Lunch Talk: Sequoia Capital's Doug Leone on Luck & Taking Risks

Sequoia Capital Managing Partner Doug Leone addresses risk taking in his Stanford GSB View From The Top talk on November 4. He also discussed the venture capital industry, what his team looks for in entrepreneurs, and more.



tags: entrepreneurship, vc, risk, management, investment

Lunch Talk: (@Yale) History of the Mortgage Market

Professor Geanakoplos describes securitization and trenching of mortgage pools, the role of investment banks and hedge funds, and the evolution of the prime and subprime mortgage markets. He also discusses agent based models of prepayments in the mortgage market.

00:00 - Chapter 1. Fannie Mae, Freddie Mac, and the Mortgage Securities Market
17:01 - Chapter 2. Collateralized Mortgage Obligations
22:44 - Chapter 3. Modeling Prepayment Tendencies at Kidder Peabody
35:40 - Chapter 4. The Rise of Ellington Capital Management and the Role of Hedge Funds
52:52 - Chapter 5. The Leverage Cycle and the Subprime Mortgage Market
01:13:51 - Chapter 6. The Credit Default Swap
01:18:36 - Chapter 7. Conclusion


tags: lunchtalk, innovation, invention, finance, risk, growth

Visa as iTunes for credit card phones.

This shows the incredible power of a dominant market player to force innovation upon its customers:

As of October 1, 2015, Visa will shift liability of fraud to merchants instead of card companies. Since dynamic card authentication offers better fraud protection, most merchants will opt to upgrade their terminals instead of having to deal with fraud charges. Fuel merchants will have an extra two years before liability will shift for terminals at self-service gas pumps.
 

Visa controls risk allocation within the payment system, which allows the company to be very flexible when new business models emerge. For example, to get a foothold in e-commerce, Visa promised web merchants that it will absorb credit card fraud losses. This approach let Visa enter a growing market for internet transactions and accelerate consumer adoption of the technology. Now, that it is in a controlling position, the company can start shifting risks back to merchants. Or at least Visa can make a very credible threat of the action because it knows, due to its access to all information about transactions, where the actual risk is.

With the right application on the wallet-phone, it can easily implement elements of social commerce too, including special deals, coupons, location-specific services, etc. - either directly, or as a backend service to merchants and banks.


tags: business, model, commerce, control, deontic, payload, risk, value, mobile

Contrary to common beliefs about the picket-fence approach, a good patent portfolio doesn't really protect a technology. In business terms (see below), the technology doesn't matter. Instead, patents enable the portfolio holder to screw up create intolerable risks for the competition's business model.

What disrupts incumbent firms in Christensen's story is not their inability to conceive of the disruptive technology: like Amit and Zott, he identifies the root of the tension in disruptive innovation as the conflict between the business model already established for the existing technology, and that which may be required to exploit the emerging, disruptive technology. Typically, the gross margins for the emerging one are initially far below those of the established technology. The end customers may differ, as may the necessary distribution channels. As the firm allocates its capital to the most profitable uses, the established technology will be disproportionately favored and the disruptive technology starved of resources. Christensen quotes Andy Grove, former CEO of Intel, ‘Disruptive technologies is a misnomer. What it is, is trivial technology that screws up your business model’. The root of tension [is] the conflict between the business model established for the existing technology, and that required to exploit the emerging, disruptive technology.

Henry Chesbrough, Business Model Innovation: Opportunities and Barriers, Long Range Planning, Volume 43, Issues 2-3, Business Models, April-June 2010, Pages 354-363, ISSN 0024-6301, DOI: 10.1016/j.lrp.2009.07.010.
(http://www.sciencedirect.com/science/article/B6V6K-4X0MPJN-2/2/06b7077564ed4d7c6266cafac731df5d)

tags: technology, competition, system, business, model, control point, risk, quote, innovation,

Innovation in higher education.

BBC reports that psychology professor Michael Bailey at the Northwestern allowed a demonstration of a motorized sex toy during his lecture:

On 21 February, psychology professor Michael Bailey held a lecture on sexual arousal, with a focus on certain aspects of female physiology, according to a statement he released on Wednesday.

"Student feedback for this event was uniformly positive," Prof Bailey said.

The demonstrator, Faith Kroll, told the Chicago Tribune she enjoyed the attention.

Everybody seemed to be happy, except The Northwestern's president, who said he was "disturbed" by the event.

tags: innovation, education, risk, information, technology, biology

Trade-off of the day: Efficiency vs Care

NYT reports about the growing industrialization of healthcare in the US:

As recently as 2005, more than two-thirds of medical practices were physician-owned — a share that had been relatively constant for many years, according to the Medical Group Management Association. But within three years, that share dropped below 50 percent, and analysts say the slide in physician ownership has continued.


For patients, the transformation in medicine is a mixed blessing. Ideally, bigger health care organizations can provide better, more coordinated care. But the intimacy of longstanding doctor-patient relationships may be going the way of the house call.

I think deployment of IT in healthcare is likely to increase. Small practice doctors will have harder time competing with large hospitals not only because they'll have weaker position negotiating with the government, but also, due to the economies of scale/scope effects, their malpractice insurance premiums will be higher and return on IT investments lower.

An article about further research into the Long Tail theory:

The Wharton researchers find that the Long Tail effect holds true in some cases, but when factoring in expanding product variety and consumer demand, mass appeal products retain their importance. The researchers argue that new movies appear so fast that consumers do not have time to discover them, and that niche movies are not any more well-liked than hits.

I think the key issue here is the difference between the type of content and delivery option used in the studies. The original Long Tail hypothesis was tested on a large online digital audio collection, while the new research uses Netflix data on movies ordered via mail. In the first case, the risk to consumer to waste valuable leisure time is essentially non-existent. Audio download takes very little time and it's easy to try a song and dump it after a few seconds.
It's different with Netflix movies, though. The waiting time for a movie is at least one day, and if the user plans for a having a good time, a risky bet on an unproven movie may not be worth it. Since we know that people, in general, are risk averse, choice of a better known movie is justified from a behavioral point of view.

In any case, the Long Tail theory seems to work best when "total consumption costs", including access and trial time, are close to zero.

tags: control, scale, selection, risk, payload, distribution, entertainment

Dilemma of the Day: risk vs uncertainty

According to Richard A. Posner, innovation is like love marriage love:

When one has to choose between on the one hand marrying one's present girlfriend or boyfriend and on the other hand continuing to search for a "better" marriage partner, one cannot base the choice on a quantitative estimate of the probability that one choice will have better results than the other. A businessman who has to decide whether to invest in a project that will not yield revenues for several years is likewise making a decision under uncertainty because he cannot estimate the probabilities of many of the contingencies that, if they materialize, will make the project profitable or unprofitable.

From this perspective, the majority of an entrepreneur's decisions are economically "irrational". In other words, a different type of rationality has to be applied to innovation decisions.

12/28/27 Reuters:

Warren Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N) is starting a bond insurer that would help state and local governments lower their borrowing costs, and is likely to lure business from established rivals struggling with credit market turmoil.

Buffett, often called the world's greatest investor, is known for taking large business and investment risks.

He has said, for example, that Berkshire is willing to suffer a $6 billion insurance loss on a single storm. The company was able to boost premiums following Hurricane Katrina after weaker rivals reduced underwriting risk.

Buffet's risk profile fits the one of a risk-taker, while in reality his larger-than-life bets decrease risks because they enable him to shape the situation. He always buys control, not risk. He times his purchases so that his ability to control the developments in the industry is at a maximum. For example, now everybody is out of cash and he can come in and define his new rules for the game.

The network's patents are available royalty-free to any party that agrees not to file infringement suits involving its own patents "against the Linux environment." Under the network's terms, that environment includes not just the kernel at the heart of the open-source operating system, but also higher-level components including the open-source MySQL and PostgreSQL databases that compete with Oracle's own core products.
http://news.com.com/Oracle+bands+with+open-source+patent+group/2100-7344_3-6170717.html

Patent aggregation/pool as a way to stave off competition.