Steve! It's time to acknowledge the customers' voice.. here's mine! (Part 1)

Check this out.. Steve  Jobs and John Landry in the early 80's when he came TO VISIT ME at McCormack and Dodge (M&D).  That didn't even happen when I was CTO at Lotus!  By then, Apple had turned it around and I had to make the pilgrimage to Sunnyvale instead.

For those not as old as I (about 99% of the US population!) M&D was a mainframe applications powerhouse which I had the great fortune to be a late founder and CTO of from 1974 through its acquisition by Dun & Bradstreet in 1983.

Steve was visiting us was due to the fact that M&D was in a lead position in getting those big-ass mainframes to talk bi-directionally to them little-ass DOS PCs (1-2-3 in particular) and we both thought there might be something we could do with Apple too.

Steve was great to talk to, really had a grip a new world of graphical computing, but was grinding under the Microsoft wheel already and had a slight and justifiable chip on his shoulder given his obvious superiority of vision.  After all, MS was still in clunky DOS character mode against Steve's early, but deathly slow, first gen  Macs. That would have put the year as '84, the year the Mac was introduced, but I think we both look too young.  I would have been in my mid-30's if that was the case, yet it looks like I wasn't even shaving!  Even worse, I look like a J. Crew poster child against Steve's West Coast black vibe... what was I thinking?

Like many tech visionaries, Steve is short on patience, does not suffer fools well, and can be hard on both his own staff, his board and increasingly even his customers. Nonetheless, we hit it off well - arrogance attracts! We both supported the notion that customers need to be led.. they're able to incrementally advance the current state of the art, but will never create a disruptive shift provided by a totally new solution.  That's the job of technologists --  hands on technologists who are able to synthesize a new vision atop a new set of capabilities just presented.  Customers will then enthusiastically migrate from the old to the new, and begin suggesting incremental enhancement to the new product.  And that cycle creates great opportunities.

Stating this tech-leads-customers argument normally sends shivers through the marketing and sales operatives, but it's true.  To disarm them, I always use the paper 13-column Wilson-Jones accounting pad as an example.  The customers might have suggested to Wilson-Jones that they lessen the reflection of the paper by muting the color -- but meanwhile  Bob Frankston and Dan Briklin were at MIT building an electronic 13-column accounting pad called VisiCalc. Neither Wilson-Jones nor their customers ever thought of it and soon the paper accounting pad market collapsed!  Lesson: Never depend on your customers for breakthrough ideas - they come from practical technologists.  

At our meeting, Steve was right on the cusp of that kind of breakthrough with the first Macs. Who cares if the processors weren't fast enough then to run the OS.. it will come. So what if there was no hard disk, that memory was grossly insufficient and as opposed to the PCs, there were no apps.. live with it!  This is a breakthrough!  Don't you get it?

And so set the attitude of Steve's personal relationship with customers that has evolved over the years, culminating literally today with the unbelievable statement regarding the iPhone 4 antenna problems,  "you're holding the phone wrong".   My fear is that as he's getting older, he's seems to be getting both grumpier and dictatorial.  He's had a few tough years health-wise so I'm not surprised.  But in an increasingly large and competitive mobile space, that's not going to be a winning approach.  I may be wrong - after all his market cap now exceeds Microsoft.

I really respect all that he and Apple has done, but there's a dramatic intensification of attitude over the last few months.  I think this time he really DOES need to listen to customers -- particularly this one.  I'm here to help!

More to come!

Venture Summit East... and VC's, FinReg, Taxes and Whining

On Wednesday, I headed to HarvardBS to panelize on angel investing in a segment named "The Seed Council", a rather unusual title yielding thoughts of fertility.. or infertility.  I spent some time thinking how that applied to investing, but was fortunately interrupted by my fellow panelists. AlwaysOn does a good job of gathering interesting people and ideas and this panel was no exception. Unfortunately, we didn't have much of an audience since it was perhaps fittingly, the dead-last panel wrapping up a three day VC conference agenda. 

The panel line up included friend and moderator Gabor Garai, new friend and fellow traveler Elon Boms, and two other guys doing micro-cap funds who I had not previously met -- Tony from NYC and David from SF.  Here's the agenda item:

Early stage investors play a crucial role in the VC ecosystem. What are they looking for now?
Gabor Garai, Partner and Chair of Private Equity & Venture Capital Practice and Co-Chair of Life Sciences Team, Foley & Lardner
Elon Boms, Managing Director, LaunchCapital
John Landry, Managing Director, Lead Dog Ventures
Tony Tjan, General Partner, The Cue Ball Group
David Blumberg, Managing Partner, Blumberg Capital

Gabor did a fine job of herding the cats with some tantalizing questions about the state of venture capital and its impact on angel investing.  I'll leave my thoughts on that hot topic for another post, but what really struck me was David Blumberg's visible irritation about the impact of possible/probable Washington FinReg policies regarding VC income taxes and the alleged impact of same on innovation in this country. 

Although I don't want to pay any more taxes than next guy, I find the argument that the sky will fall if VCs now have to pay ordinary income rates (adjusted down in fact) on "carried interest" vs. keeping the status quo of paying capital gains rates to be highly specious and unfortunately, predictably arrogant.  Though the opportunity to engage David was there, I decided to hold back -- I'd much rather debate people I'm friends with than people I just met.. it's more sporting!

It would appear that thus far, this is a far more passionate issue on the left coast but I've heard a lot of gnashing of teeth here too!  During our panel, it was certainly reinforced by the hyperbolic statements from Blumberg virtually predicting that the entire innovation infrastructure will risk collapse if the VCs have to pay ordinary income rates on the 'carry'.  Unfortunately AlwaysOn has not posted the video so I'm depending on my feeble memory to support that claim, but frankly I was taken aback.  When they post the video, I'll update this post.

What really stuck in my craw is the ludicrous suggestion that the VCs are the guys taking the risk and therefore they need to be treated 'special' for it.  They're vociferously arguing that the VC partners 20% share of the 'excess returns' after fund capital is paid back (the 'carry') should continue to be treated as capital gains for tax purposes, at a dramatically lower tax rate compared to the FinReg proposal to treat it as ordinary income.  

Huh? For starters, VC's are NOT investing their money, or if they are it's a very small percentage of the fund size that WILL be treated as capital gains on their K-1's. Instead, they're investing OPM.. other peoples money!  So help me out with that 'investment risk' argument -- it's their investors that are taking the investment risk, not the VC fund managers.

What these fund  managers get as 'carry'  is what's called a 'BONUS' everywhere else -- if they do well they get paid for doing well! Bonuses for the 'little people' are ALWAYS treated as ordinary income not capital gains.  So the VC's comp plan isn't really much different from other industries.  They derive their salaries from the 2% fee income on committed capital, and the 'carry' is their performance bonus.  It's ordinary 'fee' income and that's not capital gains. If the argument is that their bonus is at risk, I'll be glad to introduce them to every other executive with a comp plan and who pay ordinary income rates on that bonus.  A bonus is a bonus... it's that simple.

If we really wanted to support innovation, then the management teams of the VC portfolio companies should be the folks taxed at preferential rates for exceeding their performance, not the VC's. These entrepreneurs are they guys and gals that took the REAL risk, yet they have to pay ordinary income rates on bonuses just like the rest of the working stiffs in this country.  Unfortunately, the VC argument implies that they've done more to make that innovation happen, a conclusion that's not only incorrect, but indicative of the chutzpah that still pervades an industry that needs (and is getting!) a serious injection of reality.  Ironically, it's a moot point anyway today - the industry as a whole hasn't experienced 'carry' income in ten years!  But I share their optimism about the future!

To be clear, I'm highly supportive of capital gains treatment for real investment gains (and losses).. the money kind, not the time kind!  The VC Fund's INVESTORS are entitled to pay capital gains rates because they INVESTED their money for the long term and took the investment risk, but the logic of claiming that a 'carry bonus' is somehow tied to investment risk of the VC partners defies logic.  And I should state that many VC's agree with my line of thinking here.  Even Union Square's Uber-VC Fred Wilson is in disbelief that his colleagues can actually look at themselves in the mirror after making these arguments.  He argues that if this causes VC partners to INVEST more of their own money, maybe they'll provide better governance and commitment than they do currently investing other peoples money -- but he concludes that 'carry' is nothing more than fee income.


So my VC friends... Despite the fact that I know, respect and appreciate what you do, I think it's time to pay your fair share, to stop the whining and to quit the 'Zombie lies' about how you're taking the risk and innovation is doomed if you have to pay more taxes.  It's getting increasingly pathetic and I know you can do better.  It was a loophole and now it's closing.. live with it.. and let's get on with re-building this economy.

Koko FitClub Featured in Scott Kirsner's Innovation Economy Column

Koko FitClub is featured in the Boston Globe today in Scott Kirsner's Innovation Economy column. As described wonderfully by Scott, Koko set out to reinvent the fitness industry by designing an integrated system incorporating silicon, software and the domain expertise of some of the world's top personal trainers in creating the "SmartTrainer", a custom designed strength machine that embeds the personal trainer into the machine by incorporating some amazing sensor-based software.

After an initial assessment of your strength and range of motion, the machine then custom builds and monitors YOUR personal training regimen, building reps and weights along the way as your progress to your specific programs goals. Exercises must be performed at a pace designed to maximize results and the machine monitors your movement continually against the prescribed timing.  This requires concentration, no headphones or boredom here but instead a focus that make the time fly by while ensuring maximum results in a 30-minute workout.  All results are backed up to your own web page where your can track your results on line anytime, anywhere. You are motivated since you actually can see and feel the results, almost immediately. And the ambiance of the location feels more comfortable as well - more like a friendly club than a mass-market gym.

Lead Dog Ventures is an investor in FitFuture LLC, the owner of the Needham, MA Koko FitClub featured in Scott's piece and the holder of franchise rights in the Metrowest suburbs of Boston. In fact, Lead Dog co-manager Adam Landry is the CEO of FitFuture and our friends Mike Lannon and wife Mary Obana are the founders and top executives of Koko Fitness, the franchisor.  Lead Dog is proud to be investors in FitFuture and we can state from personal experience as members, this is a new and compelling approach to revolutionizing the fitness experience. Like the growing population of Koko FitClub members, we are enthusiastic supporters of the concept, the execution and the results.  

IBM's "Camp" for a Smarter Planet

Attended the meeting.. only knew Charlie Lax (Mill’s must have had cigars!).. Typically boring IBM speeches but some interesting presentation by winners of the first ‘camp’ held in Ireland.  One company TreeMetrics measures tree growth.  Ugh.

Scenes from the Mass TLC Unconference 2009..

MassTLC 2010 Unconference was a great success once again. that's me with good buds Brad Feld (ex: Anyday.com BOD and MAT)  and Scott Durgin (ex: Adesso, Lotus, god knows what!).