Esther Dyson: Markets of Magical Thinking

KAZAN – Americans are great believers in the value of entrepreneurs and small business. That faith underlies the JOBS (Jumpstart Our Business Startups) Act, a new law that will make it easier for small companies to raise money and bypass the regulatory “friction” that firms encounter when they go public. The law assumes that people who can't find jobs may be able to find investors instead, and that small companies will be able to get the financing they need to grow bigger and hire more people. Angel investors, friends, and family will boldly go where banks may fear to tread.

The JOBS Act is an extreme example of Americans’ belief in people’s essential goodness, and everyone’s right to self-fulfillment. Every entrepreneur should be entitled to raise funding from willing investors. It is a uniquely American approach, and capitalistic in the best sense of the word, for it encourages (and democratizes) investment, rather than fueling consumption.

Small (under $1 billion) companies can raise money directly from small investors in a formalization of the “crowdfunding” approach, whereby a project’s principals post their plans on a Web site and ask for money, essentially opening up the initial public offering (IPO) market. The theory underlying the law is that a new set of accredited third-party marketplaces, rather than the overburdened Securities and Exchange Commission (which missed Bernie Madoff’s monster Ponzi scheme), will ensure that entrepreneurs tell the truth, and that investors know what they are buying. (Of course, that begs the question of how thoroughly vetted and reliable those third-party marketplaces and their vetting systems will be.)

While this initiative was born in the United States, many countries are wondering how to jumpstart their own entrepreneurial sectors, and may be tempted to follow America’s lead. So why do I hope that they resist that temptation?

Unfortunately, the JOBS Act is as likely to be successful as the US government’s earlier attempts to ensure that American families could buy their own homes. Low down payments, deferred interest, and other enticements made it attractive for people to buy their own homes (or to speculate with second homes) whether they could afford to or not.

Mortgage brokers were happy to get in on the act. Some were driven by an honest mission to expand property ownership; others were driven by greed. Some knew that the people to whom they were selling houses could not afford it; others simply did not want to know. Some played by the rules; others forged documents. The banks that originated mortgage loans sold their portfolios to investors who didn't really understand what they were buying. 

In the same way, the JOBS Act will ease life for some deserving people – and most likely attract many more who are less deserving. The new system will attract scam artists and promoters who will encourage unsuitable companies to seek investment and oversell the companies to individuals who can't afford to lose the money that they invest.

I wish I had more faith in the system, but the problem is not a lack of good people, good investors, or good entrepreneurs. The problem is that, without regulation, bad people take advantage of the good ones. While regulation and restrictions may hamper small business, not all regulation and restrictions are useless.
Yes, there are some wonderful, honest companies that deserve investment and can’t get it, but they are not that common. I see a lot of start-ups. Many are appealing and have good ideas, yet most of them fail. Now the quality of even the honest start-ups is likely to decline as more of them are established, and they will spend more of other people’s money before failing.
For example, with more start-ups, it will be even harder for each of them to find management talent and the right employees. Indeed, many people whom an entrepreneur might have hired will probably become CEOs of competing start-ups. Meanwhile, all of them will be competing for a finite number of customers, and those companies that make progress will then have to compete for scarcer scale-up capital.
Many investors in these startups are likely to lose their money. Even under the current system, many angel investors lose money. The best route to success in angel investing is to invest in, say, ten or more separate companies, so that you have the chance of at least one big winner. But, again, a broader investor pool is likely to reduce the average number of investments per investor, with inadequate diversification leading to many more losers than winners.
The faith that drives the JOBS Act is the same magical thinking that drives many Internet phenomena: people are good and everyone means well. But the Internet’s easy accessibility and low entry barriers have led to spam and malware and bad behavior; each new service starts out “clean,” but then ends up requiring its own regulations.
Just ask eBay, Google, or Facebook how much they spend on security, fraud detection, and the like. They don’t want to tell you, which says a lot. As on the Internet, so in real life: sometimes friction has a purpose.

Esther Dyson is one of the world’s leading entrepreneurs focusing on emerging digital technologies. As Chairwoman of EDventure Holdings, she has been at the forefront of analysis of these technologies’ impact on business, privacy, security, creativity, and politics. She has served as a board member or early investor in numerous startups, including Cygnus Solutions, Flickr, del.icio.us, ZEDO, Medstory, and Medspace, and currently focuses on startups related to medical technology, aviation, and space travel.

Esther Dyson: Is the Web Closing?

NEW YORK – Within the tech community, there is much angst about whether the Web is about to be “closed.” Will it be controlled by companies like Apple, Facebook, and Google, or will it remain “open” to all? Will individuals be able to reach any content they choose? Will developers be able to serve users on any platform?

These questions are not new. Fifteen years ago, in the United States at least, it was America Online (now AOL) that was closing the Internet. Millions of people were relying on it for Internet service and content. Today, AOL’s purported control of the Internet looks like a joke, but it was considered a real threat at the time.

The threats nowadays come from both new companies and new models. (More about governments some other time!) Facebook is getting a lot of press, owing to its omnipresence and its pending stock offering. Increasingly, many people go online to use Facebook and little else, while Facebook encourages people to stay on Facebook to play games on Zynga, shop through Facebook commerce pages, and so on. Will Facebook control who gets to talk to us?

Likewise, Apple not only sells hardware; it controls, through its AppStore, what applications we can use on our iPads and iPhones. Amazon determines which books we read. Google, for its part, is filtering our search results – both by focusing our attention on what also interests our friends, and by excluding Twitter and Facebook results from what we see (mostly because Google and Facebook/Twitter cannot agree on whether Google should pay them or they should pay Google).

Beyond these big players, smaller startups are increasingly focusing on apps – applications that capture a user and keep him or her safe from the open Web. These apps are typically cleared and registered by big players. For many people, Apple’s App Store is a benefit, because it ensures (for the most part) the quality and security of the apps. Various app stores perform the same function for Android phones, but with fewer restrictions and less security.

In short, you can choose from along a spectrum, with more security at one end and more freedom at the other. The Web’s openness or closure is not a matter to be settled once and for all, but rather a fluctuating situation (even if the Web takes on some other name). CompuServe and FTP (file transfer protocol, remember that?) were not the end of Internet history. The same is true of the World Wide Web. Nor will Google or Facebook and apps be the last word of the digital age.

The great thing about Internet companies is that they, unlike governments, can be relatively easily deposed. They cannot outlaw competition, and, though they can engage in anti-competitive practices and filter content for their users, eventually consumers and startups fight back.

Consider the Web site Pinterest – “Organize and share things you love” – which has recently gone from startup to 11 million visitors a week. Even more recently, it has attracted negative attention for secretly profiting from its users’ behavior and spamming their Facebook friends. Should we wait for users to notice, or should we call on some government to save them from their own blissful ignorance?

How can we distinguish between paternalism and our duty to protect people from companies with incomprehensible privacy statements? If people are happy with Facebook, why should we disturb them?

In a world where Facebook can go from dorm-room project to $100 billion IPO in seven years, it may seem careless to suggest that we can just wait for a backlash to come if one is necessary. But I think we can.

Of course, we can also be part of the backlash. In fact, paranoid bloggers and self-styled consumer advocates are all part of the workings of the broader market, which includes not just companies and activists, but also pundits and politicians, each with proposals to address perceived dangers.

Don’t get me wrong: collective action in the form of government interference will sometimes be necessary. The problem is that we are as likely to get bad measures – like the recently abandoned US attempt to enact anti-piracy laws that would have fostered wholesale Web site closures – as we are to get a freer Internet. (In general, antitrust enforcement is the best approach to ensuring an open market in a world where technology changes even faster than election cycles, though it, too, can be driven more by sentiment and fashion than by economics.)

We are now moving slowly from open data to a closed online world of Facebook and apps. Use of the Domain Name System (the address bar) will likely diminish, owing not only to apps, but also to a tragedy of the commons in which new Top-Level Domain names (.whatevers and .brands) confuse users and lead them to rely on the search box or links within apps instead.

At the same time, Facebook is responding (in its own way) to user and advertiser demands. Blogger Robert Scoble likes Facebook because it lets him manage and calculate his online popularity; I like it because I can limit comments (mostly) to people who are not totally crazy. And I can also write for Project Syndicate to reach (and hear from) a broader audience. None of this is all or nothing. Different individuals have different preferences; sometimes even the same individual has different preferences.

I don’t believe that we are actually facing a world of no choices; we have many, and it is up to us to select from them. I despise many people’s choices, but I prefer the world of the so-called long tail. By contrast, the short, fat front – where content is homogenized and individuals get either one central broadcast or something so tailored for them that they never learn anything new or encounter a disagreeable idea – is always more popular. But then, just when it seems no alternative is possible, some fearless entrepreneur comes along with something outrageous that, ten years later, dominates everything.

Esther Dyson, CEO of EDventure Holdings, is an active investor in a variety of start-ups around the world. Her interests include information technology, health care, private aviation, and space travel.

Esther Dyson: Peeling, Meeting, and Shopping

NEW YORK – In mid-December, while trying to understand what was happening in Russia, I checked Twitter and found a tweet that somehow signified everything. It was from a young woman, and it said, in Russian: “Gotta sleep! Tomorrow I go to [face] peeling, then to meeting, and then to shopping.” All three words – peeling, meeting, and shopping – were in fact the English words, rendered in Cyrillic.

What this reveals is that the Russian protests – called “mitings” – are no longer just for old people, radical extremists, or jobless, unskilled, feral youth. They are for sociable people who have time and money not just for politics, but also for shopping and, yes, even cosmetic procedures.

That is a big change from just a few years ago. My Russian friends – many of them computer programmers, but also some shoppers and business executives – routinely dismissed politics as the province of the naive or the corrupt. Many of the older ones chose careers in science (and then software), because it was the only kind of desk job you could get where politics mostly did not matter (and where Jews were allowed). These people avoided politics on principle, but also because they were afraid of losing their state jobs, or of disappearing altogether.

The younger ones were not afraid; they were simply not interested in a spectator sport that seemed irrelevant to their lives. Of course, no one could affect the outcome of a football match, either, but at least it was fun to watch – and the rules were clear. In Russian politics, as the old joke has it, the outcome is fixed in advance, but the rules are unpredictable.
So, what changed? Everyone points to Facebook and its Russian analogue, V kontakte. And they do matter. But the point is not just organizing a “miting.” Protests have been organized before – in 1917, for example. The exciting difference is in people’s minds, not just in their tools.

I once wrote that “every time a user gets information, it reinforces a little part of the brain that says: ‘It’s good to know things. It’s my right to have information, whether it’s about train schedules, movie stars, or the activities of the politicians who make decisions that affect my life.’”

In the same way, every time someone posts on Facebook, they feel empowered to speak as well as to read. One of the slogans of the protests is, “We are not cattle.” On Facebook, people are not cattle; they can comment and like things, and their votes are counted. In the old days, the state ran everything. It even picked the public’s heroes: cosmonauts such as Yuri Gagarin, child hero/martyrs like Pavlik Morozov, who allegedly denounced his traitorous father and was murdered by his family in 1932, and Alexei Stakhanov, who double- or even triple-fulfilled his production targets (depending on the version of the story). Actors succeeded or failed not on the basis of popularity, but on the state’s direction; imagine a world with only one movie studio deciding which stars to promote. 

Now, the kids are not afraid and they pick their own heroes. Yes, they have seen oil baron Mikhail Khodorkovsky imprisoned on questionable charges, and inconvenient journalists beaten or killed. But they have also seen their friends posting on Facebook with impunity, and can see their own comments there. They cannot imagine disappearing without a trace, as many of their ancestors did under the old regime, when it was dangerous even to mention those who were gone.

Indeed, they are also not worried about losing their jobs. By the standards of the protesters in the Middle East, for example, they are well off. Russia does not have the same demographic crisis – a large cohort of unemployed youth – that has catalyzed change in the Arab world. (Indeed, its demographic problem is just the opposite: not enough young people.) Today’s Russian crisis is not economic, but political.

But what does this all mean? How much more will things change, and how persistent will the changes be?

It is fairly clear that Vladimir Putin will be re-elected to the presidency in March; the votes will be counted properly, even though some may argue that the slate of candidates is unduly restricted. What is not clear is what will happen after that.

Today’s protesters do not want a traditional revolution. They are mostly educated enough about the past to fear blood in the streets. They want Putin gone, not punished (mostly); they realize that it is the system that produced Putin, who then reinforced the system. They want to reverse that cycle, putting an end to corruption, official impunity, and being treated like cattle.

Unfortunately, however, there is no obvious alternative to Putin. In the most benign scenario, Putin himself would evolve. After all, Mikhail Gorbachev, the last Soviet president, managed to change the system that produced him (though perhaps he did not change it enough).

If Putin and his team were to start changing the system – genuinely fighting corruption, and perhaps releasing Khodorkovsky – the response would be positive. But that may be as much of a dream as Stakhanov’s legendary feats.

Esther Dyson, CEO of EDventure Holdings, is an active investor in a variety of start-ups around the world. Her interests include information technology, health care, private aviation, and space travel.