Are You in a Bubble?

Many people are talking about IPOs and bubbles, because it sells. Let’s jump in while the water is warm.

I see the question “are we in a bubble?” asked pretty often these days, and I think it’s the wrong question to ask. It’s like asking “are we in Ukraine?” which I can answer easily for myself: [waiting for location… ] no, I’m in the US. Are you in Ukraine by any chance? привіт to you 🙂

 Of course, bubbles always exist. Some are big, some are small. They are all unique, like precious snowflakes. I rode the dotcom bubble, and luckily I got a little bit more than a lousy t-shirt. That one was pretty big, and when it popped the effects could be felt in other sectors of the economy. I do see an obvious bubble now, but it is much smaller: the Facebook ecosystem.

Bubble

(from flickr)

Why is it a bubble? I’m not going to get into what Facebook is worth, or should be worth. No one can say. The more important issue is that Facebook is now flush with cash, and in a race to justify its valuation. That means desperately exploring ways to monetize its (almost maxed out) audience by building / buying new technologies. The buying part is where the bubble is: this is why Instagram could be acquired for one billion dollars, and why Pinterest is valued at more than that. Anything that Facebook may want to buy is likely overvalued now. Notice that I’m not saying that Facebook won’t justify its valuation one day, what do I know. I’m just not optimistic about it.

At the same time, there are lots of tech companies creating sustainable businesses while flying under the radar of the tech press (possibly because of the Facebook hype). Tech in general is not a bubble for sure. IT is evolving, cloud infrastructure is here to stay, Software-as-a-Service is becoming prevalent, etc. Take GitHub as an example: those guys are a bootstrapped company, providing a service that’s extremely valuable to businesses around the world. There are rumors that they are raising capital, which is what I would do in their place; they can set themselves up to be a big player in the enterprise space, where the big bucks are. I would bet some chips on GitHub any day if I could, and I wouldn’t touch Pinterest with four pairs of latex gloves.

As an aside, this is why I’m more optimistic about niche social networks like LinkedIn: they make a ton of money from their hiring solutions business. As long as enough industries are doing well, LinkedIn will make money from recruiters. Of course the global economy could collapse, in which case we’re all screwed (that reminds me: I need to stash some canned tuna, fresh water, and zombie repellent in the basement). 

On the other hand, the Facebook bubble could pop any day. Most of the world would barely notice, and LinkedIn would still get business from other growing industries. Disclosure: I own LNKD shares.

Parting thought: some bubbles are self-referential. Because nobody knows what a growing industry should be worth, enough people believing that we are in a bubble can spark fear and uncertainty. This in turn could cause a panic-based sell-off. From this little soapbox of mine, I kindly ask the tech press to keep things sane by doing responsible research.

By the way, I searched videos for “bubble” and found this movie trailer. Now I want to watch it.

Hacker News submission for this post if you’re interested.

 

The Real Problem with Facebook

The Facebook IPO went fine and dandy. Facebook raised 16 billion dollars. So the millon dollar qu… I mean the ONE HUNDRED BILLION DOLLAR question is what they are going to do with that treasure chest.

Facebook is a unique phenomenon in the history of humanity. Never before, a single service controlled by one company had close to a billion users. As impressive as that sounds, the question is what is means for a business.

So far, Facebook has defaulted to the laziest of all revenue models: ads. It is clear that Google is the king of ads, and this is because intention beats behavior. As someone who was sold search for many years, I can tell you one of my strongest selling arguments: when people search on your site, they are telling you exactly what they want at that time. For a large number of people on this planet researching purchases online has become routine, so there will be times when you know that a person is looking to buy stuff. If you can match a buyer and a seller, you’re golden. That’s eBay’s business, and it’s worth 50B. Google is bigger because of the sheer volume of queries it processes. Most of them are not about buying anything of course. However, Google ads really work for those precious “monetizable” queries.

The problem is that Facebook doesn’t have real search. So far they’ve bet the farm on guessing what people want, and not making them think about typing anything into a search box (I know this first hand). However, they haven’t cracked the code of behavioral ads; nobody has yet. Can it be cracked? Would it be enriched by adding spices? No one can say.

Fbads

Even if ads worked for Facebook, the potential for growth is very limited. Google has been trying to diversify their business and create another significant revenue stream for years. No dice so far. Twitter seems to have given up on that too, and they are betting on ads as well. So where does that leave Facebook in terms of justifying a 100B (or 90B, or whatever ultra-high) valuation? Will they start making hardware like Apple? Selling things like Amazon? BTW, Amazon is worth about the same as Facebook and they RULE E-COMMERCE (not to mention the growing contribution of their cloud infrastructure business).

Obviously Facebook’s asset are its billion or so users. The big bet is that some of those users (a tiny amount obviously) will some day pay a lot of money to Facebook. For what? Well, thanks to the hype generated by the IPO now they have 16 billion dollars to find out. I for one will stay out of this one, and watch from the sidelines. Welcome to the Popcorn Valley!

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The End of a Seven-Year Cycle: Leaving LinkedIn

Gentle readers, the time has come to pause my usual sarcasm and dry humor until my next post. Hope you’ll understand!

Warning: this post is very personal. It may be very uninteresting to others 🙂

In 2005 I started a search consulting business named Flaptor, which would later become known as IndexTank. Needless to say, we were not an overnight success. Like every small company we had our rough patches. These seven years have been the most intense of my life, and the intensity did not stop when we joined LinkedIn. Transitioning from a small startup into a successful, rapidly-growing public company without missing a beat is not for the faint of heart!

Before I go into the reasons I’m leaving, I would like to talk about what made this decision really hard. For starters, I have an immense amount of respect for Reid Hoffman despite not having interacted much with him. Having experienced the company from the inside, I know how much determination and drive it would take to build something of LinkedIn’s magnitude. Ditto for Jeff Weiner; my interactions with him have been spirited and thought-provoking. I have met several CEOs throughout my career; none of them were as persuasive and charismatic as Jeff. I am usually a very skeptical guy, so that speaks volumes about his ability to challenge points of view. He’s a phenomenal leader.

Unlike many other companies, LinkedIn is in a position to have a huge positive impact on the world. I was a teenager in a middle-class family at the dawn of the PC era. During that time companies like IBM, Microsoft, and Apple made my life better. Affordable hardware and software made it possible for me to learn about computers, and to develop a career in software. I believe LinkedIn can go beyond that, and improve the lives of people who were born much less fortunate than I (and most of my fellow nerds reading this).

Speaking of fortunate, I’ve been lucky to work with amazing people over the past few years. I greatly enjoyed my time with the Search team at LinkedIn; not only are they extremely smart folks, but they are also caring and fun to be around. I’ll miss them, and I hope we’ll remain in touch. Leaving this team was the most difficult part.

So, why am I leaving? I abhor clichés, so I’ll get to the point: I am exhausted from seven years of almost nonstop work, and I need a break. Over the years I’ve become accustomed to performing while tired, and I keep plowing through it while my body suffers. It’s a matter of time before that catches up with you.

It should be noted that LinkedIn is a great workplace: fast-paced work, cool products, tons of open-source software, great vision, meaningful mission (and even fantastic food!). While some may think it’s boring when compared to Facebook or Twitter, that’s just false. I wasn’t bored for a second at LinkedIn, and I have the attention span of Guy Pearce’s character in Memento. For example, LinkedIn has unique data about the world of work; one of the best teams of data scientists on the planet (led by my friend Daniel Tunkelang) is doing awesome stuff with it. I look forward to learning from their public work, as well as to seeing them at industry conferences.

I am very bullish on LinkedIn, and I will definitely remain a cheerleader as well as a shareholder. Of course the company has room for improvements, like any other workplace. As Jeff has said, there are tons of challenges that come with hypergrowth. LinkedIn has a strong set of core values that guide people’s decisions. Having read Tribal Leadership, I know how fundamental this is for any company. Zappos is an example, LinkedIn is another.

Change is always a mixed bag. I really liked managing an awesome group of people, but I know I need to take a break before thinking about the future. My plan for the coming weeks is simple: I’ll take a few naps, listen to music, eat well, catch up with my reading. I’ll try to keep writing interesting stuff here.

One final thought: my time at LinkedIn has inspired me to try to improve this world. I’m a cynical guy, so I don’t say that lightly; LinkedIn has a humanitarian side which is not common in the  corporate world, or even in the tech industry. I’d never worked at a company like that before. Technology has improved my life in countless ways, and I’m inspired by its potential to improve the lives of others. Here are a couple of videos that touched me recently:

Or I may end up working on a Google Killer someday, assuming they don’t kill themselves first. You never know 🙂

 

I’m a Small-Time Investor

I hate the phrase “angel investor.” I hate it with the fiery rage of one thousand Betelgeuses. There is nothing angelic about investing. In my mind, the phrase conjures images of wealthy patrons of the Renaissance who supported talented but destitute artists. In return, these patrons would obtain the erstwhile equivalent of karma points, Klout or whatever. Perhaps even a flattering portrait (your face with the “Brad Pitt” Instagram filter applied to it). Whoever coined the phrase “angel investor”, I want to have a few words with you. Hint: the first one starts with an f.

The problem is that I fit the definition! I like to occasionally make small-time investments (low 5-figures) in seed-stage startups with the following criteria:

 

  • I really like the founding team. I enjoy chatting with them, sharing experiences, feeling like I’m playing a minor role in their potential success.
  • I have a decent understanding of what they are trying to do (e.g. things that I’ve had professional experience with such as search software).
  • They know what they want, and won’t be easily steered by professional investors.
  • They have a very strong sense of ethics, and believe that what they are doing will add value to the world somehow.
  • Needless to say, I believe that there is an expectation of a positive return on my investment. This is no charity. I don’t wear a halo.

 

That said, I refuse to be called an angel investor. I’m just a dude who got reasonably lucky, and now can afford to play fantasy VC. I’m a has-been who probably would get sick if he tried to start another startup. I’m fat and happy playing the nickel slots. I’d love to say I was an early investor in Twitter, even if I’d invested $100 and got $4000 out.

 

Silicon Valley is more similar to Las Vegas than many people would have you believe. The main difference is that in Vegas most people gamble on games of chance. In Silicon Valley we believe we have an edge. Do we really? I don’t know. But the fact that we believe it is what makes it fun.

 

In short: I’m a small-time investor; I’m in the right place for it, and I have a few chips to play a fun game of luck and perceived skill. But if you call me “angel investor”, you’re asking me to go all Ezekiel 25:17 on you 🙂

 

 

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A Relevant Tale: How Google Killed Inktomi

On March 20th, 2000 Inktomi had a market capitalization of 25 billion dollars. As a relatively early employee, I was a multimillionaire on paper. Life was good. In the next year and a half the stock went down by 99.9%. In the end, Inktomi was acquired by Yahoo for 250M. What happened? Among other things, Google. Grab some popcorn and enjoy this story.

Inktomi was the #1 search engine in the world for a while. When I joined we had just won the Yahoo contract, and were serving search results for HotBot (there is still a search page there!) At first I worked on developing crawling and indexing tools written in C++. Our main goal at the time was to grow our index size, and at the same time to improve relevance. It became clear that as our document base grew, relevance would play a more important role. For ten million documents you may be able to filter out all but a handful of documents with a few well-chosen keywords. In that case any relevance algorithm would do; your desired result would be present in the one and only result page. You wouldn’t miss it. For a billion documents however, the handful would become hundreds or thousands. Without a good relevance algorithm, your desired result might be on page 17. You’d give up before getting to it.

At first we were using a classic tf-idf based model, enhanced by emphasizing certain features of pages or urls that correlated with “goodness.” For example, yahoo.com is probably more relevant to the query yahoo than yahoo.com/some/deep/page.html. We thought shorter urls were better. Of course this query was very popular, so spammers started creating pages stuffed with the word Yahoo. This was the beginning of an arms race that continues today. Back then we were the main target because we processed more searches than anyone else.

 

Inktomi_mug

Enter The Google

Yahoo had been complaining to us about not being result #1 for yahoo for a while. We fixed that special case, but we couldn’t do the same for many other sites or pages. In 1999 Google was gaining popularity because they were solving exactly this problem. We didn’t perceive them as a threat yet, but we did realize that we had to do our own version of PageRank. I was assigned to that task.

My small contribution to improving our relevance was coming up with a simple formula to take into account the occurrences of words in links pointing to pages. The insight was realizing that this followed a power law: at the time Yahoo.com had about 1M instances of the word yahoo in links pointing to it. Nobody else came close. Other Yahoo properties had an order of magnitude less, and then came a long tail of other sites. I decided to use the logarithm of the count as a boost for the word in the document. This wasn’t as sophisticated as PageRank (we’d get to that later), but it was a huge improvement. Our relevance got much better over time as other people spent countless hours implementing our own link analysis algorithms. We had a clear mandate from the execs; our priorities at search were:

1) relevance
2) relevance
3) relevance

Doug Cook built a tool to quickly measure the relevance effects of algorithmic changes based on precomputed human judgments. For example: it was clear that Yahoo.com was the definitive result for the query “yahoo” so it would score a 10. Other Yahoo pages would be ok (perhaps a 5 or  6). Irrelevant pages stuffed with Yahoo-related keywords would be spam, and humans would give them a negative score if they showed up for that query. Given ten results and a query, we could instantly evaluate the goodness of the results based on the human rankings.

We had a sample corpus of links and queries for which we could run this test as often as we wanted, and compare ourselves against Google. We did this for months until it became clear that we were “as good as Google.” Our executives were happy.

Relevance Is Only So Relevant

Despite our relevance being so great, there was one huge red flag: engineers at Inktomi were starting to use Google as our search engine. Our executives tried to stop us from doing it, just like Bill Gates reportedly banned his kids from using Apple products.

I thought about why I was using Google myself, and I’m sure it’s obvious to everyone now: the experience was superior.

  • Inktomi didn’t control the front-end. We provided results via our API to our customers. This caused latency. In contrast, Google controlled the rendering speed of their results.
  • Inktomi didn’t have snippets or caching. Our execs claimed that we didn’t need caching because our crawling cycle was much shorter than Google’s. Instead of snippets, we had algorithmically-generated abstracts. Those abstracts were useless when you were looking for something like new ipad screen resolution. An abstract wouldn’t let you see that it’s 2048×1536, you’d have to click a result.

In short, Google had realized that a search engine wasn’t about finding ten links for you to click on. It was about satisfying a need for information. For us engineers who spent our day thinking about search, this was obvious. Unfortunately, we were unable to sell this to our executives. Doug built a clutter-free UI for internal use, but our execs didn’t want to build a destination search engine to compete with our customers. I still have an email in which I outlined a proposal to build a snippets and caching cluster, which was nixed because of costs.

Are there any lessons to be learned from this? For one, if you work at a company where everyone wants to use a competitor’s product instead of its own, be very worried. If I were an executive at such a company I would follow Yoda’s advice: “Do or do not. There is no try.” If you’re not willing to put in the effort to compete, you might as well cut your losses (like Google did with Buzz, for example).

Of course, this is not the whole story of how Inktomi failed. There was a complicated web of causation that involved timing, bubbles, lack of focus, departures of key executives, etc. That would be a book that might sell three or four copies at best 🙂

Inktomi1

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