At lunchtime today I stopped by the San Francisco Civic center to listen to some talented people speak out against SOPA and PIPA. Flickr co-founder Caterina Fake, legend venture investor Ron Conway, Craig’s lists founder Craig Newmark and MC Hammer all took the microphone and condemned the legislation for its violations of law, common sense and economic good.

 It is hard to determine if congress is that easily influenced with campaign contributions from the old media music and movie industries or are they out of touch with the internet’s transformation of the world during the last 20 years. Did they miss the memo on the Arab Spring in which new media played a significant role in toppling three governments. Clearly they have miscalculated in choosing sides.

Congress has aligned with old media in an attempt to turn back time to $14 CDs and daily late charges at Blockbuster. Old media has chosen to lobby for protective legislation rather than take advantage of the internet’s capabilities through innovation.

Even if consideration is not given to the opponent’s charges that SOPA and PIPA will violate freedom of speech and due process, you have to question the wisdom of congress to pick a fight with the people that build and operate the internet. The people that know how to attract billions of daily internet views like Craig Newmark and Reddit cofounder Aaron Schwartz and many others who have been energized into activism to oppose congress’s threat to their beliefs and livelihood.

Even if new media loses and congress passes SOPA and PIPA, there will be an army of well educated, competent and economically advantaged new media internet opposition that will boil them in an ocean of electrons come the next election.

Matt Bai detailed and predicted the political influence of new media in 2007 in his book “The Argument: Billionaires, Bloggers, and the Battle to Remake Democratic Politics” and predicted Obama’s presidential success in part due to the creativity of Blue State Digital‘s harnessing of the influence of new media and the internet to help him. “The Argument” should be on every congressman’s night table though it might keep them awake for fear of their reelection.

A friend tweeted: “Headline from the NVCA OPTIMISM WANES FOR START-UP ECOSYSTEM AS VENTURE CAPITALISTS AND CEOS FACE ECONOMIC REALITIES IN 2012″. This blog post is a response to him since I don’t share this pessimistic view about venture capital but I could not fit it into 140 characters to respond with Twitter.

A Historical Perspective  

On an elevator ride to the heights of Boston to a free lunch at the Bay Tower Room to listen to Alex Brown pitch an IPO I learned how to read a prospectus and invest in technology. Accompanying me in the elevator was an old dog of a senior analyst from Fidelity with an apprentice analyst who was Old Dog’s charge.  I overheard this conversation 20 years ago, but Old Dog’s words are still fresh as when I heard them during the short interval of the elevators ascent.

Old Dog’s Rules for Technology Investing.

With a  Red Herring (another term for the S1 Registrations Statement)  in hand  for illustration and pointing for emphasis Old Dog said:

“First you look at the numbers, because you pay the premium for growth.”

“Then you look in the back of the book and see who is involved to see if you like them.”

“Next you look at the summary of the business. If you still like the deal, you take the Red Herring home with you, read it through and do the rest of your homework before making a buy recommendation. “

Look for growth, like the track record of the management and board, find an attractive growth business and do your homework. Simple? Yes and no. This was simple until 1998, after which  venture capital suddenly exploded. The number of venture capitalists, the amounts of money and the number of deals grew by staggering unmanageable  proportions. And temporarily old dogs rules were suspended. Everyone bought. First everything went up then everything crashed down in 2000. In the financial rubble  the mortality of even the best brand name venture capitalists became apparent.

Finite Limits of Venture Capital Investing

As I watched mine and other’s technology fortunes decline, I called Dick Shaffer, founder of Technologic Partners to get his view.  Dick had been astutely watching venture deals for three decades as a Wall Street Journal reporter and later as the publisher of the Technologic Partners newsletters he founded in 1984. Dick’s point was simple and clear, venture capital was a $15 – $20 Billion a year investment market. No matter how much money you invest you can’t really change the rate of real invention and innovation.

So fast forward from 2000 to 2011: we are back to where we started. Too much money and too many deals out strip the rate of invention and innovation. At a certain point, the quality of the investments sinks precariously.

If one looks at the chart based on data from Dow Jones LP Sources via Silicon Valley Insider, the annual amounts raised by venture capitalists exceeded the limits  the start-up entrepreneurial market can absorb in 5 of the last 7 years. On average, compared to the upper and lower bounds Dick Shaffer noted, about $5 – $10 Billion more has been raised on average per year than needed.

The cost of too much money invested is lower quality companies and plummeting venture capital returns. The limited partners that fund venture capital firms reconsider their poor investment returns from venture capital and invest less.

Of course everyone moans about the drought of capital, especially the venture capitalists. They get paid partly on their performance and partly on the amount of capital they have under management, usually around 2 – 3% per year. So if a firm has 5 partners and $1 Billion under management from raising 3 funds, the management fees alone amount to $4 – $6 Million per partner per year to cover salary overhead and travel. Hard to give up a good deal. No one I have ever known has accepted a salary cut without some protest.

We are seeing a correction.  Limited partners such as university endowments, institutions and wealthy individuals that invest in venture capital are investing less because the over abundance of capital compared to the market has reduced the returns. We might even see an under investment in venture capital until real returns rise.

Venture capital is not on its deathbed. Just look at the performance of firms like Accel, Greylock and Sequoia to name a few.  They are all following Old Dog’s rules and in the end so are the limited partners and so should every entrepreneur and start-up employee: look for prerequisite growth, partner with people you like, believe in the business and market and do your homework.

There is one challenge: Google Apps and Native Client (NACL) are less robust than Microsoft equivalents. It is essential to find a profile of users within the customer’s organization whose requirements can be satisfied with Google Apps. The technical profile for qualifying users are:

1. Microsoft file compatibility
2. User Customization
3. Workflow Customization
4. Apps and Software management
5. Policy and security management

Where a user profile can be demonstrated to be independent of Microsoft features and the transition costs quantified the business case can be made.  It is essential to find qualified projects and win the confidence of the customer so they will start the project dependent upon Google and third parties delivering important functionality at a future date. People like me who have worked for start-ups know how to convince customers to make this leap of faith.

Its not necessary to create a one to one map of Microsoft capabilities within Google Apps, but customers need to be encouraged to draw a line between those users that are dependant upon Microsoft capabilities and those that are not. The size of the set of Microsoft dependant users can be reduced with time by moving users to heterogeneous apps such as new tablet apps, new workflows like box.net and by enhancing Google Apps with Microsoft capabilities.

The customers that are the best candidates are those that are interested in moving IT and communications to browser apps. If managed service providers such as IBM IGS and Siemens Business Systems that currently hold enterprise desktop support contracts are convinced to become Google Apps partners, Google Apps success will be accelerated. If a technology refresh project can be identified, the ROI of the project can be enhanced because a hardware upgrade cycle will be eliminated.

This transition could create whole new companies to address new opportunities in the delivery of cloud computing to the desktop.

If an App is an enticing programmatic morsel that leads a customer on a trail to spending money or other type of engagement, the technical definition has not changed. But if the definition of an App is a heavy slug of code the definition of App is changing. I’m running a couple of twitter surveys and hope to publish in the begining of the 2o12. Please share your thoughts.

In a land of Internet nomads, will iPhone be a stepping stone or legacy?

Google Ventures’ Rich Miner recently predicted at a conference in Cambridge, Mass., that a significant numbers of people will disconnect from the wired Internet in 2 to 3 years, abandoning their computers for mobile devices.

His prediction, at the Xconomy forum on the Future of Mobile Innovation, raises some interesting questions about what such a future might mean for the Apple iPhone. One in seven adults relies solely on a mobile phone for voice communications, according to a recent Harris Interactive poll. A generational crosscut of this data reveals that wired telephones have almost no presence among the digital generation. Compared to the 25 years it took for large numbers of people to cut the cord to voice communications, liberation from the wired Internet will occur more quickly. Measuring from the introduction of the iPhone, it will take only one fifth that amount of time for the masses to begin to cut the cord to the wired Internet

When Internet nomads become a significant population, the iPhone will either be a fond memory of a pioneering technology or if still prevalent, it will be Apple’s proprietary legacy of equal distinction to the Intel 8086 and Microsoft Windows, a contradiction to today’s preference for open development.

There are three pillars of innovation to the iPhone, an attractive $200 entry price, an addictively simple mobile user interface, and the Apple App Store. Price is a very short term advantage in this world of relentless miniaturization and cost reduction. And Apple and Microsoft both proved that PARC’s “mouse” based user interface was an easily adapted royalty-free innovation. The iPhone UI will be one more nonproprietary innovation on that same continuum.

Is the App Store a lasting competitive advantage for Apple or an ephemeral pioneering innovation destined for business school case studies and computer museums?

The genius of iPhone applications is as a solution to inconsistent throughput of current mobile broadband services and the genius of the iPhone App Store is the standardization of application download and installation that is reasonably spyware and virus free.

The iPhone’s impressive arsenal of communications alternatives — UMTS/HSDP, GSM/EDGE, Wi-Fi and Bluetooth — should be sufficient to begin the nomadic Internet lifestyle now, if the build-out of mobile data communications infrastructure was not lagging mobile voice communications infrastructure. Well designed iPhone apps smooth out data service inconsistencies and provide a lot of value to AT&T customers who want to justify the iPhone’s acquisition and monthly data service costs.

AT&T, Apple’s exclusive cell phone network iPhone reseller in the United States, could not have created the community of diverse mobile data application developers and thus its population of premium customers without the Apple App Store. And even if AT&T could create this community of developers, it could not afford to staff its call centers with enough customer service representatives to overcome the user problems encountered in the downloading and installation of this diversity of off-deck applications. The App Store’s installation standards imposed on independent developers protect AT&T’s customer service staff from intervening in iPhone app problems.

But fast forward a couple of years, let the mobile data networks catch up and let the mobile device designers iterate a couple more generations of denser electronics, better battery life and faster processors. Most App Store offerings would be more efficiently hosted and run in a secure browser. Building on the personal privacy standards of browser technology is a very attractive option compared to the unresolved status of personal privacy on the iPhone.

When 80% of the Java, XML and Flash that one runs on a computer can operate on a mobile device without too much user frustration, most of the App Store applications become redundant. A standard SDK for controlling the mobile device’s hardware (display, GPS, camera…) from a browser and a security policy to restrict or allow access to these devices and data stored in memory is all that is needed to enable the growth of mobile device applications as rich and diverse as the wired Internet.

As the mobile Internet emerges, what will the iPhone’s legacy be? Will the App Store retain its popularity because it is a great business model for developers and advertisers? Or will competition, improved mobile bandwidth, a new generation of mobile devices and the advantage of open development obsolete the proprietary App Store?

Miner’s prediction of Internet nomads is almost indisputable. How much branded and open source technology that the nomads will hold in their hands is yet to be resolved.

Its a bad joke with a useful application. Too often I get drawn in by an inbound marketing site offer to “chat. ” And I’m disappointing to find that I am bearing my soul to a bot rather than talking to another human being via Liveperson. Its so frustrating to have typed 200 words to a descendant of Dr. Spaitso before I discover that it is incapable of responding to my needs.

Back to the joke. If you have not already watched the video link above the joke is:

The Dalai Lama goes into a Pizza shop and asks the chef “can you make me one with everything.”

Yes I know, slightly funny but irritating.

Whenever I am offered a “chat” I type this joke. If the response is a smiley or a frown I know that I am chatting with a human.

But if I get a response like “That is false information. Delete it.” I know right away that I’m on a fruitless journey.

The United Kingdom often appears to be the logical choice for an American company’s first beachhead in Europe. It is certainly one of the geographic opportunities where products can be sold with a minimum of internationalization and localization. But the United Kingdom is often not the right location for companies employing an inbound marketing model with significant sales volume booked by inside sales.Local language shatters the economies of scale that successful companies have realized from telecommunications and Internet marketing technologies in the United States. The EU is comprised of 27 countries with 23 different official languages, heavily weighted toward English, German, French, Spanish and Italian. Economically speaking, the  United Kingdom, Germany and France account for about two-thirds of the total GDP, with Germany having the largest share.

To the extent that sales and customer service relationships can be carried out via email and chat, local accents are not a factor. But when it comes to booking revenue and customer satisfaction, accents do matter. An inside sales person with a Moroccan French accent will perform poorly when selling into Paris compared to his peer who speaks Parisian French. Likewise a customer service representative with an East Indian English accent servicing the United Kingdom will be reviewed poorly in comparison to his peer who speaks English with a British accent. To the extent that conversion of inbound marketing leads rely on telephone communication, the business enterprise needs to be located where there is a rich labour pool of multilingual people who speak with the native accent of the targeted country market. There are only a few places in Europe where this can be accomplished effectively, Ireland, the Netherlands and Germany. Intuitively one would expect a rich multilingual labour pool in the London area but  salary, operating and real estate costs are prohibitive. Further, government subsidies are limited to capital intensive businesses. As a result, one does not find sales and service operations directed towards the entire European market in the United Kingdom.

Large sales and service operations of  Microsoft, IBM, Oracle, Facebook, Google, LinkedIn, Amazon, EMC2, eBay, Amazon and Yahoo are located in Ireland. There are a few firms such as Cisco/WebX, IBM, NetApp and Blackboard located in the Netherlands. When considering smaller companies, LogMein moved its sales and service operation from Budapest Hungry to the Netherlands because the multi-lingual labour pool was too shallow and SolarWinds opened sales and service operations in Ireland.

I can find representative offices of many of these American technology brand companies in the London area, but these are direct sales operations servicing local customers.

B2B technical support can be located where there is language proficiency. Customers will tolerate quality technical services delivered by a person in their local language, though accented. Such is the case of Getronics and Deutsche Telekom’s technical support centers in Hungary and Siemens’s technical support center in Turkey. If technical support can be delivered via email and chat, this function can be moved almost anyplace. Lionbridge and IBM have a promising technology that permits real-time semantic and idiomatic translation for email and chat facilitating a conversation between two people who do not know the other’s language.

In building a European sales and service capabilities, one must always remember that language fragmentation limits the consolidation of business processes using communications and Internet technologies. It takes time to implement an inbound model and opportunity will be lost if the operation needs to be moved because of high cost or an insufficient labour pool at a time when it should be scaling smoothly.

For inside sales models to work, websites need to be internationalized and localized and paid and organic search strategies localized.

Achieving measurable results in the local market with global web marketing campaigns can be  expensive because much of the creative and web technical resources need to be replicated in local markets with contractors or employees. Strategies and tactics need to be adjusted for local culture and preference. The thresholds and conversion expectations for SEO are different from country market to country market and require local expertise.

Translation needs to be idiomatic and contextual because buying search terms and creating content that is meaningful to potential customers is necessary for the inbound marketing to produce clicks, conversions and leads for inside sales.

Below is a table that explains by example how context is critical without the complexity of translation into a second language.

Mark has never uttered a derogatory word about Boston’s technology community. But so many in the venture and start-up communities have punctuated their criticism with “and Mark Zuckerberg  had to leave Boston to start a company.”  In late October,  Mark Zuckerberg  was interviewed by Jessica Livingston at  Y Combinator’s Startup School where he said “If I were starting a company now, I would have stayed in Boston.”

Finally everyone can stop comparing east coast and west, feel proud and  get to work starting, building and just working at companies without feeling embarrassed for our God given  longitude and latitude except maybe for its unfortunately long winters.

The Route 128 blame game that  started in 1990 as the minicomputer business imploded here that grew to biblical proportion  is now finally over. Its boring and serves no purpose.

All you folks that have been starting companies in the Boston area, it’s  OK,  Mark Zuckerberg said so.

Click to see Larry Summers explain how to build a sustainable prosperous regional economy is only 130 seconds

What Larry is saying is that the world is not flat but  “fluid.” Wealth will flow to regions of the world with sustainable competitive advantage. Those places where “non-replicable clusters” have developed are occurring more by design then by chance. The combination of state capitalism and education makes it possible for clusters except for the most differentiated to be replicated anywhere.

The economics of large institutions support this. Much of the employment by large companies such as IBM, Pfizer and Intel has been flat to down in the USA and the European Union. Many direct and indirect employees have been added in the high growth economies of the world such as China, India and Brazil. The trend began as off-shoring but hiring of employees to design, develop and sell products for the indigenous markets of the high growth economies is growing because these revenues  represents the future for these firms.

The GDP (ppp) of the of China, India and Brazil is greater than that of either the USA or the EU and growing much faster at nearly a 10% rate.

How should the region of Boston and Cambridge and the 495 beltway respond to the reality?

The current approach relies on innovative new businesses to pull the economy out of this economic downturn. This part of the “innovation economy” is widely covered by press and bloggers and endorsed by the Secretary of Economic Affairs Bielecki and Governor Patrick.

New business creation is an important for recovery but it should not be an exclusive measure. The state’s economic development strategy solely reliant on innovative start-ups is the equivalent of the state investing its entire employee pension fund in the venture capital asset class.

Economic development portfolio risk needs to be rebalanced with the proactive recruitment of the strategic expansion of the worlds large leadership companies to Massachusetts.

Building employment quickly by attracting the strategic developments of large leadership companies to Massachusetts will produce jobs more quickly. The Massachusetts Office of Trade and Investment facilitated the location of the business units of three  international businesses in Massachusetts last year that produced 800 jobs. That is the equivalent of 10 successful 3 – 5 year old  “c” round start-ups.

This is very complementary to a start-up innovation economy because one significant factor effecting the success of ventures here in the Boston area is the lack of large feeder companies that supply trained management and technical talent as well as act as an economic flywheel during down turns. If one compares Massachusetts with the California Bay Area, during the last 20 years we have produced one company with a billion dollar market cap where as the Bay Area has produced nineteen. Recruiting leadership companies to Massachusetts will remedy this gap.

The process for selecting target companies would involve private, public and academic leadership. The gross analysis would select a portfolio of targeted industry sectors expected to grow significantly in the next decade. Targeting companies in these sectors would be based on a granular analysis mapping the plans and strengths of these companies to Massachusetts’ attributes.

In this age of competing with state capitalism, deep economic recession and high unemployment there is a compelling case for greater cooperation between the public, private and academic sectors to create sustainable highly differentiated economic clusters in Massachusetts that will produce prosperity, increase per capita incomes, increase tax revenues and reduce tax rates.

Defining the strategic and economic development challenges of the Massachusetts digital economy in comparison to California’s trophy cabinet of home run companies provides no useful measure.  It leads to recrimination  and disparages a vague notion of local culture. Where can you go when you start from such a judgmental conclusion? No proven California CEO would move to Massachusetts and accept the remedial assignment to create a home run billion dollar market cap company. If Massachusetts couldn’t find a great CEO to build one of these companies, than right now, Massachusetts should not invest its attention and hopes in organically developed home run companies as an immediate  solution to our digital economy strategic and economic development goals.

How many people will step up to solving the problem as it has been defined: bad management, weak boards, risk averse VC and angel investors, culture requiring revolutionary change? Its a big obstacle to recruiting followers, especially from those identified groups.

Defining the digital economy in terms of its current and potential contribution to the Massachusetts economy is a much more appealing way to gain the broad support of fans of the digital economy.  A convincing story that the digital economy will improve the quality of life: more jobs, higher wages, lower taxes, high tax receipts, better education for our children … will create fans everywhere for the digital economy.

Identifying that Massachusetts has fewer  large successful “feeder” companies providing management and skilled technical and commercial personnel to the start-up community could be an actionable observation.

What could our fans do for us? One option is our fans in real estate, the legislature and academia could reach out with help from the leaders of the digital economy to Bill Warner’s Californian “home runs” and and “walk off the field home runs” to convince them to locate strategic business, research and development units in Massachusetts. Not a simple task but relatively easier and faster than the uncertain wait for Massachusetts home runs to occur organically to provide “feeders” for the Massachusetts start-up eco-system.

Aggregating fans based on a proposition of improved quality of life will draw a bigger popular audience for programs such as Bill Warner’s playbook and other entrepreneurial support and development programs to increase angel investing that would otherwise reach a narrower audience.

Quality of life is a measure of success that engages the community at large and convince the best and most talented people to want to stay in Massachusetts and make those talented people residing elsewhere feel left out.

Begin with what we have in Massachusetts. Great technology, a solvent government, health care, education. We have a few basement floodings but no earthquakes and reasonably affordable housing. If I were to continue with superlatives it could be considered a comparison to California.

Cultural revolution is a difficult to implement. It requires hierarchical organization that is incompatible with today’s social media driven digital economy community.

Leaders of the digital economy should set their goals based on metrics that the digital economy and its fans can measure quarter to quarter and year to year.  Home runs and billion dollar market caps are too abstract and take too long to capture and retain peoples’ attention.

Spring is around the corner, we’re hearing news about the Sox spring training. I’d be optimistic if it weren’t for Boston high-tech mavens. Every time I read a local blog, attend an event or read a recap I’m confronted with a negative assessment of Boston compared to the Bay Area.

I’ve been listening to this since 1990 when local VC’s and mavens declared it game over for Massachusetts because Cisco had clearly beaten Wellfleet and the minicomputer business succumbed to networked desktops.

Bill Warner compares Boston to the Bay Area using a baseball analogy comparing scoring to market caps of local vs. Bay Area companies. With all due respect to Bill, one of the most creative and sincere people I know, he has fouled out. Bill’s is not a lone voice in the wind. There are many top people obsessed with diminishing our collective self-esteem and retiring the side.

What good is it to chastise ourselves with our meager digital financial performance compared to the Bay Area? We don’t have Google, Apple, Cisco, Intel, Hewlett-Packard. What shade of  scarlet letter should we wear?

I just don’t see John Henry, Tom Werner and Larry Lucchino making a similar point about the dismal Red Sox pennant history to follow with a demoralizing analysis of New York Yankee superiority..

I can attest to listening to 20 years of  Boston vs. Bay Area bitching and seeing no results. It’s not actionable. Where is the list of funded actionable issues taken on by companies, industry groups, VCs and State Government where they have had an impact over the last 20 years? Doesn’t exist because no one has affected any change in the perceived conditions causing the Boston area to perform less successfully than the Bay Area.

We should most certainly be concerned with innovation and economic development. But maybe we should be doing it differently with a different attitude. I’ll leave this topic for another day.

This comparison is as effective as comparing one of your children to another. Each child is born with different abilities, intellects and passions. Twenty years of telling one child he is not as good as his or her sibling would certainly not produce a change in the child’s character or motivation and result in a high functioning, well-adjusted happy adult.

So mom and dad, speak softly and confidently, the next Mark Zuckerberg might be in the next room and what you say and how you say it my just affect his decision to stay in Boston.