox.

But, that hasn't prevented the moral panic lobbying/promotional campaign from gearing up -- though, at least some appear a bit skeptical about it. The NY Times has an article that goes through the details and notes that Hollywood lobbyists have been working over time to convince the press to complain that Redbox rents R-rated movies to children. And they're also trying out some ridiculous claim about how Redbox is going to put studio plumbers out of work. Seriously. But, just you wait and see. It won't be long until articles start appearing claiming that Redbox kiosks are a threat to our children, since they can rent R-rated movies (the fact that these same kids can access whatever websites they want in the privacy of their own homes, with content much more graphic than any R-rated movie probably won't be mentioned).

But, of course, that's purely a moral panic -- and one that Patry even predicted in his book. What Hollywood and its lawyers are really worried about is that they don't get the same monopoly rents on pricing of DVDs. Once Hollywood got over its totally bogus fear of the VCR, it eventually embraced the idea of "windows." It's basically an attempt to do what economists call differential pricing -- where different people pay different amounts for the same basic product (or perhaps in slightly different forms). Classic differential pricing is a good thing in economics, if done right, because you can actually better optimize the market -- selling expensive (high margin) goods to those who will buy them, but making additional money on lower priced/lower margin goods to those further downstream, thus (in theory) maximizing profit.

Hollywood's version is a bit mucked up, of course, because it often will seek to abuse its monopoly position to squeeze excess rents out of the market with the government helping it -- and thus it freaks out when any sort of innovation (the internet, rental kiosks) come along. The real fear is that by introducing $1 rentals as soon as the DVD is released, it will cut into DVD sales (why buy at all when it's so cheap to rent?) and rentals from places like Blockbuster, who have worked out revenue sharing deals with the studios. So, once again, rather than compete in the market, Hollywood's lawyers are trying to convince the press and politicians that Redbox DVDs are "a threat to your children." But this is the exact same sort of "folk devil" that Patry describes Hollywood trumping up with every kind of technological innovation. Hopefully, we're smart enough not to fall for it this time.

Filed Under: dvds, innovation, moral panics
Companies: redbox

Yet Another Study Shows That Patents Lead To Sub-Optimal Innovation

from the no-surprise-there dept

Over the years, we've pointed to tons of research, especially historical research, that shows that near total lack of evidence that patents have any causal relationship to increased innovation. Some of the research shows little effect in either direction, and some of the research actually suggests a serious disincentive to innovate in the face of patents. If you're not all that familiar with innovation and patenting, this may come as a surprise. After all, the whole idea behind a patent is to create an incentive for someone to invent something that moves humankind forward (promoting the progress). The theory is that by providing some sort of gov't granted exclusive monopoly, the inventors have more of a reason to go forward.

There are two key problems with this theory, that explain why the historical evidence can find no support of this happening in practice. The first is that people invent and innovate for all sorts of reasons -- very rarely having to do with "because I can get a patent." It may be "because this is something I need or something I want." Or it could be because the innovator recognizes that with or without a patent, providing that product in the marketplace is likely to be lucrative (and being first in the marketplace is even more lucrative). Or, it may just be that the innovators are driven to make the world a better place. Whether it's profit motive or altruism, there are many reasons that invention and innovation occur without the need for patents.

The second key problem is the very nature of innovation itself. As anyone who's been involved with serious innovation over a period of time can tell you, innovation is an ongoing process, rather than a one-and-done sort of thing. You take an idea, and you work on it, and then you see what people think, and then you innovate, and you try something different and you get more feedback and you innovate some more, and so on. It never ends. You're always continuing to innovate. As such, others are often doing similar innovations, and the ability to leapfrog each other in the marketplace is actually a fantastic driver of innovation. If someone else is doing something cool, it's of little use to just copy them. You want to make something even better. And then they want to leapfrog you as well. That drives serious rapid innovation. A patent, on the other hand, greatly limits this whole process. Because it assumes that innovation is a one-and-done process. Someone comes up with something new, and that's it. The market needs to live with it until the patent expires or someone comes up with something entirely different. That's massively stifling on the normal process of innovation.

A few months back, two professors, Andrew W. Torrance and Bill Tomlinson, published a paper on a simulation game they ran to test out some of these hypotheses. A bunch of folks submitted this back when it first came out, but I wanted to spend some time looking over the details before writing about it. Basically, Torrance and Tomlinson create a nice simulation system that really does a good job simulating the various models for innovation with patents or in a more collaborative world. And, what they found in the simulation they ran supports what has actually happened in the real world, according to the research we've discussed in the past:

These results indicate that current patent systems (that is, systems combining patent and open source protection for inventions) may generate significantly lower rates of innovation (p<0.05), productivity (p<0.001), and social utility (p<0.002) than does a commons system. This suggests that current patent systems may significantly deter, rather than spur, technological innovation compared to a commons system.

Specifically, the results compared three separate models: one where everything gets patented, one where it's a hybrid model with both patents and a common, and one that was pure commons. The results are pretty striking. In the pure commons (no patents) world, they ended up with more innovation, significantly greater productivity and massively more social utility.

Given how well this seems to match up with previous research on what's actually happening, it seems like this model has at least something going for it. Still, it would be interesting to see what happens as they run more tests and continue to refine the sim. But it certainly raises ever more questions about the insistence among patent system supporters that the system must increase innovation. The evidence there is scant. The evidence on the other side? Quite imposing.

Filed Under: innovation, patents

Why Just Copying Isn't Enough: Cargo Cult Science And Copycats

from the gotta-leapfrog dept

We've talked about cargo cults in the past around here, and Boing Boing points us to a great video of a talk by Jeff Veen, which argues that copycat innovators are a form of a cargo cult: The point he's making is one that we've tried to make here many times in the past -- though his analogy is much better than most we've used. Basically, it's easy to just copy what you think is cool about a product, but that's rarely (if ever) enough to actually get people to buy. This is an issue we see all the time when people get upset about our position on patents. They say that, without patents, someone would just come in and "steal" the idea, and then where would you be? But, the fact is, just being able to "copy" the product isn't enough to get it sold.

If you're truly innovative, then you not only understand your product better than some random copycat, but you also understand what makes your market want your product.

That can't be copied. Not easily. Yes, the copycat may win over some customers, but it's not the same. And, by knowing the product and the market better than anyone else, you should also be able to stay ahead of the curve and keep innovating. The copycat just has to catch up -- they're running towards where they think you were, when you may already be well past that.

But the comparison to a cargo cult is quite accurate. The cargo cultists built up their faux airports, thinking that it would bring in the same wonders as the real wartime airports did. Companies make copycat iPhones because they think that people will suddenly rush to buy them like they bought the iPhone. But it doesn't work that way.

Filed Under: cargo cult, copycats, copying, design, innovation, iphone, jeff veen, patents

Nintendo Pays Innovation Tax To Patent Holder

from the good-for-innovation? dept

A year ago, we noted that Hillcrest Labs was going after Nintendo, claiming that the Wii violated its patents. And, like so many other patent holders, Hillcrest got to take two separate cracks at Nintendo, suing in court and also filing with the ITC to block imports. Recognizing just how ridiculously costly it is to defend both the lawsuit and the ITC process, it looks like Nintendo has just agreed to pay up. The company still insists that the Wii doesn't infringe, but the system is stacked against companies who actually innovate. It's so costly to defend yourself, that it's usually just cheaper to settle. Consider it a tax on innovation... except the tax doesn't even go to anything useful.

Filed Under: innovation, patents, tax, wii
Companies: hillcrest labs, nintendo

Fewer Foreigners Coming To US Grad Schools: This Is A Problem

from the not-good-for-anyone dept

I still cannot understand the antagonism that many seem to feel towards skill foreigners getting jobs in the US. The job market is not a zero-sum game, and there are two important things to understand when it comes to these foreigners:

1. Studies have shown, repeatedly, that bringing in such skilled foreigners helps create new jobs by expanding the economy. In fact, 25% of all tech startups these days are done by foreign-born workers, and in Silicon Valley that number is over 50%.
2. The even bigger point: it's not as if these skilled workers suddenly disappear if they're not in the US. Instead, they remain in their home countries (or other countries) where they're still just as skilled and now more likely to be competing with US companies, who were hindered in hiring the best employees. Getting beat in the market by a foreign competitor isn't good for US jobs. It's terrible for US jobs.

And yet, thanks to the economy and our own immigration policies, guess what's happening? Not only is it incredibly difficult for skilled foreign workers to get jobs, many foreigners aren't even trying to go to US grad schools any more, knowing how difficult it is to get visas and jobs in the US. As many are noticing, this is undeniably bad for Silicon Valley and bad for innovation. Can someone please explain why it's somehow better to let those people compete with US companies, rather than work with US companies to grow them?

Filed Under: immigration, innovation, silicon valley, skilled labor

Techdirt Book Reading List 2009

from the food-for-thought dept

A couple years ago, after completing my series of posts on the economics of ideas and infinite goods, I wrote up a reading list of books that were useful in thinking about all of this. With our recent launch of a book version of that series, called Approaching Infinity, I updated that list with a bunch of more recent books (basically, the books sitting on my desk again...), and wanted to share them here. For this post, I'm only writing up short reviews, but plan to revisit some of these books with much more detailed reviews, in the future. Not surprisingly, we'll kick it off with four of the books that I feel are the most important for anyone to read if they're interested in these things. Together, they make up the four books that you can get together (all signed by their authors!) in the Techdirt Book Club package.

The Essentials:

• Moral Panics and the Copyright Wars by William Patry

  Patry, long established as one of the foremost experts on copyright law, has written an outstanding text that discusses how copyright law has been twisted and abused by corporate interests who don’t use it for its intended purpose (to promote the progress of creative works) but as a tool to prop up an outdated business model. On top of this, he explores the misleading and inflammatory language used by those seeking to abuse copyright law in this manner. Highly engaging and a must read for anyone who’s worried about the state of copyright today. Oh, and as a bonus, Patry has started blogging again in support of the book, after he gave up on blogging a couple years ago.

• The Public Domain by James Boyle

  Law professor James Boyle has been one of the foremost critics of the undue expansion of copyright law over the years, fighting against things like the DMCA and the Sonny Bono Copyright Extension Act. Over the years, he’s noticed a troubling trend among some to question why the public domain is even needed — so he wrote an entire book to explain why. It’s filled with story after story that highlights both the importance of the public domain and how overly aggressive copyright laws have held back the public domain and the creativity that it previously allowed. As a highlight, don’t miss the incredible chapter on the birth of soul music by Ray Charles. If today’s copyright regime had been in force at the time, we might not have had soul music at all. Think of all the great music we may be missing today thanks to current copyright laws.

• Against Intellectual Monopoly by David Levine and Michele Boldrin

  This book was on the list two years ago, but that was an earlier digital-only draft, as opposed to the full hardcover version now available. Levine and Boldrin are two well-known economists who began investigating the impacts of intellectual property, and were eventually quite disturbed by what they found. That is, they could find no evidence that either copyrights or patents actually achieved their stated intention of "promoting the progress." Instead, they found a lot of evidence that the opposite occurred — and that copyright and patent law served to hinder the progress and slow down its pace. Chock full of examples and citations to important studies, this book is a must read for anyone trying to understand the state of today’s intellectual property law and how closely it lives up to its stated purpose.

• The Gridlock Economy by Michael Heller

  An excellent addition to the literature on property law and the economics of property. Heller recognized what he refers to as "the tragedy of the anti-commons," when too many property rights get in the way of the efficient allocation of resources, and notes how this has come into play on things like patents and broadcast spectrum. If you’re trying to understand the economics of intellectual property, especially if you’re a strong believer in property rights (as we are) this is an excellent book to understand where property rights can go too far.

Intellectual Property

• No Law by David L. Lange & H. Jefferson Powell.

  This is an incredibly worthwhile read. I plan to do a much more detailed review shortly. It methodically lays out the argument for how and why copyright law as it's written today clearly violates the First Amendment ("Congress shall make no law... prohibiting the free exercise thereof; or abridging the freedom of speech..."). The book is, at times, a bit dense to read through, but you kind of expect that from two lawyers. However, the detailed and thought provoking look at the history of intellectual property law, along with related legal concepts such as misappropriation and unfair competition -- as well as its detailed dissection of a few key court cases -- is, alone, worth the price of admission. I have some other problems with the book (including its eventual suggestions for how to "fix" copyright law), but there's so much value in the first half of the book that I'd highly recommend it.

• Patent Failure by James Bessen & Michael J. Meurer

  A must read for anyone looking to understand the patent system today. Bessen & Meurer go through a ton of the research that has been done about patent systems, and include a bunch of their own, and make the case that the patent system simply does not work for the majority of industries out there. The book is incredibly strong in detailing study after study after study that details, in an incontrovertible way, that the patent system is fundamentally broken and clearly hinders innovation much more significantly than it helps it.

• Copyright's Paradox by Neil Netanel

  Similar to No Law above, Copyright's Paradox goes into great detail showing how copyright law appears to quite obviously violate the First Amendment, and why that needs to be dealt with.

• The Patent Crisis by Dan L. Burk and Mark A. Lemley

  Mark Lemley should be a familiar name around here for his views on intellectual property, and this book certainly is a worthwhile read. It does a great job laying out the many problems with the patent system and why it often does significantly more harm than good. Where I find it a bit less convincing, however, is in suggesting that the court system can fix these problems. I agree that the current Congressional patent reform bills aren't very good, but I'm not convinced the courts will go anywhere close to far enough in fixing the system.

• Intellectual Property and Theories of Justice Edited by Axel Gosseries, Alain Marciano and Alain Strowel

  This is a collection of academic papers having to do with intellectual property, as related to not just legal and economic arguments, but philosophical ones as well. I don't agree with all of the different papers, obviously, but there's a lot to get your mind churning on different ideas and different approaches to intellectual property issues within this book.

Economics & Innovation

• Free by Chris Anderson

  By now, you should probably already know about this book, but Chris puts into book form much of what we talk about on Techdirt. My review of the book notes that it's well-worth reading, though I think he could have gone farther and could have done a better job anticipating how to respond to the obvious critiques from people who were responding emotionally, rather than based on the actual points raised by the book.

• The Venturesome Economy by Amar Bhide

  This is a fantastic read if you're looking to understand innovation in a global economy. It puts to rests various myths about globalization or off-shoring being bad for the US economy, and shows how innovation itself is global, but the key question is learning how to actually implement ideas, and how to take concepts and continually innovate, rather than just focusing on a small part of the puzzle.

• The Pirate's Dilemma by Matt Mason

  While it suffers from sensationalism, at times (too much so at points), the book does a fantastic job of highlighting example after example after example of how what some people feared as "piracy" was simply a leading indicator of innovation. In every case, the same pattern emerges: some existing industry freaks out over so-called "pirates," but the "pirates" are merely the market telling the industry what it wants, and what's possible. Eventually (often over massive protests from that industry) someone comes along and figures out how to deliver what the market wants -- and to do so profitably. This is a must-read for anyone who calls things "piracy" without understanding the real implications of what's going on.

• Predictably Irrational by Dan Ariely

  A quick and easy read that gets people to rethink certain easy assumptions about economic behavior. While I disagree with the idea that the actions are somehow "irrational," I do think it highlights how there are often more variables at play in an economic analysis than a simplified analysis takes into account. For folks around here, his investigations into how people respond to "free" within an economic model (i.e., they value it more than you would expect) are particularly noteworthy.

• Here Comes Everybody by Clay Shirky

  Pretty much anything by Clay Shirky should be required reading already, but this book is one of the best out there in getting you to understand how the old systems of production and consumption are changing due to enabling technologies, and how the old distinctions between production and consumption are melting away.

• Remix by Larry Lessig

  Not necessarily Lessig's strongest book, but still absolutely worth reading. It goes well with Matt Mason's (and James Boyle's) book above, in getting you to understand the nature of creativity, and the way in which nearly all creativity involves mixing one's own unique ideas with those that have come before.

• What Would Google Do by Jeff Jarvis

  While admittedly it can feel a bit preachy at times, once you get past that aspect of it, you realize that it's a manual for innovative decision making (not just in business). It's about recognizing that businesses by themselves don't get to call the shots any more, and if they don't realize that, they're probably not going to stay in business very long.

• Rebel Code by Glyn Moody

  If you want to understand how the concepts we talk about here can be applied in practice, the open source community is a good place to start. Glyn Moody has written an excellent account of exactly how that came about.

• The Future of the Internet: And How to Stop It by Jonathan Zittrain

  I actually disagree with the conclusions of this book, but there are still a number of good points raised within it, about how there's always a fight between "control" and "openness" in new technologies. Zittrain worries about the trend towards control, though I think in the end the market will settle things, and "control" will lose out to openness in the long run.

• A Culture of Improvement by Robert Friedel

  This rather epic tome goes deep into how innovation occurs in Western Society through a basic mechanism of a "culture of improvement": the idea that when something doesn't work right, we seek out a better solution. If you want to understand how innovation occurs, this is a good starting point.

• From Concept to Consumer by Phil Baker

  We've said it time and again: the real key to innovation is not the idea, but actually implementing it, and innovating to get the idea out there, and to see how you can deliver more of what a consumer needs. Written by someone who's done that many times over, this book is basically a guidebook for those looking to go from the idea stage to actually bringing a product to market. For those who think that the invention is the important stuff, and bringing it to market is just "business stuff," this is a worthwhile read.

Obviously, there have been a ton of other great books that have come out over the past couple of years, but these are the ones that I've kept close to my desk recently, and wanted to share with all of you.

Filed Under: books, economics, innovation, intellectual property