I got asked by a young local entrepreneur to be his mentor.  He was looking for help in how to think about his most recent pivot, and how to take his newest creation to market.  As I started asking some questions about what he was doing and why, I found myself wandering into racing metaphors.  They made sense at the time, so I wanted to share them here.

Two Stroke

Do you require constant fiddling?  Are you extremely temperamental?  Likely to just up and quit because the conditions are not just right?  These are the hallmarks of the two stroke engine.  They have more power for their mass than their four stroke cousins, but mainly are they a pain to maintain.  If not properly lubricated (substitute money for oil), things just seize up and die, usually with painful results:

Casey Stoner going over the high side – (purists will note this is not a 2 stroke engine). Photo credit.

NASCAR

Ahhh NASCAR.  It’s a lovely form of racing.  To the casual observer, they might think I was making a comment about going round and round but not actually getting anywhere.  Funny, but no.  What I mean when I use this term is the money, or rather, the amount of it a founder will require:

Lineup of NASCAR race cars. Photo credit.

It’s not an insignificant amount of money to get that car rolling.  Much less out of the garage.  All that money means overhead, management and complications.  Being a NASCAR team owner means you are basically spending all of your time raising money.  Spending time chasing dollars and managing your commitments to your sponsors.  In short, you are more focused on getting the sticker on the car, and not getting the car across the finish line. [note: I am using NASCAR as a metaphor, and not saying that actual NASCAR owners are not concerned with winning.]

Club Racers

The club racer is a special breed.  They are dedicated.  They are die hard.  They are crafty.  Only a club racer could find so many uses for duct tape.  More importantly, a club racer knows the details.  They know how many miles are on those pistons.  They know how many heat cycles your tires have seen.  They know what the weather is going to be, and thus the required jetting and tuning for the engine.  They know.  Not someone else somewhere else on the team.  They are obsessed with knowing these things.  They measure everything and look for any incremental improvements they can get.  They will live out of the back of a van, driving themselves from race to race, living on bare minimum budget to ensure they live to race another day.  Tenacious.  Budget conscious.  Racing because they love it.  It’s not a job.  It’s a passion project.  It’s what they breathe.

Lest someone be confused that the club racer ethos can’t find it’s way to the big stage, allow me to introduce you to Romani Fenati.

Romani Fenati at Jerez, Moto 3 race 2012

What you may not immediately notice is the utter lack of stickers and sponsors.  To have that much empty space on the side of the bike, never mind a plain white helmet, is unheard of at the world level of racing.  He finished his debut race in Qatar in second place.  He was a last minute addition to the Moto 3 roster by the Italian Motorcycle Federation, completely unknown and completely unsponsored.  And he crushed it.  Always be ready to capitalize on those opportunities when they arise.

I’ll leave it to you to sort out what type of entrepreneur you are, or with which ones I prefer to work.

I have been thinking a great deal about what the Facebook IPO means.  While reading many posts up at Hacker News about whether we are in a bubble, lamenting Zynga, or skewering Groupon, I am left wondering what will really become of Facebook.

The tl;dr version is that I can’t sign up for Facebook at this price.  I have many friends there, and I am happy for them, but I find the valuation a bit too rich to be comfortable investing.

I started off using Bing Finance to use their stock screener to see if I could paint an interesting picture of how Facebook compares to other public companies.

First I started with valuation.  Setting a minimum valuation of $74B (which is the low end of the Facebook filing range) yields 95 companies.  Notable in that list is my current employer at $101B.  Other notables – Anheuser-Busch ($120B), Apple ($532B), ATT ($193B), Chevron ($203B), Cisco ($102B), Comcast ($79B), GE ($204B), Google ($198B), Intel ($139B), IBM ($235B), McDonalds ($97B), Microsoft ($257B), Merck ($117B), Pfizer ($169B) Qualcomm ($106B), The Home Depot ($78B), The Walt Disney Corp($78B), Verizon ($115B), Visa ($96B).

For my second filter, I wanted to add a revenue line.  According to their S1, for the year end 2011, Facebook had revenues of $3.7B.  I will use that as a min bar.  I then set a max revenue range to $10B, which leaves plenty of room for hyper growth in the first year.  That reduced the list to just one company.  Visa.  The company that makes money on just about every payment transaction in the world.  Further, with earnings per share of $3.57, they have revenues of $8.5B, and a market cap of $96B, the high end of the Facebook filing range.

If I remove the top end filter on revenue, the list of 95 drops to 40.  From my notables list above, the following remain:

Amazon ($48B), Anheuser-Busch ($39B), Apple ($108B), ATT ($114B), Chevron ($244B), Cisco ($43B), Comcast ($56B), GE ($142B), Google ($38B), Intel ($54B), IBM ($107B), McDonalds ($27B), Microsoft ($70B), Merck ($48B), Pfizer ($67B) Qualcomm ($15B), The Home Depot ($70B), The Walt Disney Corp($40B), Verizon ($110B), Visa ($96B).

So none of my “notables” dropped off the list, but it’s important to point out that only one of them has single digit revenues, and only and additional 3 would be under $50B in revenues.

I can already hear people yelling that profits matter, not revenue.  OK, I’ll grant you that.  Since my notable list didn’t reduce, let’s see if adding a third filter, earnings per share, does any pruning.  Facebook’s diluted EPS for 2011 was $0.46.  Setting the min bar to $0.45, and a max to $2.00, the 40 goes to 9, and here’s what’s left of my notables:

Amazon ($1.37), ATT ($0.67), Cisco ($1.17), Comcast ($1.50), GE ($1.23), Pfizer ($1.10) and Verizon ($0.85).

The only one of those with a PE multiple higher than the implied PE of Facebook (76 at the high end of it’s pricing range) is Amazon.  No other company cracks 50, and only 3 are above 20:

ATT (47.8), Pfizer (21.1), Verizon (43.5).

My point in all of this is simply trying to highlight what should be painfully obvious.  Risk.

Each of the 7 companies left in my notables list has a much reduced risk of their main line of product waking up one morning, deciding the company isn’t cool anymore, and moving on to the next thing.  ATT and Verizon have that risk, but what they have going for them is the ability to point to the size and quality of their network infrastructure.  They have hard assets like towers and land leases which are of limited supply, and difficult, if not impossible, to replicate, with incredibly high build out costs for competitors.  Same thing with Comcast.  GE – well they just make a ton of stuff.  Cisco makes less stuff, but R&D is certainly a barrier.  Pfizer – well the drug R&D budgets are legendary, and the process for getting FDA approval is an underfunded-company killer.  Visa has incredible barriers to entry tied to fraud protection they have build, customer acquisition, and the network of businesses using their product.  Paypal, Square and others are certainly making progress here, but it’ll be a while before Visa is really hurting.  For obvious reasons, I can’t comment on Amazon.

The Facebook IPO is exciting, for sure, but I am getting really really nervous that we are setting expectations for our up and coming entrepreneurs in an unrealistic way.  You’ll remember from my last post that I made the point that something is worth what someone will pay for it.  I will not pay $35 for a share of Facebook stock given what I know about the financials published in the S1.  I can hear the criticisms of this analysis, saying that Facebook is a new kind of company, blah blah blah.  That’s incredibly self serving.  Their primary asset is their customer base, which has lock in tied to data (pictures, connections, etc), but I am not sure I agree that cognitively a person would have a stronger connection to a company based on data stored there than they do with their mobile phone plan.  ATT needs $114B in revenue to stay in my notables list – to Facebook’s $4B.  Verizon has revenues of $110B.  Both ATT and Verizon are valued around 45x PE, implied value to Facebook of $20.

For all those who say “well, with 800M customers, they will figure out how to monetize them later” – I don’t even know what to say to that.  If you couldn’t figure it out at 100M, or even 500M, what is another X hundred million customers going to teach you?  Comically, this reminds me of all those pitches to VCs in the late 90s: “the market has 1B people, and if I get just 0.1%, that’s 10M customers.  Think of all that revenue.”  That’s a pitch that would get you thrown out of any VC these days.  Sadly, Facebook has actually acquired all of those customers, and are likely saying “if we can just get 0.1% to monetize at a higher rate…”

The real truth is that Facebook is worth what someone will pay for it, and the greater fool theory prevails here.  Expect the stock to jump above $50 on day one.

It seems I can’t have any discussions with entrepreneurs without the topic of Instagram coming up.  They all think that now is their time to strike the iron since the valuations are going to the stratosphere.

I want to be very specific and clear on this point.  Facebook bought Instagram.  Instagram was not sold to Facebook.  That’s an important distinction, and lends well to the conclusion of this discussion.

Before we get there, for all the entrepreneurs out there, I wanted to share some experience on the topic of road shows.  The very first road show in which I participated was Cymer, way back when I was a summer associate at Morgan Stanley.  It was extremely exciting for a young guy, and unbelievably grueling for the management team.

The essence of the road show is that a company wishing to go public works with their investment bank to travel around the world meeting with institutional investors to convince them that they should buy stock in the coming offering.  The process is a real slog, riddled with questions about the business and why the investors should invest.  Those questions can make the difference in the price of the offering to the public market.

It’s critical to understand a few things here.  Companies, when they go public, book the cash from the sale of the shares based on the first price.  When a deal sets its price range, as Facebook did today of $28-$35, the company will receive their cash based on where that price lands.  The employees and shareholders who continue to hold through the offering benefit from the price appreciation which comes in the months and years following.

The person who stands to benefit the most from future price appreciation is none other than Zuck.  He wants the price to go up.  More to the point, he wants to limit the possibility of the road show landing on the price at the bottom of the range, and potentially impacting the day 1 pop, future excitement, etc.  Based on the S1 capitalization table, the valuation implied by this price range is between $75B and $94B.

Now, back to Instagram.  People seem to be universally of the opinion that Instagram was not worth $1B.  They are wrong.  A thing is worth what someone will pay for it.  Zuck was willing to pay $1B.  Apparently without the consent of his board (since he controls voting).

If Zuck was worried about protecting the value of the stock, and maximizing his upside, it would behoove him to remove from the table any questions he might get from investors about “this Instagram thing” or “what are you going to do about Instagram and your mobile users” or “isn’t your engagement model based on traffic, and you are not the leading photo solution for mobile, which you have identified as critically important since mobile users are 2x more engaged?”  You see where I am going with this?

So Zuck uses some stock to increase the likelihood that the price lands at the top end of the range.  Doing some quick math reveals that the $1B price was really only worth about $0.37 per share of Facebook stock (based on the pricing range).  Remember, this money he’s getting from other people when the stock prices.  So Zuck spent $0.37 per share to protect his personal downside.  $0.37 per share to maximize the likelihood that the price of the offering lands at $35 and not $28.  It’s a very smart move.

The counter argument would be that investors would not have ascribed so much value to Instagram.  They may not have…directly anyway.  Investor sentiment is fickle and needs to be nurtured.  The job of Zuck, the management team, and the bankers is to remove doubt.  Doubt can cause the price to land at $28.  Still a great day for employees, but the company loses $2.3B in cash from the sale of the stock.  Further, the value of the company would be $19B less if it priced at the low end of the range versus the high.

In the case of a pricing of $28 versus $35, Zuck would lose $211M on the shares he is offering, and $3.5B of post offering share value.  Is the $1B payment for Instagram starting to make a bit more sense?

I was reading an article about how Google is going to change their algorithms to penalize sites which are overly optimized for SEO.  It’s no surprise to arrive at an end state where rules of a system are gamed when pecuniary gains are available.  The entire SEO industry has grown up around trying to figure out how to optimize sites for Google’s black box.  To ensure an improved customer experience, this action was inevitable.

Paul Graham recently wrote that building a search engine was a frighteningly ambitious startup idea.  He accurately points out that the once spartan design of the Google homepage is now an overly cluttered mélange of links and ads.  PG is calling for hackers to build a better mousetrap, but what I thought of when I read his post was about Heisenberg’s uncertainty principle.

You see, Google is a completely algorithmically driven enterprise.  They measure and measure and measure.  In doing so, they have sought to index the world’s information and make it available to anyone.  Many would argue that they have been incredibly successful.  After reading PG’s post, I began to think that perhaps Google’s incessant measurement of click-thru rates and speeds has not only changed the web for the worse, but created a situation where they could no longer measure what was good for their customers; that the measurement of the one variable reduced their ability to know the value of the other.

As for the title of this post, I have taken one part Heisenberg and added in Schrödinger’s cat when evaluating the situation with Google.  Their black box algorithms contain the cat (happy web surfers) and the radioactive isotope (monetization of search).  They have never allowed anyone to peer inside their box, so their happy customers are both simultaneously alive and dead.  Sadly, in order to inspect the state of their customers, they will need to measure them.  In measuring them, they will need to open the box.  In opening the box, they will alter their understanding of the happiness of their customers, while simultaneously reducing their understanding of their measurements tied to their ranking algorithms.  It’s a vicious cycle.

As part of my time off between leaving one job and starting a new one, I decided I really needed to get some time away from my daily technology interactions.  I wanted to break the annoying habit I have of pulling my phone out of my pocket every 60 seconds to see if a new email has arrived, checking Hacker News, Techmeme or any of the other minute by minute distractions.

My itinerary was to take me to Winthrop, WA, where I had been told lay some amazing X-country skiing.  I discovered XC skiing last year in Whistler and fell in love.  I love the workout, of course, and the fact that you can really punish yourself if you want to while out on the trail.  Beyond that, it’s all new to me.  There’s little on snow I won’t go down on a snowboard.

I remember finding myself on top of a frozen 30 foot waterfall once, and proudly declaring to my friends, “my heath insurance card is in my inside pocket” before completely botching my first jump turn and falling the rest of the way.  Sadly, the daily cash flow of skiing/snowboarding is crazy high, and I am no longer getting the required endorphins to make it worth it.  I’m willing to go to new mountains for the change in scenery, but I’m at that point in my life where I no longer see double black diamonds, but instead I see loss of income potential.

The other thing I dig about XC skiing is that it doesn’t appear anyone else has figured out what a kick ass way to spend your time it is.  Not entirely true – there’s a sizeable population of older (dare I say “wiser”) folks out on the trails, however, for the most part, there is no one on the trails.  I could count the people I ran across in a 3 hour sessions with both my hands.  Lovely.  It’s not glitz and glamour.  It’s you, your skis, some hard work, and lovely scenery.  Perfect.

Unique to this trip, I was alone.  My lovely wife gave me a hall pass, which meant I was alone from Tues early AM to Friday PM.  No checking in, and no calls unless it was an emergency.  It was truly and unplug vacation.

Knowing that I was going to be turning the data plan off on my phone once I crossed over Stevens Pass, I thought I would try another interesting experiment.  What would happen if I simply didn’t talk for the entirety of the trip?  To anyone.  Not a word.  I wasn’t sure I could do it.  My internal dialog alone is enough to, as my mother put it, “drive a saint crazy.”  I wondered how my brain, and more importantly my psyche, would handle this.

I’ll save all of the sordid details and skip to the end for the reader.  I made it all the way through.  Well, right up until Officer Friendly gave me a speeding ticket somewhere along my route home for doing 65 in a 60.  My first ticket in 10 years?  Groan.  OK, here are some of my observations:

I was surprised how much my jaw hurt by the end of the first day.  I was actively suppressing the desire to speak, and forcing my jaw shut.  It’s possible that I was clinching it, but it ached by the time the sun went down.

I was surprised at how quickly people adapted to my situation.  At first, I felt it necessary to explain in long-hand written form that I had no voice to anyone who would be helping me or expect to communicate with me.  I bought a pad and pen at a grocery on the drive, and on the first day during lunch, dinner, and while getting the skis/trail pass, I had written out in paragraph form, anew each time, that I had no voice, sorry for being a pain, blah blah.  Most folks just shrugged and went about helping me with as little trouble as possible.  By the start of the second day, I abandoned that pretense, and would simply point at my throat and make a “nope” cutting hand gesture.  Again, everyone just adapted immediately, smiled and life went on.  I could point at food, and pay for things, so life wasn’t that hard.  Until I locked my keys in my car.  I wasn’t staying at the Sun Mountain Lodge, but to the receptionist behind the counter that day (Megan, I believe your name was), you unwittingly participated in my experiment.  I considered calling time out, as it seemed unfair to ask for help from someone under the false pretense of my not having a voice.  She called a couple of companies for me, and argued with one person when she thought their price was too high.  The issue resolved itself, and I will certainly stay there next time I am in Winthrop.  They won a customer.  However, it was what she did when I left that surprised me the most.  I was feeling pretty rotten that this person had to spend time with me on account of my being voiceless, so I wrote the following:

“Sometimes it can be hard to ask for help when you have no voice, but stupidity sometimes overwhelms self reliance.  Thank you for helping when you really didn’t need to.”

She asked if she could pull the page out of my pad and keep it.  I was floored.  Great people there at the Sun Mountain Lodge.

I was surprised how much slower time moved.  I wasn’t watching TV.  I allowed myself a movie (go Kindle Fire) on two of the nights, but other than that, I was reading books on my Kindle, sleeping, riding my bike on the trainer, eating or skiing.  That was it.  Time slowed way way way down.  It was fantastic.

I was surprised at how much my internal dialog dissipated.  My thoughts seemed to slow down and focus.  I felt more creative.  I felt like my train of thought was hitched to one track at a time, and that the track ran for more than just a few feet before wanting to jump to the next track.  I felt less caffeinated, despite having not changed my caffeine levels.

I was surprised at how much more purposeful I was in my interpersonal interactions.  During the entirety of my trip, I felt like I was a burden on others.  Whether my lack of voice was real or fabricated is irrelevant.  I think I would have still felt the same way.

It was a wonderful rebalancing trip, and an interesting experiment.  Winthrop is, to put it nicely, a blink and you miss it sort of town.  I am now interested in replicating this experiment during a a full Friday to Sunday stint in a city of measurable size, with sufficient daily activities as to require human interaction.  The handful of weeks off between jobs has been absolutely wonderful; a fantastic gift.

The title is a bit misleading as I have been in role for close to two years, but Windows Phone has been in market for a year.  During the course of the past year, I learned quite a few things, and have been asked a number of questions from the community.  I wanted to take this time to share some of those learnings, and answer a variant of the most common question I get (both internally and externally): “how are you guys doing this?”

Upon starting in role, the person who recruited me for the position (Charlie Kindel) walked me through what he calls the 5Ps.  This served as a very useful framework for thinking through how our team was going to tackle the very real problem of being in last place for developer ecosystems, and building excitement and driving recruitment for a pre-released mobile OS.

When we first met as a team, we sought to lay out what we though were the foundational principles for our work.  This is essential, as it makes it very easy to say “NO” to things when you have clear principles.  Since our fiscal year runs Jul to Jun, we have refactored our team principles for our current fiscal year.  We did this based on the experience of the year we had behind us.  With that in mind, I wanted to share some of the principles from the last fiscal year.  No real corporate secrets here, and in fact, some people will say that this is just common sense.  Maybe so, but the results have been building, with the new IDC/Appcelerator report out (expected press coverage), and it looks like interest in Windows Phone development is at an all time high.  Awesome.

Inspire Developers

The problem facing our team was essentially one of a cold start reboot.  We had to start with a completely new dev platform, new tooling, and the fallout of a clean break from Windows Mobile 6.x, making many of those developers angry.  The bottom line message for the team, and our extended team in our DPE org (Developer & Platform Evangelism), was to build the message and demonstrate the clear opportunity of building on Windows Phone.  For the first year, this involved heavy upselling of our investment in the long term success of Windows Phone.  However, it also necessitated that we have improved reach and effectiveness with our outbound communications.  This meant landing our stories with the press, but also engaging with developers on a 1:1 basis where possible.  An impossibility to execute with our team alone, the partnership with our DPE org led to the creation of our mobile champs program.  Having local feet on the street in the countries where we were selling phones was critical for developer support.

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Subject: Ms. Muffet would run scared from you.

Why Miss Muffet? Because we are looking for someone who has unbelievable _web_ skills.  Get it?  Web…Spider? No? #facepalm

Befitting our desire to stand out with our job postings, I give you one rendered in tweets:

Our team has a serious bunch of people who take #winning very seriously…but we have no tigers’ blood #ImportTariff

Specifically, we are on the Windows Phone Apps org, and we are responsible for the App Plat and the breadth dev ecosystem #WhupAppsForShort

We are looking for an amazing web technologist who wants to advance to state of the web on mobile devices #LovesWindowsPhone

Our purpose is clear: “Cultivate a developer ecosystem that delivers outstanding mobile experiences.”  #TopThatGoogle

You will have broad responsibility: ensuring top 20 web sites look great on WP & educating breadth web devs about the same #YouAreABeautician

You will find those places where WindowsPhone web stands out against the competition, and shine a light on it #CompeteToWin

You must have the mind of a genius but the heart of a teacher, because we have to reach loads of web devs #ScaleItUp

This will be an incredibly challenging position, requiring lots of cross group collaboration #TheWhatAndTheHow

There are 2 screening questions: 1) do you code as a hobby & 2) have you successfully marketed a dev platform before? #HardToFind

The person who thinks they can and the person who thinks they can’t are both right #WhichOneAreYou

You can read about the job here: #WhatAreYouWaitingFor

I was doing some birthday shipping for my wife a few weeks back.  I actually had to hold off on posting this write up because I didn’t want to tip her off to what sorts of things she might expect for her birthday.

This post isn’t about her birthday, however, but rather Amazon and their collaborative filtering mechanism which makes recommendations to you while you are shopping.  Given that the search term with which I started was “gymnastics mats,” I can understand 4 of the 6 of these recommendations.  I can even go out on a limb and convince myself that, yes, people who are likely to be buying gym mats need to keep deer away.  Think of the liabilities to the gym studios when that first deer hurts themself.  The rules just aren’t set up for four legged participants.  Sadly, Bambi and her friends are really into gymnastics, and they keep hanging around.

It was the book recommendation that really piqued my attention.  The book itself is a parable style yarn about leadership and psychology.  Think “Chicken Soup for the Bad Manager.”  The scary thing is that I have read this book.  My manager suggested it as one of those great books I needed to read.

So I am left wondering what type of people are buying gymnastics mats from Amazon.  Are they type A business execs who are fashioning home gyms for their gymnastics bound children?  Are they incredibly driven, though perhaps misguided, leaders who are building gymnasiums?  Or is this simply a case of Amazon having a bit of fun with me, knowing that I read that book, and that I have deer eating the grass in my yard?

So I’m sick.  Sick and travel are never fun.  Recycled air on the plane is usually the culprit.  Sick sucks.  In particular, it sucks when you are out of your element.  Travelling in the US usually affords you the ability to walk into any familiar looking pharmacy and choose the appropriate cold medicine from the dizzying array of choices.

International travel comes with its challenges, but most of my travel for the last few years has been to familiar western culture countries.  When you get sick, you can at least understand some of what you are seeing in the store.  Identifying the cold medicine in Barcelona, even with Catalan, was doable.  My Spanish is passable enough that I can get by in most western European countries.  Well, Finland was challenging, but they speak very good English.

China is an all together different problem.  First, the character set is foreign to me.  Second, Beijing is huge.  HUGE.  I am having trouble orienting myself because no matter what direction I look, there are buildings.  Lots of buildings.  This is the first city I have ever been in where I didn’t immediately know where I could walk from my hotel to get basic snacks/soda.  I’m staying in a relatively nice hotel too, but there is no shop in the hotel.  Oh, and English is not a first class language here, so good luck when you have to deal with the local shop owner.  Hit or miss.

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This is a video thank you card to the men and women who work at Easton Bell.  My goal is to land this in front of Easton Bell President, Chris Zimmerman (I think I figured out his email).  I’m using all the tricks in my bag.  The tweet went out this morning, some buddy mails, this blog post, some spelunking through LinkedIn, etc.

I know I have next to no talent in movie making or editing.  I used my Flip HD and personal laptop on this project, working in close partnership with my companion – my beautiful 6 year old daughter.  She had a great time with the filming and the editing, and loved seeing the final product.  Sorry in advance for the wonky volume.

If you watch the video, and it touches you in some way…share it with a friend.  I would love for the team at Easton Bell to see the reach and impact of their products, to know that they each had a hand in saving a life, keeping a family together, and keeping a smile on the faces of my family.  It’s also nice to use social media to pass around stories of companies that done good.

**note: I think the email in question is CZimmerman@eastonbellsports.com.  I am going to send a link to the video with a nice note.  If anyone sends email to Easton Bell, please be respectful of inboxes, and remember, we want them to be happy about this.