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.

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...

Israel Technology Generations - IVA

A few weeks ago I was asked to give a keynote at a venture capitalists conference in Israel. Given I was never funded by any Israeli VC I thought the honor was worth the afternoon . For the sake of full disclosure, one of the best local VCs – Yaffa formerly from Star Ventures - did want to invest and we just couldn’t get it done due to some technicality (She did introduce me to her brother in law, Leo Apotheker, and years later we ended up being co-presidents at SAP for a great couple of years). In any case, I wanted to share with you this presentation, as a broader vision for what I believe the next wave of Israeli technology and investments should become.

For those who are not familiar with Israel, the country is now entering its 60th year, which I divide into three generations, roughly 20 years in length each. If you add to these 60 years the generation that preceded the formation of an independent state in 1948 as “Generation 0” we get four very different set of periods, different drivers and, interestingly enough, very different technology industry in each.

Generation 0 was all focused on the creation of an independent state – and so the technologically minded folks (most educated at the Technion and Weizman Instititute) were all working on establishing the primary tools a state would need. The best evidence as to the importance of science on the this generation was the selection of a scientist, Chaim Weizman, as the first president of Israel (Einstein rejected an offer to become president later).

As the state achieved independence and was thrown into a battle for life, Generation I focused most of their efforts on survival of the state. A single galvanizing vision of survival sent every tech savvy youngster into science. The defense forces together with the universities served to assimilate the waves of immigrants into society and acquired knowledge became the equalizer in this nascent society.

My father, who immigrated from Iraq after the state achieved independence, became a communication officer in the army (where he met my mother, an immigrant from Morocco who served as a wireless communicator, for which I am thankful to this day). The army paid for him to get a bachelor’s degree, and he signed up to become a career officer – that was the deal, we educate you, and you serve the state for life (well for 16 years…). His first job out of college in 1972– build a wireless network across the Sinai peninsula. The same network served to defend the state and lasted the entire war in 1973. I was born as he started his university years in the Technion and returned to the same school a few years later to get my own bachelors degree in the same house my parents rented.

Somewhere after the six day war, or at the 1973 war, a new generation of Israeli technology emerged. The new companies took a lot of the knowledge the military developed for defense purposes and started exporting it to other countries through 10 or so large hi-tech companies. Generation II was asked to grow an export economy, and improve the Israeli economy. As the state started feeling more secure about survival, growth was the top requirement for a country that found its way into the global economy, at first with military oriented companies like Tadiran and Elbit, who branched out to civilian technologies as well, but later on with purely civilian giants like Scitex, and Daisy. Generation II had very few business leaders, some of them coming from Gen I companies (lik Uzia Galil) others representing the new Israeli Entrepreneur – like Efi Arazi.

My father, who retired from military service in 1981, transitioned just like the state from communication officer to exporting communication equipment in south America, first for Tadiran later for Elbit. I watched him go from military service into business and got exposed to the American culture and to my first Apple II computer in the American high school of buenos Aires.

Generation III started to emerge somewhere in the late 80s, and took shape in the happy days of the 90s internet bubble. It was a generation of individual risk takers, young, aggressive, techno-geeks. Some of the more successful members of the club are the Checkpoint founders - Gil Shwed, Shlomo Kramer (we both went to the same elementary school, he was one year ahead of me), The Chromatis guys, Mercury’s Arie Feingold (of Daisy fame) and Amnon Landan, Yossi Vardi and the ICQ boys, and so many others.

In my own family journey, after being part of a less than stellar startup in educational software, I decide to start a new company, and convince my dad to do the unthinkable – leave the security of a technology giant to the uncharted water of a 1989 startup - Quicksoft. That company spawned 3 more startups we both shared, two of those sold later to SAP, and one still runs to this day as Adobe’s distributor in Israel. That small startup  we started in my parents basement, grew after many acquisitions and changes to be SAP lab in Israel which hosts almost 1,000 engineers who write software for companies around the world.

Generation III was catalyzed by two actions taken by the Israeli government – in particular one person in the public Sector – Yigal Erlich – at first the chief scientist of Israel, who granted many startups, including Quicksoft the funds that made the difference between closing the doors and exporting software. Yigal then started "Yozma" a fund of funds – where he co-invested the state together with 7 international VC funds, and created the VC industry in Israel investing well over $2B a year in the state - making Israel the second most exciting region for high tech innovation after the silicon valley, my adopted home for the last 12 years. As an observer in both worlds, with the luxury to travel back and forth (well, most of the years, I traveled without luxury in coach…) I can see how Israel evolved along the same patterns as the bay area, with a very slight phase delay between the two centers of technological gravity.

It is common to ask in Israel, “ how come there is not one Nokia in all these startups?”. Israel did not grow a Microsoft, a Google, or an SAP out of all these great startups. The most successful got acquired early, and the ones who stood on their on, like CheckPoint remained leaders in their market, but the market did not become a giant market like cell phones or search. The two biggest technology companies in Israel are Teva and Iscar – one leads the world in generic drugs, the other makes carbide cutters that serve every metal cutting industry in the world. Both of these are considered giants in Israeli terms, both need lots of technology, but none of them is as sexy as Nokia, or Google. I keep asking myself whether Israel needs a Nokia?

 
So, if Gen 0 was about getting a state, Gen I was all about survival, Gen II was the organized export era, and Gen III is the generation of individual stars...

• What will make Generation IV, the one starting roughly arond now, a better one than previous generations?
• What are the challenges and where is the path to growth, and dare I say greatness for Israel?
• With the emergence of two Asian giants in China and India, with their infinite talent pool, and equally infinite markets, what is Israel to do to stay relevant, virant and growing?
• Which technology will fuel this growth?

More in the next few posts.

Blog Interrupted

I start with an apology for taking so long between posts – and I have an excuse. See, we are raising money to start this new company called Better PLC. After years of fighting for budget allocations, I forgot how much fun it is to actually go convince investors that your idea has enough merit that they should put their money, and much more importantly - their trust in you.

It is somewhat funny that everyone I talk to has heard about this new company we are trying to create, but no one really knows what we do. In every meeting I discover new ways of achieving the ambitious goal we have set for ourselves, and people really get energized about the idea. It is one of those giant small ideas that I truly believe can make a big difference in this world.

I had a conversation yesterday about all these software entrepreneurs who are moving into clean-tech. My view is that we all see a giant market ready for disruption, bursting ripe from years of very little investment. Put that with a group of people who made enough money not to be enticed by easy money, but looking for a real mission in life and you get some really interesting artifacts happening. It is almost as if the entire silicon valley is going through a mid-life crisis – but instead of looking for a new fast car (we now have our official fast car – the Tesla), we are all looking for a calling. I saw it at TED this year; I see it everyday with so many great ideas.

The people I met over the last 75 days on any part of the world are just amazing in their passion, and drive for a better world. Some solve energy issues, others education, healthcare, food, water – all problems that can really touch life. I am at awe with some of the scientists that I met; all have much bigger goal than to start a small company, or bring a new product. I personally stopped just seeing the problems in the future; I see an ocean of opportunities. 

I get people coming at me from every corner asking how do they sign up for our mission, before they even know what it is we’re going to do. When we share the vision with them you can see in their eyes that they all find their calling. I missed that sense for such a long time, it is just refreshing to be back in it. It is not that SAP was bad for me - it was a great home, it is a great company. It is just so easy to get sucked in to the daily grind of large corporate politics, that makes you lose that sense of big mission, your purpose and your sense of direction for what’s right and what’s wrong.

In any case, I promise to share this weekend some of the things that popped up on my radar over the last few weeks. I gave a few presentations, on both enterprise software and clean tech – in particular a presentation in Israel last week – which I will bring into a series of blog posts. So stay tuned next week…

shai

where do 'big ideas' come from

I was asked by Benjamin Bakhshi a great question related to today's posting. while I replied in the talkback section I realized it was worth to post it in the "Nature of Business" (NoB) section although just to start the conversation with other corp readers as to their experiences.

"Shai, here is a question: Do you think 'big ideas' in the world manifest because of large corporations, or because of smaller entrepreneurial businesses?"

My answer read pretty close to the following (I came up with the parallel metaphor to evolution theory after my original answer):

Benjamin,

From my experience in large corporate environment the big ideas usually start along one of three paths pretty much like evolution theory:

• Emergence of market demand (usually manifested through one of your smaller competitors proving that the market wants a new product) - see Prius. In some cases this is the equivalency of one species eliminating another one by being more adapt - Think of the effect of refrigiration on the ice shavers service providers. In general any business that replaces people with an appliance wins.

• Bottom up innovation - a few engineers (usually a handful at most) come up with a breakthrough idea, and build it in their after hours. If they have enough momentum to survive, the idea gets viewed by corporate leaders who are either strong enough to approve it or strong enough to protect it until approval. This is the beauty of emerging traits - re-combination of the current organizational genome that produce a super-baby. As a general rule of thumb the bigger the market share you have in the segment where the innovation happened the lower the exec support you would get for disruption

• A disruptive technolog that meets a strong visionary leader who knows how to apply the technology to solve an age old problem the company struggled with in the past. Once the problem is re-addressed and solved the big question the corporation needs to solve is how to scale production and go-to-market - which is where the large corporation can beat the small up and comers, even if they have a time advantage over corporate. In this case we are looking at bio-engineering - an understanding of the function of a certain new gene that allows us to create a superspecies through applied science. As a general rule of thumb here - the closer the leader is to a founder the higher the probability he picks the right choice.

finally, if you allow me to cheat, one of the main path through which innovation happens in large corporate is through acquisitions - either of ready products or of 'big idea' people...scaling from there is pretty easy for corporate - all you need is to integrate well and let the start up thrive inside while slightly reducing chaos over time. I used to call this a retro-virus, which was the role I played at SAP - re-awakening the great genetic material in a body that is much larger and much smarter only slightly dormant for a while. I guess in this experiment the body is very much awake, even smarter but the retro-virus has been pushed out of the body after it is no longer percieved as needed...At least I am free to infect other domains again.

what do you guys think? have other experiences? better metaphor?

Stanford Presentation

This week I had the pleasure of being invited to speak at Stanford University - in what they call Entrepreneurial Thought Leaders lecture series. I have a confession to make - I tried to get into Stanford back in 1990, my application got rejected and I convinced my Dad to start Quicksoft - which became TopTier and a few other companies). So, when they ask me to come and tell my story to students I always say yes, as a way to share with the younger smarter students what lies ahead - after they leave stanford.

Over the years I found out that most of the metaphors I use come from the world of science and so I have a new set of lectures that I call "Nature of Business" - where I share some of my past experience and provide a way to look at those situations through the laws of science. I beleive a lot of technical people can relate better to the science than the art of business, so I hope that they can take the imagery and build a framework in their mind that will help them make the right decisions more intuitively.

I was already asked to convert the presentation into a book, so I might start posting some entries here in the blog and see what you guys think. If you like the PodCast and want to hear more - shout!

shai