Semantic enterprise elevator pitch (2 min video)


Thoughts on the Santa Fe Institute

A topic of considerable thought, discussion and debate for many of us long before a series of ever-larger crises, the Santa Fe Institute (SFI) chose the theme of complexity in regulation for their annual meeting this week. Prior to sharing my thoughts on the important topic of simplifying regulation in a future post, which will be covered more extensively in my book in progress, I want to focus a bit on SFI.

I was fortunate to attend last year’s 25th anniversary meeting at SFI, but this year I was only able to view the final full day via webcast, which was excellent. The official SFI about page can be found here, although having written many of these descriptions myself; I’ve yet to write or read one that captures the essence of the organization, people, or contributions, so please allow the liberty of a few additional lines in first person.

I have been following SFI regularly for over 15 years, and since moving to Santa Fe nearly two years ago have had many interactions. SFI essentially pioneered complexity as a discipline, but has also been a leader in what I refer to in my own work as a mega disciplinary approach to discovery, without which frankly many researchers and their cultures can become blinded, and discoveries stalled, with R&D performing substantially below potential.

One of several strengths at SFI is their ability to draw from a very broad universe of scholars, each of whom is a leading expert in a specific discipline, but also share an interest in complexity theory—which affects everything else, as well as the need to work across disciplines to optimize learning.

The intimate size and environment of SFI is no doubt partially responsible for attracting so many leading scholars to contribute and engage. After living in Santa Fe, visiting the campus and attending multiple events, with a great many exchanges with larger institutions for 30 years, I can certainly understand the appeal for permanent faculty, visiting scholars, post docs, and business network members.

This year’s event was organized by Chris Wood and David Krakauer, who are two individuals at SFI I have had the pleasure to get to know recently (forgive my informality here; it comes natural). David heads up the faculty and Chris divides his time between research, administration, and running the SFI business network. These two represent a diverse faculty and also make an interesting combination, with Chris being the calm diplomatic type while David exudes sufficient rebelliousness at times for me to wonder, despite his brilliance, how he prospered at Cambridge (due to my own rebel instincts and frustration with academia), until reflecting on his current role. It is precisely the challenge when shepherding deep diversity that brings out the best in people; one of several skills David demonstrates when leading groups.

A good way to learn more about SFI from afar is to view a sample of their research online, including videos. Their model, however, like many—is not perfect, as the institute is substantially dependent on donations in what has been a very uncertain time and economy of late, so for those who may be seeking a worthy tax deduction this year, I would urge you to consider a donation.  For larger corporations and foundations, I recommend exploring the SFI business network, which is similar in many respects to the experimental virtual network I operated in the late 1990s, but also benefits from the physical conference interactions throughout the year, not just with SFI scientists and staff, but also with other business network members. Several of our network members have also been business network members of SFI, so I have known quite a few over the past dozen years, including Franz Dill on our Kyield advisory board who represented P & G for many years at SFI. For corporate and foundation executives in particular, I highly recommend viewing a short video interview with SFI Vice President Nancy Deutsch to explore relationship options.

Unlike universities and federal labs that grew large physical empires with massive overhead, the small size of SFI, fewer conflicts, independence, location and talent attract exceptional human quality, providing a rare situation certainly worth preserving and improving. My hope for SFI is that the community and entity will continue to adapt, evolve, and forge a strong and diverse financial structure that could become a model for the future.

While it may not always be obvious to some of my colleagues in business and finance, the independent theoretical research produced by SFI is essential for thinking through and eventually helping to overcome the world’s most pressing challenges, which is from my perspective excellent long term strategic alignment for any mission statement.

Mark Montgomery
Founder & CEO

Large scale job growth requires new ecosystems

In July of this year Andy Grove wrote a thought provoking article: How America Can Create Jobs.

I reread the article this week, which led to spending my Saturday writing this article.

These are complex issues that often require a lifetime of immersion to understand, if ever, with both experiential and intellectual exposure. Generally speaking an economist is not qualified to discuss job creation—rather they are an excellent source for analyzing the impact and results. A career in one company or even one industry will not necessarily provide a good understanding of the topic, and a career in academia has proven to be more of a negative for understanding job creation than a positive, despite the confusion in media and academia.

Most jobs are created a few at a time by small business, born from need by entrepreneurs to make a living and/or fierce desire for liberty and then only grow under the right conditions, or environmental factors. I call the process, art, and science of crafting viable entrepreneur environments market farming, not to be confused with economic development, which often manifests in the form of government welfare programs. When ‘toxic chemicals’ are introduced to markets, which we’ve often seen from a variety of sources in the U.S. in recent decades, the result for job creation is very similar to toxicity in agriculture; barren fields. A good example of a very toxic application for markets is the current realization of moral hazard in housing where those who chose not to abuse the system are being punished  and are also being required to subsidize those who chose to abuse the system.

Another example still infecting markets today are thousands of smaller companies throughout our economy who made a daily choice for decades to play by the rules  and are now required to subsidize in a multitude of ways larger competitors who threatened our entire system. Moral hazard is at its core an extremely dangerous threat to the very motivation that binds our entire global economy together. Despite the wishes of many, voluntary markets are much superior to compulsory, even if highly dependent upon regulatory enforcement. Some lines are best never crossed, most of which have been crossed recently, which is negatively affecting job creation currently more than all other factors combined.

Markets can also be damaged by excessive harvesting, over grazing, subsidies, mandates, too many citizens dependent on government, market dominance, over consolidation, strategic interests, capital droughts, capital floods, excessive taxation, dysfunctional politics, fiscal imbalances, excessive debt, excessive greed, and last but not least; customers who don’t understand how to farm markets.  Markets have always been more fragile than most understand; otherwise society wouldn’t be so intent on destroying them.

Bubbles do not a durable economy make

I was highly critical during the formation of the excesses in the dot-com era, excessive outsourcing to Asia, the strategic venture capital model that emerged in Silicon Valley, and the expansion phase of the housing bubble. Most of my conversations were private; some were protected by confidentiality, and none were terribly popular. The red flags I raised almost certainly damaged my businesses and career, but in hindsight proved accurate. Note the ironic moral hazard (still) at play here…

The dot-com bubble was the result of a combination of excessive capital entering venturing from institutions chasing higher returns on far too large of a scale, and a new global medium that threatened to completely change the game throughout large sections of our economy. The combination of the Internet and Web didn’t alter fundamental economics nearly as much as disrupt and rearrange specific segments, but the growth and then enormous values attracted everyone from authentic entrepreneurs to fraudulent opportunists to entrenched institutions threatened with extinction; a process that continues.

I argued then that the historic over-investment in the medium completely disrupted a natural organic process well underway before the stampede of capital flooded (fragile) fertile fields of emerging commerce. If not for the dot-com bubble America would be much stronger today with a much greater number of strong companies poised for the future. Unlike housing, which was far more national, the dot-com bubble was primarily caused by Silicon Valley, Wall Street, the relationship between the two and their investors. It was enabled by the SEC and the White House which viewed the capital gains from the bubble as a positive (capital gains can be positive, but not in pump and dump schemes that just leads to higher government spending based on unsustainable bubbles).

India and China may have been negatively impacted from too much investment later, but in the earliest stage of web commercialization, public forums like the Asian Internet marketing discussion list were full of authentic, hungry entrepreneurs who were far more eager to learn than the majority of their western counterparts. Essentially what I witnessed in those early days of Asian e-commerce were not investors, observers or academics—but doers. During the dot-com era, while the U.S. was overflowing with prospectors infected with gold fever, Asian entrepreneurs were becoming the tool makers of the future with national support from policy, strategic investment, and trade negotiations that leveraged their strongest asset; the fastest growing and potentially largest markets in the world.

In the U.S. our policy favored entrenched interests, including capital and job flows to Asia, which remains true today. Most government agencies for example at the local, state, and federal level are still financially rewarding multinationals that are sending assets and jobs to Asia while cutting in the U.S.  BRIC countries must indeed think we are self-destructive fools—one need not start a global trade war to make wise decisions at home, and avoid suicide.

Lethal prescription for U.S.; easy money instead of fiscal discipline

One of the byproducts of the dot-com era was excessive centralization of wealth, particularly in and around Silicon Valley, Manhattan, and a few other cities, creating a negative spiral of protecting assets (again attempting to keep unsustainable bubbles inflated-improper use of capital) instead of creative destruction that favors job engines and long-term wealth creation. It also created resentment in flyover states that did not participate in either destructive strategic capital wars, or fraud, which was caused by moral hazard from the S&L crisis that I think contributed to the housing bubble.

The rise of Asia combined with the wealth effect of technology and the real estate bubble provided a potentially lethal combination to the U.S.  At the precise time the U.S. (and EU) should have been saving more, and retooling for a changing global economy to become more competitive—just the opposite occurred; cost of living in the U.S. went ballistic, as did the cost of infrastructure, healthcare, education and government; making it increasingly difficult for authentic entrepreneurs to build real, long-lasting companies in the U.S. (monetary easing?).  So venture capitalists, institutional investors, and multi-nationals focused primarily on two strategies for profit making, depending on their internal strengths; scaling in emerging markets and financial engineering. Most I’ve talked to privately don’t feel they had any choice, but they are wrong—I didn’t participate in the self-destructive mayhem nor did most others.

Until very recently, when the first real economic correction began in generations, Americans could party their way through a public university, obtain a degree, and if nothing else popped up get a job with a government agency and be set for life—our institutions are filled with mediocre and apathetic cultures because of it. The more gifted and/or driven students could join the stampede of financial engineers on Wall Street (or increasingly Silicon Valley) to harvest some of the excessive currency that had been printed over the years, get rich quick, and retire. Brilliant scientists could remain in academia forever, consult on the side, and sell some IP to obtain wealth without assuming much if any risk. While I am exaggerating to make a point, this is hardly the type of incentive structure, culture or environment needed to build new industries or strong companies like the early Intel, which after all moved the bulk of its manufacturing operations out of the Bay area long ago due to a suicidal cost trajectory from this very culture.

Market manipulation eventually fails; market farming eventually works

The problem that few in Silicon Valley would admit publicly until very recently is that California is just too expensive and prices need to fall dramatically in order to be competitive; an extreme case of the same disease facing much of the U.S. and EU.  A large portion of the capital invested in California is strategic and protectionist, and not free to flow to opportunity. For several years while I was a VC based in AZ, CalPERs mandated $8 billion per year in just one program to be invested in venture capital firms located within California borders, representing a classic predatory bubble maker, resulting in good companies starving throughout the U.S. while many undeserving ventures partied hard in California. Most states were either unwilling or unable to play capital warfare (this is still the national U.S. policy).

I was born in California and we liked living there otherwise but over decades we’ve seen a great deal of market manipulation under the guise of market capitalism. Populism mixed with political and market manipulation has now devastated the world’s strongest economy. The place that taught the world about the importance of creative destruction failed to practice the discipline; otherwise capital would have flowed to opportunities in flyover states. Instead, other states were viewed as competitors and Asia was viewed as the answer, but California was over estimating its own community and underestimating others.

The good news is that many other areas in the U.S. have become far more competitive on costs with relatively competitive human capital, particularly for tech manufacturing of the type Andy Grove discusses. The bad news of course is that healthcare, education, public policy and bureaucracy are acting like chains of economic repression to emerging companies, either directly or through our dysfunctional banking system. Perhaps worse is that entrepreneurs have been lectured rather sternly for the past several years through policy that bigger and incompetent is far more highly valued by the U.S. now than smaller and competent, even though entrepreneurs create jobs, so we should not be surprised at the result.

Enough of the past; what about the future?

As Andy Grove suggests I think accurately, one of the key problems facing the U.S. today is our lost ability in scaling companies. Where I disagree with Andy is that he argues against new business as the primary answer to that problem, which probably reflects the fact that I am a founder of a start-up in a new emerging ecosystem and he is founder and advisor to an entrenched giant that emerged 40 years ago. I am certain, however, that the U.S. needs more creative destruction, not less, and that cannot be achieved through entrenched institutions—they simply have too much to protect and usually fail to cannibalize voluntarily, which results in economic stagnation.   Job creation on the scale the U.S. and EU need today requires new ecosystems—they will not emerge from entities threatened by same, or quite possibly even regions or markets they dominate (update– see this article for a post doc EDU).

What we need today is what Intel had in the beginning, as I recall portrayed to me a couple of years ago by a mutual friend Les Vadasz over lunch in Palo Alto. In the early days of Intel, several essential ingredients existed, without which they may not have survived, the most important being a customer willing to take a chance with a young company.  This simple dynamic of mature supporting emergent is prevalent in Asia, improving in the EU, Canada and others today, but has become almost completely absent in the U.S. culture. The fact that the first major customer for Intel was based in Japan may tell us something about how clubby U.S. industry was even in 1969; otherwise Intel would probably have found its initial customer in the U.S.

I have immense respect for the founding team at Intel, not only because of the great technology and wealth created that supports industries, governments, and foundations, but the manner in which they created it. They not only created a new ecosystem but taught many others how to farm markets, learning the hard way over time the high cost of toxicity to market farming.

Today however, we should not look to market leaders for job creation, but rather young companies attempting to create new ecosystems, like our effort in leading the semantic enterprise. Whether we call it opportunity, liberty, creative destruction, or simply progress—emerging companies are the job engines of our economy, particularly when built upon new technology ecosystems that only occur every generation or two. There is no alternative to the new company and ecosystem. Any culture or nation that fails to embrace this truism does so at their own peril.

The laws of physics eventually wins, even in cyberspace

“If a more advanced life form were given the task of providing to the human species a tool that possessed the potential to save itself from itself, it would have invented the Internet. What remains to be seen is whether the species is sufficiently evolved to properly manage the tool.”

– My thought for the day published in Comlink, 12/31/1996

The net neutrality issue is finally being debated, thanks not to populist politics, but rather the supply and demand dynamics of electromagnetic spectrum. Unfortunately, I believe activists and advocates have been exploited all along on this issue, often apparently without their awareness.

I beg people to not limit their scope or the debate to consumer publishing and communication, which may account for the super majority of time and bandwidth, but a tiny portion of impact. The modern Internet increasingly represents the service economy worldwide—meaning the majority of the U.S. jobs and economy, the marketing and transaction mechanism for global trade, banking, education, and e-government. Even raw commodities are substantially included in this debate as the pricing, marketing, education, trade and logistics are increasingly conducted over the Internet. Internet economics and global economics are now substantially the same issue, so this is much less an access and free speech issue today than one of global economic security—one cannot function without the other.

When was the net neutral?

For a very brief time following the commercialization of the Internet, the medium was a reasonably level playing field. Small businesses around the world were able to sell products through an uncorrupted distribution channel in a manner that was sustainable with modest upfront investment and could scale with organic revenue. From 1995 through 1997, or before the trillion dollar herd stampeded, a very diverse and functional economy was in its infancy. It was then a classic pay as you go system that was mutually beneficial to customer and vendor. The burgeoning sustainable economy was then substantially replaced by the largest price war in human history, and quickly transformed into a battle of manipulation between institutions, regions, and nations as the scope and scale of the opportunity and threat became apparent.

This historic and relatively pure medium, which I referred to as phase 1 of e-commerce (IJHIT- ISBN 0-9624990-8-0), lasted less than three years. As institutional investors began to study growth rates in cases like our incubator, even relatively challenged MBA analysts of the type that tend to filter institutional investments could see the best opportunity since the wheel, but few could see the collective damage of their individual behavior. To do so would have been career suicide anyway—truth wasn’t politically correct in this era.

Companies like Amazon were founded that would require several billion dollars in funding before break even, and many years of profits in the best of the best to earn back their ‘start-up costs’. Amazon was at least charging for products with a real business model; many that followed were pure capital predators, some of which went beyond giving away free services that cost tens of $millions to paying more for eyeballs than the profit margins of advertisers could pay for.

What drove the predatory insanity?

Some pension funds saw the medium as the answer to decades of under-funding amidst cost of living inflation that was increasingly self-created. University endowments began to achieve academic Nirvana where in some cases funds became so large with such high returns that the most expensive institutions could have provided free education, but did not—rather salaries, bonuses and overhead grew. Dorm rats who lusted for rich parties paid for by others were drawn to capital centers where get-rich-and-out investors manipulated relationships from seed to exit in what appeared to me to be systemic fraud. Governments surrounding the capital centers on the coasts became so fat on the feast that their self-destructive engines would soon redefine unsustainable. Fly over states suffered with an increasingly difficult moral dilemma—participate in the frenzy or starve? Does this sound like a level playing field?

It can be a very difficult emotional process for humans to voluntarily wean themselves from harmful or self-destructive practices, particularly after entire ecosystems become dependent and those involved are getting very rich, but at some point it must substantially find some equilibrium.

Bubbles tend to occur in clusters—the culture and skills tend to move from one bursting bubble to the next until people wise up. The financial crisis finally ended the price war, with a few exceptions like social networking that continued to be funded at worse odds for success than the regulated casino industry.

Who doesn’t like free?

The free or nearly free addiction model has been exploited since trade was invented. Unless tightly restricted and regulated—preferably with highly ethical folks involved, free empowers consolidation of power in those who control forms of duopolies and oligopolies, to include (eventually) national governments and financial centers with corporate partners. Sound familiar? Free invites and then demands manipulation, for it lacks the governing forces that enable diversified and dynamic markets to correct. For a good example look at the destructive forces of health insurance when healthcare costs appear free and unregulated; any such system will eventually fail when corrective action is not allowed in some form—whether competition, regulation or more commonly necessary; both.

In contrast, pay as you go empowers consumers and small businesses that create jobs in a diversified, sustainable ecosystem that ultimately government and institutions depend upon, without which they too eventually fail. To my knowledge no model has yet been crafted that works better than the simple exchange of currency for products and services.

Whether dealing with unaffordable housing, healthcare, or bandwidth, subsidies deemed necessary due to injustice are most appropriately dealt with by co-ops, non-profits, and governments—preferably in that order, NOT startups or corporations. Private corporations, particularly publicly traded giants, should not be in the subsidy business, as they are in the best position to expand dominant market share from one industry to another, precisely what anti-trust was intended to prevent. The inevitable result of market manipulation is some form of privatization of profits at the public expense with increasing influence over the political process.

Pay as you go is the most just referee I have found, sporting honesty, transparency and adaptability as virtues, which is no doubt why those threatened by same resist the simple model.

Why tail wagging the dog is bad for everyone

Having tested the hypothesis of self-regulation in the modern economy, with our global economy nearly collapsing, one would think the lesson would still be fresh, but we’ve seen the result with reform attempts regardless of party. The biggest risk moving forward however may well be a conclusion by the masses that regulation isn’t necessary, or worse—even possible. Lord help us.

We are still employing primarily industrial policy and tools for a computer driven economy, with only modest exceptions recently in real-time reporting by the SEC. While it’s true that national power in a global economy has been severely eroded, multi-nationals are not a viable alternative to functional government. We cannot expect multi-nationals to manage the global economy—management is legally bound to serve corporate interests within the limits of regulation, period—everything else is noise. I have yet to observe a viable alternative to functional government, rather only conflicted claims and ideological spin to the contrary.

The bandwidth proposal by Google and Verizon is nothing more than another long overdue wakeup call to national governments within a global economy that is increasingly conducted via the Internet and Web. When governments charged with the responsibility fail to regulate in some rational form, those with the greatest interests at stake tend to do so. This phenomenon is as predictable as the water wars in the wild west, the shadow banking system peddling 120% L to V paper, or states defending against open borders. That organizations would move to protect their interests should not come as a surprise—by law, public corporations in the U.S. are compelled to do so, regardless of claims to the contrary—we call it fiduciary responsibility.

Mark Montgomery
Founder & CEO

Web 3.0 Leaders Look to the Year Ahead

Jenny Zaino at asked a group of us to provide predictions for 2010. An interesting mix and worth a close look, particularly for those seeking input from the front lines of Web innovation.

Maya in the global parcel delivery business

A few months ago we decided to produce a series of papers in story telling format to better communicate the value of our Kyield system for decision makers in large organizations, rather than the normal highly technical use cases written and consumed primarily within the scientific community: ‘Semantic Scenarios for the Intelligent Enterprise’.

I just posted a new use case in the series:  Maya in the global parcel delivery business.

While these cases are hypothetical in nature, they are based on countless conversations to include formal audits in my consulting firm that pre-date the commercialization of the Internet, and even productivity software, but involve highly sophisticated state-of-the-art technology– we are finally resolving these complex issues even if the world has yet to deploy them. In this case I have attempted to demonstrate several very important issues impacting all of us, using the stage of a fast growing emerging market and mobile workforce to illustrate the challenges and potential. A few of the issues I attempt to demonstrate include:

  1. The structural problems with intellectual property today, particularly in a wired world lacking security.
  2. Importance of innovation in the workplace, or more often lack thereof, and why.
  3. How to align interests between the individual, organization, and investors; critical as we’ve seen in the past 2 years.
  4. The consequences of not providing meritocracy and transparency in a hyper-competitive global economy.
  5. The benefits of attracting gifted team members in almost any industry, regardless of formal education.
  6. A lesson in how not being too greedy can indeed be the most profitable strategy, even in the mid-term.

I hope you enjoy the format and content. Feel free to email me with your thoughts in private:

Happy holidays to you and your family– MM

HBR debate … Think U.S. Tech Isn’t Healthy?

Laura D’Andrea Tyson contributed to the HBR debate with an article titled:  Think U.S. Tech Isn’t Healthy? Look at the Data.

A rich comment section followed. This is my contribution:

A very constructive debate that is no doubt having a broad positive impact, so you should all be proud of your public contributions — it’s badly needed from my perch. Many leaders have been having these discussions privately for years where I fear it did little good.

I believe Gary Pisano has it correct when he focuses on the trade imbalance. If all other theories to include promoting outsourcing were valid for the U.S. as a nation — rather than just global corporations and other nations, then the disequilibrium would surely have eased long ago.

I’m afraid what we have is a classic conflict between the fiduciary responsibility of leaders in publicly traded corporations on U.S. markets, and the reality of global economics with dysfunctional global regulatory bodies that lack the structure and ability to resolve such conflicts.

Some of the questions in these comment sections reveal a deep confusion that is prevalent in our society — many don’t understand how one can embrace global trade, yet complain about the results. The truth as I see it is that although we have a global medium with few restrictions, and we certainly have an interconnected global economy; we all still live in nation states, complete with an extremely complex web of trade law, currency policy, taxation, IP law, and wildly differing enforcement levels. We also have still quite different cultures, radically different cost of living, debt levels, environmental laws, subsidies….

Taken to its logical end state — the trade imbalance reflects structural impediments to market forces; otherwise markets would correct. One can argue that we are experiencing just such a correction now, and would have earlier if not for manipulation by the FRB, but then they have no control over the currencies of others, and we have little control over the silent barriers to market access. I believe that is why we are seeing intentional downward pressure on the dollar, which is at best a temp measure.

Higher educated and better trained workers in healthcare and house building does not balance the trade deficit — alt energy can help, but until we see common policy in currency as well as subsidies, and equal access to markets, it would require a remarkable miracle indeed for technologies deployed globally to correct one nation’s imbalance, particularly when that nation has much higher costs, yet the workers use the same automation, with unequal currency values.

Competitive taxation is a no brainer — an arms race type of investment with borrowed money very risky. A trade war would be foolish and self-destructive, but is a great concern to me given the scenario. We cannot spend our way out of this situation, and I see no technology on the horizon that has the potential to reverse the imbalance, particularly given that it would surely be deployed globally almost immediately today, thereby neutralizing any nationalist affect, even when the U.S. continues to pay most of the bill for global basic research.

This is not a happy situation. I did not complete my own book on global economics and innovation precisely because I could not foresee a transition that works for the U.S. given the challenge, short of magical enlightenment by trading partners, combined with a willingness to significantly downsize U.S. liabilities, and quick transformation of our learning ecosystem and culture. Quite a bit to ask even of an optimist — even if possible.

Mark Montgomery
Founder & CEO – Kyield
Twitter: @kyield