Convertible Notes - Danny Crichton

Should you have Institutional VCs in your Seed Round?

2013-05-15T00:00:00-07:00

One of the most common questions I get as a VC from seed-stage company founders is "Should I take money from institutional VCs in a seed round?" That's a difficult question, and every start-up is going to have their own approach in answering it. I'll try to work through what to think about in this post.

Any time a company raises a venture round, investors are curious to know whether the current investors in the company are also participating. The reason is simple: the investors who probably know the company best are the ones already on the cap table. They get the investment updates from the CEO, and should be intimately familiar with the business and its future prospects. Thus, their further investment in the company sends a strong signal of how current investors see the business performing. If they are attempting to increase their ownership, it indicates they are bullish on the company. If they are trying to avoid putting more capital into the company, that is probably a sign that the company is no longer a good investment.

This is one of the most visible signals for a company raising capital. Its importance should not be understated.

When it comes time to raise a seed round, many company CEOs try to game this signal by placing only angels and micro-VCs in the syndicate – essentially, any investor that doesn't have the capital base to offer more money in a future round (or so little that it isn't material). In other words, they prevent their company from sending a negative signal, since none of their investors could participate in a future round even if they wanted to.

The downside to this approach should be obvious though – while you limit your downside, you also eliminate your upside. Angels are almost always enthusiastic supporters of all of their companies, for the simple reason that they only get an equity investment when a Series A round is completed when using a convertible note structure. They have strong incentives to sell a company's vision as hard as possible, since otherwise, their investment is worthless. However, that also means that the signal from seed-stage investors is quite weak. Their vote of confidence is not through capital, but rather through words.

Start-up founders are in the risk business, and yet, they often have an aversion to the calculated risk of adding an institutional investor to their seed round. Institutional investors are going to have a choice when the company is ready to raise its first equity round – do we lead the investment, or do we pass? Either choice is of great consequence for the company. If they lead, the investment process is significantly shortened for the founders - saving enormous time early in the company's life cycle. Founders also need to consider the current funding climate where the growth of Series A investments has not increased as fast as the growth of seed rounds. Moving from seed to Series A is now the most difficult step in a typical start-up's financial path.

If the VC passes though, it could be very difficult to recover while seeking capital. A negative signal like a pass from a sophisticated investor is likely to add significant doubt in any partnership meeting that discusses the company - regardless of the actual value of the company itself. It's like applying to college, and one of your letters of recommendation is negative. It is memorable, and that is not good.

That's the gamble though. So what are the primary decision criteria on whether to add an institutional investor? There are several considerations:

How strong is your relationship with the VC firm? The most important criteria the depth of the relationship between your company and the VC firm. The ideal situation here would be for the VC firm to completely understand your idea, have strong partnership support for the company's long-range vision, and a good personal relationship with everyone that might have a say in the future funding of the company (lead partners, associates, etc.). If this relationship is strong, there can be a lot of benefits to adding the VC firm into a round, including connections like finding strong co-investors in future rounds.
What is the deal setup? How much of a seed round the VC firm wants to take (and the founder wants to give) is the next criteria. In a convertible note structure, many firms these days are more hesitant to write large checks without the benefits of equity. Giving a small stub to a VC firm, or even better, several firms, may be the right strategy because large institutional VCs today are less involved with companies with check sizes below $500K. In other words, their negative signal is limited, since they didn't make that much of a bet on the company in the first place, and probably didn't track the company that well. For start-ups looking to raise larger amounts of capital, particularly those companies that are trying to work on big problems that take a long time, it may be advantageous to raise a larger seed round in the low millions of dollars that is an equity round. That way, there is much more limited signaling risk, since the firm is already deeply invested into your success.
What's your risk tolerance? The funding climate for start-ups has changed. Even if a VC firm that seed invested passes on your company, they may provide good contacts to the rest of the investment community that drives the process forward. It is not unheard of for firms to pass for reasons outside of company performance – maybe the firm has changed strategic direction, or the partner on the deal is interested in something else. Again, there is a gamble here like everything in start-up life.

There is no right answer on whether to add institutional investors. I would say that there is a strong aversion to having institutionals among founders in Silicon Valley, although that has changed more in the last year as founders understand the current investment climate better. Build relationships with angels, micro-VCs and institutionals, and see what options make you feel most comfortable.

Why the Possible Waze Exit is So Important to Israel's Ecosystem

2013-05-14T00:00:00-07:00

Rumors continue to swirl that Facebook is currently negotiating a buyout of Waze, the popular social mapping app. The app was founded by three co-founders, Uri Levine, Ehud Shabtai, and Amir Shinar, and is based in Israel with an office in Palo Alto. As part of a potential Facebook acqusition, the Palo Alto team would be merged into FB's Menlo Park office, while the Israel team would be used as a launching point to launch Facebook's engineering efforts in that country.

TechCrunch today ran an article that discussed whether the creation of the Facebook office would harm the nascent start-up community in Israel. The article's author, Mike Butcher describes a conversation:

Because, he says, although the Waze R&D center could be a beach-head for a full-blown Facebook R&D shop, and thus good for Facebook, “it could have catastrophic effects upon local early stage startups’ ability to compete on salaries and benefits.”

His argument is that if a big company like Facebook stays away, then the Israeli tech ecosystem is more likely to be able to “push more innovation” towards Silicon Valley, which would be in the “best interest of both the local startup industry and Facebook.”

Certainly, such a large acquisition inside such a relatively small country could well change the successful dynamics of the Israeli eco-system. If it became a mere engineering centre for Facebook, Apple and Google, the implication is that we might not see quite the same levels of startup activity as we’ve seen emerge in the past from Israel.

That is almost certainly overstating the ‘problem’. It’s more likely that the experience of being inside these big tech companies in Israel is more likely to create a virtuous circle of new entrepreneurs, spin-outs and new projects. Plus, more eyes and ears on the ground for potential acquisitions.

Indeed, one should be cautious with the labor market in a country of 7.7M (which is smaller than the size of the Bay Area). It is true that slight changes in the available jobs could dramatically change the price of wages, which in turn, could equally affect the growth of the start-up ecosystem.

This reasoning is deeply flawed though, which Butcher points out but not nearly strongly enough.

Exits are everything in venture, a point that I seem to have to make to people far more frequently than I expect. Entrepreneurs (minus some exceptions) want to get rewarded for the risks they are taking in launching their business. Venture capitalists want to have strong returns by putting money in fast growing companies that eventually lead to liquidity. Even governments benefit from the exits, since taxes aren't collected until the underlying securities are liquid (Facebook's IPO, for instance, greatly helped the California state budget).

Waze and the building of a new Facebook engineering center in Israel won't harm the ecosystem – it will dramatically improve it. By showing that Israeli companies are capable of building billion dollar businesses in the consumer space, the country will not only attract more investment than before, it will attract more in-flow talent from places like Europe where such exits can at times be difficult to reach. Not only will Waze not harm the local ecosystem, it may be just the kind of fuel for the fire that leads to Israel becoming a key innovation center with a stature equal to that of Silicon Valley.

Not all exits are necessarily good – many acqui-hires are not positive for the founders or the investors. But a billion dollar acquisition of a mobile app? Yes please.

Why we need data rights

2013-04-22T00:00:00-07:00

Data is becoming the central force for change in society. As we increase the sophistication of our analytical tools, there is more and more pressure on decision makers – whether in companies or in government – to utilize data and "insights" in their deliberations. Unfortunately, this opens up many of these decisions to a dangerous hack: controlling access to data can easily determine the outcome of major decisions. Just take a look at some of the recent stories where manipulating data access was key to a decision:

Several states have or are considering passing laws that restrict the ability to film slaughterhouses. Perpetrators would be subject to punishment that could include being placed on a terrorist list. Video tapes of slaughterhouses are one of the key pieces of evidence for animal rights groups to push policies that encourage humane treatment of animals. By banning videotaping, these legislatures are trying to control the debate on animal rights by limiting the evidence that can be introduced.
For years, the National Rifle Association has used its lobbying powers to prevent the collection of gun data by the government. Furthermore, the Centers for Disease Control have been banned by law from considering any research into firearm violence and its effect on human health. Again, access to data becomes key to a major policy issue, in this case gun violence. Without gun data, policymakers are forced to choose actions based solely on argumentation and rhetoric, without the deep scientific research that would lead to the best outcomes.
Federal funding of comparative effectiveness research on healthcare in the United States is contingent on researchers not making formal recommendations about different medical treatments. This sort of research is used to show that two treatments – which may have widely different costs – have the same efficacy in patients. It is one of the best ways to reduce medical costs, since it prioritizes using the most effective treatments, not necessarily the most expensive. By preventing data on this sort of research from being released, pharmaceutical companies can continue to lobby doctors to choose more expensive, yet less effective therapies.

It is clear to me that one of the most important civil rights issues of the coming decade will be around access to data. As data becomes the key leverage point in many policy and business debates, the politics surrounding data will only continue to heat up. If you don't want a particular decision to be made, you don't have to argue against it, but merely ensure that the data needed to prove it is prevented from being collected in the first place.

These data rights are intimately entwined with the need for a right to the Internet, which is an on-going goal of many activists. But we need more than mere access to the web as our goal. We need a more extensive set of rights and principles enshrined in law and in business ethics to ensure that the best policies and decisions are being made. These rules include:

A strong rule against political meddling in research funding agendas. Neither the Congress nor the President should have the ability to politically influence the outcomes of research through either funding or policy mechanisms. Right now, the Food and Drug Administration already has this political insulation given its status as an independent agency fiercely protective of its freedom to operate. Other research agencies like the National Science Foundation, the Centers for Disease Control, and the National Institutes of Health should have similar protections.
Business schools need to teach the politics of data, and the ethical importance of ensuring that all possible data is being considered in business decision-making. Many business leaders are simply unaware of how data is manipulated (or are doing the manipulation themselves). Greater emphasis of this issue in core management classes would greatly help business performance.
More widely, we as a country need to have a greater debate on what information we have a right to access. Wikileaks was the first splash in this area, but now that the news story has tapered off, we have failed to sustain the deeper discussion that this leak of classified materials prompted. The First Amendment enshrines a variety of freedoms, but access to data is not one of them. We need to modernize our legal thinking around this issue to include the right to access data that doesn't fall into some exceptions like national security or trade secrets.

The rise of Big Data opens up a number of policy quandaries that we must confront in the coming years. It is crucial that we start considering the politics of data more fully, and carefully calibrate our thinking and our laws to ensure that decisions are made with the best possible science – not just based on the power of those with levers to the data itself.

Hiatus Over

2013-04-20T00:00:00-07:00

Springtime is in the air, and so is the annual cleaning of this blog. I have taken a break over the past few months to consider what I want to focus on in my work, and in my writing. That process has now been completed, and with any luck (and a little bit of tea), new posts will begin to emerge on this website.

I want to indicate a couple of changes to the editorial content and the website for those who have followed me through all of the iterations of my website over the years.

I have changed the name of my blog over the years from Informed Skeptic, to Danny Crichton, and now, "Hacking VC." I think this new title best describes what the focus of my writing will be in the coming year, namely thoughts and ideas that come from my work as a venture capitalist in Silicon Valley. There will also be some code examples occasionally as I learn new programming languages and libraries over the next couple of months and years. In addition because I cannot restrain myself, I will also include a random smattering of foreign affairs and politics in here. Sorry in advance.
I have refreshed the theme (yet again). There is now more focus on the content, with a greater width for columns as well as a simpler design. I'll never stop tinkering with the layout, but I like where this is right now.
I have started using Twitter more – you should follow me if you haven't already.

Brief Blogging Hiatus

2013-01-31T00:00:00-08:00

It has been almost two months since I last posted on this blog. That is a surprisingly long time for me, considering I have been blogging for almost 5 years now, almost without a single month being missed (the last gap was during the endgame for my undergraduate thesis).

This last month has been a month of change – new goals, new tasks, new home (having moved to SF this past month). As I execute on my goals for 2013, I realized that the amount of time that I spend on this blog is out of proportion to my own personal benefit from it. I intend to come back to this blog at some point in the future, but for now, it is going on hiatus.

As always, I am available by email. Send a note if you have something to say. Otherwise, hopefully regularly scheduled programming will return soon.

The Danger of Models of Development (or, how culture really matters)

2012-11-26T00:00:00-08:00

How portable are models of economic development? When people talk of the Washington Consensus or the Beijing Consensus, they are indicating a set of economic approaches toward development that include deep cultural connections. America's approach of privatization and deregulation has brought immense prosperity to the country over the past century (even if we may have moved the edge too far in the past few years). Likewise, China's approach to state-centered economic growth is merely an extension of an extremely long history of bureaucratic development.

One of the economic theories that have been put forward to address this is varieties of capitalism - an approach that seeks to consider countries in terms of holistic systems of production - one in which individuals interact in a system of institutions that all work together in synergy. Thus, the United States has strong patent rights, strong rule of law, entrepreneurship, libertarianism, deregulation, etc. - the change of one of which would be incompatible with the others.

The theory has many problems (namely, reverse causality), but it highlights a true danger in economic development: economies grow organically, and it is nearly impossible to graft on a new industry or approach and expect it to be successful. One only has to look at the demise of Silicon Valley clones around the world to see how difficult copying a set of economic institutions can be.

Daniel Altman (who I seem to beat up a little too much), wrote another article for Foreign Policy in which he discusses the increasing levels of human capital development in Africa. His statistics are quite interesting, but one thing I thought was interesting was the on-going comparisons to South Korea.

For example, in overall human development as judged by the United Nations Development Program (UNDP), Madagascar now sits where the Republic of Korea did in 1980, on the cusp of its export boom. And a closer look at the data reveals many more examples of progress.

and

As Korea showed starting half a century ago, vast natural resources are not a prerequisite for rapid growth. With better education and health come higher productivity, rising wages, and greater buying power. To plan for this growth, companies will need to use a long time horizon. One way to do it is by laddering the marketing of their products in parallel with increases in living standards.

We must be cautious about trying to mimic the success of one country in other parts of the world. While South Korea's success could quite possibly be transplanted to other areas in Asia, it seems hard to believe that its approach will work well in a region as diverse and different as Africa. It is the cookie-cutter approach that I believe has most harmed development in the past, and it is the individualization of development plans that offer the most hope for a better future for humans across the world.

Book Forum - The Syrian Rebellion by Fouad Ajami

2012-11-23T00:00:00-08:00

Syria is the worst kind of crisis - simultaneously heart-wrenching yet mostly ignored by the international community. One cannot help but see the photos of the destruction (for a great selection, see this gruesome slideshow from the Atlantic) and want to do whatever it takes to try to direct the crisis to its end. The on-going destruction reflects our own psychology and helplessness, a failure of the modern international system to protect human rights in the face of pure evil.

Yet, the complexity of such situations - the ambiguity of a society that seems so distant, so impossible - is perhaps the most interesting story. The lack of action by Western powers from America to France does not reflect a missing capacity for power projection, but rather a lack of willpower on the part of politicians who abdicate their role of moral leadership.

This issue gets at the heart of The Syrian Rebellion by Fouad Ajami. Ajami complains, almost bitterly, about an Obama administration that simply refuses to put the effort behind the Syrian opposition like it did in Libya just a few months earlier.

There was no shortage of alibis for American passivity: America did not know the protagonists and couldn’t trust the Free Syrian Army, there was no United Nations Security Council resolution authorizing foreign intervention, and more. On February 26, Secretary of State Hillary Clinton, in an interview with CBS in Rabat, the Moroccan capital, all but took away any hope that there would be rescue for the Syrians. It was a stunning performance, a measure of the ability of power to avert its gaze from places in trouble. (Ch. 9)

This sort of frustration is perhaps obvious for a neoconservative-affiliated scholar like Ajami, who was one of the major supporters behind the Bush administration's wars in the Middle East. And really, who can blame him? The scenes of horror that are coming to us from Syria boggles the mind and challenges our very conception of human decency. The situation cries out for action, any action.

And yet, that is precisely the danger of intervention. For all of the right-wing attacks against Obama about "leading from behind" in Libya, the strategy was incredibly sound. Augmenting Libyan forces in their own strategy and tactics with international military forces, thereby allowing local, on-the-ground troops to choose their own destiny in the military campaign, allowed American policymakers to defer to knowledgable generals without the sort of fog of war that proved so costly in Iraq.

What are the options in Syria? Ajami notes that Syria has been the cradle of Arab nationalism for decades, and savors its sovereignty after years of colonial domination. The Syrian opposition forces, while certainly welcoming of assistance, hardly desire to request help from their former colonial masters to win the war. This relationship is even more complicated given who the opposition represents, namely, the former Muslim Brotherhood and other Sunni Islamists.

I am an interventionist, and I generally subscribe to the Responsibility to Protect (R2P) doctrine. But I also believe that diving into an ambiguous situation could be far more costly than anticipated. This isn't the Hutu and Tutsis in Rwanda, or the Serbs in Srebrenica. There was clarity in both cases, a moral path illuminated for all to see.

Despite Ajami's attempts, I finished The Syrian Rebellion with less conviction to intervene than I did before starting the book. Despite the horrors perpetrated by the regime, it is unclear what the next government would be. Assad's regime is gruesome, but would the next phase really be better? Interestingly, the same question gets asked about Iraq, and it is not at all clear what the answer is, even today. "It depends" is probably the right response.

Syria gives me strong echoes of the Congolese war of the past two decades, which started in the fallout of the Rwandan genocide. Despite on-going international intervention, the war continues unabated, with little solace coming to the heart of Africa. The sad reality is that the environment described by Josef Conrad more than a hundred years ago in Heart of Darkness remains a startlingly close depiction of Congo today.

After years of strife, it is hard for countries to rebuild and move forward. The civil infrastructure is lacking, and the sort of normal course of society simply can't function without the centralizing effect of the strongman dictator. Iraq's transition to democracy has been difficult precisely for this reason, similar to Congo and today, Syria. Despite the length of Hosni Mubarak's tenure as leader of Egypt, his regime never stamped out the vibrant political culture that today is completely lacking in Syria. The transition for Egypt will still be difficult, but manageable.

This state of affairs isn't lost on Syria's neighbors. Israel, which has faced decades of treats from Syria, remains relatively mum on the affairs happening across the border. Ajami describes the situation well:

True, no binding peace accord had been made with the Syrians, but the Assads had delivered the most quiet of borders. There was no way of knowing who and what would replace this Syrian regime. Populism and chaos could threaten that subtle working relationship developed over four decades. (Ch. 6)

So, what are the next steps for Syria and the international community? More efforts directed toward China and Russia seem obvious, if perhaps futile given the results of the last UN resolution on the outcome in Libya. Turkey has slowly evolved into a more aggressive foe of the Assad regime, and could be used as the launch pad to provide greater assistance for the Syrian opposition.

But it is the opposition itself that has the most power in this engagement. They set the tone, and could provide the political space to allow for intervention. Reducing the ambiguity of the new government, providing better support and political representation of the minorities who benefitted from Assad, and building a clear consensus on human rights would go a long way to assuage the fears in foreign capitals of engaging in the crisis. It is their future, and they have quite a bit of control on the outcome.

For the rest of us, vigilance is needed. Despite the atrocities underway, it can be all too easy to read the latest story on Black Friday (Wal-Mart strikes!) and develop a shroud of silence around the events transpiring in the Middle East. These changing battle lines are never easy to follow, but we have a responsibility to keep the pulse on the issue and ensure that the story doesn't disappear. As we have learned from so much evil in the past, these situations can go from horrible to hell almost overnight. We have to learn these lessons, and continue to push for a pluralistic, democratic Syria that works on behalf of all of that country's stakeholders.

The More Negative View of Korea's Growth

2012-11-12T00:00:00-08:00

Foreign Policy has an article that basically offers the opposite view of Korea's economic growth that I presented yesterday. Daniel Altman argues that Korea's best days are behind it already, and that the country is tracking the arc of Japan's rise quite well:

Korea's rate of economic growth has been falling since the early 1990s, and its overall trend tracks Japan's with a delay of about 20 years. In terms of urbanization, the lag may be closer to 15 years, but the resemblance is clear. Also, the age profile of Korea's population 15 years from now will likely be very close to Japan's today.

Altman is generally correct - there are a lot of close correlations with the Japanese and Chinese cases. However, it is interesting that an article that focuses so clearly on economic growth rates would seem to miss mentioning the Asian Financial Crisis and the Tokyo real estate bubble.

These crises were very important for moving the East Asian nations away from unsustainable policies. Much as the dot-com bubble eventually led to today's vibrant and strong internet entrepreneur culture in Silicon Valley (they are actually businesses this time!) Tokyo and Seoul faced many problems internally with their models of development, and their respective crises both set off reforms.

Unfortunately, Japan has never fully followed through with its reforms, for a host of reasons. Most importantly, the inability of its political leadership to fundamentally alter the balance of power between the central ministries and the business leaders that run Japan's companies has undermined the country's entrepreneurial goals, preventing Japan's investors from gaining the economic freedom they need to build the next Sony. Japan now faces so many problems (and has faced them now for two decades), that it seems like there is never going to be a light at the end of the tunnel.

Seoul developed its own approach to structural reforms in concert with the IMF in 1997 and later, but it has so far shown an unwillingness to move beyond basic protectionist orthodoxy to a more free-trade centric model. This is often a hard transition, but countries like Israel have shown that there remains a hybrid approach that creates a free-trade centered economy while maintaining strong social security and state intervention in the economy.

Despite its negativity, the article does end on a bit of a high note, arguing that Korea has an opportunity to change its trajectory since it can view the outcomes of its East Asian neighbors:

Yet the best thing Korea has going for it may be the opportunity to see and learn from its neighbors' mistakes. Japan had the chance to reinvent its economy and chose, explicitly or otherwise, not to follow through. China arguably has it tougher than Korea: Its political system may still be entrenched after its breakneck growth subsides, constraining the free flow of capital and ideas.

Let's hope that the country takes its opportunity seriously.

The decline of the BRICs, but the rise of Korea?

2012-11-11T00:00:00-08:00

In an article in Foreign Affairs, Ruchir Sharma blows apart the notion of the BRIC nations (Brazil, Russia, India and China) as the leading economic forces in the coming century. He emphasizes the demographic issues facing China, the rising concentration of wealth in Russia, as well as the slowing growth rates across all four countries to argue that the BRIC acronym should really be retired.

He moves beyond analyzing just the BRIC nations though, instead briefly noting the facts of development over the past 50 years. Sadly, despite some notable exceptions, Sharma notes that few countries have made any progress in their rise (in terms of real per capita incomes) in the past half century. Economic evidence demonstrates that countries can rarely grow at high sustained rates for more than a decade, since few countries have been able to adapt to the changing politics and technology that confront their economy. Sharma aggressively targets China in this regard, arguing that its bureaucracy simply cannot handle the combination of a changing economic landscape with the dual trends of urbanization and an aging population.

It is Sharma's comments on Korea that interests me most:

In the past, Asian states tended to look to Japan as a paradigm, nations from the Baltics to the Balkans looked to the European Union, and nearly all countries to some extent looked to the United States. But the crisis of 2008 has undermined the credibility of all these role models. Tokyo's recent mistakes have made South Korea, which is still rising as a manufacturing powerhouse, a much more appealing Asian model than Japan.

And this is something that I completely agree with:

Among countries with per capita incomes in the $20,000 to $25,000 range, only two have a good chance of matching or exceeding three percent annual growth over the next decade: the Czech Republic and South Korea.

Really, Korea remains one of the most exceptional cases of economic growth in the last century, even among its cohort of Asian tigers. I am currently reading an excellent economic history of Korea (Asia's Next Giant by Alice H. Amsden) that describes the political economic decisions made by the South Korean government from 1954-1980 or so.

Some of the early take-aways from this book seem so directly relevant to the case of China that it is interesting that the connection has not been made more clearly by economic analysts. Amsden describes the constant push by the Korean government to increase exports, with the government driving much of the national strategy and lending capital to business leaders to execute that strategy. Not surprisingly, the close relations between the corporations and the government could easily have led to high levels of corruption in the opaque decision-making of the military dictatorship.

Yet, such corruption never became endemic. Amsden describes a system in which the government would set strict standards on growth and operations performance, and would threaten companies with economic bankruptcy if they couldn't follow through. Amazingly, the government did follow through, consistently moving money to the best performing managers and companies, who received substantial profits from their success. As Amsden writes, "[...] the big business groups had to deliver."

Can we make the same claims about the approach that China's leadership has taken? When we see the riches that have been amassed by some of China's top leaders (the New York Times reports that its premier has access to close to $2.7 billion), it is hard to imagine a system that is carefully calibrating its targets and holding firms accountable. Interestingly, both the governments of China today and of South Korea in the 1970s faced the same problem, namely legitimacy. High growth ensured that the demands for liberalization would be quieter, a sort of Faustian bargain between ruler and ruled.

South Korea's success story continues to this day. While analysts are still undervaluing the country, it will be interesting to see the next decade and whether the country can reach the potential that its fundamental statistics would seem to indicate are attainable.

Election Wrap-up - The Supreme Irony of Mitt Romney

2012-11-10T00:00:00-08:00

Back in October of last year, I wrote a blog post titled "What scares me about Mitt Romney" that looked into the business and educational background of the then future Republican nominee. My main concern with Romney came from his emphasis on data and analytics - his formative years were spent at Harvard Business School and Bain Capital, where he perfected the data-driven approach to private equity investment. While such skills are at the heart of business, the political world has generally been immune to such quantitative approaches.

So it is not without heavy layers of irony that Romney campaign staffers started blaming the team's approach to data as one of the leading causes of Romney's failed bid. BusinessInsider has one of the many accounts of Project Orca, a data and engineering centric approach to Get Out The Vote operations on election day. Rather than revolutionizing the campaign's activities, the program helped to suppress Republican turn-out efforts by preventing volunteers from accessing voter lists, and making it difficult to track who had voted and who had not.

Contrast the Romney campaign's maladies with the big data operation at the heart of the Obama campaign, as described by Time Magazine:

Get-out-the-vote lists were never reconciled with fundraising lists. It was like the FBI and the CIA before 9/11: the two camps never shared data. “We analyzed very early that the problem in Democratic politics was you had databases all over the place,” said one of the officials. “None of them talked to each other.” So over the first 18 months, the campaign started over, creating a single massive system that could merge the information collected from pollsters, fundraisers, field workers and consumer databases as well as social-media and mobile contacts with the main Democratic voter files in the swing states.

While a number of commentators seemed generally surprised at the campaign's approach, using data in politics is relatively banal - marketers have been doing this for decades, carefully calibrating their messages to target different consumers. It is not the fact that data was used by the Obama campaign that is interesting, but rather, how was it possible that Romney, the king of quantitative approaches in the private sector, allowed his campaign to be completely trounced in the data competition.

It is not as if the Republicans couldn't find the right talent. Despite the general liberal bent of many engineers, there are high quantities of libertarians that strongly supported Romney in this cycle. Data-centric methods were also at the heart of Obama's 2008 campaign, although they were not nearly as well developed. This was hardly a secret weapon.

The only answer is that the campaign was mismanaged. This is really shocking. Romney argued quite vociferously that he was best qualified for the White House given his private sector experience - he had run businesses, had run Massachusetts, and he would be the leader needed to bring the United States out of its economic malaise. Why then did his campaign perform so badly at developing this voter platform and its collection of high-quality, real-time data?

I will admit, I tend to like Romney. I have a strong bias toward technocrats, since one of my core political beliefs is that the United States needs to work harder at depoliticizing more issues. While I have strong reservations about Romney's political instincts, I do like the idea of looking at policy more rigorously within a larger (qualitative) holistic framework.

Yet, the story of Project Orca forces us to confront a Romney that isn't nearly as good as he seems to be on paper. Indeed, when you look at the names of the people running his campaign, you start to perceive strong hints of the old Bush playbook - choose people for who they are (and particularly, their ideological bent), rather than their effectiveness and competence. One wonders about the companies that failed under Bain Capital, and if the right people had been selected to lead them.

I think we misjudged Romney. I accepted his data chops at face value, and noted my concern about how that translates to politics. But my criticism jumped too far ahead, and I should have looked at his qualifications more closely.

Yet, Romney is not the only irony in this data story. Republicans are continuing to face a changing demographic landscape that will slowly but continually erode their core electorate in the next few cycles. Perhaps that is why the Romney campaign was so loose with the data - they didn't want to detect what they already knew about the state of the electorate in 2012. The Republican party has little to offer to solve this problem, and it will be interesting to watch how immigration reform will play out this year.

Data can be counterintuitive, and it takes a strong and confident leader to read data and change course, especially when one's instincts suggest an opposite approach. The Republicans and Romney never did confront the data that they had available to them, nor did they setup the systems needed to get a real view of the ground game they would need for victory. Regardless of his policies, Romney made a fatal error here, and he got what he deserved on Tuesday.

Update on Korean Studies

2012-11-10T00:00:00-08:00

It has been two weeks since updating this blog (and an entire new election has come and gone in the United States!) I wanted to give a brief update on some of the stuff that I am working on so that it doesn't appear that I have entirely dropped off the face of the planet.

I am continuing to draft my research papers regarding my trip to South Korea last year. Right now, I am targeting about 6-7 essays about various topics, most of which will be independent of each other. I am hoping to finish them up over the Thanksgiving Holidays (the week of Nov. 18).
I am continuing to study Korean by reading Korean books. Right now, I am reading a book called 두 얼굴의 네이버 (you can read a book review of it in Korean here). It is a graphic novel depiction of Naver's corporate history, and is thus relatively bite-sized for learning a foreign language.
I just ordered Korea: the Impossible Country, a new book that was recently published from Tuttle. The book was been doing well in its reviews, and claims to give a more distinctive account of the culture of Korea than many other titles. We will see when I receive the book.
Finally, the leadership transition is underway in China as I write this. I am trying to catch up on all the news, but the best portal for it that I have found is Foreign Policy, which has a remarkable series of articles covering the transition.

Tomorrow is also 빼빼로 day, so definitely get in the spirit and eat some chocolate sticks for the holiday.

Awesome Map of Seoul's Start-up Scene

2012-10-28T00:00:00-07:00

Eunjin Kim (you can follow her on Twitter: @eunnkimm) has compiled an impressive map of the current start-up scene in Seoul. Not only is it a great example of how to use the FusionTables API available from Google, but it also allows us to get a wonderful sense of the geographical layout of Korea's innovation infrastructure.

Start-ups appear to be concentrated mostly in the heart of Gangnam, with another small cluster near Hongdae in Mapo-gu. This is somewhat interesting for several reasons. First, Gangnam has some of the most expensive real estate in all of Korea, as well as the highest cost of goods in the capital city. Much as how San Francisco is one of the most expensive markets in the United States, the high costs don't appear to be slowing the onslaught of start-ups coming into the neighborhood.

What is interesting though is what this tells us about the location Korean start-up CEOs choose for their companies. Gangnam is also the site of Samsung and NCSoft, some of the largest firms working in the software space in the entire country. Hongdae, the other innovation cluster, is a much younger environment that generally attracts college students with its extensive nightlife and eateries. The CEO's choices would seem to reflect a desire to be near talent rather than youth, and this may also indicate the kind of employees companies are looking to employ.

One should probably not take away too much from this split - both sites are accessible from the No. 2 line on the Seoul Metro and are about 25 minutes away from each other. Nonetheless, it is interesting to see similar dynamics work in Seoul as does Silicon Valley. Palo Alto/Mountain View and SF remain the hubs for new ventures in the Bay Area, despite much cheaper places like San Mateo. These days, there is a constant discussion of whether Palo Alto or San Francisco is a better place to start a company (PA for the work, or SF for the fun?)

Clicking through the different categories, one of the draws of Gangnam may be its enormous number of venture capitalists, the vast majority of which have located along the No. 2 subway line following Teheran-ro. It almost seems like this is the Sand Hill Road of Korea, given the heavy concentration of the industry along this one street (although to be fair, the road is lined with skyscrapers, so the actual per person concentration of VCs in the area is certainly lower than Sand Hill). Although we can't tell from the map, I would be interested in the time-series analysis here - did start-ups follow the money, or did the money follow the start-ups?

Given this concentration of financing, it is interesting to see that the co-working spaces are spread relatively uniformly throughout the city environment. I can't help but feel that this will be a problem for many of them, since it is the concentration of entrepreneurial talent in one location that is so important for a start-up ecosystem to develop. While the map may not have complete data, I imagine that the economics of co-working spaces have pushed them to find cheaper real estate outside of Gangnam. Ultimately, such a strategy is just not likely to succeed, even with good urban transportation, but I am willing to withhold judgment.

All of this is interesting to watch though. Thanks to Eunjin for compiling and making this available!

Government Regulation and Outrage

2012-10-24T00:00:00-07:00

If you were paying attention to the press last week, you probably read a headline like this one from TechCrunch: "Not From The Onion: Minnesota Bans Stanford’s Unauthorized Free Online Education." Or this headline from VentureBeat: "Dear Minnesota, free online education is a good thing (yeah, really)." While the sarcasm is appreciated (really, all of us from Minnesota are quite nice about these things), it was the articles themselves that turned me from a bemused spectator to an angry commentator.

TechCrunch writes:

This story of government overreach is so outrageous that we have to re-iterate that it is, in fact, real: the State of Minnesota has banned popular free online education site, Coursera ...

and

... the silly incident underscores a widespread problem between government regulators and startups: 20th century consumer and worker rights laws are hindering innovation.

VentureBeat writes similarly:

That, of course, is as ridiculous as it is ineffective. Coursera is delivered by the free and open Internet, so unless the state of Minnesota wants to start censoring the Internet, good luck.

You would think the government passed a law banning puppies and chocolate.

Coursera today released a statement that clarified many of the issues related to students taking classes in Minnesota. As Coursera noted, "Some states, like Minnesota, have laws to regulate higher education dissemination, mainly in the interest of protecting their citizens from sub-par education." [emphasis mine]

It is important to emphasize that the law in question was passed almost 30 years ago, mostly in response to the burgeoning for-profit university industry that were quickly making headway across the country. Despite the conspiracy theorists of some members of the press, these laws were not passed to protect state universities from competition, but rather in response to an issue of concern: consumers were signing up and paying for university degrees in which they received sub-par credentials.

If you don't understand why these regulations were important, than maybe it would help to listen to a recent episode of Frontline that investigated the scare tactics of the for-profit higher ed industry. In the context of the approach that industry took to its consumers, it is surprising that there aren't even harsher laws on the books to protect consumers.

Should Coursera be covered under the law? No. It's an entirely different institution, which is now recognized by the MN Office of Higher Education. Politics and the law worked as intended.

But I want to step back and address this issue of "20th century consumer and worker rights laws [...] hindering innovation." These laws don't come in a vacuum. Most of these laws came about because private industry pursued unethical practices that harmed consumers, and required a legislature to take action.

The issue of Uber strikes as close to the heart of this issue as any other recent company. Uber is a great service that I have enjoyed. They have a new business model, and they are setting a high bar in customer service, transparency, and ethics. But, there is a reason that taxis and their drivers are regulated. Bad meters, extortion, and longer routes are just some of the issues that plagued the taxi industry before consumer protection laws.

These laws are indeed protecting incumbents today, and it behooves Uber to argue its case to politicians, much as Coursera made its case in the past few days. But let's not forget the entire history of these laws. Some consumer protections are necessary in the marketplace to ensure that ethical practices are rewarded. For every Uber and Zazzle, there are a dozen firms that would jump at the chance to make a quick swindle if they could (some industries in their entirety thrive off of such practices).

I want innovation as much as possible (it's what pays my bills, in a literal sense). But I also want to know that the goods and services I purchase meet certain standards. The law can facilitate the market when done right, and the outrage of the technorati toward 20th century laws should change to a much cooler approach that emphasizes methodical improvement over feverish exasperation.

Book Notes - Triumph of the City by Edward Glaeser

2012-10-15T00:00:00-07:00

I just finished Edward Glaeser's book, Triumph of the City, on the history of urbanism and the importance of cities in the twenty-first century. The book covers an enormous amount of ground, although unfortunately, its breadth restricts an in-depth examination of many of the book's topics. Nonetheless, the book was filled with a number of insights that I thought were particularly interesting.

The value of in-person contact has increased while the cost of distance communication has decreased

With the advent of Facebook, Skype, and Twitter, Gleaser notes that it is easier than ever to engage with others from all the way across the world. Yet, the premium people are willing to pay to live in cities has only increased this past decade. It seems strange that we could live in the woods and telecommute, yet many of us instead choose to live in dense apartments with little greenery or sunlight.

Glaeser argues that the value here is serendipity -- cities provide random encounters that greatly increase our own human capital. He argues, mostly persuasively, that the rise of artistic movements came from the close (geographically) collaboration of artists in certain schools, and such agglomerations are typical of many of today's industries like internet start-ups in Silicon Valley. Such osmosis of new ideas is simply not possible with the communication technologies we have in our service today.

What I think is truly interesting though, is that people don't choose to live in the suburbs instead of the city, but rather move to other cities and telecommute. When I worked at Google, we had people from New York City and Tel Aviv working on my team, and we had fewer than a dozen members working on my product at the time. Communication technologies disproportionately benefit the urban dweller, and thus it is not surprising that they would encourage even deeper connections in between cities.

Despite their horrific nature, slums in urban areas are often better for poorer people than rural areas

This one was quite surprising, and I am not completely convinced about it. Glaeser argues that the number of urban poor continues to skyrocket because cities offer qualitatively better opportunities than the countryside does, in a sort of economics explains social movements theme. He buttresses this argument with a wealth of statistics, which given the format of the book, are not fully fleshed out (specifically, the book lacks a real micro-level treatment of the urban poor -- Glaeser relies mostly on averages as his evidence which is not as convincing).

These issues aside, this theme makes an important point: the power of visual evidence can mask the truly heartbreaking scenes in the countryside where the level of poverty can be even more shocking than what is witnessed in cities. Sometimes the most powerful stories are the ones least reported, since the lack of access is a symptom of the underlying poverty problem itself. While it can be hard to look at the many issues facing the poor in a city like Lagos, Nigeria, their issues would multiply in the largely lawless regions surrounding the city.

Building up is more environmental than merely preserving old architecture

Glaeser became the most vocal on the issue of historical preservation and NIMBYism, arguing aggressively and persuasively that cities are at their most functional when they are dynamic and changing. He doesn't believe that destroying the city center of Paris is viable, but rather that cities must find ways to allow more people to enjoy their benefits, even if that means removing some buildings from the last century. His model city in this regard is Chicago, which has continued to the present day to develop its waterfront property along Lake Michigan, while he castigates New York City for preserving tens of thousands of buildings with little sense of the needs of the city.

His most persuasive point, though, is that the "greenest" areas in the country are preventing more residents from moving in, forcing these migrants to move to areas of the country that are far more brown in their orientation. Coastal California and New York City are some of the most efficient areas in the country for energy consumption and greenhouse gas emissions, yet due to their development policies, new residents are swayed to move to places like Houston or Phoenix in order to find affordable housing. That doesn't make sense, and Glaeser is incisive in his criticism on modern progressive environmentalists who prefer historicism over practicality.

Miles traveled on freeways increase 1:1 with miles built

I knew this from a regional planning class, but still, it is a fascinating problem at the heart of building modern urban transit systems. As governments build additional transit infrastructure, particularly freeways, there is an equal increase in use by the public to take advantage of the new resource. For instance, adding lanes to a highway may literally add capacity, but the analysis of the project often fails to take into account citizens who will decide to use the highway but previously had not (in other words, people are dynamic, and make decisions based on current traffic conditions).

Solving this problem is simple, if politically unpalatable in the United States. Congestion pricing -- charging for road usage based on the current rate of traffic -- brings the social cost of driving back to the driver. Such systems are in wide use in Singapore, where traffic has moved quickly for decade despite incredible levels of density. Indeed, one of the interesting pieces to this policy is that the public is usually quite opposed until they experience the faster roads -- and then perceptions begin to change regarding the proposal's benefits.

Overall, the book is impressive and is recommended if not for the in-depth economics discussions, than at least for its level of coverage of the myriad issues facing cities today.

Japan's Becoming More Entrepreneurial?

2012-10-03T00:00:00-07:00

The New York Times today had an interesting story about "start-up salons" popping up in Tokyo. These salons are apparently acting as social lubricants to build a network of entrepreneurs in Japan.

Of course, there are still many issues in Japan (and much of the rest of the world) with fostering new ventures. As the article notes:

With its economy sluggish and its population graying, the country slipped to No. 25 in the most recent ranking of global innovation by the United Nations, falling out of the top 20 for the first time since the survey began in 2007.

...

More than ever, many innovations seem incremental or just plain odd. A $4,500 “networked” washing machine released by Panasonic in August that can be operated remotely via smartphone was greeted with derision in the Japanese blogosphere. “Has Panasonic lost its way?” one blogger asked.

I think that these sorts of "underground" communities are crucial in the early stages of a new start-up ecosystem. The connections that are formed will be crucial in the future, but even more importantly, they provide the moral support and camaraderie that will help the community face the tough challenges that will invariably come.

However, I think we need to be careful about being too excited about small changes. The article notes that a start-up incubator "[...] received close to 100 applications during its latest round this year." This is in the third largest economy in the world, with more than 100 million people.

Let's be clear here. Building networks is really important, but policy change is what is going to allow any start-up ecosystem to grow. Tax policy, business regulations, competition policy, immigration are just some of the areas that government has to get right in order to facilitate new venture formation. It might be the case that these social networks can lobby the government and encourage these policies, but I believe that is likely to be unrealistic.

So where should countries like Japan go? I think there are a couple of different avenues. First, there is a tremendous need for established figures in the economy to help support new businesses. Japanese business leaders (even a handful!) can take the lead and attract significantly more attention to this nascent movement. Second, the Japanese government can lower the costs of starting new businesses, and also ensure that a level of competition exists within the labor market and procurement policies. Furthermore, there is definitely a need for more entrepreneurial activity in Japanese universities.

These are low-hanging fruit. No one needs to act as a "trust-buster", trying to break up all of the large Japanese companies that currently dominate the technology sector. Nor do we need all policies to be completely replaced. But, steps in the right way can act as a lubricant itself - creating its own force to encourage further reforms and more entrepreneurship. It is about momentum, and hopefully these start-up salons are a great first step.

The Competitive Pressure of Labor Economics

2012-10-03T00:00:00-07:00

Bloomberg has a lengthy article on the plight of South Korea's college graduates:

With almost three out of four high school students going to college in an effort to get a top-paying job in one of the leading industrial groups, known as chaebols, South Korea is being flooded with more college graduates than it needs. Its 30 biggest companies hired 260,000 of them last year, leaving another 60,000 to swell the youth unemployment rate to 6.4 percent in August, more than twice the national average.

This complements a recent article I read by Dr. Se Hoon Park, who wrote earlier this year about the reasons why Korea's education system is not producing the results it wants:

Essentially, years of extra tutoring prepares Korean students for college entrance exams but not for acquiring a college education. That is, Koreans are so good on international test scores because they work overtime being taught to pass these tests. When they enter the real academic world in college, they do not have the skills necessary to succeed.

These two stories are intimately related. A college education has no value whatsoever if it is about memorizing facts, or simply excellent test taking. Instead, college must be seen as a laboratory of the mind, a place where one can be independent, try new things and discover new ideas, learn about one's self, and develop a diverse skillset in a world that is changing rapidly.

One of the interesting elements of the debate around education these days in the United States is that we seem to forget that the country did quite well the past few decades in spite of our system. Not everyone did well, mind you, but the economy remains the envy of much of the rest of the world. How can we reconcile the performance of the American economy with the generally-perceived poor performance of US schools?

I think the core piece is that American schools, particularly colleges, get a lot of things right. Education performance is surprisingly not one of the most important factors in the development of the human mind. That may sound like heresy, but think of the other activities that probably matter a lot more: doing independent research, taking on leadership positions in extracurricular groups, and learning about new ideas that might come just as much from outside the classroom as inside it.

Korea has an enormous number of college graduates, but companies don't want them. Part of this is the actual structure of the labor market – the large conglomerates really do depress the number of these graduates that are hired. But I think there is also a case to be made that the right skills were not fostered in the educational system, and telling kids not to go to college just isn't solving that core problem.

One of the most important lessons I learned from my time in Korea is that competition has a price, particularly when the variance in the prizes become too large and the tournament is zero-sum. No one wants to live or work in such a pressure-filled environment, and everyone becomes much more conservative and safe in their approach to education and careers. Much like start-ups, monitoring metrics too closely can actually result in stunted growth, because people become fearful of missing their targets more than reaching a better outcome.

I want to leave with this: Educating every person is good, but we have to be cautious about connecting all of education to specific economic outcomes. Education is not an end, it is a means of development, and it has to be balanced. If you get that right, the jobs will follow.

Why Consultants Need to Get the Hell Out of College

2012-10-03T00:00:00-07:00

The Wall Street Journal had a hilarious story today about a new college ranking developed by Boston Consulting Group:

How far do they have to go? At the Boston Consulting Group, we have developed a new ranking to determine the educational competitiveness of countries: the BCG E4 Index. It is based on four Es: Expenditure (the level of investment in education by government and private households); enrollment (the number of students in the educational system); engineers (the number of qualified engineers entering the workforce), and elite institutions (the number of top global higher-education institutions).

As those who read this blog occasionally, I often blast statistics that have no meaning, as well as quantitative analysis that tries to take complex and complicated topics and turn them into a single number. Among the worst culprits of this are management consultants, particularly when they move out of areas of business that have relatively standard metrics for performance.

Just listen to this ranking. The number of engineers? Pure expenditure? Elite institutions? This has all the hallmarks of a committee going around the room and belching out any random thought that they can find.

Here is what matters: We need high-quality and accessible education at every tier in the talent pipeline. We need a diverse set of schools including elite universities, well-funded state colleges and universities, community colleges, trade schools, technical institutes and apprenticeships. Diversity and breadth here are very important, and seem to be completely missing from this index.

But the thing that angers me is the focus on engineering. Yes, there is a deficit of people entering computer science disciplines based on the current labor statistics. But, the economy is not built with just engineers. Rather, the strength of an economy comes from so many different sources, including science majors (which apparently don't get included), history and English majors (communication folks), education majors (to actually teach the next generation how to function), and everything else in between. It is about balance.

We need less of these pointless metrics, and much more attention to be focused on the real policy problems facing schools. There is a complex legal and social environment that teachers have to operate in, and rather than just whitewash the whole system to a simple number, we should begin to focus on individual students and classrooms to see how different types of students have outcomes in our system. Now that would be a point of comparison between countries.

AniPang (애니팡) Spreading as Fast as Animals Pop

2012-10-02T00:00:00-07:00

I got this message yesterday on KakaoTalk and was interested:

Translation: "'세은♪' has just invited you! Check it out now! (More detailed info / Set an option not to get invited ▼)"

Apparently, this is a social game that has gone quite viral in Korea in the past few weeks. The game utilizes the immensely popular KakaoTalk chatting application to encourage its players to send invites to their friends (quite reminiscent of the original Mafia Wars and other early games on Facebook).

KakaoTalk has recently been expanding into other areas, including games, in recent months as they have faced pressures from Apple's iMessages and other chatting applications. One of the advantages of the games model here is the unique leverage that the program has with users on their mobile devices. At least for Korean gamemakers, KakaoTalk is an excellent platform given its enormous market saturation.

As for the game itself, 애니팡 is something of a social cross with Bejeweled and other popular PopCap games that have been popular for some time here in the United States. There is definitely a distinct Korean feel to the game that makes it interesting if slightly derivative. (view a video of the game play here).

You can download the game from the Android and Apple app stores.

Update (10/3/2012)

A helpful reader sent along this event announcement. Apparently, there is going to be a tournament for the game held in Seoul soon.

Lotte Department Store - Main Store Young Plaza Grand Open

Find the Greatest Master Hand of AniPang!

For the first time ever in Korea, an event to find the Greatest Master of AniPang is to be held at Lotte Young Plaza.

Preliminaries: 10. 5(Fri.) ~ 10. 6(Sat.) 11:00 ~ 12:30 / 17:00 ~ 18:00 (25 people by order of arrival can enter the competition, respectively) Finals: 10.7 (Sun.) 14:00 ~ 17:00 Place: Specially prepared stage in front of Main Entrance of Lotte Department Store - Main Store Young Plaza Prize: 1st - Lotte gift certificate worth one million won 2nd - New iPad 3rd - Dr.Dre Headphones

A good number of gifts, including AniPang hearts, gift vouchers, beverages, will be offered to participants.

A Korean poster announcing an AniPang Tournament

Crowdsourced Funding Assists Eat Your Kimchi Writers

2012-09-09T00:00:00-07:00

The extremely popular Eat Your Kimchi website, which provides humorous and educational videos on Korean culture and is written by two Canadian former English teachers, has succeeded in their quest to fundraise for their new studio and business venture on IndieGoGo. The saga they went through, though, showcases many of the issues that new entrepreneurs face in the Korean policy environment.

The founders of Eat Your Kimchi posted a request for funds last week, asking for $40,000 to pay for a studio and potentially a video editor. This is to supplement more than $100,000 of their own savings in building up their business in the country. Their story brings up many of the hurdles facing new international entrepreneurs:

Anyhow, we had a bit of a problem that we’ve been trying to work out for the past year: we don’t have Visas in Korea, since we’re not teaching. Currently we’re here on tourist visa’s which are indeed totally legal, but we’ve spent all our time since quitting teaching looking into how we can work in Korea and get a stable visa. We tried getting Entertainment visas, since we’re kinda entertainers, but those visas couldn’t be got without a company to sponsor us. And there’s no company to hire us for a business visa either, be it government or private.

This is serious problem not just plaguing Korea, but the United States as well. Starting your own business means foregoing the support of an established organization to sponsor visas, greatly decreasing the ability of new immigrants in starting and building new business ventures. In the United States, a study I often cite has shown that roughly 25% of new technology firms were started by immigrant entrepreneurs.

Immigration is a sensitive topic in almost every country. Even in Singapore, which has taken a very liberal attitude in the past few years to foreigners coming to the country and working in finance and high-technology, has recently taken a more stern approach to immigration amid concerns from the general population that the country has not fairly distributed Singapore's wealth across all citizens.

Nonetheless, these new immigrants are often a well-spring of new ideas for technology ecosystems. There is a reason that Silicon Valley is both one of the most common diverse regions in the world and also the top innovation hub. The region's constant change is a perfect environment to receive and utilize the news and information these newcomers bring to the ecosystem.

The next issue that E.Y.K. faced was actually purchasing the business license, an issue that I will take to task in the coming weeks in my series of research papers:

In fact, setting up a private business here is very expensive. Specifically, you need $100,000 to do so.

This cost is one that I think is quite shocking to many Americans who have considered starting businesses overseas and in Korea in particular. In the United States, one can open a business for a very low fee (in some cases with the help of services like LegalZoom, it might even be below $100). $100,000 in Korea seems unreal in comparison. Furthermore, seed- and early-stage venture financing in the United States generally provides cash in the range of $10,000 to $250,000 dollars for the first angel round. Just getting a business license could completely wipe out your bank account!

The final issue faced by E.Y.K. concerns the current real estate business model used in Korea:

Problem is, apartments in Seoul are significantly more expensive than the apartments in Bucheon. Most of our money is going into putting down the deposit for this apartment.

Korea continues to have two main systems for allocating apartments: 월세 (wol-se) and 전세 (jeon-se). Wol-se is a method in which a tenant places a deposit (known as 보증금 or bo-jeung-geum "key money") and also pays a monthly rental rate. In Seoul, deposits for Wolse apartments tend to be around $8,000-$20,000 for a bachelor's apartment depending on typical real estate factors. Monthly rent is $400-$1000 on top of that. Jeon-se apartments are all about the key money - a tenant places a large fee down and then never has to pay for any further rent. These are definitely more expensive, about $100,000 to the millions of dollars.

Importantly, the key deposit money is always returned at the conclusion of the housing contract. The landholder merely takes the interest of the money over the course of the tenant relationship. Historically, this system assisted the quick development of Korea's apartment infrastructure. The key money provided the funds for the next set of apartment buildings, and then the money would be returned to the original tenant (sometimes using funds from the next tenant). This system worked until the 1997 Asian Financial Crisis, when the whole system sort of collapsed.

The problem today is that it remains very difficult for new immigrants and young people to enter the Korean real estate market. While there is a cultural component, many Korean students live with their parents following college graduation more out of economic necessity than by preference.

One of the most important take-aways from this whole story is that start-up costs are crucial to a vibrant innovation ecosystem. The costs of starting a new business need to be lowered, and also depreciated slowly over the lifetime of the company. The license fees are probably easier to change than the entire real estate market, but Korea and other countries need to really focus in on the problems faced by Eat Your Kimchi and other budding entrepreneurs if they are to build up their innovation potential.

LTE iPhone for Korea?

2012-09-09T00:00:00-07:00

CNet is reporting that the latest iPhone is rumored to have LTE capabilities, and that Apple has been reaching out to Korean cell phone carriers KT and SK Telecom about offering the phone on their networks. However, the nebulous concept of "4G" has made the work of offering the iPhone on Korean networks more difficult.

4G technologies like WiMAX and LTE represent the latest round of cell phone networks that are currently being deployed around the world. EnGadget recently had a nice report that goes over the history of cell phone networks and the many different definitions for the generations of cell phone technologies available. Basically, the International Telecommunications Union has defined 4G to mean a certain level of bandwidth (100Mbps for mobile devices) and few "4G" technologies currently meet those standards. To make it even more difficult to follow, T-Mobile calls its HSPA+ network 4G as well, adding to the confusion.

But back to Korea's telecom companies. While the iPhone will (presumably) support LTE, CNet notes the difficulty of aligning the frequencies of the phone with the individual countries and their spectrum allocations:

Both carriers are authorized Apple partners selling the iPhone in Korea, and both want the new phone to take advantage of their LTE networks. But supporting 4G LTE is trickier than supporting 3G because different LTE networks around the world use their own unique frequencies.

In the U.S., Verizon uses a 700-megahertz frequency, while AT&T uses both 700MHz and 2.1GHz. SK and KT both use different frequencies. So the burden rests on Apple to manufacture separate iPhones with different LTE modems to support the various frequencies. That's why Apple doesn't offer Korean consumers LTE as an option on its newest iPad.

Korea is one of the few countries in the world with strong LTE subscriptions. The Korea Times reports that Korea currently has 8.4 million LTE subscribers, which is roughly similar to the number of Verizon LTE subscribers. This is indeed an impressive fact, and a reminder of Korea's penchant for being on the cutting edge of mobile technologies. Indeed, that means that we are approaching approximately 20% of Korea's population on high-speed, 4G cell technologies, and that doesn't even include the abundant Wi-Fi available throughout Korean cities.

Apple, KT, and SKT will all work out the details of these problems. For Apple, this issue will only become more frequent as more countries expand their 4G networks on more frequencies.