Tim Oren's Due Diligence

The Roving Eye: Clamatology, A Bio-Garage In Silicon Valley, Mickey The Crony Capitalist

I checked, it's not April 1st. This report on a use of prehistoric mollusk shells to estimate temperatures appears to be genuine. With a worldwide sample size of 26 such shells, it's not going to change science overnight, but it could prove informative in time. It also has multiple linguistic possibilities, leading to the informative but punishing comment thread on the post. Bonus points for the "shopped" illo, at least for those who follow AGW insider ball.

Waiting for VCs, or DHS, to knock. Outside of the probably excessive attention being paid to the amateur DIYBio movement, there are some serious folks working in minimal facilities. Rob Carlson documents one such, in an undisclosed garage in Silicon Valley. Whoever is behind it is attempting serious work - anti-cancer compound screening - but is lying low due in part to credible fears - documented by Carlson - of finding not venture capitalists but armed agents from DHS at their doors. There are legitimate issues of WMD proliferation here - Carlson himself has credibly proposed micro-brewing as a reasonable comparable to the potential scope and scale of low-rent bio-production. But an uncoordinated, antagonistic approach by bureaucrats toting guns is not going to lead to any sort of containment. It's more likely to cause the same swift proliferation of enabling knowledge as that sparked by the misguided Federal policies on cryptographic technology in the '90s.

The thug in the mouse suit. Back as far as the 60s, there's been a feeling that ugliness sometimes lurks behind the squeaky-clean, family-oriented facade at Disney. Maggie's Farm documents some of the recent questionable deeds of the mouse. You can choose from using the Federal government to extract fees from foreign visitors to help promote Disney parks, to suppressing politically uncomfortable content about 9/11, to getting a non-profit that exposed an ineffective Disney education product thrown out of its offices. And of course we all know about the 'copyright event horizon', ensuring that nothing created since the first appearance of Mickey will ever go out of copyright.

Startup Helps MSM Sites Become SEO Spammers

How often do you find a cross-over story about three notable Left Coast industries: venture capital, media, and -- err -- sex?

It seems that noted San Francisco sex writer Violet Blue did some checking on what the SF Chron and sfgate.com were doing with her content (NSFW WARNING) and didn't like what she found. Her past columns had been copied to another domain, all outbound links (and some punctuation) stripped, the articles split into multiple pages, the pages stuffed with keywords - some inappropriate, and festooned with pay-per-click ads. And it emerged that multiple domains had also been aliased to these dead-end copies. Now where have we seen that kind of behavior before?

Here I should mention that sfgate.com is apparently - by admission of the author - within the letter of her contract by making this use of her work. That relationship, now terminated, was based on a level of trust that she feels has been abused, and made no explicit stipulations on how the content can be reused. The interest here is what this incident may say about the ongoing behavior of the MSM online, and its implications for the industry's business model.

This occurrence is not a one-off. The Violet Blue post also mentions the LA Times as creating similar ad-stuffed dead end pages, also with a list of multiple aliased domains. What caught my attention was that both the Chron's and Times' alias lists incuded subdomains of one common domain: perfectmarket.com. Perfect Market is an LA-area startup that claims to:

[help] newspapers, magazines, and broadcasters with a web presence and other online publishers grow their revenue with little effort and no risk. Our proprietary technology solution better fulfills the needs of intent users – people who arrive at their sites through keyword searches seeking specific information – with exactly what they're looking for in our customers' online content. Optimized content with relevant ads generates higher click-through rates for advertisers, and dramatically more revenue for publishers and their ad network partners.

That glowing description does seem to fit the prosaic implementation discovered by Ms. Blue, so it seems safe to conclude that Perfect Market is the technology and services partner that assisted the Chron and Times in stripping the original content into its SEO'd counterparts.

Perfect Market is a well backed venture. It has raised over $20m in venture capital, the most recent round closing in February and announced yesterday. Interestingly, this round was led by the bankrupt Tribune Company, parent company of the LA Times. Perfect Market also has solid backing from more traditional VCs, including Trinity, Rustic Canyon and IdeaLab. (Mayfield also has a board seat, though no publicized investment.)

Again, nothing to see here from a legal perspective. The company is selling a service and technology to its MSM clients, who bear responsibility for its operation against content that they have bought or licensed.

There are three business perspectives that do emerge. The first is the potential reaction of authors who find their work used in this fashion, and the consequent ability of MSM sites to work with those with an established byline. Ms. Blue has pretty much covered that by example, so I will pass.

The second is the reaction of the so-far-unnamed party to the transaction: the search engine. The keyword and ad-stuffed dead end pages apparently produced by Perfect Markets's technology are isomorphic, from a search company's point of view, to those created by more questionable tactics such as scraping. The intent is the same: to spam the index. This is the behavior that routinely gets questionable sites shoved to Google's back pages, or banished altogether. One has to wonder just how long this type of abuse will be tolerated, simply because it's being practiced by a recognized media outlet. (And we can note in passing that the irony of an MSM that routinely suggests that deep links are 'stealing' behaving in this fashion is thick enough to spread on toast.)

Finally come the implications for the businesses of the MSM sites themselves. While Perfect Market suggests that what they are enabling is an exhibit of MSM brand power, reality would seem to be the opposite. It should be clear that neither the potential reader nor the original author are going to be happy with the existence of a keyword stuffed, link stripped dead end page. The difference between these pages and those of a more prosaic SEO spammer is simply the brand attached to them, which might entice the reader to click through. It should be clear that the Chron, the Times, and other MSM outlets behaving in this fashion are doing no less than milking their brands to the detriment of long term trust and value. It is a subtle, but telling, exhibition of their desperation.

Update: From a comment by Ben Metcalfe at GigaOM:

It looks like LA Times, Baltimore Sun, Orlando Sentinal, South Florida Sun Sentinal, Hartford Courant, Allentown Morning Call, Virginia Daily Press and the New York Daily News are all using this or looking to.

It's The Uncertainty, Stupid

An NRO reader reports a Q&A with a Fed economist:

Did he believe that the healthcare reform and related tax proposals, the proposed cap and trade legislation and the consequent increase in energy costs, the expiration of the Bush tax cuts, the agitation for higher taxes on the wealthy, the proposal to increase corporate tax rates, the proposal to increase capital gains taxes, the trial floating of ideas such as a national VAT and removal of the earnings cap on FICA, the more robust regulatory bureaucracy . . . did he believe any of these uncertainties were depressing hiring?

He stated yes, without a doubt and proceeded to relay a conversation he had with a local chemical company regarding their 2010 capital expenditure budget. When asked what the company intended to invest in 2010, the response was ‘nothing,’ not due to a paucity of good opportunities, but because it was impossible for the company to calculate a rate of return given all the uncertainty over cost of labor, energy prices, regulatory mandates and the like....

“No investment means no hiring and no new tax revenues. It’s the uncertainty, stupid.”

And I'll note that 'nothing' for a capex budget really means you are milking the business. Depreciation isn't just an entry on the balance sheet and tax return, particularly not for a chemical manufacturer.

Brains and Beta

Researchers at Caltech has linked the fear of losing money to a specific structure in the brain, the amygdala. Subjects in which it was damaged were willing to essentially disregard downside risks. The amygdala is linked to emotional responses of all kind of events, including threats, and it makes sense that something that might have evolved to mediate life and death fight/flight decisions is invoked in making the fear/greed tradeoff in investing.

It would be interesting to also know the neurological involvement in gain seeking. But while Caltech gets started on that, perhaps someone should do profiles on amygdala function in - let's say - VCs, day traders, hedgies, and Fannie Mae executives.

(Via Tyler Cowen.)

"Obama’s offer of small business financing is meaningless."

Here's why.

And here's why that's why:

Cruel, But Fair: Some Questions For Ben Bernanke

At Zero Hedge, some proposals for what Fed Chair Bernanke should be asked at his reconfirmation hearings. Some are quite technical, some understandable to all. A sample:

6. An important factor in the financial crisis (and a large part of the ultimate cost to taxpayers) was the implicit government guarantee of the GSEs. In part because of decisions you made, there is now an explicit government guarantee of every large firm on Wall Street. Has moral hazard increased or decreased over the past year?

You don't have to be a financial wizard to tell something's amiss. Gold headed for the sky, banks sitting on piles of cash, and the double ready to dip. There are a lot of avoided questions and evaded responsibilities that need to come home to roost. This might be a good place to start. RTWT.

Silicon Valley's Dirty Little Secret

Over nine years ago I wrote the following in a short piece for an Asian colleague who was interested in the 'Silicon Valley culture':

" The Valley is really an aggressive, colonizing culture that grows by importing immigrants, and has overspread and occupied part of California. By immigrant I mean anyone who moved from outside into the Valley, whether from another region of the US or from outside it."

It was therefore interesting to come across this recent post from a population geographer, who had arrived at a similar evaluation from his own direction. For instance:

"...in these global cities [including the SF Bay], two economic geographies share the same physical geography – and those economic geographies are in conflict. One set requires catering to high skill, highly paid workers and firms where cost is a secondary concern. The other involves occupations and industries where cost is very much a concern. The occupants of these two geographies have very different public policy priorities.... In a global city, particularly a mature and expensive one, the elite geography wins. "

"And where do these elite come from?

"This explains why, for example, not only have taxes gone up, but things like schools and other basic services have declined so badly in places like California. Traditional primary and secondary education is not important to industries where California is betting its future. Silicon Valley, Hollywood, and biotech draw their workers from the best and brightest of the world. They source globally, not locally. Their labor force is largely educated elsewhere. Basic education and investments in poorer neighborhoods has no ROI for those industries."

This is one half of the poorly hidden secret. While industry leaders will express pious support for local education and improvement, their actual exposure is limited: Immigrating employees with children will ask for salaries that can cover the costs of private schooling or locating in one of the high priced areas with decent schools. But since being an engineer, scientist, or manager of same doesn't necessarily breed true in the next generation, it's always assumed that most of the next wave of talent must be imported from elsewhere. Even if they are nominally Stanford or Berkeley grads, their birth certificates usually don't read 'California'. As far as the other population:

"If you are just an average middle class guy, why live in one of those global cities anyway? ... And frankly, the folks on the global city side prefer it if you leave anyway. Immigrants are unlikely to start trouble, but a middle class facing an economic squeeze and threat to its way of life might raise a ruckus. That won't happen if enough of them move to Dallas and rob the rest of critical mass and resulting political clout."

If this is sounding familiar, I suggest you read the whole article, which draws some worrisome conclusions for long term social and political impacts on the region and the US generally.

The other half of the secret? The post gives a hint:

"...an attractive environment draws diverse uses, then one becomes economically dominant and, through superior purchasing power, displaces other uses over time. The story ends when that dominant economic activity exhausts itself..."

Due to rising costs and regulations, and the effect of the Internet in reducing geographic specificity, Silicon Valley has been progressively moving its lower valued functions offshore: chip fabs, customer support, QA, documentation and lower-level code and data creation and maintenance. With them has gone a good chunk of the immigrant inflow, both American and international, which has shifted to ever more highly educated and experienced people. And it now appears that this generation of more senior offshore immigrants is more ready to return home, rather than making the Valley their permanent station in the global network.

This, along with a recession unprecedented in Valley history, and a government with little understanding of business, may be why Michael Malone has said that the area is now a 'sandwich missing its meat':

"...the big pull [of innovation] has always come from the thousands of fast-moving, risk-taking new start-up companies who find unexpected (and sometimes vast) new applications for those technologies.... Those companies aren’t there anymore. The crucial center of the tech world – new and fast-moving companies – the meat in the technology sandwich – is gone. Under the press of an economic slowdown, government regulations that have handcuffed entrepreneurs and venture capitalists – and perhaps most of all, an Administration that increasingly seems actively hostile to entrepreneurship and small business – high tech is hollowing out. "

It took decades to build up the human, financial and technological capital that has made the Valley what it is - for better and worse. It will likely take as long to dissipate that capital, so there is time for a correction. But the trends are in the wrong direction.

High Beta Personalities?

An interesting article in The Atlantic describes studies of a so-called 'orchid' gene, believed to indirectly code for a tendency to ADHD as well as anti-social behavior, violence and 'externalizing' (what we'd have called 'acting up' back in the day). The relevant evolutionary question is: If humans as both as groups and individuals generally enhance their survival chances by social cohesion, why haven't these negative alleles been selected out? Noting in passing that studies in which phenotypes are evaluated by necessarily subjective questionnaires make me twitchy, the studies cited in the article put forward a hypothesis with some experimental support: The same gene that creates the downside behavior is highly responsive, in a positive sense, to more supportive environments during childhood. It can apparently lead to either a problem child, or a super-achiever, depending.

Roughly 20% of the population have the 'orchid' allele in question. Leading me to wonder: What's the proportion of carriers in Silicon Valley in general, or in the entrepreneurial or venture capital contingents in particular? What kind of selection might be going on right under our noses?

“I’m not going to hire anybody in the United States....

...I’m moving. They are doing everything possible to destroy jobs.” So says Emerson Electric CEO David Farr, who was promptly attacked by administration officials.

He's right. Whether through incompetence or ideologically based intent, our government is damaging the economy and discouraging job formation during the worst downturn since the Great Depression. Take for instance, the misnamed 'stimulus'. Financed entirely by deficit spending, it's taking over a million dollars to create one 'job', often a public employee position that should have been cut to balance a state or local budget. From the same article, the private sector puts just over $300,000 of capital to work to create a job, capital less available because it's been diverted to government debt.

That's assuming business is willing to risk capital in the current environment, where one now must assess political as well as market risk. From the point of view of one small businessman, it looks like this:

Over the last year the Congress and Administration have:

• Printed trillions of dollars of new money, raising the risk of future inflation


• Borrowed trillions of dollars, sucking capital out of private lending markets


• Run up deficits that pretty much guarantee future tax increases


• Toyed with health care bills that will substantially increase the cost of labor
• Toyed with climate bills that will substantially increase the cost of fuel and electricity


• Demagogued industries with average to below-average profitability for making obscene profits that must be reduced (e.g. health insurance companies who make 3-4% of sales)


• Taken over whole industries (autos, banks) and run them to the benefit of favored political constituencies, even when it violates the law (e.g. trashing for secured creditors of auto companies in favor of the UAW).


• Demonstrated a disdain for money-making by imposing populist compensation limits on executives of out-of-favor companies and industries.


• Spent money in the stimulus mainly to add government jobs, every one of which is generally focused on making my life running a business harder. If you do not understand or believe this, you have not run a business that employs people.


• Shown a general philosophic hostility towards markets and capitalism

What sane person will put up risk capital, with a potential payoff years in the future, in an environment like this? Is it any wonder that analysts now think umemployment will reach 12 percent or higher? (More likely 20% if you count those who have dropped out entirely from discouragement.)

Mr. President, you're not helping. You're making things worse.

A Message From A Biotech Entrepreneur

This was originally sent to the Instapundit reagrding his posts on biotech innovation. Since I found it as a comment here, I'm going to take it as being an open letter. I'd be pleased to credit the author if he or she will e-mail me:

"I read with interest your links today on pharmaceutical and medical device innovation, including an article of your which I had not seen before. While what both said is true, it overlooks perhaps *the* major source of innovation in this segment: venture financing of start-ups.

By way of introduction, I run a young biological tools company. Our products will contribute directly to creation of a new generation of pharmaceuticals and of diagnostic tests. At the moment we are funded entirely by NIH, as the venture capital market is moribund. I also serve as a frequent reviewer at both NIH and NSF, on both academic and small business panels, and for a dozen technical journals where research results are disseminated.

These days big pharma does very little research. The innovation comes from the small companies, and those that succeed often acquired by big pharma, or license their drug candidates to them so that the enormous costs of clinical trials are absorbed by the much larger partner.

These small companies live on what can be substantial investment (hundreds of millions of dollars each) by venture capital firms. So the ability of a company to raise money will depend on the VCs being able to generate enough after-tax income for their few successes to fund their failures. Obamacare is squeezing this on both ends. First, the capital gains rate is slated to increase substantially. Second, the revenue potential for the putative new products under whatever form Obamacare takes will undoubtedly decrease. This also affects company value for any potential IPO.

That makes this space a much less attractive investment. Of course companies will still be funded, but they will be far fewer in number and the pressure on them to produce will increase from what is already obnoxious. Since success is partially a numbers game, there will be fewer products that come to market.

No, a company cannot live on grants. A $2 million grant award is a large one, but this is typically the amount that a company raises from venture sources for its *first* funding round (of many). And winning grants these days is really, really challenging: success rates are on the order of 15%. It is nearly impossible to fund a company of any size from grants alone -- only the academics can live on grants since their salary and lab overhead is heavily subsidized by their institution.

I should also note that there are many overhead categories that government grants will not cover, such as intellectual property prosecution. The agency funds the work, and expects you to publish the results, but will not fund obtaining patents. There is a commitment to commercializing new products!

That to me is the major threat to innovation under Obamacare: draining the life blood out of the small-business corpus. That's where the innovation resides, and that's what appears will be hit the hardest."