High Impact Noise

Just finished listening Michael Heller on EconTalk who was talking about his new book The Gridlock Economy. Michael Heller talked about a fact that a had previously known but had not given much thought recently. There is an increasing number of biotech patents being issued, while the number of biotech drugs approved has remained relatively stagnant. This is both an indictment on are drug approval process and more so of the patent system.

Heller talks about how the patent system was written 50 years ago when one patent went with one product. While this may still be the case in small molecule pharmaceuticals, this is certaintly not the case in biotech or in software or in any complex system. Today, innovation is built on the innovation of the passed. The need to find the possible world of patents your product may infringe on and negotiating with those parties limits innovation / public good. Research shows that the patent system, excluding pharmaceuticals, has an overall negative economic impact.

This got me wondering, is these are market solution to this problem? The status quo will not allow the patent system to be abolished, but could the government decrease the transaction costs? Could the government make a market for buying and selling partial patent rights?

(Disclaimer, the details to this proposal have only been hashed out for 20 minutes. )

When a patent is issued, shares to use that patent are issued as well. These shares would allow companies to use the patent up to a certain revenue threshold. (Make 100K off a patent). The company would receive the proceeds of the public offering of these shares. Additional, follow-on offering would also be in the companies control. I am sure there are all sorts of problem with this thought process, but its a start in decreasing the transaction costs that patents bring.

Not the exact graph I was looking for, but replace cost with patents, and the graph looks pretty identical.

I have been catching up on my reading lately, finishing books I started 1-3 years ago.

Why Most Things Fail by Paul Ormerod is on my desk today.

I found this quote to by very relevant to today’s economic landscape.

“The question, as Schumpeter saw it, was not ‘how capitalism administers existing structures… [but] how it creates and destroys them.’ This creative destruction, he believed, caused continuous progress and improved standards of living for everyone.”

Hopefully the fall, and the subsequent reshaping of the banking industry is capitalism driving improvement.

Bailout Sleuth is a new website funded by Mark Cuban that is keeping an eye on the bailout. For this bailout to work, all transactions need be transparent to the hard working tax payers. The lack of transparency has largely gone unreported, but bailoutsleuth.com is trying to change that.

The site has already report on:

• Executive and legal compensation redacted on contracts
• The bailout going to fund deferred executive compensation
• High dividends being paid by the banks

There has been a debate in the blogosphere about whether Venture Capital companies are being irresponsible for only now telling their portfolio companies to scale back their spending.

Fred Wilson wrote about this previously saying

”...we have a responsibility as investors, board members, fiduciaries, and advisors to our companies to tell them what we’ve seen before, that acting now decisively will make it easier to survive tough times.”

Now Michael Arrington has added his two sense dispelling to rediculous myths that has come out during this debate.

• VC’s made this happen. (Just Silly)
• VC’s should always be stressing to their portfolio companies to conserve cash.

Arrington does a particularly good job refuting this second myth. Both are worthwhile reads.

In the end the economy is in the dumper. If you think stressing to your portfolio companies the necessity of conserving cash is irresponsible, then I pray my money is not being managed by you.

I really interesting slide deck by Sequoia Capital and how the current financial crisis impacts their portfolio companies.

SUBJECT: REQUEST FOR URGENT BUSINESS RELATIONSHIP

DEAR AMERICAN:

I NEED TO ASK YOU TO SUPPORT AN URGENT SECRET BUSINESS RELATIONSHIP WITH A TRANSFER OF FUNDS OF GREAT MAGNITUDE.

I AM MINISTRY OF THE TREASURY OF THE REPUBLIC OF AMERICA. MY COUNTRY HAS HAD CRISIS THAT HAS CAUSED THE NEED FOR LARGE TRANSFER OF FUNDS OF 800 BILLION DOLLARS US. IF YOU WOULD ASSIST ME IN THIS TRANSFER, IT WOULD BE MOST PROFITABLE TO YOU.

I AM WORKING WITH MR. PHIL GRAM, LOBBYIST FOR UBS, WHO WILL BE MY REPLACEMENT AS MINISTRY OF THE TREASURY IN JANUARY. AS A SENATOR, YOU MAY KNOW HIM AS THE LEADER OF THE AMERICAN BANKING DEREGULATION MOVEMENT IN THE 1990S. THIS TRANSACTIN IS 100% SAFE.

THIS IS A MATTER OF GREAT URGENCY. WE NEED A BLANK CHECK. WE NEED THE FUNDS AS QUICKLY AS POSSIBLE. WE CANNOT DIRECTLY TRANSFER THESE FUNDS IN THE NAMES OF OUR CLOSE FRIENDS BECAUSE WE ARE CONSTANTLY UNDER SURVEILLANCE. MY FAMILY LAWYER ADVISED ME THAT I SHOULD LOOK FOR A RELIABLE AND TRUSTWORTHY PERSON WHO WILL ACT AS A NEXT OF KIN SO THE FUNDS CAN BE TRANSFERRED.

PLEASE REPLY WITH ALL OF YOUR BANK ACCOUNT, IRA AND COLLEGE FUND ACCOUNT NUMBERS AND THOSE OF YOUR CHILDREN AND GRANDCHILDREN TO WALLSTREETBAILOUT@TREASURY.GOV SO THAT WE MAY TRANSFER YOUR COMMISSION FOR THIS TRANSACTION. AFTER I RECEIVE THAT INFORMATION, I WILL RESPOND WITH DETAILED INFORMATION ABOUT SAFEGUARDS THAT WILL BE USED TO PROTECT THE FUNDS.

YOURS FAITHFULLY MINISTER OF TREASURY PAULSON

First read at The Big Picture

Wham, lets bail out AIG. I am thoroughly confused by the Paulson Doctrine, but I think Paulson is confused by it as well. No to AIG, Yes to AIG. No to Lehman, Yes to Bear.

Is the end result good or bad. In the short term I am sure it will stabilize the market. But has anybody learned their lesson from this? Lastly who is going to be the villain after the dust settles?

With Enron and Worldcom you had real villains. People lying, cheating and stealing. But in this mess I don’t think any big names are going to roll. Extreme mismanagement is not a crime yet, so CEO’s you are off the hook.

Michael Lewis has put together his blame pie, but it is just so unsatisfying.

I will be sharing interesting quotes from my readings and school experience.

From the guy who brought you the Johnsonville Brat, talking about the changes he implemented in his business to encourage the employees take responsibility for the business.

A grand plan was impossible, there were too many variables. I wasn’t certain which system to change; I just knew I had to change something in order to alter expectations and begin moving toward my goal.

In life or in business we often trick ourselves in to feeling in control, but there are always too many variables. Sometimes you just need to tinker until you put the variables in balance.

Stayer, Ralph. (1990) How I Learned to Let My Workers Lead. Harvard Business Review. 7-8

Barry Ritholz at The Big Picture has a great list of lessons learned from Bear & Lehman

To summarize:

• Don’t just risk your company, risk the entire financial world.
• Be the first to Implode!
• Engage in systemic risk so as your counter-parties are also threatened.
• Threaten an important part of the economy
• Your Balance Sheet is the only thing that matters

I would like to add one more, no one cares if your company goes under unless your product is a necessity to the rich. Watch the youtube video below for a little more perspective on this phenomenon.

I am in business school! There are certainly a whole host of things to talk about in today’s hectic economy.

Hopefully I can start pushing posts out.

The internet has lowered the barrier to entry into many fields. Amateur writer/reporters can blog, amateur singers and movie makers can post to youtube, often achieving success inline with the “pro’s”. I for one see this as natural progress though much of the establishment media is often threatened, and denigrate online talent.

This movement of amateurs could be creeping into the investment world. SocialPicks has recently received a round of funding from Bay Partners. SocialPicks offers a forum for amateur investors to show off their analysis and investment skills.

As we are finding out more and more, experts most of the time, are not so expert (see Black Swan by Nassim Nicholas Taleb). And aggregated crowds are often smarter than individuals most of the time (Wisdom of Crowds by James Surowiecki). This includes highly paid Wall Street analysts.

SocialPicks looks to let amateurs compare their performance against the Pro’s, often showing that such “gurus” as Jim Cramer are not the people you should be taking investment advice from. In addition SocialPicks aggregates the information about stocks giving an overview of how the crowd feels about a given investment.

The Internet has developed under a “philosophy of free”. Watching Chris Anderson Talk at Nokia has only reaffirmed my belief that to succeed on a large scale in this digital era, Free is the key.

The internet and traditional phone companies are headed for a clash. Ribbit may be the first company to lead the charge in changing the telephony landscape, making it accessible to any developer. Their API offering is extremely interesting, allowing any developer to use their telephony backbone, see their demo for some nifty stuff.

But as All Thing D Article writer John Paczkowski points out

”.. how’s the company going to make money? Ribbit says it plans to charge for services like calls to traditional landlines, voice-mail transcriptions and billing…. Being able to use text-to-speech transcription services and archive voice calls are many of the features that consumers have shown interest in over the years. However, whether or not they’re willing to pay for these features is going to be the big question.”

I know that I am barely willing to pay for my phone calls, especially knowing the cost of a phone call is diving toward zero. Archiving my voice calls would be great, but if Google got in this game I know that they would do it for ZERO. So I am wondering, where is the advertising opportunity in this venture.