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Government Run as a Business: The Offsite

I'm a businessman; call me "TE". The search committee picked me to run the US government as a business. It's my first day on the job.

Of course we're going to start with an offsite to get the strategy right. Turns out we've got this place called Camp David with skeet shooting and plenty of conference rooms.

"Growth is what's most important to any business," say I. "I hear we're withdrawing from the Afghani market. What's that all about?"

"They're not a good market for government, sir. In fact, you might say they're ungovernable."

"OK," I say, "That initiative was undertaken by one of my predecessors. We don't have to throw good money after bad. But where can we expand? What about Canada? They're very governable. Work up a plan for me. Maybe Europe, too; see if we can underprice that outfit in Brussels. Squeeze 'em with some protective tariffs.

"Now what about selling more products to existing customers? The move into health care is good; lots of money and good margins there. Is it true they have to buy our product or they get fined?"

"Yes, sir," says a woman proudly. "Not exactly yet but soon."

"Good; keep on top of that. What about housing?" I ask. "What can we do in that market?"

"Well, sir, we have a housing finance arm; they're not doing very well. But we're bailing them out."

"Let 'em go. I assume they're firewalled and won't take us down in a bankruptcy. But what about actually building housing?"

"We do that for people who can't afford housing, sir."

"That's a lousy market," I point out; "we should be building houses for the rich. Go where the money is. Which reminds me, what about banking?"

"That's in the private sector, sir; we've been bailing them out, too."

"So we've got 'em where we want 'em, right? Call the loans. Acquire them in bankruptcy; good way to consolidate competitors."

"But the Fed won't like that, sir."

"Have that Bernanke guy in my office tomorrow morning. What about food? Can't we go into the food market? Let's do organic; people pay a lot for that."

"There are no clear standards for what gets labeled organic, sir."

"We should set the standards. If we make it, it's organic. Let's make a rule the competitors can't claim their stuff is organic. Or will we get sued?"

"We have sovereign immunity, sir."

"What's that?" I ask.

"We can only be sued if we agree to be sued."

I'm really going to like this job. Best business I've ever run. Lots of room for growth. Very little competition but we gotta look out for those Chinese.

************************************************************************************************

So, my fellow fiscal conservatives, do we really want a government that's "run like a business"? Do we want a government always looking for opportunities for grow? In fact the problem may be that our government is too much like a business in its drive to expand its reach. I think we want a government which does only those jobs businesses can't, shouldn't, or won't do.

Doing Good by Doing Well

"I'm hoping to get a job with a non-profit."

"I'll probably have to work in industry for a while, but then I plan to start a non-profit."

"I want to find a business with a triple bottom line."

"We're developing a video game that'll teach people not to be sexist."

"Once I make some money, I hope to be a philanthropist."

"I'm hoping to get a job with an NGO."

Noble thoughts, think I, but on the whole misguided fuzzy thinking.

All of these quotes come from bright, energetic young people studying to begin careers in areas like smartphone apps, computer game development, and web site wizardry. None of them say they want to make a lot of money (except to fund their planned philanthropy). None of them say they want to build insanely great products (Steve Jobs' mantra) or build a great company or lower the cost of energy or change the way people shop or even increase farm yields. Maybe they're just telling us what they think we want to hear; but they appear to be serious. Where did we go wrong?

Thomas Edison put as much energy into making inventions profitable as he did into discovery. If he hadn't, it would've been a lot longer before the world benefited from his inventions and his incredible invention stream – the electric light bulb, sound recording, movie making etc. etc. – would have been unsustainable for lack of funding. Don't know what he did as a philanthropist. Doesn't much matter.

By most accounts Henry Ford was a pretty awful person. He was a racist, an anti-Semite, and an admirer of much of what was happening in Nazi Germany. His charity went to some pretty bad causes. He didn't invent the car but his business and engineering acumen led to a car that every middleclass family could afford and his factory was a highway from poverty to the middleclass. The wreckage which is now Detroit didn't happen on his watch. The Fords who presided over that were much more socially conscious and politically correct – but they didn't do as much good as mean old Henry.

Bill and Melinda Gates are innovative philanthropists. They're driving the established bureaucracies of the UN and prominent NGOs crazy by insisting on results, which is a good thing. But, so far, Bill did more to change the world with a licensable operating system which made it possible to build and sell commodity computers that much of the world can afford and figure out how to use.

Now iPhone and Android are making the world more accessible by another order of magnitude. Steve Jobs built insanely great products – at high profit margins. Google gives Android away – because it enhances their hold on the search business. Google's motto may be "do no evil" – the good they have done is to link us to the information we need; the founders are famously billionaires.

Jeff Bezos and Amazon may have done as much for readers and books as the Carnegie Libraries.

Thanks to Charles Theodore Dotter who invented the stent in the artery of my heart as well as angioplasty itself; I hear he made a fortune. Glad he was motivated.

In 1865 Col. Edward A. L. Roberts received the first of his many patents for an exploding torpedo; it was used not for war but increasing production from hydrocarbon formations. He died a wealthy man. The co-inventors of modern fracking combined with horizontal drilling were Joseph Clark and Riley Farris. By vastly increasing the supply of natural gas, they have arguably done more for energy independence, energy abundance (a good thing), and lower carbon emissions than all the well-intended grant-funded green efforts in the last twenty years.

Not every person who has become rich has done good while getting there, obviously (I might mention drug dealers and certain investment bankers). Even the very do-gooding Ben and Jerry earned their fortunes by making sugar-coated cholesterol taste even better (without so much as a warning label). And there are many famous examples of people like Gandhi who did good without getting rich.

Nevertheless, I'll bet that, on the whole, when these students become workers and businesspeople, those who devote themselves to insanely great products, making things much cheaper than competitors do, or profitably knitting us all closer together in cyberspace will make more of a difference in the world while they are growing their bottom lines than when they later retire as philanthropists. I wish I could find a good way to tell them that.

Maybe I ought to un-retire and go back to work myself.

Related posts:

Great Docs and Technology Saved My Life Thursday

Natural Gas Disrupts the Energy Industry

WHO Doesn't Like the Gates Foundation

 

 

Don’t Watch The Dow!

Watching the day to day movement of my company's stock was one of the worst mistakes I and many other CEOs made. The Chief Executive of the US shouldn't make that mistake. Neither should our Board of Directors (aka Congress). Ben Bernanke should know better but doesn't. He took credit for the stock market going up; it'll be hard for him avoid feeding the market beast even more dollars to keep it from declining.

The deficit settlement was a small step towards government doing what consumers have already begun to do, living within its means. That's bitter medicine for the economy in the very short term even though it's a necessary part of a long term cure. But on Wall Street "long term" means the next quarterly report. Trading is done based on whatever rumor is expected in the next hour or so. Even if traders believe the economy will be stronger next year or the year after that because of the actions taken last week, they will still sell stocks if they think profits will be down this quarter because of less government spending. Plenty of time to buy in later for the rally. Or stocks move because they do – because a bunch of similar computer programs are all trying to get in or out of the market before their competitors do. As painful as a selloff is, it mustn't be used as a judgment on the policy of either a company or a country.

The bond market is a much better indicator of investors' long term view of a country's prospects. Despite talk that the threat of default (which might not have happened even if the debt ceiling wasn't raised) would tank the country's credit rating, the interest rate on short duration treasury went below zero yesterday to all time lows and the dollar rose. People were paying for the safety of holding the debt of the US government denominated in dollars. Yes, that partly reflects problems in Europe. But confidence in our currency and our bonds clearly means that the world thinks, after last week's action, that the US is more likely to pay its debts in full and have a robust economy than we were before the specter of default. Europe hasn't taken its medicine yet; we've begun to take ours.

The trouble with doing the right thing for the long term is that it is impossible to measure in the very short term. That's why it's much easier for politicians to take short term actions – like stimulus or a bailout – which have results before the next election despite the long term price. The greatest danger facing us now IMHO is that we'll panic as voters because of the difficulty of the next few economic steps without quite as much of a government crutch and elect people who promise us more palliatives and sugar pills. We can't let ourselves get spooked by the Dow.

Update: For why VCs and entrepreneurs shouldn't watch stock prices, see Brad Feld's Public Service Announcement For Entrepreneurs: Ignore the Dow.

Bill Gates and I: 60 Milliseconds on 60 Minutes

Billg was berating a group of us. "Somebody's confused. Somebody just doesn't understand. You guys are all wrong. I'm not going to use this thing!" The camera cuts to me looking dour, then back to Bill. The episode is part of a 60 Minutes interview (I'm at 6:50 into it) with Microsoft co-founder Paul Allen and is meant to illustrate that billg had an aggressive management style. Actually, this was a pretty mild illustration; he didn't even say "this is the dumbest f..ing thing I've heard since I've been at Microsoft."

Friends were nice enough to phone, email, and post on Facebook that they'd seen me on 60 Minutes. I don't remember the incident or whether or not I was responsible for the offending product but I do know how it happens that CBS has this video and can certainly remember plenty of episodes like this

Paul Allen says immediately afterwards that you had to stand up to Bill when he shouted; he's right. If you were wrong, best to say so and not try to bluff or make excuses. If Bill kept on shouting, you had to tell him that you get it and there's more stuff to cover. If Bill was wrong, you had to tell him that – not easy to do but no choice. There was no respect and ultimately no career for those who knuckled under. There was also no immediate praise for standing up to him – but that's how Microsoft careers were made (as long as you were right most of the time).

The tape was shot during a period when reporter Connie Chung had permission to tail Bill on the Microsoft campus. The company was just getting big and successful enough to attract negative publicity and the PR firm convinced Bill that he could get good PR in this way. At first he loved it; Connie flattered him and asked softball questions. We had ways to meet without the cameras but she got plenty of good footage. Once she had all her footage, she came into Bill's office with her camera man and started to ask really tough and hostile questions, ambush journalism at its best. Apparently Bill got upset, knocked over a chair, and ordered her away – all on camera.

I happened to be with Bill a couple of days later when he was bemoaning this and wondering why the press was so hostile. "You can make them less hostile if you want," I said.

"How?"

"Stop winning all the time. Success invites attack." He didn't take my advice. Losing isn't part of his personality. I'm sure he's also grown a thicker skin over time. Done a lot of great things, too.

More Microsoft memories:

Microsoft Memories

Microsoft Memories – Sleeping with Telcos

Microsoft Meetings

How MAPI Beat VIM (an historical footnote)

Too-Big-To-Fail Goldman Buys Facebook Share

As a former founder and CEO of a public company, I understand why Facebook founder Mark Zuckerberg wants to raise money without taking his company public. During the dot.com bubble ten years ago, many companies, including mine, went public too soon – most before they were profitable, some before they even had revenue. Nevertheless, the announced deal between Goldman Sachs, Russian investor Digital Sky Technologies, and Facebook is disturbing both because Goldman was one of the banks considered too big to fail by the Federal Reserve and because the federal regulations on how many investors a company can have before going public is being used, as regulation often is, to favor big banks and big companies.

The details of the deal as described in a New York Times article by Susanne Craig and Andrew Ross Sorkin: "Facebook has raised $500 million from Goldman Sachs and a Russian investor in a transaction that values the company at $50 billion, according to people involved in the transaction. As part of its deal with Facebook, Goldman is expected to raise as much as $1.5 billion from investors for Facebook."

Further according to The Times article: "On Sunday night, a number of Goldman clients received an email from their Goldman broker, offering them the opportunity to invest in an unnamed 'private company that is considering a transaction to raise additional capital.' Another person briefed on the deal said that Goldman clients would have to pony up a minimum of $2 million to invest and would be prohibited from selling their shares until 2013."

So what's not to like about the deal? Don't we want private sector investment? Risk taking?

Too Big To Fail

The deal reportedly values Facebook at $50 billion. Could be too much; but that's certainly a risk that Goldman and its wealthier clients are equipped to take, isn't it? Sure… except if we are expected to bail them out again if their investments go sour. Nothing substantive has changed since the last bailout , when the Federal Reserve gave Goldman 52 separate infusions with a high balance owed of $18 billion (all of which has been paid back). Goldman is, if anything, an even bigger and more important part of the entire financial structure. It's not that this one deal could even dent Goldman; still, they are playing a heads we win, tails you bail us out game. They get a privileged seat at the investment table; and, if they don't play their cards right, they get lent new table stakes by the Fed at concessionary rates, while the smaller players are forced to fold for lack of capital.

We don't want the government regulating what risks Goldman and its clients take; that a sure way to freeze and politicize the risk taking and private investment we need. That means we either have to change the law so that the Fed cannot repeat the kind of bailout it did last time around – and investors know this and can act accordingly – or we need a preemptive round of financial trust busting leaving no entities standing that are too big to fail.

Access to Public Markets

In an over-reaction to the dot.com bust, a law known as Sarbanes-Oxley was passed requiring much greater disclosure by publicly-traded companies. A consequence of this, whether intended or not, is that small companies can no longer afford the accounting required to be public. It is also true that the transparency required of a public company may be a bad idea for a startup which has good reason to keep its successes and failures secret from competitors and imitators. Moreover, quarterly reporting with an emphasis on short term results is not a great way to run any company and can easily be a fatal distraction to a company which needs to focus on long term value.

The SEC allows a company to have up to 499 investors without being public (state law varies). A secondary market in the shares of private companies has grown up including online exchanges like SecondMarket, which says it has "More than 30,000 participants, including global financial institutions, hedge funds, private equity firms, corporations and high net worth individuals". This is a largely unregulated market in which participants invest at their own risk. An investor can decide whether she wants to invest in a company which is not making public disclosure of its results and is not regulated by the SEC.

But the restriction that company have less than 500 investors is leading to the formation of investor pools which act as a single investor. Certainly this is legit when the investment pool, a VC firm or a pension fund, has many investments; but what if the pool was formed just to skirt the rule on having too many investors in a single private company? According to Bloomberg, the SEC is investigating this practice. It seems from the little information available, that this is exactly what Goldman is doing in the case of Facebook to allow its favored accounts to buy shares.

I'm not convinced more regulation by the SEC is a help to anyone; the illusion of oversight is dangerous to investors. Remember Enron and Bernie Madoff – remember the underreporting of underfunded pension plans, particularly in the public sector, and all those publicly-traded banks which were suddenly insolvent. An honest caveat emptor might be more helpful. The simplest thing may just be to lift the arbitrary limit on the number of investors a company can have without being forced to be "public".

There certainly shouldn't be one rule for Goldman and its clients and another rule for everyone else. Small companies need access to risk equity (not a guarantee of funding, just access) to allow them to compete with companies big enough to make their own deal with Goldman.

See Socialist Senator Sanders Saves Capitalism for more on the bailout of Goldman.

See Public Company – Deciding To Do It for the price a small company makes pays to go public.

See AT&T: Lesson From the Crypt #1: Don't Manage for Quarterly Results for why neither large nor small companies should manage for quarterly results.

My novel, hackoff.com: an historic murder mystery set in the Internet bubble and rubble has plenty of hair-raising stories about investment banks during the dot.com era as well as the story of a fictional company that went public too soon.

When Angels Fear to Tread

It's the lack of exits that's a problem amid the deadly clamp of panic throughout the economy - a far cry from the irrational exuberance that drives entrepreneurs (and their investors) and which brings us trouble and fraud as well as greatness and "slumdog millionaires".

No matter how much we bailout the auto industry, there'll be less jobs making cars next year than there are this year – in fact cutting jobs is a condition of the bailout funds. There are going to be less bankers a year from now, too. New jobs will come from new industries, not from the ones on life support. So it is essential that there be some source of funds for entrepreneurs so that they can do what they do best (when they succeed) – create good jobs for future markets.

Tom Friedman suggested bailout money for VCs; Fred Wilson articulately pointed out that only the incompetent VC firms would take the money and that skilled VCS actually do have money and can raise more. Entrepreneurs pointed out in comments on Fred's post that there IS a shortage of money from entrepreneur's POV. In a comment on my post on the subject, Fred suggested tax breaks for angels.

Angels are motivated by fear and greed just like everyone else – angel investors, that is, who, in better times, are a source of funds for entrepreneurs launching the businesses of their dreams. Angels (I've occasionally been one) are just as perverse as all other investors; we're more likely to invest at market tops when everybody else is and less likely to invest in scary times like the present even though there's greater opportunity now.

There is a way to get angel money flowing again but it's not by subsidizing angels – even with tax breaks. Angels are claustrophobic; don't like going into investments without exits.

Angels generally step aside (but don't get cashed out) when a company gets its second round of financing. Often VCs step in with money, advice, and contacts for the next round of a company's growth. The angels and VCs (and entrepreneurs) generally get some reward when the company is either bought or goes public. But companies aren't getting bought or going public right now.

The result is a logjam. The VCs are concentrating their time and attention on companies which would have – in better times – been long out of their portfolios. It's true, as Fred said, that the good VCs can raise more money; but they can't clone themselves. Fred can only serve on so many boards at a time. That means that venture funds can't take responsibility from angel investors at the rate they used to – they have last years' hatchlings still in the nest.

An angel looking at a potential new investment not only confronts the risk of failure – that's always been there – but also the risk that he or she will be in an active role with the company – and perhaps its only source of capital –for a long time to come. We angels, like the VCS, still have the companies that we previously incubated in the nest. So we're not looking for new investments either. We're scared and there are no exits.

Only greed (the dream of an outsized return) can conquer fear. Tax breaks don't do it; you need to have some gain before you can use them.

An opinion piece in the Wall Street Journal today by Tom Hayes and Michael Malone entitled "Entrepreneurs Can Lead Us Out of the Crisis" suggests not only tax breaks for angels and entrepreneurs but also eliminating Sarbanes-Oxley to make it easier to be a public company. This has the virtue of appealing to greed (the IPO dream) and opening up exits; but even I'd agree that, in the dotcom generation, companies went public much too soon – eventually to the detriment of the companies as well as their investors.

We investors have to give up the dream of a QUICK outsized return. We can dream but we have to dream the patient dream. We probably even have to wait for companies to be profitable before we can make any money. That's OK; we can live with that as long as we can have the dream.

Turns out there is something government can do, however, to get investor juices flowing again: invest in infrastructure that creates opportunity rather than subsidizing zombie companies which are blocking the way. When the Erie Canal was built (funded by private investors buying government bonds), private money flowed to boat people and businesses all along the canal. Same kind of thing when the railroads with built with healthy doses of land grants and other subsidies – fortunately government DIDN'T elect to subsidize the canal boats which the railroads put out of business. DARPA (government) had a lot to do with inventing and funding the Internet; the Internet enabled and encouraged a wave of privately funded innovation.

I wish more of the bailout were focused on infrastructure – especially new enabling infrastructure. If transmission lines actually do get built, "alternative" power'll flourish with much less government intervention than is planned. The government does have a role in building those power lines. If the United States can become an e-nation with every citizen having access to a highspeed persistent connection whether at home or on the road, that infrastructure of connectivity will light the exuberance lights for a new generation of connected services. Government's role there is to create telecommunications competition we don't have today and to subsidize the last five or ten percent of connections as we did with rural electrification and telefonication because the network as a whole gains value when it is universal.

We investors and entrepreneurs have to relearn patience. Fair enough. We'll come back into the game once we can't stand to be on the sidelines any longer and when we see a future – almost no matter how distant – in which there is an exit.

A VC Says No to VC bailout

"Thanks but no thanks" is Fred Wilson's prompt response to Tom Friedman's column suggesting that $20 billion in bailout funds be made available to the top 20 VC funds so that they can invest in the future rather than the past of failed banks and auto manufacturers. Fred says:

"…the top 20 firms in the venture capital business are the least in need of a bailout of any group I've ever thought about. These firms, the Sequoias and Benchmarks and Accels and Kleiner Perkins [Fred modestly didn't add his own Union Square Ventures but could have] etc etc can raise a fund anytime they want. Accel raised a ton of money last fall in the midst of the worst global financial meltdown in my lifetime…

"The worst firms, on the other hand, will gladly accept government money. And that is what is going to happen with all of these government efforts to pour more money into the "innovation sector". That money will go to bad investors and weak entrepreneurs and management teams for the most part. It's a problem of adverse selection."

If anything, Fred is understating the danger in flooding the venture market with government money. It's a corollary of Gresham's law that bad investment drives out good. Suppose you're thinking about investing in software or green tech or something else…. and suppose you know the government's about to dump a lot of dumb money in the field, well then you don't invest because someone who's good at grants but probably not good at software or green tech or whatever is likely to wipe out the market for whatever you were going to invest in. If you're going to invest at all, you try to figure out who's going to get the government money and you put your money there. In other words, the smart money ends up front running the dumb money. Not good.

Of course the damage from government "investment" isn't limited to venture funding. Governments around the world have carefully been "investing in" the very banks which should get out of business and out of the way of better run and smaller (and less dangerous) banks. The better and smaller banks can't get investor money in this climate because the investor money would be competing with government money. Same, of course, in the manufacturing sector.

There is one part of Fred's post where he and I do have a slightly different POV: "… the venture capital business, thankfully, does not need any more capital. It's got too much money in it, not too little. Just ask the limited partners who have been overfunding the venture capital business for the past 15-20 years what they think." From an entrepreneur's POV, we like the VCs to be what they consider over-funded – more chance for entrepreneurs to get funded themselves on better terms than otherwise even though we then run the risk that our competitors will get funded as well. But neither as an entrepreneur nor as a limited partner in VC firms would I want to see government money poured or even dribbled in at the top. "Thanks, Tom Friedman, but no thanks."

 

    

Internet Services Worth Paying For

Can you charge for your new Internet service? You're always up against the expectation that Internet services are free. Moreover, you won't grow as fast if you charge as you will if you give something away. On the other hand, a service has to be very large and have lots and lots of hits (or be dominant in certain niches) before advertising'll pay the freight. Capital is currently at least tough to get and much, much harder without a revenue plan (but not impossible, see twitter).

If you're going to be able to charge for your service, you have to make the case that your service is worth paying for.

An easy case is online backup. I happily pay Mozy for this service because I wouldn't want my backup vendor to be monetizing our relationship in any other way than payment from me. If Google offered me free backup, I'd respectfully decline; I don't want the contents of my hard disk to be part of anyone's index. Generalizing, you can charge for a service if there's a very high expectation for privacy. I pay for Paytrust, an online bill management service, for the same reason. (However, I wouldn't recommend them because it seems like owner Intuit is letting them languish and service is deteriorating).

Although it seems counterintuitive, some directories are worth paying to get into even if you're not selling anything. In the old world, you have to pay to stay OUT of 411 and the white pages because your landline provider is making money by selling your access information. I'd pay to be in a directory if I can have control over who has access to my information. The SIP directory maintained by FreeWorldDialup (in which I'm an investor) requires paid registration for maintaining a listing after a 30 day grace period. This was a tough transition for FWD which was launched in the days when everything was free and only eyeballs mattered.

Some services can charge simply because they're demonstrably better than their free competitors. TypePad, on which this blog is hosted, is an example; it charges a minimum of $4.95/month to host a blog. Competitor blogger, owner by Google, is free. But TypePad hosted blogs look more professional (IMHO) so bloggers pay to be hosted here – those to whom it's worth paying for the difference. Six Apart, the company which owns TypePad, has apparently decided it's better to have fewer blogs and get paid for all of them. That's probably why they're still in business and still independent.

FeedBlitz (in which I'm also an investor) used to offer a free service (as well as a paid upgrade) for sending blog posts or other RSS feeds to email, IM, and twitter. As of the beginning of this year, the minimum monthly fee charged to new publishers using the service is $1.49 after an initial free month. The service is still free to those who subscribe to publications. Founder Phil Hollows explains the change:

"FeedBlitz has grown from serving zero to nearly 7 million active subscriptions. From zero to nearly 73,000 publishers. From zero to over 216,000 lists. FeedBlitz has grown into the leading independent automated email marketing service, routinely and reliably delivering over 60 million automated messages a month directly to subscriber inboxes…

"FeedBlitz needs, then, to keep up and ahead - indeed, you expect us to keep up and ahead - as we scale up to handle hundreds of thousands of publishers, to continue to add features and capabilities, and to be there for you in the future. To fulfill your expectations, FeedBlitz needs to generate commensurate revenues to fund both current services and future plans.

"The FeedBlitz business model has ensured our survival and funded our growth so far. Still, to build for the future, starting on January 1st, 2009, we're updating it.."

FeedBlitz competitors have sprung up from time to time. They usually fold. There is a free much less rich service available from FeedBurner, now owned by Google (and currently somewhat neglected by them). FeedBlitz' future, much like that of TypePad, is to serve those publishers who need a service worth paying for. The publisher count'll grow slower than it did when FeedBlitz was free; but new volumes'll bring new revenue. Important to its publisher-customers, FeedBlitz isn't at the mercy of a new round of funding to keep adding both capabilities and capacity.

So can you charge for your new Internet service? Well, it has to be a service demonstrably worth paying for. And you still can't create a twitter-like hit based on a paid model. If you have a free competitor, than you have to be much, much better and you have to explain why you're better. Services sold to support other services and content – as TypePad and FeedBlitz are – have an easier time selling a paid model; but services sold to individuals can succeed on a paid model as well.

Pay Caps are Overdue

A free market demands pay caps for those who have been insulated from failure. Should've been in the bank bailout bill from the beginning (although there shouldn't have been a bank bailout bill at all).

The counter-argument that talent will leave the bailed-out institutions is nonsense.

First, why would we assume that the people who head these institutions are talented at anything beyond maximizing executive pay?

Second, where is all this formerly expensive talent going to go? Even if they hired Arthur Andersen to help them "be a Tiger", they don't play golf well-enough to make the pro circuit. Their rapidly shrinking (but non-subsidized) competitors aren't going to hire the losers while they're letting their own people go. We don't want them in startupville and we don't do high salaries or high perks here; even our option plans are changing to restricted stock now. The market for over-paid executives is probably worse than the market for MacMansions.

Third, they are in effect government employees paid with public money. $500k is extremely generous for a government job.

Fourth and most important, the prospect of a future payoff in restricted stock isn't bad at all – unless you don't believe that the company you are leading has a chance of success – in which case said company ought to be folded without paying you another dime. If I weren't retired, I'd run any company I believed in for $1/year if the restricted stock deal were right – and I wouldn't lead a company I didn't believe in for any salary. Maybe I'm just jealous because I never had a seven figure salary as a CEO or in any other position although I did make money from options (Microsoft) and selling founder's stock (ITXC for which we provided the seed capital).

Then there's the argument that companies won't take a bailout if it limits executive salaries. If they don't need a bailout, that's fine, of course, and a good thing they don't take one. If they do need a bailout and executives block it, the board should fire those executives. If the board doesn't do that, then stockholders should fire and/or sue the board. There is such a thing as fiduciary duty. Besides, who is going to pay the executive salaries if a company which needs bailing out doesn't get so bailed?

Pay caps for bailouts won't ruin the free market; they protect it. It would be a good thing if some "low paid" executives demonstrated some success. The spillover might be more backbone from pension funds and other big holders of stock and downward pressure on executive salaries across the board. This is the time to wring out excesses of all kinds.

Advice to Entrepreneurs – In Lieu of Capital

Programming contracts can fund development of your breakthrough product when no one else will; and contracts are a good way to keep eating while you pursue your dream. This strategy takes more patience than would be needed if you could get angel or venture funding to pay you (and any associates) while you do initial development and work towards revenue; but you probably can't get that funding today unless you have a great track record. And you don't want to give up your dream.

That strategy worked several times for me; didn't make me rich but did get me good product income when I had no money to invest and couldn't or didn't know how to raise any.

Once in the 1970s a bank hired me to develop some software to connect their computers to the newly formed automated clearing houses (ACHs) which would make paperless credits and debits possible. I wrote the software for my usual fixed fee with 25% up front and the rest in progress payments. Then the bank came to me and said: "We are part of a joint venture which could market software like this to other banks. All banks need this capability because social security payments are going to come through the ACH and none of them are prepared. Moreover, there are standards for what these transactions will look like and how they're accounted for so every bank has pretty much the same requirements. This is a great opportunity but we need a bunch of changes to make this into a product. What would you charge us for these changes?"

I knew more about the software business than they did and knew that changes for productization would be more extensive than they thought. I quoted them a high but reasonable fee for this which, to their surprise, was more than the original development cost. "We don't have that in our budget," they said.

By now I was convinced of the product potential. "OK," I said, "I'll make the changes for a much smaller amount which will be a non-refundable advance(basically what I needed to support my family) but I'll keep ownership and grant you an exclusive license to sell the product. You'll pay me 2/7 of gross sales of new product and can deduct the advance from that. You'll sell a one year license that comes with free support and maintenance releases. I'll back up your support people (what we'd call tier three today). Additional year licenses will cost x% (I forget what it was) of the then current cost of an initial license and I'll get 4/7 of them because there won't be much selling effort."

Their business plan hadn't included renewal income so much of the cost of what I proposed was out of money they hadn't banked on. But, most important, the outlay for development now fit the budget money they had available. It was a deal and I was in the software rather than just contract programming business.

The product became the leading product it in its category. My company grew but my interests wandered to politics. Eventually I sold the remaining product rights back the bank's joint venture for enough to finance three sabbatical years during which I ran for the US Senate (unsuccessfully) and was Vermont Secretary of Transportation. That's all another story.

Patient irrational exuberance is not quite an oxymoron. Entrepreneurs always need irrational exuberance; in times like these – when the potential rewards are high but the price of entry almost unmanageable – you have to believe in yourself and your ideas enough to wait a long time for gratification. Hanging out doing contract programming is a good way to spot opportunities (which someone is willing to pay for) and to earn a share of them.

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