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Internet NOISE

The growth of the Internet and the introduction of services like Facebook, Twitter, FriendFeed etc. has created new challenges in isolating the signal (the information in which you are really interested) from the noise.

Search only gets you so far – it's good if you are looking for the same information as everyone else or it's already been indexed but if you are looking for new or breaking information that is relevant to you – you have a much bigger challenge than you did in the past.

 

Think of yourself as a high performance radio receiver…

The challenge in building a receiver is to make sure that you have a high enough signal-to-noise ratio to get the job done – detect the faintest signal in which you are interested from the ambient noise.

Part of the system engineering choices of a high quality receiver is balancing the capture and amplification of the signal you want while at the same time minimizing the sources of noise in the receiver. The more signal you can capture and amplify while minimizing system noise, the better the signal-to-noise ratio of the receiver and the clearer the received signal.

One of the other important aspects of receiver design is minimizing spurious signals – signals that are a by-product of how the receiver has been implemented – these spurious signals are sources of interference and noise that mask the signal that really has your interest.

 

A large network of "friends" may be socially reassuring but if you use it as one of the inputs to your information receiver you are making a poor design tradeoff between signal and noise. After all, large groups de-emphasize individual opinion in favor of those elements of information that are perceived as having wider (and hence allegedly more useful) appeal.

When I first started writing this blog in March 2006, my first post was about "Finding stuff in the Blogosphere" where I noted that most of my blog reading was articles that had been forwarded by friends. Two years plus later I read a *lot* of blogs but STILL the more interesting "new" stuff I get has been filtered by a small group of friend or colleagues who share common interests with me.

By a few, I mean a handful or so of people who are loosely collaborating on something of interest – in my case it ranges from a couple of groups around my hobbies/personal interests to a larger disjoint set of groups around the companies or business ideas on which I focus. These interactions have a very high signal-to-noise ratio.

Unlike these filtered interchanges of information, many Web 2.0 companies that focus around entertainment and social interactions are being confused as sources of signal while in reality they are sources of noise. We've been lured by the comfort of social interactions and the sense of being "one with the herd group" that we've lost sight of how much harder it's become to find relevant information in a timely manner.

As the current wave of Web 2.0 companies begin to fade from interest, it's time to capture the essence of their true value – interactions between groups of people who have tightly coupled, shared interests. After all, does anyone really have 500 "close" friends whose opinions are all equally valued? I didn't think so!

I think the future applications of "social networking" will see a new wave of companies emerging that focus on leveraging small (social?) group interactions around more meaningful objectives (like sharing knowledge, digging into a topic, learning new things) than throwing sheep at one another.

Got an idea for one? Drop me an email and let's talk.

 

An Oil Bubble?

What role do analysts play in driving a speculative bubble and how do you determine a true bubble from market fundamentals?

Both of these questions came to my mind as I read this morning's New York Times and their coverage ("An Oracle of Oil Predicts $200-a-Barrel Crude") of Goldman-Sachs' analyst Arjun Murti and his prediction of oil at $200 a barrel.

Mr. Murti has a successful track record in predicting oil prices going back to 2004 so many traders are likely to pay serious attention to his latest projections as this quote from NYT suggests:

""Even if you disagree with their views, the problem is that Goldman does carry so much credibility," said Nauman Barakat, senior vice president for global energy futures at Macquarie Futures USA. "There are a lot of traders who are going to buy based on their reports."

I can't help thinking that we're seeing the precursor of another Black Swan event – if that's true, two more questions come to mind… who's going to lose their shirts this time and will it be another massive hit to the financial markets? I can't see the Fed stepping in to bail out the oil speculators if indeed this is a bubble!

The price of oil impacts a business model

One of my favorite bike rides in the Bay Area is the Portola Valley loop – nice wide bike lanes and great scenery. Riding the "Loop" takes me past Valley Fuel, an independent gas station almost at the intersection of Portola and Alpine.

As long as I can remember, Valley Fuel was always "full serve" only – the price of gas was always higher than alternative fuel stops around the area but the staff are very friendly and the station saw good patronage.

For the last couple of weeks my daily ride had allowed me to check out the impact of rising oil prices at Valley Fuel. Slowly the price rose… $4.59, $4.69 then $4.79 for premium gasoline. I looked forward to my daily ride with renewed enthusiasm – when would Valley Fuel pass $5 a gallon as a posted price?

But last week saw the end of an era – an era where Valley Fuel was a throwback – hanging on as a "full-serve" fuel station while all their competitors had long since gone "self-serve" only.

Last week, Valley Fuel introduced "self-serve" as a purchasing option for their customers.

My guess is that "friendly good service" had a limit to its price – at $4.79 a gallon, Valley Fuel was 50-60 cents/gallon higher than the competition and, after all…

It isn't hard to pump your own gas!

Barriers to entry

Pitch a VC and one of the likely questions you get will be "so, what are your barriers to entry". A common answer is "deep intellectual property" as it represents the most attractive barrier – some knowledge, insight or invention that is a) hard to replicate and b) defensible with patents.

10 years ago this would have got you a long way – but not anymore.

10 years ago it was possible to identify a big problem, come up with a potentially valuable solution and raise money with a fair expectation that you would have one or two other competitors. Given a market of size, a small number of companies could coexist and fight for the lead – even then it was still winner takes all and becomes the most valuable.

The Internet/Web/Search engines have flattened information flow – it's now very unlikely that a meaningful problem remains hidden from sight for any significant time. Even a "stealth" mode company doesn't get much of a break – after all, while what they are doing remains hidden, the problems they are going after are in plain sight!

Start a company today and you have to face:

  • Ideas get shared faster
  • More people start thinking about visible problems
  • Between excess capital looking for a home, lower implementation costs (Amazon AWS, Open Source, web development etc.), its way cheaper to start a company.

The end result is intense competition from the beginning.

So while you should still look for defensible intellectual property, today's environment places the highest premium on management execution:

  • Do enough, no more (at least for this release!)
  • Get it right, quickly – not necessarily the first time
  • Build a firm foundation for growth
  • Be able to add a steady stream of new features
  • Delight your customers!
  • Be better quality than anyone else (stability, ease of use, performance…)
  • Scale gracefully

It's hard to claim management execution as a barrier to entry but if you have it, it provides a real advantage. Not only will it help you build momentum faster, your success will make your competitors spend more time looking at you at the expense of focusing on their own business.

Management execution isn't about being perfect in everything the company does – it about being better than anyone else on the stuff that matters. When you are looking for your advisors, selecting your investors or building out your team, look for people who have had exposure to companies that clearly demonstrated good execution.

Learn from these people – it will really help…

Vista = DOS?

Is Vista* a "Dead Operating System"? This question came to mind over the last couple of weeks as more and more entrepreneurs pull out Macs to give their pitches to me and everyone else is still running Windows XP.

The percentage of Macs has really spiked over the last 6 months – ok – anecdotal observation with no scientific method or basis to back up the claim – but the increase has been significant enough that as we waited for a entrepreneur to hook up to the projector (only to find that the projector didn't have a DVI cable) one of my friends remarked, "we need to get a couple of MAC adaptors and keep them in the conference room".

Ok, this is the Best West Coast and the sun is shining, everything is green (for a couple more weeks) and what happens in Palo Alto/Menlo Park isn't a proxy for what happens in New York or D.C – but the (re) adoption rate of Macs is remarkable.

With the ability to run XP (through Parallels), get the benefits of OS X (Mac and Unix under one cover) plus have all the great Apple industrial design, it's tempting…

If it wasn't for my investment in software for digital photography (much of which I'd have to purchase the MAC versions), I'd give some serious thought to switching...

So that brings me back to Vista…

There is no compelling reason or attractive feature in Vista to make me want to upgrade – moreover, the experiences of my friends with Vista has made me stick to XP for the foreseeable future. The lack of sizzle in Vista and the rising penetration of Macs caused the "dead operating system" thought to pop into my head.

With Apple now a serious Intel customer, Intel has become neutral in the OS wars – Linux, Mac, Windows – doesn't matter to Intel – they collect the dollars for the CPU every time.

Absent a new release of Windows that adds significant new (and useful) functionality, I'll stick with XP… or keep thinking about a switch to the Mac**.

*All trademarks are the property of their respective owners

**I'm sure I'll get a lot of email from my Mac friends who have been telling me to buy a Mac for the last 2 years!

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STU PHILLIPS
MENLO PARK, CALIFORNIA

Intense Brit, lived in Silicon Valley since 1984. Avid pilot, like digital photography, ham radio and a bunch of other stuff. Official Geek.

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