Solon Partners

I am always on the lookout for new ideas on how to spark entrepreneurial spirit and create fertile conditions for growth of innovative start-ups. As such, as soon as I got my hands on Senor and Singer’s book ”Start-up Nation. The Story of Israel’s Economic Miracle” I tore into it looking for what could be transferred or copied by Estonia.

In theory, the two nations have much in common – tiny nations with small populations and unusual languages, menacing presence of oil rich neighbors (that have more than on one occasions invaded), no abundance of readily convertible natural resources or cash crops, and a recent past dominated by central planning and socialism. In reality, the likelihood of successfully localizing the Israeli model in Estonia is rather low.
In “Start-Up Nation” Senort and Singer describe how within just 20 years Israel created a world famous high-tech economy and one of the biggest venture capital markets in the world. Authors illustrate the uniquely Israeli landscape that created synergy from the close proximity of great universities, strong gorvernment investment into high-tech R&D, and a particularly strong and innovative national character forged by the government through the national service sytem.
When in the 1990s the government provided funding to encourage venture capital to invest in Israeli startups – the synergy was commercialized into an $18.1 billion technology export industry (2008) from near zero. As Erel Margalit put it “Venture capital was the match that sparked the fire.”

“Start-Up Nation” leaves the impression that Israel’s success can be generally divided into three broad influences: investment into education, investment into military R&D, and investment into culture of innovation.

Investment into Education
Israeli educational system is very effective at producing scientists and engineers, while successfully absorbing Russian, Ethiopian and other emigration in the millions. According to the OECD, 45% of Israelis are now university educated, and these universities are very good.
In 2008, Weizman Institute and the Hebrew University were chosen as the best two places to work in academia (outside of the US) by Science magazine. Israel now produces more scientific papers per capita than any other nation. Israel is a top 10 producer of patents in the field of nuclear science. Hebrew University is ranked #12 in in global biotech patent rankings (Telaviv University is #21). Israel has numerous nominations for Nobel Prizes and has recently won several prizes in economics and chemistry. Of course, all of this has required consistent government support for investment into raising the quality of the education to the world class level.
Investment into Military R&D
Constant threat of military conflict with hostile oil rich neighbors has forced Israel to invest billions of dollars every year into military R&D. Investment into projects such as the Merkava tank, Lavi jet are known by name, but in addition to these specifically military applications, there were many international projects with readily transferable technologies and innovations in the fields of  satellites, missiles, optics, communications, cryptology and many others. The military R&D projects trained several generations of highly qualified and experienced engineers and technology professionals with unique cutting-edge know-how and expertise. Moreover, the Israeli government through its mandatory national military service targets for extra development the most promising leaders and scientists through specially designed military leadership programs.
Every year all high school students have an opportunity to try out for the elite military units topped by the Talpiot. Talpiot only considers the top 2% of the students, less talented students have to settle for less prestigious military units. If Talpiot  candidates pass the 41 month training course they then commit to six years of further development in advanced military service. Today many of the Isreali NASDAQ listed tech companies are founded or run by Talpion alumni. As a result the authors claim that:

In Israel, one’s academic past is somehow less important than the military past. One of the questions asked in every job interview is , Where did you serve in the army

Thus Israel’s start-up engineers and future CEOs have by age 25 not only faced academic challenges, they have learned improvisation and innovation in leading combat operations against terrorists with millions of dollars in technology, learned responsibility in leading troops into battles and made rapid executive decisions literally under enemy fire. Israel has masterfully managed the technology transfer in leadership and technology skills learned through modern military service into profitable uses in the civilian technology markets.

Investment into a culture of innovation
Authors describe how Israelis are brought up in a culture of improvisation and innovation on the “edge of chaos.” A key to survival in the environment with few natural resources and hostile neighbors is thinking outside the box and challenging conventions in order to even up the odds.
The geopolitical reality of Israel is that it is surrounded by 250 million Arab neighbors (some more friendly than others) that are financed by the proceeds from the sale of 1/3 of the world’s oil reserves. In such difficult environment Israeli leaders have had to adapt to finding unexpected and unconventional solutions. Isrealis have learned that to tease out the best from a team a real leader should be ready to resist group-think and defending the status quo:

Maximize resistance—in the sense of encouraging disagreement and dissent. When an organization is in crisis, lack of resistance can itself be a big problem. It can mean that the change you are trying to create isn’t radical enough . . . or that the opposition has gone underground.

This is something that is specifically taught to everyone in the military through the after-action review process for analysis of all military missions. The ability to accurately and honestly admit and assess own and teams’ weaknesses and thus find ways for improvement is highly valued and rewarded. Israelis learn from early on that:

It’s ok to try and fail. Success is best, but failure is not a stigma; its an important experience for your resume”

An excellent demonstration of this culture has been the Yozma venture capital fund of $20 million combined with $100 million investment into creating 10 Venture Capital funds (each made up of local VC in training, foreign VC, and Israeli investment bank/company). Today these funds manage approximately $3 billion of capital and support hundreds of Israeli high-tech companies. There are now over 45 venture capital funds actively operating in Israel, and Israel has over the same period doubled its share of the global VC investment with respect to Europe (15% to 31%). The key for gaining support from the VCs was that from the beginning the government wrote in a cheap buy out clause (equity plus reasonable interest if the fund was successful). The idea of the program was: “while government shared the risk, it offered investors all of the reward.”

Relevance for Estonia
Unique synergies of the Israeli ecosystem is instructive, but not readily transferable to Estonia. Despite strong efforts none of the Estonian Universities have ever broken into the the top 500 rankings, and are unlikely to do so in the next decade based on the current level of investment and international professors’/students recruitment policies. Under the given budgetary and political limitations it would be difficult to finance, but effective and rapid change can be achieved for example through making it possible for all Estonian university students to study abroad for 1 year, and making it a graduation requirement. But long term solution will require more investment form the state as well as strategic private partners.

Israeli military history is also difficult to transfer to Estonia. Estonia currently has virtually no military to civilian technology transfer. The last remaining Estonian military company E-Arsenal (which had been attempted to bring optical technology manufacturing into Estonia) was recently turned into a real estate company to manage its Tallinn property. Estonia should certainly consider providing direct government financing for private companies able to bring high-tech military R&D projects into Estonia. Estonia’s current active participation in NATO operations, NATO’s cyber-defence centre in Tallinn, and Tallinn potentially winning the EU IT headquarters project – Estonia should be able to participate at a minimum in communications and cryptography projects which could bring unique know-how with advanced technologies to Estonia.

Finally, there is much to be learned from the Israeli experience of venture capital incubation through building incentives for privatization into the program. The likelihood that local VC firms begin to strengthen and emerge would be significantly enhanced by this approach. The private VCs are much better able to deliver the “smart” part of smart money – by providing, in addition to investment, better level of access to credible mentoring, introductions to international investors, top professionals, prospective acquirers, new customers and strategic partners. This seemed logical enough for the Irish in 2008 when they launched a €500 million “innovation fund” designed to copy the Yozma model.

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Theo Paphitis one of the stars of UK’s Dragon’s Den has taken to advising nine companies with their plans to enter into rapidly expanding global markets. The whole process has been documented by the BBC in an interesting new series “Adventure Capitalist.” In the three episodes Paphitis takes his protégés away from the market report, rumors, urban legends and Googling, to face the actual target markets (Brazil, India, Vietnam).

Intellectually we all acknowledge that if it was easy, someone would have already done it, but our ego often tempts us to believe that we are the first to have some unique insight or solution to the problem. Initial contact with the target market is therefore often a surprisingly painful and uncomfortable experience for most entrepreneurs, creating challenges to their ego and often disillusionment. The mirage of a big fat market that is just dying to get your product, is replaced with a long list of new local challenges (often the very reasons that previous attempts at market entry by others have failed). If the CEO’s can weather the initial blows and roadblocks, and creatively re-focus his/her attention - innovative solutions can emerge.

Here’s three good examples:

Bremont (product - luxury watches)

Founded by two bothers as a fruition of their life’s passion for watches. Three years ago they started selling their distinctive aviation related designs and established some brand recognition in the UK market. So far they have invested over a £1.5M into building the brand. India is one of the fastest growing economies in the world, with a 300 million large middle class, and more per capita millionaires in Mumbai than anywhere else. Bremont seeks to become more global and expand into India’s upscale watch market.
Culture shock: Most Indian luxury watch customers prefer gold, gold plated and gold tone watches instead of the stainless steel like Bremont’s watches. Indian market penetration with a new product requires a celebrity endorsements, instead of the planned air force or other reasonably priced endorsements. Moreover, Bremont pricing strategy was unrealistic: seven different taxes and duties totaling over 75%, customer expectation haggle 30-40% of the retail price, and the dealer cut together more than doubled the expected watch price from the already high £6,500.
Resolution: Bremont listened to the customer feedback, and deciding to start very slowly with only one or two displays at shops in India before they can do proper advertising and marketing.

Regenatec (product - biodiesel converter kit)

Regenatec, a five year old start up company’s £500,000 in R&D produced the RG100 - converter that lets any diesel engine run on biodiesel. also sells “ethical” biodiesel (no food oils). India is the biggest diesel market in the world, also the fastest growing oil market.
Culture shock: Jatropha plantations in India are still in the experimental phase, with no regular commercial volumes available. Indian government heavily subsidizes standard diesel bringing its cost per liter down to 35 rupies, while jathropra biodiesel is at an economically uncompetitive 50 rupies per liter. With no reliable supplies of reasonably priced biodiesel, there is no way that Regenatec can pursue its business model in India. Finally, the conversion violates Indian vehicle type certifications, and needs to be recertified after the conversion - a bureaucratic headache.
Resolution: Field trial stage with one bus and one generator, and seeking $2 million to continue entry into India’s market.

Marmite (product - English spread for toast)

Small (£40M sales) subsidiary of food giant Uniliver, Marmite is a century old UK company that got popular during WWI (cheapest way to get vitamins added into peoples diet) as a replacement of jam on toast. Marmite has started to internationalize, and has had success in countries like Sri Lanka where they have 30% market share. Marmite seeks to target India’s very large middle class of moms that make the meals for their families.

Culture shock: Focus groups showed that Indian moms thought that toast with Marmite tasted strange, smelled funny and reminded everyone of medicine. Most Indians simply did not like Marmite on toast.

Marmite refocused, and pitched the spread as a cooking ingredient, a type of flavor enhancer. Marmite consulted with Indian chefs to create some dishes for new focus groups and testers. Turns out the potential customers really enjoyed the yeasty and tangy flavor that the spread added to Indian food.

Resolution: Marmite was able to approach the Indian market from another angle by pitching their spread as a cooking ingredient. They also understood that market entry will require a robust marketing strategy with an initial investment of £500,000. Marmite decided to get a local celebrity chef, advertising, in-store displays and sampling, recipe campaigns and other targeted promotions. Marmite does not expect to turn a profit for 3 years, plowing all revenues back into marketing, but remains optimistic about the prospects of success in India.

Paphitis is an experienced entrepreneur that started out as a tea boy and filing clerk, but now is on the Sunday Times Rich list of the wealthiest UK residents. He made most of his fortune with the £100 million sale of Canadian underwear retailer La Senza.

Much of what he has to say seems simple and obvious - but very difficult to actually carry out - as most true things in life. Theo’s commentary is available here.

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We all have our favorite “computer guy,” “theater gal” or “tax guy” – to whom we turn to, and who’s sage niche expertise we blindly and gladly follow, because it just makes no practical sense to try to replicate their passion and depth of understanding. The system works great — a more personalized and astute human version of Amazon’s recommendation engine. Latest proof, a recommendation from my “quality reading guy,” and a very funny local author. He passed on this gem of an article New Yorker by David Owen “The Inventor’s Dilemma.”

David Owen’s story gives an insightful glimpse into Saul Griffith’s life – MIT’s supercharged “invention engine” who’s projects are financed by the likes of Google. Griffith gives a very practical description of how difficult it is sometimes to define from which side to approach global problems – technology or market.

Successful startups are lectured on the need to be addressing real market problems with their solutions. Easier said than done. Griffith found out that despite his invention of a simple machine that makes lenses for glasses so cheaply that they become affordable even to the poorest of the world, this was not the problem that needed solving. The solution actually already existed (cheap Chinese lenses), and the real problem was — lack of professionals to deliver prescription eye testing to the poor, for which Griffith had no technology solution.

Griffith’s also believes that capping greenhouse gases at levels currently recommended by climatologists to keep the global warming under control would require the biggest public works project in the history of the world and is financially and technologically impossible at this time.

It’s not the trilateral commission or some other shady organization blocking all the useful inventions – it’s just that coal (the most abundant fossil fuel) is simply too cheap right now, and the other energy technologies have not advanced far enough to be competitive. Griffith’s insights into power storage are concise and to the point:

Unfortunately the difference between the world’s best battery and gasoline, in terms of energy storage per kilogram, is not a factor of ten; it’s more like a factor of hundreds or thousands.

Griffith makes you wonder if sometimes we choose to narrowly solve technological problems because the alternative – changing social/market habits seems like a much more expensive quixotic quest. All start-ups, and especially “saving the world through green energy” start-ups, take pause to consider — will the technological solution you offer really solve the problem or merely expose the underlying social/market barrier.

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Buyology by Martin Lindstrom does not quite deliver on its cover claim of “How everything we believe about why we buy is wrong” but the book is a worthwhile intro to the topic of neuroscience marketing. People enjoy thinking that we are rational and calculating, but studies show that in reality we are often driven by chemical messages and backwards-rationalizing our decisions.

Companies have realized that using focus groups and self-reporting is often highly inaccurate because test subjects often do not know themselves why they prefer one product over another. This could also explain why 52% of all new brands and 80% of all new product launches, even if supported by major advertising campaigns, fail within the first few months.

This is where fMRI brain scans and STT electroencephalographs come in – measurement of target consumers allows advertisers to create truly effective targeted advertising. Now images and messages are tuned so that they have the maximum impact in releasing endorphins or dopamine. Interesting findings from the research in the book:

• Brainscans have revealed that the scary pictures and warnings how cigarettes “WILL KILL YOU” in fact actually activate the craving areas of the brain and increase cigarette sales.

• Seeing strong brand logos like iPod, Ferrari and Harley Davidson registered the exact same patterns of activity as viewing religious icons and symbols (crosses, Virgin Mary, Bible, etc).

• Cinnnabon’s pumping of bakery smells into the mall really does sell a more product.

• The new car smell is a specially designed aerosol spray that manufacturers apply before shipping their vehicles.

• Peanut Butter and Nescafe jars are specifically designed to release a maximum burst of product smell upon opening the lid.

• Bang&Olufsen’s remote includes inside a non-functional aluminum brick to add weight, because consumers were ready to accept the higher price for a more “substantial” product.

Maybe I am just too jaded, but I already believed that companies are using various subtle ways to increase our spending. So I have grown a thick skin and try to ignore the marketing messages. Apparently so do most people, as people could on average, according to Nielsen’s surveys,  recall details of only 2.2 commercials of all the commercials they had ever seen.

Lindstrom’s Buyology confirmed that companies are not satisfied with the dismal performance of advertising 1.0  and have taken sales to the next level by incorporating neuromarketing into the design of their sales campaigns.

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Superb post from the original and irreverent mind on Morten Lund. Lund found and/or invested in over 40 tech startups, among them names like Skype and ZYB. However the newspaper business proved to be Lund’s kryptonite.

In 2006 he founded  a free Danish newspaper that quickly grew to be the most widely read paper in Denmark with half a million circulation. Nevertheless, the top spot did not deliver sufficient revenues and despite help from his frends at Draper Fisher Jurvetson, money ran short. To keep the project going Lund commited DKK 105 million in  funding for the project (backed by personal guarantees. However, with the collapse of the advertising market the paper lost its life blood and was forced to close in 2008. [colorful description by Lund of the sinking ship can be found here and here]

As a result of the personal guarantees and facing a severe  liquidity crisis Lund was forced to declare personal bankruptcy in 2009.

Despite the stress and emotional drain of the government sponsored “re-boot”  Lund seems to have re-discovered his mojo and is back at it. Inspiring example of true entrepreneurial spirit! (Oh - and this should be a lesson learned for everyone regarding the net effect of personal guarantees).

Here is the message that he wrote to his fans and devotees:

This picture reflects UPSIDE DOWN TO ME
- and the WORLD IS 100% UPSIDE DOWN WHEN:

The Banks Are Out Of Money,

AIG got 180bio$ in Gov Aid – market cap today 5,3bio$

Im Bankrupt but feel better then ever.

Climate change has made Danish summers AMASING.

The Hedgefunds forgot to HEDGE.

56% of all twitter users follow no one.

Obama came out of NO WHERE because he made a deal with the weapon industry and therefor he can challenge doctors and pharma to on a HEALTHCARE REFORM.

People talk much more to each other during crisis – we suddenly have something in common.

Wireless power seems to be a consumer facing reality soon

I have been thinking lately – (to twitter or blog or video) – I wanted to write a story about how upside down the world is now – how much I have learned from my bankruptcy situation and how my world has changed again. Only for the better. In very short – I’m much better, sharper, ore alert and happier in this situation. I feel like I’m home and I feel richer then ever – since 90% of my friendships showed out to be non related to my wealth – and people still buy into my visions… BASICALLY: I started with NOTHING – and here we go again – Nothing + A Network that beats even the wildest imagination for a dyslectic from suburbia + a bag of experience that NOW consists of things NEARLY NO ONE ELSE ON THE PLANET HAS TRIED.

To entrepreneurs: TIME IS NOW

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Benchmark Capital’s Bill Gurley wrote in his Post that we may be on the verge of witnessing a drastic reduction of the venture industry.

Before joining Benchmark in 1999, Gurley was a partner at Hummer Winblad Ventures. As if that is not enough street cred, he has a background as a highly touted research analyst at CS First Boston. So banter of a 50% reduction from Gurley should be taken pretty seriously - considering the full implications for entire sectors of technology that are entirely dependent on venture financing. No wonder that the new mantra being repeated at all start-up events is “cash-flow is king.”

Mind you 50% figure is not a hyperbolic tweet taken out of context, but a very well reasoned analysis showing how  pension funds, insurance companies and foundations  have lost a lot of money by exposing their portfolios to more venture capital investments. The credit crisis  combined with the inability of  the venture industry to deliver significant returns from  IPOs or blockbuster M&A deals spells - reallocation.

Predicting that  institutional investors will likely cut exposure to “alternative assets” by reducing their portfolio allocation by 50%. Logically, Gurley expects a proportional cut in money available to those venture capitalists raising new funds.

This very much mirrors the comments from my contacts in the venture industry - trouble has hit home with many Estonian and Scandinavian VCs that have been unable to start new funds, or have to settle for unexpectedly small funds.

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On 23 July 2009 Apple  pulled the developer license for the one of the world’s most prolific iPhone developers - Perfect Acumen. The Pakistani development team led by founder Khalid Shaikh has launched 943 applications on iTunes - which  is about 5 apps a day, every day, for 250 days. This armada of apps was reportedly earning  a total of several thousand dollars per day (full list of his apps http://www.yappler.com/Developer/98920/Khalid-Shaikh.aspx )

Other development houses such as Brighthouse Labs have also capitalized on the strategy of releasing a flood of cheap simple apps, with over 2,000 apps available at $0.99. Together these two companies’ apps accounted for about 5% of all applications for the iPhone.

Shaikh’s revenue model was simple - develop simple apps such as news readers targeted at every major niche topic -“US Army News” (military) “WWE Updates” (wrestling), “Skin Care Updates” (cosmetics),”iSoaperStarsUpdates” (soaps) etc. The price of the app was $4.99, and their only function was to pull news feeds for internet sites with keywords for that target niche.

Over the course of 9 months and 900 separate reviews and approvals, Apple did not detect what it now asserts to be  hundreds of Shaikh’s apps using copyrighted images without permission. Clearly this shows that enforcement was not overly stringent during the past year. The mere volume of apps being published over such a short period of time under one developer name should have triggered some additional scrutiny.

The decision to ban Shaikh appears to signal Apple’s strengthened enforcement of its developer policies. Now that Apple has reached  50,000 app milestone, enforcement of application quality will likely go up the priority list. Even though the price of the apps is 4.99 or less, customer expectations are surprisingly high and buyers feel cheated when they realize that all they get is a second rate RSS feed.

It is important to note that Apple did not ban Shaikh because it sold applications with poor quality and low value to the customer (such a termination would be contractually very difficult to defend), but it had to premise the termination on the alleged IP violations. To improve customer experience Apple is certainly willing to enforce it’s developer agreements, and updated restrictions seem likely in the future.

Unlike the usual outrage by developers against Apple’s ban decisions, the Shaikh’s license revocation has been greeted with a modicum of support. Everyone agrees that  iTune’s customers in general are willing to tolerate only a handful of purchases gone bad and cases of buyer’s remorse before considering switching to other providers - whether that is going to push customers to look for big brand  and/or famous studio apps (read EA and ), jail-broken apps or downloading free apps from torrents.

Regardless of which of these three options  diverts customers, it is not good for independent developers. Shaikh was an easy target, but the diffult task is still ahead - it is in the interest of Apple and all indi-developers to resolve the issue of perceived value and transparency in application quality.

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Joltid Ltd, a British Virgin Islands company founded in 2001 by Niklas Zennstrom and Janus Friis, the team that created Skype, Kazaa, and Joost, is threatening to shut down eBay’s Skype service. Skype’s approximately 450 million users generated $500 million in revenues in 2008, a figure expected to grow to $1 billion for 2011, according to the Wall Street Journal.

eBay bought Skype from Joltid Ltd in 2005 for $2.6 billion, but the deal did not include the complete assignment or transfer of the “Global Index P2P software,” merely a license for this core technology component.

Joltid Ltd. still holds a key patent on the content distribution platform technology that allows Skype to manage bandwidth efficiently. US Patent number: 7480658 filed on 14 July 2004 lists Joltid Ltd as the owner, and the Estonian programmers Ahti Heinla and Priit Kasesalu as the inventors of the technology.

eBay’s 10Q quarterly report filed with the SEC disclosed that in March 2009, Skype Technologies S.A. filed a claim in the English High Court of Justice (No. HC09C00756) against Joltid Ltd. due to its cancellation of the software license, and Joltid counterclaimed for copyright infringement and license repudiation.  The outcome of the dispute will be determined by the UK trial scheduled for June 2010.

Joltid has now canceled eBay’s license, and if effective, the cancellation could disable the whole service, as re-engineering the entire P2P architecture for half a billion users around the world within 10 months would be a mission to mars. eBay would have to rapidly develop, test and roll out world wide an alternate non-infringing technology, license an alternate technology, or abandon the service altogether. According to the 10Q eBay has chosen to try to develop an alternative technology.

This kind of an IP disaster is reminiscent of the Volkswagen deal to buy various Rolls Royce and Bentley factories and assets, but failing to buy the Rolls Royce trademark which was sold to BMW. For more embarrassing IP disasters look here.

The moral for entrepreneurs - make sure that you get qualified advice when negotiating and documenting technology deals to avoid such colossal PR, technology and financial disasters. The advice applies equally to those start-up founder/heroes that fancy themselves Renaissance-men capable of playing any role in any company, consultants that attempt to give occasional IP advice as an up-sell on their other services, and those CEOs thinking that their in-house lawyers should be able to handle it - I mean - how hard can it be?

eBay and Volkswagen found out the hard way.

yrjo internet, software licensing

Sweden is traditionally sees as a bastion of individual rights, but on 1 January 2009 it took a big step towards big-brother-like monitoring of international phone calls, e-mail and internet traffic.

All of the parties in the ruling government coalition were in favor of the sweeping data tracking measures included in the FRA Law. Interestingly enough every single Swedish political party’s youth organization has taken a position against the law. No wonder the Pirate party is quickly gaining followers from various youth groups with its anti-FRA stance as a centerpiece of their platform.

The FRA law allows supercomputers to scan all cross-border internet traffic in real time for trigger words and phrases. Once a trigger word, topic, name or phrase is identified, the communications will be reviewed in more detail and investigated further by Swedish electronic security service FRA (Försvarets radioanstalt). Electronic data monitoring has been introduced in Sweden like in other countries as part of anti-terrorist measures. Civil rights activists are concerned that this kind of monitoring may be used significantly broader than just for identifying terrorists, but also to find other potential violations such as software piracy, or to monitor any individual, group or religion’s activities for any reason.

Electronic Frontier Foundation (EFF) has been speaking out internationally against the growing proliferation of such measures. EFF this month filed a lawsuit entitled Jewel v. NSA over Obama administrations refusal to turn over oversight records related to social network surveillance.  EFF described the allegations on its website as follows:

Evidence in the case includes undisputed documents provided by former AT&T telecommunications technician Mark Klein showing AT&T has routed copies of Internet traffic to a secret room in San Francisco controlled by the NSA. That same evidence is central to Hepting v. AT&T, a class-action lawsuit filed by EFF in 2006 to stop the telecom giant’s participation in the illegal surveillance program.

Running for President, at that time Senator Obama announced that there was:

little doubt that the Bush Administration, with the cooperation of major telecommunications companies, has abused that authority and undermined the Constitution by intercepting the communications of innocent Americans without their knowledge or the required court orders.

Now, in response to EFF’s Freedom of Informational Act demand for disclosure, President Obama’s administration has cited immunity and a “state secrets” exemption in refusing to turn over the records.  EFF now seeks to have a federal judge to review the records in camera to determine if illegal surveillance of Americans has been carried out.

The program is reminiscent of the Department of Defense Total Information Awareness (TIA) program revealed by the New York Times in 2005.   That program was exploring data mining that included the mapping of communications and related social networks, but was shut down by Congress in 2003 over concerns of the legality of surveillance. Of course after the Patriot Act and the amendments to the Foreign Intelligence Surveillance Act, most of  such surveillance has been legalized in order to find and fight potential terrorist activities.

If the Judge forces the turn-over of documents we may soon find out the level of monitoring applied to  Facebook, MySpace, Twitter and other social network communications. Meanwhile, we continue to remind people of the often forgotten obvious fact - your online posts and pics are not private or confidential.

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I am posting an update to a social media valuation post from last week. There is a growing chorus questioning the high valuations and viability of business models of the social media start-ups.

More fuel was thrown on the fire this week with the announcement of the results of the latest round of fundraising at Ning.

Ning, a social networking start-up, raised $15 million at a $750 million valuation this week. The application allows anyone to launch their own personalized social networks (i.e. an entire network of Brüno aficionados, fans of the HBO show the Wire, or the Silvio Berlusconi support group).

Ning has a lot going for it: vip pedigree of founders - Andreessen and Gina Bianchini, approximately 200,000 active networks created to date, 30 million registered users, and it is revenue positive  from the placement of Google ads.

To beef up the revenue model, the company will be rolling out is own proprietary advertising scheme, $25 premium service network subscriptions as well as virtual gifts. This series- E round led by Light Speed Venture Partners showed significant valuation growth over last year’s $500 million D-round.

The latest successful fundraising round however does not change the fact that revenue will still trail far behind the valuation.  David Dines pointed out that even if 10% of the 200,000 active Ning networks subscribers pay up for the $25 “premium” monthly service upgrade, this would generate $6 M of revenue per year.

Using the advertising multiple for  big social network sites suggested by Raj Kapoor (Managing Director at Silicon Valley’s Mayfield Fund)  of $.20 month of on site advertising revenue per user would add from $6 million active users an additional $14M per year for an approximate total revenue of $20 M per year.

Even for optimists, this kind of revenue numbers stand out sharply in contrast to the $750M valuation.

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