Monthly Archives: March 2014

Kickstarter, Oculus Rift, and internet rabble rousing

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The internet is mad that Facebook bought the VR company Oculus Rift. We shouldn’t be surprised that someone bought this company, it was going to have an IPO or be bought. There’s no doubt about that. The problem isn’t that it was bought, but the company that bought it.

Oculus Rift was a startup. Startups need money so they launched a Kickstarter Campaign and raised $2.4 million. Startup money typically comes from three groups of people in early stages (3Fs) – Family, Friends, and Fools. The Kickstarter campaign clearly is the fools. Not because they didn’t think the company would succeed, but that they thought they’d have a say in the end result. Kickstart has had other scams, such as the feminist blogger that was going to buy a bunch of games and show how awful they were (but didn’t). Kickstarter has always said that you are donating and has no control if you ever get anything out of it.

If a startup is successful with the money provided by the 3Fs (and this is a huge IF as this is typically called the Valley of Death in startup parlance), these companies try to get Venture Capital Funding. The VCs are the people that have a boatload of money and try to make even more by getting companies to “exit.” There are three options for “Exiting” a startup – IPO, Purchase by another company, or failure. VCs prefer your startup being purchased by another company – it has the least risk (you never can tell what your stock price will be – see Facebook’s IPO. To get this money you typically have to give up control of your company. This comes in two forms ownership and members on a board of directors. In some cases the VC will take less ownership for more members on the board. Apparently one of those people that owned a large portion of Oculus Rift was Mark Zuckerberg – he reportedly made $337 Million on the Facebook purchase of Oculus Rift. That means he owned roughly 1/6 or 16% of the company ($2 Billion sale and all). Supposedly 2 other VCs made roughly the same amount of money on the deal. Which means that the founder likely owned less than 50% of the company and could have been forced into the deal.

Effectively, the moment Mark Zuckerberg invested in Oculus Rift, the company was going to be sold to Facebook – as long as it was shown to be successful. What this means to me is that if you read or see Zuckerberg personally investing in something, expect Facebook to eventually buy it. Additionally, with Zuckerberg owning that large of a percentage of the company, there’s no way it could have been sold to any other company. It was IPO, Facebook, or bust.

With this broader context, I cannot be mad at either Luckey or the other leaders of Oculus Rift. They knew the game when they got into VC – even if you aren’t into making a lot of money when you start, your VC will push for a positive exit for themselves.

One of the angriest people about this whole thing was Notch, the Minecraft guy. He finds Facebook creepy and is upset that his $10,000 facilitated that sale. Even if he had gotten stock for his investment, he would have only had 0.42% ownership share over the company (assuming Luckey sold all his stocks through the Kickstarter which is unlikely). Unfortunately, it’s likely his stocks would have been diluted and the VCs would have controlled enough of the board and stock to force the sale to Facebook despite all the people that could have owned stock if the money had been raised through a Kickstarter alternative like Fundable.

When investing in a Kickstarter, you can’t get emotionally attached, you need to look at it as if you’re gambling. You might never get anything from it, but at least you helped someone else’s dream come a step closer to reality. I’m happy for the folks at Oculus Rift because they got lucky in a very unfair game. I don’t like Facebook either – but it was unlikely for any other outcome unfortunately.

Who’s responsible for the internet’s capacity?

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AT&T thinks that Netflix is trying to pass off the cost of network connections to end customers. There have been a few different displays of the architecture of the internet. Netflix operations at a different layer than AT&T does – Netflix is an application, so it runs on a layer above the network layer, which AT&T operates. Netflix doesn’t really care who actually sends their bits to the end user – they just care that they get there in a fashion that enables high def video. To this end, they purchase bandwidth from a company, mostly Cogent, and I pay Comcast (others pay AT&T) for me to receive those bits from the bandwidth provider of Netflix. I pay Netflix for access to their content.

Based on this payment model, if there’s not enough bandwidth for Netflix and I’m paying AT&T or another ISP for accessing Netflix, it’s up to them to make sure I have that connection. Content is King, so for me, it’s most important that I can access what I want when I want. That’s why I have an ISP so they can let me see what I want.

I think that the best analogy for content trumping gate keepers are the examples of higher premiums from popular channels. In some cases Timewarner cable pushed for lower rates to show a specific channel to their subscribers. In this example Forbes points out that ESPN costs $5.54 per viewer, they wanted to lower that price and pulled the channel out of rotation. This made a lot of people unhappy and in some cases people left Time warner over the issue.

Essentially, this is the same thing that is happening with Netflix. The ISPs don’t want to pay to upgrade their infrastructure to ensure that the consumers of media online (many of these people paying for higher download speeds and higher data caps). Netflix is providing a service that these people are willing to pay for but cannot control how the ISPs interact with their intermediaries so is in a tough spot. It’s a target because of it’s popularity and has no control of how anything gets to a specific user. That’s why it’s looking at the peer2peer model (which is how Skype keeps their rates low) so it won’t need to go through Cogent and will likely burden other parts of the network very differently.

I believe that if an ISP cannot meet it’s advertised speeds 90% of the time, then they need to update their infrastructure to meet my needs. If they throttle a popular service I’m watching and thus make it unwatchable, they need to upgrade their infrastructure. Most ISPs have an extremely high profit margin, which means that it’s coming out of their infrastructure investment and are not actually adding value.

There are many companies that are responsible for the capacity of the infrastructure and all of them can negatively impact our ability to use the internet. However, from an end user perspective, my ISP is on the hook first, then everyone else.

Experts and Algorithms

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I’m currently reading: To Save Everything Click Here by Evgeny Morozov. I find the book interesting because it really pushes back against what he calls “Internet Centrism” which he essentially defines as anything that is considered good because it’s on the internet. For instance, Bitcoin is good because it’s a digital currency or having the LA Times write an article using an algorithm for the most recent earth quake – or online book publishing (good because it destroys traditional “gatekeepers”). One of his arguments is that because we don’t understand the underlying biases behind an algorithm we can’t truly tell if the algorithm is actually better than a subjective opinion on something. An example he uses to argue this point is a comparison between traditional food critics and Yelp reviews. Yelp uses an algorithm to determine what are the best restaurants, while a critic uses both experience, repetitive visits, and an underlying knowledge set to determine quality of an establishment. We can learn what biases the critic has (indian over french) through reading his critiques over time, with an algorithm we just never see what we don’t want to on the web (see the filter bubble).

Interestingly, this is somewhat in contradiction of Daniel Kahneman’s Thinking, Fast and Slow, which argues that the only time an expert should be trusted, especially when something is subjective, is when there’s a great deal of immediate feedback on a decision. Otherwise an algorithm is more effective and will definitely get you well beyond the 50% accuracy of most experts. Kahneman’s argument rings true to me, not surprisingly. I have a strong background in analytics through my undergrad, master’s and job experience with Six Sigma. All of these rely on models and algorithms to predict specific behavior. These models can be applied to both people and processes. I’ve felt that experience is always good for helping interpret results of the analysis, but in many ways the analysis forces you to quest preconceived notions around a topic you might be an expert.

I do think that these two systems can live well together. If we don’t know what algorithm Facebook, Twitter, Google, or others actually are using to provide us information we can’t truly be sure what biases have been introduced. I think that Netflix provided us with a great example of the power and weaknesses of algorithms at the same time. They offered a million dollars for people to make a better algorithm than theirs. The group that won, actually used an aggregate of algorithms – they selected from the 5 best algorithms and combined them. These were tested against what people actually wanted to watch and how they rated the results. So it was algorithms guided by the results and continually improved. However, I think Netflix has a different objective than Facebook or Google –  they provide you the ability to enter you preferences and then a suite of selections to make you happy. Google doesn’t allow you to modulate your search criteria beyond your initial search term.

Experts have a role, but the need to display humility and a willingness to learn. Algorithms have a role, but they need to be tested for biases and in many cases we must forcefully push against them. If we only hear our own opinions how can we learn and grow. If we never are challenged how can we be empathetic with other people – both of these lower the quality of our lives and we don’t even realize it.

Philanthropy, Private industry, and science

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Apparently I’m not too happy with the NYT magazine and their exposés of late. First there was the long article about millenials and how they don’t want to work for the “old guard” which is ahistoric and ignores a great deal of the similarities between the silicon valley of today and the past silicon valleys and other similar environs.

Now they are rushing about in concern over private scientific research. Apparently, it’s a new big problem. It’s neither new nor a problem. First of all some historical context. Scientific labs as we know them today were truly founded through industrial labs. These labs were initially in the dye industry back in Germany in the late 1800s, sure there were university labs, but they weren’t researching as big of thing as the industrial labs started. These labs had problems that couldn’t be solved in academic settings. The universities were training grounds for scientists, but in many cases the scientists actually did their doctoral research at Bayer or a similar type dye company. These dye companies almost all became pharmaceutical companies over time because of the similarity in chemistries between dyes and pharmaceuticals.

This was in the 1800s and really hasn’t abated. I’ve written about Bell Labs and Xerox in the past which are essentially the Bayer equivalent for telecom, semiconductors, and computers.

Science has always been a combination of public, private, and universities. In fact, research that I conducted through my master’s degree has shown that the INTERACTION between private industries and universities produces the most important work (in terms of citations). Our concern should not be if science is going private or not. Our concern should be if they are sharing with the broader scientific community. That’s the biggest risk. It’s one of the biggest problems with industrial scientific research – it never reaches the light of day even if it becomes a product.

Why doesn’t it? Well, simply because it’s better protection for some processes for the technique not to be patented. In the case where something is relatively easy to copy (an iPhone) it’s best to patent because you’re protected them. In the case where it’s very difficult to copy (a nitride layer on an Intel chip) it’s best to hide that process as deep as possible. In fact, it’s best if any technique that would uncover the underlying process to make that nitride layer from reverse engineering destroys the product. For Intel, this is the best result, for the rest of the world, it’s suboptimal as Global Foundries and TSMC will struggle for years to reverse engineer the layer if they ever can. This slows the innovation process as a whole, but we’re willing to suffer this inefficiency because Intel makes some nice chips.

Beyond this debate, the author is upset that someone would want to push scientific research in one direction that might only help white people or rich people. Unfortunately, this is capitalism. We may not like it in basic research that is going to be used to cure diseases, but we tolerate it with Intel so we need to be realistic and tolerate it in this case. Furthermore, I think that the author doesn’t understand that adjacencies in research in diseases will arise and we’ll learn more about all humans, not just them white folks. Ironically, at this point the author calls out a researcher that is working with an Oracle billionaire – that researcher works at Rockefeller University.

What are seen now as seminal research institutions in many cases started out through the very philanthropy the author is upset about. Carnegie Mellon University was the combination of two institutions in Pittsburgh started by an industrialist and a banker. It is one of the most respected research organizations in the world. These men were driven by the same desire to push scientific research as Bill Gates and the other (mostly) men on the list.

Is this a perfect system? Not by a long shot, however in the current political environment scientists are going to take money from whatever source they can. It’s merely practicality. A professor will typically have anywhere between 1-10 grad students. These students at the PhD level will likely be fully funded by the professor. If that professor does not get funding, those kids don’t get to keep working and either have to find another adviser or quit. Here’s the kicker in the case that professor does get money – a large proportion of that funding is taken and allocated to less profitable portions of the organization. At University of Texas, this meant that the EE department was probably funding part of the Chemistry Department. Some departments are like the Football team, while others are like the Swimming team. The swimming team might be winners, but are in a small market.

If we truly wanted change in the way we fund scientific research we need to increase the amount of public investment across multiple institutions. We need to increase funding across multiple types of research fields, specifically focusing on the intersections between academic fields. Push for collaboration between industry and universities as well as collaboration across national boundaries. All of these improve the citation rate and quality of the research. We can even work to partner public funds with private funds – we just need full disclosure.

The problem isn’t privatization. We’ve had an oscillation between really publicly funded (1960-70’s with NASA) and really privately funded. In all cases science has marched on – we just need to make sure it keeps on marching.

Innovation, Kickstarter, Etsy, and First World Problems

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Innovation happens at it’s best when companies have wide ranging experiences and sources for ideas. It’s been shown that leaders with a broad network of unique individuals across an organization have better ideas that can influence the direction and innovation of a company. It’s also been shown in other studies that a group doing research will have better results if the members have a diverse background. This is true in since in general as well. Much of the breakthroughs we see happen at the interfaces of scientific disciplines. Which is one of the reasons why it takes so long for paradigms to change in scientific communities – the old guard doesn’t want to adopt to the new truth. Scientists that move into that field from one of those boarder disciplines will be more likely to adopt that new idea than the old guard. A great example of that is physicists and biologists moving into Economics. They are bringing new ideas to economics that aren’t supported by the current theories but are slowly making head way (HFT use these theories more than classical economists).

Platforms like Kickstarter, Etsy, and Git Hub, make it a lot easier for unique ideas to reach a broad audience and enable collaboration. Github is all about collaboration between different coders, while Kickstarter and Etsy aren’t about collaboration but about sharing of ideas though design. 

Kickstarter and Etsy literally are market places of ideas. These places allow people to scratch the itch of sticking it to a corporation that might make a similar product and helping out the little guy at the same time. I personally like both places because I’ve found some really interesting presents for my wife that will likely be unique to the area I live. Essentially, Etsy is so low of volume that in a given city there might be one other person with that same item.

Many of the products fall into the “me too” category where they are fixing a minor problem that isn’t really a big deal. They are addressing first world problems. These are similar to the mobile app masturbation fest that we call Silicon Valley or San Francisco today. Some of these ideas are really novel or could lead to some cool concepts if given the support that they need. However, the ones that aren’t really useful won’t actually survive. They just don’t get the backing that they need – if they are a Kickstarter project or won’t have enough people buy stuff if they are an Etsy company. 

The other interesting thing about both is that once you reach a certain size you’re done. In Kickstarter’s case that’s reaching your financial goal to complete your project while in Etsy’s case if you sell too much you have to move on to a different platform. 

For the most part, these platforms are all about selling products or concepts that could be manufactured in different ways, but we want the hand made feel to it (or unique designs). I don’t think there’s anything wrong with that. Especially since there can be Kickstarters for documentaries and activities in third world countries.

That’s where the market place for innovation comes through. Aside from shipping concerns I don’t really care where the product is being designed or made. I’m purchasing them for the uniqueness rather than where it’s made. Some people might focus on that, I don’t however.

I will definitely use these platforms in the future. In fact, I essentially bought a watch on Kickstarter today because the goal was already made. I have no idea when I’ll get it, so when it comes it’ll be a surprise. Kind of like the wallet that I bought. I’m not super happy with it, but I’m helping someone’s dream come true. And that is really what I’m buying when I use Kickstarter.