The Long Tailpipe - Shai Agassi's Blog

Nature calling

It has now been 100 days (and change) since I spread my wings - what a time. It couldn't have planned it better, as I am leaving tomorrow for a week in the Galapagos. If you have to go on a boat in a remote part of the planet, it better be as great a destination as the Galapagos Islands - always been on my top 10 places to go see before I check out of our planet. To top it off, not only do I get to be with my family all that time, I actually will be sharing the boat with some of my best friends from YPO - Young President Organization. So the days will be packed with nature and family, while the nights will be shared with friends.

You may not know but there is no cell phone coverage and no blackberry on the islands. Which is such a great bonus - I hope the withdrawl from society will not be too tough on everyone looking for answers on berry...

Next time, I will post some pictures of our planet - promise.

Scaling the Energy Mountain

I saw this great presentation from professor Nocera, at MIT, which you should truly download and watch on iTunes. If there is anyone who doesn’t get the scale of the problem we are facing, professor Nocera really knows how to punch you in the gut with the reality of our global energy crisis. We used to debate the flip angle of his worry – that of climate change caused by greenhouse gasses emissions. People still claim we don’t know what the scope of the problem is, or when will the glaciers melt (some even have the chutzpa to say they are waiting for it to happen so we can dig for oil in Greenland…), etc. Professor Nocera has a much simpler view on it – we are running out of energy – and the clean energy solutions we have don’t scale - with the exception of solar (did I mention he is working on solar solutions at MIT...in particular recreating photosynthesis).

To summarize his energy math –
1.    We will need 28 Trillion Watts as a planet in 2050 – 18 TW of which are not in existence today – even if we reduce our average level of consumption significantly below current US levels.
2.    If we convert every plant we have to fuel plants we will get 7 Trillion Watts (we do have to give up on all food crops in that case). I heard some people argue a different number on this point
3.    If we go Nuclear and figure out how to put a new safe nuclear plant every 36 hours we can get 8,000 nuclear facilities (we will each get a neighborhood nuclear plant) supplying 8 TW. In Israel, that will translate to roughly 5 new nuclear facilities…
4.    If we catch all the winds in the world (and with it the birds) we will get 2 more TW
5.    Finally, if we damn all the rivers we didn’t already put a damn on – we will get 1 trillion watt – putting us in a world without fish (which goes perfectly well with a world without trees, crops, birds, and your local nuclear facility).

On the other hand we do know that the sun pours 800 Trillion Watts on the planet at any point in time. Historically we lived entirely based on that energy – everything we grew, hunted and ate leveraged that energy source. Wind and waves resulted from the sun, we turned them to energy for transportation and mechanical drive through boats and windmills. What we didn’t use simply got into the ground and turned into fossil fuels over the years – that was our planet’s battery – and we filled it up over 300 million years. The battery held its energy in complex C-H bonds, until we became smart enough to figure out we can burn that bond and make things go faster, bigger, farther and spread our Icarus wings to get closer to the sun.

Well, the news flash is that we have used half of that battery in the last 100 years or so. At the rate we are going, we won’t have 100 more years to go, we probably have closer to 50 as we accelerate the burn rate. If we do not revert back to using the sun, and being very efficient at doing it, well we might simply need to figure out how to have less people or less burn. Neither option leads me to the comfort that we will peacefully figure out whose turn it is at the decision table when we decide on who owns the remainder of the global battery.

The urgency of that battery drain pace is daunting to me. I hear people telling me that the energy problem is solvable (on its own -  was the claim) within 10-20 years for each of the issues we are facing. My view is that we have to do whatever we can to solve any aspect of it, as soon as possible, or we will simply drain what’s left before we have time to let the problem solve itself. 8 years of doing nothing amount to almost 20% of the time we have left on the most urgent global clock, it is ticking loudly and we cannot afford 8 years of doing nothing.

What we need is a portfolio approach, most of which should be focused on two time axis – long term focus on the disruptive solutions that can scale to meet our real needs; and short term solutions that drastically reduce the energy consumption of our  current technology set. Some of the people, in particular VC backed companies, should focus on the short-term cycles – as the VC implicit impatience (and I do say that with the most positive sense – they have to be impatient to sieve out the bad ideas quickly and redirect the money towards the successes.) The long-term solutions need to get different kind of money – patient money that does not want short-term returns, but is looking for long term mega-profits, with big social impact. I call it “mission money”.

I am glad to tell you that as I am going through the funding process I am more than impressed with finding the “money missionaries”, they are around, they are smart, they want to do good and they sign up. If the world splits the efforts – VCs will buy us more time, missionaries will buy us a way out – I believe there is a way to address all these points at scale and allow us all to keep going faster, bigger, farther, only this time not at the expense of our children.

Driving Economies - IVA Continued

In continuation to the discussion about growth through innovation, I took a look at the economic drivers that drive the baseline of an economy. Normal growth curves can take small states, like Israel, into pretty much cruise mode – GDP will sustain as long as three cost ratios remain stable:

• Demographics, as represented by health care costs and social security ratios, both manifesting the retired population to working generation size ratios
• Education, as measured through the ratio between what an 18 year old knows when they come out of school with compared to their parents at 18.
• Security costs, counting military spending and internal crime rates.

Interestingly the US is reversing ratios on all these indicators in recent years. The demographics in the US, as result of significant improvements in medicine grows a much larger aging population than native working population. We have seen a significant slide back in the knowledge ratio (son/father knowledge ratio has been declining since the late 80s) – which is amazing given all the technology we are able to use for educating kids these days. Finally, we have had significant decline in normal internal security costs (with a very interesting explanation as to the reasons you can read in Freakonomics), but a six-year very significant spike in (what we hope are temporary) costs of wars on Terror at home and abroad.

What I believe is holding the US is a combination of talent import process, caused by the great H1-B visa policy that allowed more than a million talented scientists and engineers to immigrate into the US if they can show knowledge – not money – as the ticket to the promised land of silicon valley. That wealth of knowledge met wealth of capital (the funny part is this wealth comes from global capital coming to invest back in their own exported talents) – with the meeting place set for Sand Hill Rd, Menlo Park, CA. The creativity of these young engineers brought us the web, eCommerce, the gadgets (no, I didn’t get an iPhone yet – but I sure want one…), the ever present connected world, advertising based media, the social virtual community of web 2.0 – wave after wave of [Knowledge -> Technology -> IP -> wealth -> Venture Capital] circles. All the while, the economy is growing, taxes are flowing, and everyone enjoys the party (especially the tax man).

The comment on my previous post regarding Singapore’s leadership success, one that comes from treating the island state as a large company by its founder-leader is right on. To a certain (much larger) degree, China applied the same model to create modern china over the last few years. Where most countries need one good idea every 5-10 years and can ride the wave of that idea for a generation, China needs to create one of those big ideas pretty much every 5-10 months at their scale. So what is the next big idea – because if you are a small country, like Israel or Singapore, you just can’t wait for the wave to hit the shore, you have to start paddling before the wave comes.

I contend that it is time to get Israel out of cruise mode – not by slowing down the great circular VC model – rather by accelerating and focusing part of it. It is also time to turn Israel’s global brand around – the world mostly sees Israel as exporting a problem by the friction it creates through its (legitimate!!) presence in the middle-east. I believe it is time for Israel to start solving some big problems that worry us on a global scale and export the solutions. Personally, I would like to see Israel start exporting solutions to the true fundamentals again – Water, Food, Energy, Emissions, Genetics – the founding blocks of humanity.

The theory I have is that Israel should focus on one or two of these every five years, in overlaping waves. The focus is not a government program – quite the contrary, it needs to be a commercial focus, galvanized through a challenge of huge scale. The challenge needs to be one that can unite the common people, the entrepreneurs, the wealth – so much so that no one will want to be left “outside” the solution. Think of it as an Apollo mission, getting humanity to the moon and back, only targeted at one or more of these fundamental problems. Make the challenge look so big it becomes truly emotional, the best brains can see their life’s mission in it – after which they simply can’t back away from that mission, day and night.

In the next posts I will try to illustrate how big the problems are, but also how small the solutions can be. All of these fundamental solutions are tightly interlinked, and the key is that solving one will help solve the rest of them in a cascade of solutions.

IVA Continued - Generation IV

I believe that every region in the world has some evolved properties that drive the region to emerging behaviors. The properties are mostly a mix of demographics and government policy combining to create market conditions that in turn drive people’s behavior. Baby boomers create a booming market, aging baby boomers with accumulated wealth create a different market. Simple. When you open a market it usually becomes efficient; when you make a local market with more than a billion people efficient it will change the world. Simple.

So I took a look at the world’s markets and expertise by putting all the goods we make on some imaginary line, long tail by nature, but that’s not the point. I tried to figure out what each global region got better at over the years. The graph looks like this:

At the top left you see products that have mass appeal – global brands. The US is brand heaven, where companies learned how to export brand awareness for everything and make brands like Starbucks, Apple, MTV and NBA household names even in China. By creating global awareness the demand for those products (which is already high) becomes even higher – pushing value add up, and with it the US GDP.

On the tail side, America had to deal with geographically distribution of demand for esoteric products, as Chris Anderson calls it, long tail products. Stocking costs and distribution pains hurts profitability on these products – which America solved through the infinite store of the Internet and eCommerce – welcome to the land of eBay, iTunes and Amazon.

In between the two, we find the non-branded products lots of people buy. It is the part of the graph dominated by giant distributors like Walmart – serving as America’s storefront for anything produced in China. The Chinese perfected manufacturing and supply chains to drive these products manufacturing costs so low, the world can afford to buy more of them.

Europe remains in a very interesting situation, due to higher manufacturing costs there is a strong drive to push away mass-production of any non-branded non-specialized goods from Europe, at the very least  away from western Europe. So the continent relies heavily on tourism and other service industries (like financial services) which cannot be easily pushed away to Asia, and on “niche monopolies” driven mostly by years of heritage. You cannot make French wines or Swiss watches outside France or Switzerland. You also cannot take a Paris vacation anywhere other than Paris (Sorry, Vegas, we did notice that Paris, Vegas was fake). Some of the expertise, such as enterprise software remains a form of art with many experts in residence within 50 miles of a small town in Germany – which makes the expertise highly concentrated, at least for a generation. The problem with the European model is that you cannot afford to lose any of those “temporary monopolies” as you cannot regain them very easily once lost. See the case with Baan Software in the Netherlands, once they lost their grip – no new software giant emerged in the same region.

The demographics that drive the models are pretty obvious, but what are the traits and policies that can be changed and how do they affect the country. How did Israel become a high-tech startup generator, and what happened to the startups in Germany, a country that has a very significant mid-market sector but very little in startups (Hasso Plattner is trying to change that with his new and successful HPV fund)

The US model almost forces talent to recycle into small companies once large ones fail to ride the next next wave. It is a model that uses incentives through education, immigration, taxation, and aspiration all fueling the desire for a bigger risk with better rewards. The US idolizes the Edisons, the Fords, the Wrights, the Jobs and the Gates of each generation. They are as big stars if not bigger than the movie stars, and they get the rewards through patents, investments, stock options (all of which can also be abused, but that does not make them evil…). The risk-reward equation is so skewed towards taking risk, that imagination continuously sparks the entrepreneurial genes, and ideas (even bad ones) tend to reach market early and often - failure is not only an option, it is well accepted socially. The successful startups generate another generation of Venture capitalists, eager to invest their new wealth in the next wave, and even more eager to share their experience and knowledge with the next generation of smarter guys – and so goes the circle of life. Silicon Valley’s version of “The lion King”.

Europe on the other hand tends to view stock options as almost evil – a compensation tool forced on owners, not a driving tool that sparks risk taking. Talking about risk, European students, who graduate from universities without debt (counter to their US counterparts – who have more debt at 25 than they can count) still tend to be risk averse in their job choices. The reason is not a trait that cannot be changed, it is a function of local policy – in particular, labor law. Since people tend to stay in their jobs, and get heavy protection the harder it is to convince European masses to generate new jobs threw risk taking enterprise. In other words, the less jobs get opened and created the more people get risk averse (no new jobs = protect my seat at any price), the less jobs get created - negative feedback cycle . Since not many new jobs are created due to the Asian emergence of more affordable labor, it does not seem as though that music is about to start again any time soon. As such, when you enter the cycle as a young kids , afraid that if you do not find a secure job with an established company right out of University, you think that you may never find a job. So, we have a generation of young guys that tend to shy away from the kind of jobs, and from the kind of education that made Europe so successful in previous generations. Just as India and China start to produce infinite classes of engineers, Europe stops.

I contend that Israel, although very similar in traits to the US market, falls more into the European category of temporary monopolies. Israel was great in Security software, with a core of expertise growing from one company. Israel is a world leader in Telco software, because of Amdocs’ heritage, but while that expertise branch out of Amdocs to other telco software companies, it did not branch out to other vertical industries. The problem with that model - when a company fails even if for one second, as happened recently to Comverse, the results can be devastating with hundreds or even thousands of jobs eliminated or shipped over to other countries and the temporary expertise disappears – as happened to Scitex in the 90s. The job market absorbs such talents, but the equity lost in market leadership (and the taxes the state gains from the profits) are almost never recovered.

Some countries find their way to growth by applying more government uber-guidance. Take Singapore as a great example – free market economics drive great successes proven over the years, yet government intervention in the form of massive guided grant and investment programs drive global market competitiveness into the country and grows local knowledge and companies around the seeds the government put in place. In small enough countries, such seeds grow to drive comparatively significant economic growth through sheer temporary competitiveness. In larger countries the market directives need to be more heavy handed at first - Japan applied that model in post WWII through MITI, and China is doing it today to its extreme success with double digit annual growth for more than a decade in a row.

I truly believe that the VC industry is instrumental in absorbing these booms and busts and the talent is quickly reapplied into new startups. As such, the VC model is essential to keep the technology economy in Israel going on, no doubt. The question remains though whether the VC model alone is good enough to create significant growth and to generate long lasting strategic advantages for an economy with $120B in GDP? Remember that in order to get to double digit growth (which sounds like a fantasy until you consider China and India who are growing at that pace) you need to "create new GDP" in the order of $10B-$15B annualy.

In other words, will Generation IV drive this greatly succesful experiment called the state of Israel through the “Shaking the tree” model or is there a need for a single galvanizing vision that focuses some of the innovation on a new domain the country will be excelling in - driving $10B growth annually into the market on top of its existing dynamic?

**This post was written before the posting of the great comments on my previous post - I will respond to the first couple of comments posted by you guys later...